Trump's quiet economic crisis

“We, the citizens of America, are now joined in a great national effort to rebuild our country and to restore its promise for all of our people.” 

The opening words of President Trump’s inaugural address likely foreshadow the theme for his first address before a joint session of Congress on Tuesday – an opportunity to define his agenda for a more prosperous and competitive American economy.

But what exactly is the country’s most urgent economic challenge? Scanning the headlines, one might think the answer is tackling the negative impacts of foreign trade, reversing the decline of American manufacturing, or slowing the rapid pace of technological change.

In fact, the fundamental issue that will define Trump’s economic legacy is one that rarely gets mentioned: the U.S. is facing a crisis of declining economic dynamism, driven at its core by a historic lack of new business formation.

Put more simply: Americans are reeling from the negative effects of too little economic change, not too much. This low-dynamism era is quietly calcifying our economy, resulting in less competition, widening inequality, and fewer pathways to the American Dream.

Take the startup rate: According to the typical economic narrative, the forces of technology and globalization are destroying businesses at a more rapid pace than ever before. The data tell a very different story. The rate at which businesses close has been remarkably stable for the past 30 years and currently sits near an all-time low. What has changed – and changed dramatically – is the rate at which businesses form. In fact, the startup rate has dropped by half since the late 1970s.

Enter the Great Recession, which turned what had been a slow startup decline into an accelerated collapse. For the first time on record, the rate of business formation dropped below the rate of business closures. Even after years of economic recovery, the startup rate has barely budged from its record low. The news gets worse when it comes to geographic mobility and labor turnover rates – two important measures of dynamism that demonstrate the extent to which workers can access better opportunities. Both have fallen to historic lows.

With rates of dynamism shrinking, geographic concentration is on the rise as fewer places power national growth than ever before. Case in point: over the first five years of the recovery, five metropolitan areas alone – New York, Miami, Los Angeles, Houston, and Dallas – produced the same net increase in businesses as the rest of the country combined.

Indeed, the recession ushered in a troubling new normal: most metro areas now see more businesses close than open every year, reversing decades of nearly universal expansion. As a result, an economy that for decades added an average of over 100,000 firms per year instead had 182,000 fewer firms in 2014 than in 2007, even though GDP increased by $1.1 trillion over that period.

Voters may not be aware of the statistics, but they certainly feel their effects. President Trump carried 209 counties that had previously voted twice for President Obama. Of those counties – a diverse combination of urban, rural, and suburban areas – 75 percent saw more businesses close than open during the recovery, well above the national average.

The low-churn, startup-less recovery has been quite good for one constituency: incumbent big businesses. Indeed, facing less competition, large older firms (think Carrier, Toyota, and Boeing) are enjoying something of a golden age: they have never been more profitable, more dominant within their industries, or responsible for a larger share of the U.S. workforce.

Compared to the endangered species of new businesses, big incumbents need relatively little help from government but command the lion’s share of its attention. Yet established companies of all sizes shed more jobs than they create in an average year. Essentially all net job growth comes instead from – you guessed it – new businesses. And it’s new businesses that disproportionately drive innovation and productivity while keeping markets competitive. There is no trade association, though, for the businesses that don’t already exist. Arguably the most critical constituency in the economy has no real champion in Washington, D.C.

Restoring dynamism will require presidential leadership across a broad set of policy areas. Every proposal from tax reform, to infrastructure, to regulatory overhaul should be evaluated through the lens of dynamism. Will it increase mobility for workers and reduce geographic inequality? Will it foster competition? Will it improve access to capital for entrepreneurs?

It’s time to reorient the economic agenda to ensure the future belongs to upstarts, not incumbents. On Tuesday night, President Trump should start by kicking off the first presidency truly dedicated to the cause of American entrepreneurs.