The Covid-19 pandemic had a profound impact on the U.S. economy, causing disruptions and hardships. However, amid the challenges, there may be a silver lining: a surge in new businesses.
New research conducted by economists at the University of Maryland and the Federal Reserve and presented at the Brookings Institution reveals a notable increase in Americans starting businesses during and after the pandemic. These new ventures span various industries, from traditional businesses like restaurants and dry cleaners to cutting-edge high-tech startups.
This surge can be attributed to the fundamental changes brought about by the pandemic, which reshaped the way Americans live and work. These changes created new opportunities for entrepreneurs, who are regarded as best equipped to respond to sudden shifts in the business landscape. Additionally, the influx of trillions of dollars in pandemic assistance from the federal government provided many individuals with the necessary capital to start their own businesses and hire employees.
Early indicators from federal statistics already hinted at a surge in business creation. Initially, some economists dismissed it as a temporary trend resulting from the pandemic, expected to fade quickly.
This skepticism was rooted, in part, in the long-term decline of startup activity over the past few decades. A recent paper by economists from the University of Chicago and the Fed showed that startup activity and employment, as a percentage of the economy, had been steadily decreasing since the 1980s. The market has become increasingly dominated by a handful of large corporations.
However, the new research by John Haltiwanger of the University of Maryland and Ryan Decker of the Federal Reserve, renowned experts in economic dynamism, suggests that the pandemic may have disrupted these negative trends.
Mr. Decker and Mr. Haltiwanger stated, “We find early hints of a revival of business dynamism.”
They note that it is still too early to conclusively determine whether a lasting reversal of pre-pandemic trends is occurring, given the relative novelty of this revival.
Advocates for policies aimed at fostering economic dynamism expressed enthusiasm. John Lettieri, the President and CEO of the Economic Innovation Group, a think tank in Washington, remarked, “This is evidence of a genuine resurgence of economic dynamism led by a spike in start-up activity unlike anything we’ve seen in the post-Great Recession era.”
To support their findings, Haltiwanger and Decker analyzed a range of publicly available data on new and existing businesses. They discovered a sustained increase in new-business activity, accompanied by job creation.
Furthermore, the geography of this entrepreneurship aligns with the new dynamics of an economy where more Americans are working remotely. There is a decrease in start-ups in downtown areas and a significant increase in suburban regions.
According to the economists’ report, monthly applications for new businesses that are likely to generate jobs are now 30% higher than they were in 2019, just before the pandemic began. These applications experienced a sharp rise following the onset of the pandemic when the government injected stimulus into the economy. Although they briefly declined, they surged again towards the end of 2020 and the beginning of 2021 when lawmakers provided additional financial support. Consequently, young companies have accounted for a larger share of employment and total firms in the economy.
Interestingly, these trends may have contributed to business claims of labor shortages in recent years, despite an increase in the number of workers returning to the labor force. Established companies suddenly found themselves competing for talent with a higher number of start-ups than they were accustomed to.
One question that the study does not directly address is the extent to which President Biden can be credited for these developments, as he has frequently attempted to do.
President Biden claimed, “A record 10.5 million new business applications were filed in my first two years, the largest number ever on record in a two-year period.”
White House officials expressed their encouragement regarding the study’s findings and maintained that the $1.9 trillion American Rescue Plan, signed into law by President Biden, played a significant role in supporting this entrepreneurial surge. The plan provided financial assistance to individuals, businesses, and state and local governments.
Jared Bernstein, Chairman of President Biden’s Council of Economic Advisers, remarked in an email, “In the spirit of crisis equals opportunity, we’ve long believed that measures in the Rescue Plan helped create a supportive backdrop for entrepreneurs, especially small and minority-owned businesses. This work shows extremely welcomed progress in that space and credibly connects it to the strong job gains we’ve seen over the president’s watch.”
