Covid-19 has destroyed jobs as well as
lives. More than 100,000 restaurants and bars closed in 2020, for
example, despite the almost $1 trillion federal Paycheck Protection
Program. The shift to online retail and the rise of telecommuting due to
the pandemic will disrupt even more commerce. The job loss is likely to
remain significant for many years. A desperate need now exists for new
businesses to open and replace those that have shut down.
Yet standard measures suggest that America’s entrepreneurial energy
has been declining for decades. In 1984, a high-water mark for Ronald
Reagan–era new business formation, 14.6 percent of all establishments
were less than one year old. In 2018, by contrast, only 9.2 percent of
all establishments were that new. The declining rate of firm creation
did not bring catastrophic increases in unemployment pre-pandemic
because the rate of job destruction had also declined.
We must rekindle America’s entrepreneurial imagination, and a
post-Covid push for easier business permitting is a natural place to
start. The thickets of local business regulations that entangle American
localities shouldn’t be allowed to stymie our economic recovery.
Cities—where so much American growth is already generated—should set up
one-stop permitting shops to get new firms open as fast as possible. And
while cities are doing that, the federal government should pay for a
cost-benefit SWAT team to make it easier for them to reevaluate their
rules and to junk the bad ones. Some regulations could just be dropped
for a year, say, to make recovery easier and to learn whether those
rules actually do any good.
That Covid-19 would be disastrous for small
businesses was clear by the end of March 2020, as the pandemic
accelerated in America. The Alignable network includes 4.5 million
businesses and regularly polls a subset of its members. I was part of a
team of economists that worked with Alignable to use those polls to
understand the extent of the coronavirus carnage. We spent some time
confirming that the businesses that responded were roughly
representative of America’s overall small-business ecosystem.
By early April, 45 percent of the polled entrepreneurs said that they
were closed because of Covid-19. Even more shockingly, 37 percent
expected that they would still be shuttered in December 2020. The more
intangible businesses, like finance and professional services, were more
likely to be open; the more physical businesses, including restaurants,
were not. Fifty-six percent of eating and drinking establishments in
our sample were closed, as well as 70 percent of arts and entertainment
venues.
The typical business in the sample had only enough cash on hand to
cover two weeks of expenses, so we thought that the dire predictions of
mass extinction were plausible. The federal government, however, stepped
in with unprecedented largesse. The Paycheck Protection Program first
allocated $349 billion for loans to small businesses. These were more
like gifts because the forgiveness provisions were so generous.
Demand
for the loans was enormous. And the distribution was not perfect: banks
initially gave the cash to their best customers, rather than to the
businesses that had suffered most from Covid-19. Some banks, especially
smaller banks, had more PPP cash to pay out per customer. A team of
researchers and I compared businesses with preexisting relationships
with cash-rich banks to businesses that had banked with cash-poor banks;
we estimated that a loan equal to 2.5 months of payroll boosted a
firm’s chance of survival by 12 percent. The cash reduced the wave of
bankruptcies, though at an astounding cost.
To meet the first tranche’s funding shortfall, Congress delivered a
second mountain of money. With that extra $320 billion, the PPP’s total
size of $669 billion was almost as large as the entire recovery program
that Congress passed in 2009 in response to the Great Recession, and
with the third tranche approved in December, it became bigger still.
Probably because of that massive spending, the eventual number of
business closures was smaller than many early estimates, including our
own. Coresight Research, which specializes in tracking changes in
retail, predicted in June that 20,000 to 25,000 stores would shutter in
2020. The eventual number was about 9,000—fewer than in 2019. But 2019
was already something of a retail apocalypse, partly because of the
ongoing shift to cybercommerce, and the number of closures in 2020 was
more than 50 percent above the 2018 figure.
Many well-known retail firms have gone bankrupt during the pandemic.
Few retailers are as iconic as Brooks Brothers, which filed for
bankruptcy on July 8, 2020. Few are as glitzy as Neiman-Marcus, which
filed on May 7. Ann Taylor, J.Crew, Lord & Taylor, Century 21, Chuck
E. Cheese, J.C. Penney, Jos. A. Bank—all went bankrupt in 2020. These
companies have assets, especially brand names, that make it likely that
they will endure post-bankruptcy, but many less famous companies will
have no post-Covid future.
The Internet presents a permanent challenge
to brick-and-mortar retail, but before the coronavirus, restaurants were
thriving in the electronic age. Between January 2001 and January 2020,
U.S. retail employment grew by a paltry 2 percent. Over the same period,
employment in eating and drinking establishments rose more than 50
percent. Covid-19 has been particularly brutal for the food-service
industry.
Between February and April 2020, employment in restaurants and bars
fell more than 49 percent, with 6 million-plus workers losing their
jobs. By December 2020, food-service employment nationwide remained down
by 20 percent, relative to February. A disease that makes proximity
unsafe destroys demand for in-person dining, with or without lockdown
regulations, and thousands of restaurants have permanently or
temporarily closed because of the pandemic.
According to data derived from the small-business service Homebase,
one-third of the food and drink establishments in New York that were
open in January 2020 were closed at the start of December. Across the
U.S., the National Restaurant Association estimates that, as of
December, at least 17 percent of all eating and drinking places—more
than 110,000 establishments—were not open for business.
Business closures are not intrinsically bad. In 1942, Joseph Schumpeter famously wrote in Capitalism, Socialism and Democracy
that the “process of Creative Destruction is the essential fact about
capitalism,” where that process “incessantly revolutionizes the economic
structure from within, incessantly destroying the old one, incessantly
creating a new one.” Yet creative destruction works to generate
prosperity only if new firms arise to replace the old, and America seems
increasingly unable to form new companies.
