According to Gallup, the United States now ranks 12th in the world in business startup activity. Italy, one of the weaker countries in the Eurozone, has a higher rate of business startups than the US. This isn’t a statistical quirk. Entrepreneurship, the special sauce that launches new business, is in steep decline here for the first time ever.
“When small and medium-sized businesses are dying faster than they’re being born, so is free enterprise,” writes Jim Clifton, Chairman and CEO of Gallup. “And when free enterprise dies, America dies with it.”
For six years, the number of small businesses closing has exceeded the number of businesses starting. The number of business deaths exceeded births in 2008 for the first time in US history and has gotten worse in the ensuing years. Since 2010, the rate of small business closures has increased.
In the 1980s, the number of new businesses exceeded those closing by more than 100,000 every year. Today, 70,000 more businesses die than are started each year. This somber fact goes a long way to explaining the current weak job market. Two-thirds of all new jobs are created by small businesses.
There are 6 million businesses in the US with one or more employees. The majority of these, 3.8 million, have 4 employees or fewer. Only 1,000 companies have more than 10,000 employees. Corporations are obviously important to the economy, but they are just the mature outgrowth of start-up companies launched decades ago.
Two years ago, the founder of the Subway sandwich chain, one of the largest restaurant companies in the world, said the company wouldn’t exist if he were trying to launch it today.
“If I started Subway today, Subway would not exist,” Fred Deluca told CNBC. Deluca said the environment for entrepreneurs in the U.S. has “continuously gotten worse because there are more and more regulations. It’s tough for people to get into business, especially a small business.”
Subway itself, like many franchise companies, has been a particularly successful engine of small business growth. Most of its restaurants are owned by independent small business men and women who license the brand name from the parent company. There are, in fact, almost 1 million small businesses that exist through a franchise agreement with a parent corporation.
Earlier this year, the National Labor Relations Board issued a preliminary ruling that would radically alter the franchise business sector. If the ruling stands, it could dampen further business startups in the US. The ruling would benefit labor unions and trial lawyers, but at the cost of further eroding America’s entrepreneurship.
A few years ago, I had an idea for a small business. It wasn’t a flashy tech start-up or a potential billion dollar idea, but I thought it would meet a need in the marketplace. Things were preceding well until I met with lawyers. The amount of regulatory and legal clearance that was required convinced me to bury that idea deep in the ground and never speak of it again.
I doubt my experience is unique. Extrapolate that throughout the entire economy and you arrive at a point where 11 nations have a better record of business startups than the US. Not long ago, the United States was 1st in the rate of business start-ups. Today, countries like Hungary, Denmark, Finland, Sweden, Israel and New Zealand, in addition to Italy, are more entrepreneurial that America.
All the rhetoric out of the White House or the halls of Congress can’t arrest this American decline. Small business is literally dying in the United States. By the time the media or the political class notices, it will be far too late.