In the News
After several straight months of positive numbers on jobs and unemployment, the American economy finally looks poised for recovery.
But under the hood, the engine of American job growth might be sputtering.
For at least the past 30 years, the rate of new business creation has been declining, and from 2006 to 2010, according to the Kauffman Foundation, new business starts plummeted by 31 percent. While most Americans may think of small businesses as the principal source of job growth, it's actually younger firms (most of which start out small) that create almost all the net new jobs in the U.S. economy.
Solving the nascent crisis in American entrepreneurship needs to be a top priority if the U.S. economy is to succeed in the long term. And of particular concern should be ensuring that millennials — 75 million strong — are ready for success as entrepreneurs.
Despite popular perceptions of the typical entrepreneur as a hoodie-clad wunderkind, the Kauffman Foundation reports that the peak age for entrepreneurship is actually closer to 40 — an age that the oldest millennials will reach in about five years.
But the hardships of the recession may mean that millennials, compared to their predecessors, will be less ready to launch their own firms.
For one thing, says Kauffman Foundation Policy Director Jason Wiens, the slowdown in start-ups has meant fewer opportunities for younger workers to cut their teeth in the workforce. Moreover, less experience means less access to capital.
"A lot of people use personal savings as a way to fund a new business venture," Wiens says. "And if your earnings potential or your earnings have been depressed because of poor job prospects, you may not have the financial wherewithal to ... fund that business."
And, of course, there's the problem of student debt. According to the Project on Student Debt, college students graduating in 2013 with student debt owed an average of $28,400.
The first step for ensuring this entrepreneurial potential doesn't go to waste is to create a fertile environment for entrepreneurship more generally. And in this arena, small steps can have big impact.
One easy idea, for example, is to exempt start-up small businesses that are sole proprietorships or limited liability companies from having to file tax returns four times a year, as the IRS currently requires. Last Congress, Rep. Scott Peters (D-Calif.) introduced H.R. 5636, the Cut REDTAPE Act, which would have allowed start-ups with revenues of under $1 million to file just once a year, like most large companies do.
Another potentially simple step to ease the regulatory burden on entrepreneurs is to rethink state occupational licensing requirements. According to the Kauffman Foundation, as many as 30 percent of U.S. workers are now subject to state licensing requirements — including such occupations as fortune tellers and tour guides.
While licensing requirements that protect health and safety remain essential, some requirements potentially serve just to shut out new entrants and limit competition (including in lower-wage occupations) or to raise revenue. One study estimated that the economic "dead weight" resulting from licensure requirements could amount to as much as $34 billion a year.
Some states, such as Connecticut, have already launched broad "regulatory reviews" to reexamine the laws now on their books. More states should initiate this process and put licensing requirements under especially strict scrutiny.
As for millennials, reducing the impact of student debt will be crucial for unleashing this generation's entrepreneurial potential.
While the overall burden of this debt is what's gotten the most attention, of equal concern should be the damage done to millennial credit scores, which average just 620. This is too low to qualify for a mortgage — which means it's also too low to qualify for a small business loan.
Worse yet, too many millennials aren't even part of the financial mainstream. According to research by the Federal Deposit Insurance Corporation, as many as 37 percent of young Americans ages 25 to 34 are either "unbanked" or "underbanked" — meaning that they either have no bank account at all or rely principally on check cashers and other non-bank institutions for their financial needs. Bringing millennials into the financial system, helping them repair their credit and to save are clearly top priorities.
Despite these hurdles, there's every indication that millennials are at least as innovative and entrepreneurial as the generations that have gone before them. Deloitte's 2014 survey of millennials, for example, found that as many as 70 percent of millennials see themselves working on their own instead of in more traditional arrangements.
The challenge now is to ensure that this entrepreneurial potential — and the economic growth it would bring — don't go to waste.