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Entrepreneurs play a critical role in the American economy. The new businesses they launch provide new goods and services. They also provide existing goods and services more efficiently, forcing incumbents to do a better job through competition. And while most media attention seems devoted to potentially high-impact technology startups, regular “mom and pop” businesses can be important mechanisms for upward mobility. We want a dynamic economy where labor and capital can be employed as productively as possible. Entrepreneurship plays a big role in making that happen.
It remains to be seen how entrepreneurs navigate the post-pandemic economy. But before the coronavirus outbreak, there were several disturbing long-term trends about America’s startup superpower. Among them: New businesses have become a smaller share of all companies than they used to be, as well as their share of total employment. These trends are illustrated in “Federal Policies in Response to Declining Entrepreneurship,” a new Congressional Budget Office report on the subject:
Now a decline in startups isn’t always bad, at least as it affects the economy’s productive capacity. The CBO notes, for instance, that the rise of big-box retailers in the 1990s meant the implementation of more efficient business practices in the sector. CBO: “As a result, the decline in new firms and their employment share in that sector was associated with an increase in productivity growth, as smaller, local retailers could not compete with the large incumbent firm.” Overall, though, research suggests the decline in entrepreneurship has resulted in a less productive American economy.
What are some examples of pro-entrepreneur policies? CBO runs through a variety of them, helpfully giving potential pros and cons for each approach (keep an eye on when CBO uses the word “would” vs. “could”):