428A Russell Senate Office Building, Washington, DC 10:00 a.m. EDT
Chairman David Vitter
Good morning, and thank you for joining me today for the Senate Small Business and Entrepreneurship Committee hearing on the recent data and long-term trends concerning entrepreneurship in America.
Small businesses are the driving force in our economy, historically accounting for over half of all employment and nearly two-thirds of all employment growth in the United States. Small businesses, particularly those just starting out, have long-been the most dynamic in the economy, often responding to local needs and market demands more quickly and more effectively than larger firms.
According to unequivocal research from the National Bureau of Economic Research, the private sector, and larger institutions like the Organization for Economic Cooperation and Development, it is this dynamism that drives much of our economic growth, not only through the creation of new jobs but also through increases in productivity.
Among this Committee’s top priorities is ensuring that these brave entrepreneurs have the support, resources and environment necessary to make the leap, start a business, create jobs, and grow their enterprises.
This hearing will examine the data and recent studies by bipartisan experts on entrepreneurship and economic growth, so that we can discuss policy solutions in the context of what the research tells us about the long-range outlook for startup and scale-up businesses in America.
Nearly a quarter of small businesses will fail in their first year, and nearly half will not make it past their third. Those are certainly daunting statistics, but entrepreneurs are both hopeful and determined – which we’ve seen time and again. Historically, births of new businesses outpace the deaths of older businesses, even during recessions.
The 2008 recession, however, had a markedly different impact. In the years since, small businesses have been struggling to bounce back. The recession’s effects can still be felt today with less than two-thirds of those who lost jobs during the recession able to find new employment, and enduring pessimism about the economy that only recently has started to turn around.
According to experts, including those here today, one of the main contributing factors to these continued effects is the decline in small business activity following the recession and its subsequent slow recovery. Specifically, according to the most recent data from 2013, the share of all firms that came from startups fell from nearly 17 percent to only 8 percent in just over two decades, while employment in new firms fell 65 percent in that same period.
This decline in both new business startups and small business job creation activity is concerning for two reasons.
First, this is the first time on record that we have seen closures of businesses outpace the rate of startups.
And second, this downturn in the growth of new firms has had lasting effects on the economy – as research from our witnesses today has shown.
The silver lining is that there is still substantial motivation by many Americans to both start and grow their own small business.
While the long term trends are alarming, new figures from the Kauffman Foundation indicate that startup activity over the last two years has been on the rise, having increased from its low in 2013.
That is certainly good news --– however, 50 percent of all startup activity has occurred in just 20 counties across the country, according to the Economic Innovation Group’s Distressed Communities Index. I want to note that only one member of this Committee represents a state that includes one of these counties, so this study should interest all of us. Compared to past recoveries, when we saw small counties with less than 100,000 people generating the highest rates of new business formation, rural counties have seen net negative establishment growth in the most recent recovery period. I would argue that this explains why economic growth remains unacceptably low and so many Americans feel that the recovery has not reached them.
The purpose for examining the recent data and studies at today’s hearing is to discuss what we can do on a federal level to reverse the long-term downward trend in entrepreneurship - to both accelerate and expand the recent improvements we have seen in startup and small business activity.
Access to capital is perhaps the primary constraint limiting the creation, growth, and expansion of small businesses. As we’ve discussed in prior hearings, it was small and medium businesses that experienced disproportionately larger layoffs and failure rates compared to large firms during the most recent recession. This was primarily driven by contraction in the credit markets and heightened collateral requirements, but was exacerbated by an acceleration of the long-run decline in community banks, the traditional source of startup and working capital for small businesses.
The 2010 Dodd-Frank bill additionally hampered the ability of community banks to underwrite a loan because more often than not, the increased origination and compliance costs would be more than the revenue from that loan. Clearly, this is an area in which a targeted fix – either legislatively or administratively – would benefit both community banks and small businesses.
Common-sense regulatory reform, on a broader scale, would be immensely helpful to small business owners who must operate in a convoluted and ever-expanding regulatory environment on a federal, state, and local level.
The SBA’s Office of Advocacy stated in a September 2010 report that small businesses face a substantially higher impact from federal regulations than large businesses, estimating that regulatory costs borne by a small business exceed ten thousand dollars per employee per year. Further, the even the World Bank recognizes the challenges regulatory burdens pose to startups, ranking the United States 49th out of 189 countries for ease of starting a business in its Doing Business report.
Looking at the entrepreneurial spectrum, there is a distinct inter-generational divide. Surveys show that nearly two-thirds of millennials – or individuals under the age of 30 – have a desire to start their own business. However, data from the Federal Reserve indicates that only 3.6 percent of that demographic owns their own business, which is a significant drop (compared to 6.1 percent in 2010 and 10.6 percent in 1989 for the same age group) and indicative of the long-run decline I’ve mentioned.
Although the causes of this decline have been difficult to determine, potential explanations have ranged from the poor financial condition millennials were left in following the recession to student loan debt to broader fears of stiffer competition in the internet age. This divide between desire and ability is one of the biggest challenges we face as lawmakers in encouraging entrepreneurship, as the businesses that millennials start today will form the foundation of our economy tomorrow.
At the end of the day, it takes more than money to start a business. It takes an entrepreneur who is willing to stake their livelihood on an idea and determined to follow through. As members of this Committee, it is our duty, in turn, to ensure that entrepreneurs across the country have access to the resources necessary to start and grow their businesses into a thriving enterprises, free from unnecessary or damaging impediments from the government. The issues they face are manageable ones with practical solutions, so there is no reason for inaction on our part.
I look forward to today’s discussion and thank everyone for being here.