The simplest measure of new-business
dynamism is the startup rate, defined as the share of all business
establishments formed in the previous year. That measure will count both
the formation of new businesses and new factories, branches, and chain
restaurants. Between 1984 and 1989, the startup rate ranged from 13.9
percent to 14.6 percent. Twenty-five years later, American
entrepreneurial energy appears down by almost 40 percent. Between 2009
and 2018, the startup rate ranged from 9.1 percent to 10.1 percent.
A similar measure is the share of employment in new firms, which
stood at 3.9 percent in 2018 and has not moved above 4.4 percent since
2009. Thirty years earlier, in 1988, the share of employment in new
firms was 7.4 percent, and ranged between 6.9 percent and 7.9 percent
from 1984 through 1989. A far smaller proportion of Americans today work
in new firms, and if experience in a startup engenders future
entrepreneurship, this might mean a permanent loss in American job
creation.
Our country is also far less dynamic in other ways. We move less
across space and between firms. More than one-fifth of Americans—20.2
percent—moved into a new home in 1985; fewer than one-tenth of Americans
moved in 2019. Between 2007 and 2020, the share of Americans who moved
across counties ranged from 3.5 percent to 3.9 percent; between 1983 and
1990, the intercounty mobility rate hovered between 6.2 percent and 6.7
percent. Indeed, from 1950 to 1992, the share of Americans moving
across counties never fell below 6 percent a year.
Economists Raven Saks, Christopher Smith, and Abigail Wozniak link
declining geographic mobility to parallel declines in mobility across
firms, industries, and occupations. Since 1999, Americans have become
much more likely to stick with their old jobs, if they’ve got them. The
long-term jobless are also rooted in space, often because they’re living
with their parents, even when they are over 35.
Many factors doubtless help explain the
decline in American dynamism, but regulation seems a major culprit.
Building regulations have ensured that housing prices stay high in
productive places like San Francisco and New York City, deterring people
from moving there for opportunity. In the 1950s, fewer than 5 percent
of jobs required an active occupation license, yet by 2016, more than 22
percent of the employed population was licensed. Many of these licenses
were for jobs, such as floral arrangement and interior design, that
create few or no public-safety risks, unless one considers a bad floral
arrangement a public concern. When states require licenses, mobility
across occupations and across states is discouraged, especially since
not all states offer reciprocity agreements. For example, Texas’s state
webpage tells us that the state “does not recognize out-of-state
licenses for eyelash extension, hair weaving or wig specialties.”
But regulations that limit new business formation represent the most
direct attack on new entrepreneurship. They suppress the
entrepreneurship of the poor, which typically involves physical goods,
far more than the entrepreneurship of the rich, which often takes place
in cyberspace these days. Reducing the bite of those regulations is an
obvious step to promote equity and ease the economic recovery after
Covid-19.
The story of Facebook’s founding is the stuff of bestsellers and
Hollywood, but a key feature of the tale is that the social network was
born into a legal no-man’s-land. No regulations interfered with Mark
Zuckerberg’s brainchild until it had become an Internet behemoth.
Zuckerberg was a Harvard undergraduate and brilliant computer
programmer; a less advantaged Bostonian who wanted to start a restaurant
or grocery store would face a far thicker web of rules and regulations.
Boston’s “starting a business” webpage has a convenient “how to”
section with a button that lets you click “start a restaurant.” This
seems promising, but when I tried it in early February 2021, the button
led only to the Economic Development webpage for the city, full of
cheerful boldface claims such as “we promote policies that help
businesses grow while fostering economic inclusion and equity.” If you
instead clicked “start a food truck,” you would open the food-truck
lottery page, which is somewhat more useful. An older document online
contains 18 permitting steps, including one for dumpster placement, a
storefront-sign review, and, of course, the “weights and measures
inspection.”
New York City’s portal for starting a business is admirably well
maintained and clearly displays the business certificates, inspections,
licenses, permits, registrations, rules, and regulations that could
potentially affect a “food and beverage service” in the city—all 141
of them. Some are understandable, such as the “certificate of fitness
for handling, use and storage of flammable, compressed gases.” Others,
like the “canopy permit,” or “the electronics store license”—needed
before you can sell a single calculator—are more debatable, to put it
mildly.
Cities can make it easier for small
businesses, post-Covid, by reducing the number of regulations and by
making it simpler to comply with existing ones.
Ronald Reagan issued a controversial executive order in 1981 that
required cost-benefit analysis before the imposition of any new federal
regulations via executive agencies. For the last 40 years, new rules
have faced a quasi-independent assessment—the least we should ask.
Congressional rules, of course, face no such scrutiny, and neither do
local rules. As far as I know, no American city has engaged in either
prospective or retrospective cost-benefit analysis before regulating
businesses or new construction. Going forward, a commitment to such a
policy would slow the relentless expansion of local regulations.
Eliminating old rules that fail to pass the cost-benefit test would also
make it easier to start businesses.
“Washington should create an impartial cost-benefit-analysis office to provide assessments for states and cities.
Most cities have too few experts to do all this analysis on their
own, but the federal government could help here. Several years ago, Cass
Sunstein and I proposed that the national government should create an
impartial cost-benefit-analysis office to provide free regulatory
assessments for states and cities. The goal would be a relatively
impartial, highly professional operation, like the Congressional Budget
Office. An external review process would help make these assessments
more impartial. A single national office of this kind would enable
American cities to draw from a common pool of expertise.
