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The U.S. Economy Is Bouncing Back, but Entrepreneurship Isn’t

In the U.S., unemployment rates are below 6 percent, and GDP rose 2.2 percent in the last quarter of 2014, prompting politicians and pundits to tout the rebound of the American economy. However, one crucial economic element hasn’t bounced back. Entrepreneurship has sharply declined since the economic downturn.doomsday

According to Census Bureau data, Americans started 27 percent fewer businesses in 2011 than they did in 2005. It’s not just a consequence of the economic downturn; as a share of all businesses, startups have been declining in America for the past 30 years. Even in the high-tech sector, which creates more startups than any other sector, the declines, as a percentage, have been equally steep. For the first time since the late 1970s, the number of business failures outnumbers new businesses created, which is bad news for America’s economic future.

New small businesses employ just 2 percent of American workers, but they’re responsible for 15 percent of new jobs created. They’re also responsible for increasing innovation and productivity throughout the American economy. Some researchers blame the concentration of business within large corporations, which makes it tough for new businesses to gain market share. For instance, Walmart controls 50 percent of most groceries and general merchandise sales, making it hard to for family-owned businesses to compete.

bankruptOther researchers blame the aging of the population, saying that people are most likely to start businesses when they’re young. According to Inc. Magazine, that supposition is wrong. The average entrepreneur starts at age 40, and people between the ages of 55 and 64 have the highest rates of entrepreneurship in America. Still, economists are right when they say millennials have a great opportunity to revitalize small business growth. Unfortunately, millennials are interested in self-employment, but many aren’t interested in true entrepreneurship.

Dealing With Limited Capital

Shows like “Shark Tank” create the perception that venture capitalists everywhere want to invest in new businesses. In reality, very few entrepreneurs have access to venture capital. Most rely on family, friends, and savings for startup funds.

When small business owners make rookie mistakes, or when they need capital for expansion, they often have difficulty recovering from setbacks and funding the growth of their companies.

Banks have consolidated since the 1980s, leaving fewer small banks with knowledge of the local business climate. Loan decisions are made by algorithm, not by local lenders who know the community.

Bank consolidation also means that when a big bank fails, many entrepreneurs are left without options. If Citigroup hadn’t narrowly escaped failure in 2009, over 1 million small business owners would have lost some kind of day-to-day financing.

In the past, small business owners could put up their homes as collateral for bank loans. Their homes became surety for startup funds or credit lines for lean times. As a result of the economic downturn, in addition to the burden of student loans, fewer millennials own homes. Those who do own homes face plummeting property values and underwater mortgages.

Mistaking the Sharing Economy for Entrepreneurship

The U.S. Economy Is Bouncing Back, but Entrepreneurship Isn’tCompanies like Uber, Airbnb, and Lyft are creating what experts call the “sharing economy.” People can share their resources, such as their cars or their homes, as a way of making money. Lyft, for example, lets people who need rides request a car in the Lyft app.  Lyft drivers respond, picking up passengers in their own cars, and keeping the fee minus Lyft’s commission.

Lyft drivers make no set hourly commitments, and they aren’t required to work set schedules. Lyft calls its employees entrepreneurs, but in reality, it’s more of tenuous labor model. People who rent out homes or rooms on Airbnb are more like landlords than hourly workers, so they’re not expecting employment protections. Lyft and Uber drivers, who are more like hourly employees, aren’t guaranteed minimum wage, overtime benefits, paid time off, or health insurance.

The people who start companies like Lyft are entrepreneurs, but the people who drive for Lyft aren’t. They’re self-employed workers setting their own hours and determining their own work volume, they aren’t launching proprietorships, partnership, or corporations of their own. They don’t invent new technologies that create opportunities for new inventions and new businesses. Also, they don’t create jobs for workers in their communities or become sponsors of important community activities.

Student Debt and Unemployment Fears

Millennials, currently ages 20 to 34, are the most educated generation in America. By 2020, they will represent the largest segment of the U.S. population. They’re also starting fewer small businesses than any generation before them. In 1977, Americans started 35 employer businesses per 10,000 people. By 2009, the percentage of small businesses per 10,000 people had dropped by half.

Researchers from the Kauffman Foundation think that the economic downturn played a significant role. The millennials got a great education, but their education came with a steep price tag. Between 2004 and 2012, the average real per borrower student debt increased from $24,000 to $30,000. An increasing number of students are also defaulting on student loans. Millennials who graduate with crippling amounts of student debt can’t afford to fund small businesses, and if they default on loans, the devastating effect on their credit rating makes it tough to borrow money.

Because millennials came of age during the economic downturn, they also fear a soft labor market. In 2010, the unemployment rate for workers ages 18 to 34 peaked at 13 percent. As a result, millennials feel less confident that they’ll find work if they start a new company and fail. The risk of defaulting on student debt, plus the risk of unemployment, makes them skittish about taking a risk.

Why America Needs Entrepreneurs

Entrepreneurship is about more than the feeling of being your own master. It’s about creating innovative products, helping other businesses realize their goals, and driving job and community growth. Without revitalizing small businesses and entrepreneurship, America won’t sustain its current economic gains.

Millennials, more than previous generations, say that work should foster creativity and community connections. Nothing says creativity, innovation, and investment in community like starting a small business.