Boosting Small Businesses

Decline of Small Business Formations a Concerning Indicator of Dynamism

The new formation of small businesses in the United States — which employ 47.3 percent of American workers — has been in decline, despite several periods of economic growth, for over 40 years.

Business dynamism, measured by the rates at which firms enter the market, grow, and leave the market, is low as a result of this decline. The free market rewards businesses which address economic demands and develop efficiencies, while eliminating firms who do not over time. This dynamic process is vital to productivity and sustained economic growth. Entrepreneurs play a critical role in this process, as well as net job creation.

Business formations in the United States must begin a reversal of the steady decline

To improve the health of the American economy, business formations in the United States must begin a reversal of the steady decline experienced since the 1970s. Two large factors inhibiting the formation of new businesses are a lack of citizens with the necessary capital to start a firm and optimism about the outcome of starting a new firm.

Starting a new enterprise, particularly amid periods of economic uncertainty, reflects both a choice and a capability on the part of an individual: a choice to seek an economic return and the ability to navigate an uncertain environment.

Direct Cash as a Vehicle for Increased Business Formation

Recent trends in small business formation appear to indicate that the primary barrier to entry for new entrepreneurs tends to be starting capital requirements more often than optimism about future opportunities. Despite the difficult circumstances of the coronavirus pandemic, small business formation in the United States increased by 24 percent in 2020.

In fact, the start of this unprecedented spike in small business formation — totaling 4.4 million new firms in one year — coincided with the disbursement of the first federal stimulus in 2020, lending credence to the notion that a lack of cash is a factor in lower rates of new business formation.

Spike in small business formation with disbursement of first federal stimulus in 2020

While this trend is not entirely conclusive, the timing and scale of the small business formation rebound is unlikely to have been a coincidence. Secondary and tertiary spikes in small business formations in 2020 appear to have been timed in anticipation of the second and third disbursements of stimulus checks passing through Congress during the pandemic, as well, despite conventional wisdom pointing to declines in small business formations during recessions and an unclear timeline of the end to the COVID-19 pandemic.

Further examples of small business formations as a potential consequence of direct cash policies include data corresponding with the monthly disbursement of direct cash to Americans due to the Child Tax Credit.

In a Humanity Forward/Social Policy Institute study, 21.3 percent of surveyed parents were either small business owners already or had plans to form a business. Receiving the Child Tax Credit each month has assisted parents in covering basic living expenses, such as daycare for children, which frees up more time to pursue entrepreneurial ambitions. Conversely, existing small businesses are seeing parents return to work during a labor shortage because of this influx of additional help with daycare costs.

Federal assistance with lowering barriers to entry for small business formation through direct cash policies also appear to have acted as an equalizer that has enabled a boost to the number of minority-owned businesses.

Small business

Zip codes in the United States which experienced the greatest increase in small business formations in 2020 were predominantly Black neighborhoods. Even after controlling for other variables, the proportion of Black residents in a zip code had the strongest impact on the start-up growth rate.

By advancing direct cash policies such as stimulus checks and the expanded Child Tax Credit in Congress, Humanity Forward has aided entrepreneurs across the United States in converting their ideas into startups and creating new jobs in the process for millions of Americans seeking reentry into the workforce.

Through Humanity Forward’s continued advocacy for policies that put cash directly into the hands of American citizens, this recent boost in small business formation could become the start of a much-needed rebound for entrepreneurs and the introduction of new and innovative ideas for the U.S. economy.

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