We need more new small businesses to increase the Labor Participation rate from its 14-year low of 63%:
The solution is less government borrowing and red tape; more economy and thrift.
Fewer start-ups in the high-tech sector? Actually, yes
Published: Friday, 14 Feb 2014 | 10:24 AM ET By: Heesun Wee | Editor, CNBC.com Twitter 131 LinkedIn 34 Share
Despite the current war for tech talent in hot start-up regions including Silicon Valley, new research paints a more muted, long-term picture of American entrepreneurship and job creation under pressure.
The number of start-ups and subsequent jobs they generate have been declining for decades due to barriers, including limited visas for skilled workers.
Another roadblock is soaring student debt, which can discourage would-be entrepreneurs from striking out on their own.
In two separate white papers from the Kauffman Foundation released this week—on the tech sector and on the broad state of entrepreneurs—the rate of small business creation has been steadliy declining for the past 20 years or so.
This dip—particularly in the technology industry—has been occurring well before the most recent recession began in 2007.
Wait a minute. Since the depths of the 2008 economic collapse, the Nasdaq has more than doubled with plenty of tech buzz, heralding the next big thing. "Equity crowdfunding. Start-ups and mobile apps galore. Aerial GoPro cameras!"
But researchers at Kansas City-based Kauffman, which studies entrepreneurship, say the recent tech climb is part of a longer start-up view that includes a distinct slump.
The recent runup "is a blip in a long-term decline in high-tech start-up rates and dynamism," said Dane Stangler, the foundation's vice president of research and policy.
Business dynamism includes how fast firms and employees turn over—all factors that help drive worker productivity and the overall U.S. economy.
Also worrisome is the decline of new tech start-ups amid more consolidation.
Firms are either growing quickly or getting swallowed up—with fewer businesses left in the middle, which might otherwise expand organically.
The net result: Fewer ventures churning, innovating and creating products and jobs, said Dane Stangler, vice president of research & policy at the Kauffman Foundation.
The number of new U.S. start-ups per 100,000 individuals was about 185.6 businesses 20 years ago in 1991, according to data from Kauffman and the U.S. Census.
New start-ups per 100,000 people declined 29.3 percent, to 131.3 for 2011, the most recent year of figures available.
"That raises some concerns about what's going on," Stangler said.
Few start-up visas and rising student debt: Start-up trends naturally reflect population changes, including aging baby boomers or those born after World War II.
Kauffman research shows older entrepreneurs aren't being replaced fast enough with younger upstarts.
Barriers preventing younger workers from becoming the next Mark Zuckerberg or Elon Musk include limited visas for skilled workers and rising student debt levels, Stangler and other economists say.
[Even more destructive is the destructive expensive government red tape that creates barriers to competitive entry by more efficient enterprises. Just try starting a garden produce, hot dog or lemonade stand from your garage or home, despite the ads.]
Overhauling U.S. immigration law has been long-awaited for years. But lacking political consensus, start-ups have struggled to absorb high legal fees associated with acquiring visas [and licenses]. And the months-long hiring process can delay key business decisions as they wait for visa lottery outcomes.
[There are plenty of unemployed American engineers and service employees that large companies prefer to offshore or replace by Green Card H-1 B or Student visas at wages below American living standards with the ever constant threat of deportation.
Workers in high demand include engineers, computer scientists and software developers [and foreign fashion models.]
Visas are key to growth, because immigrants are more likely to be entrepreneurs and create new jobs, says Donald Marron, director of economic policy initiatives at the Urban Institute.
[What a crock from someone who has little idea what is going on with small business formation.]
Marron is among those pushing for more start-up visas.
[And how many productive jobs has the Urban Institute created? It seems they are a mouthpiece for their large corporate donors.]
Of the engineering and tech companies founded in the U.S. between 2006 and 2012, 24.3 percent had at least one key founder who was foreign-born, according to Kauffman data.
In Silicon Valley, the number was 43.9 percent. [Cheaper wages for venture capitalists?]
(Read more: How lack of immigration reform harms start-ups, US economy)
Another speed bump to more new businesses and job creation is rising student debt.
Exorbitant loan payments can deter young professionals from starting businesses.
President Barack Obama and the administration are pushing for student debt loan reform in which payments don't exceed more than 10 percent of an individual's income.
"We need to abolish these fixed student loan payments and move toward income-contingent loans," said Gene Sperling, director of the National Economic Council.
Small businesses unwilling to take risks: Survey
Liam McGee, Hartford Financial Chairman & CEO, says his company's third annual survey of small businesses and entrepreneurs shows they're not taking risks due to uncertainty over the future.
Eat or be eaten:
Beyond rising debt levels and absence of immigration reform, tech start-up growth is being dampened by more consolidation that favors mature firms over younger businesses.
[Barrier to competitive entry conspiracies between big business and government were noted by Adam Smith in 1776:
“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”
― Adam Smith, The Wealth of Nations: An Inquiry into the Nature & Causes of the Wealth of Nations
“No society can surely be flourishing and happy of which by far the greater part of the numbers are poor and miserable. ”
― Adam Smith
“Civil government, so far as it is instituted for the security of property, is in reality instituted for the defense of the rich against the poor, or of those who have some property against those who have none at all.”
― Adam Smith]
“Mercy to the guilty is cruelty to the innocent.”
― Adam Smith
“Never complain of that of which it is at all times in your power to rid yourself.”
― Adam Smith, The Theory Of Moral Sentiments ]
"The share of young firms in the high-tech sector has exhibited a more pronounced secular decline in the post-2002 period than in the rest of the economy," according to Kauffman.
In other words, a grow fast or get acquired—"eat or be eaten"—landscape has emerged.
"That's different than it was 20 years ago, when organic growth was prevalent," said Stangler.
The upshot is fewer young, tech firms, fewer jobs—and ultimately fewer choices for consumers [and employees], amid thinner ranks of businesses.
Stangler noted we're already seeing shades of this trend as giants including Amazon.com crowd out other retailers.
Entrepreneurship broadly has come into vogue, of sorts, as the recession pushed more Americans to create their own work.
But whether these perceived opportunities translate to more start-ups and jobs remain to be seen.
As Kauffman researchers summarized in their report,
"We need entrepreneurial growth, with more new and growing businesses creating new types of products and jobs across the entire economy."
[And it will not come from more government run by and for big business, but less...]
(Read more: More Americans see entrepreneur opportunities)
—By CNBC's Heesun Wee. Follow her on Twitter @heesunwee.
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