Starting a new business in America goes crazy

AS THE PANDEMIC unfolded, the usual economic statistics produced the expected disastrous results. During the stretch in 2020 from February to May, 20 million jobs were lost. Businesses have been wiped out at a faster rate than during the financial crisis a decade earlier. The disaster news was everywhere.

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Buried in the Flood, however, there was some light, detailed in detail in a National Bureau of Economic Research working paper published in June by John Haltiwanger of the University of Maryland, using a series of data from the Census Bureau which he had helped develop. It was distilled from the first step typically taken by an entrepreneur in starting a business, an employer identification number application required by the US tax authorities, the Internal Revenue Service. The apps provide an unusually quick read on what is going on in the economy.

Unlike the financial crisis, when the creation of new businesses slowed down and then remained depressed, the number of applications started to increase dramatically after May 2020. “We assumed it was an opportunistic necessity.” , said Hatliwanger. One possible explanation was that people stuck at home were suddenly setting up cottage industries, like the production of masks. But it has never been entirely satisfactory. The surge peaked in July and August 2020 but has remained robust enough to produce the most new business for the year since at least 2004, the earliest date for which data was compiled. New business creation was strong in April of this year; Mai only dragged on July 2020.

Among the many puzzling elements of the boom was how it unfolded during a particularly brutal time for small businesses, whose failures were captured in a series of alternative data extending through the third quarter of 2020. The Death and Birth of companies can, however, tell the story of the US economy. Examination of the application forms indicated that ten types of businesses represented 75% of the total. By far the largest sector, accounting for almost a third, was retail and in particular electronic commerce. The Biden administration may be preparing antitrust agencies to attack the tech giants that dominate this field. But new entrants apparently see opportunities.

Other popular sectors include food preparation and accommodation, both of which have been hit hard over the past year; trucking (all these packages to be delivered); health care; and scientific and technical services – an amorphous category that can be a haven for skilled people who pull out of big business. Geographically, new business creation has been particularly robust in Texas and Florida; in percentage terms, the South Arc of Georgia, South Carolina and North Carolina did even better. New York, New Jersey and California have all fallen behind. As America has started to reopen, this difference between states has narrowed, but it is still greater than before the start of the pandemic.

Perhaps the most striking change is that four times as many one-man businesses have been founded since the start of the pandemic than during a similar period of the financial crisis. Obvious explanations, such as more people driving for Uber, don’t count towards these start-up stats. Other explanations include the possibility that many of these jobs may be a by-product of moving families, or perhaps evidence of the emergence of new types of remote work.

The strong numbers may also highlight how, despite the devastation of the past year, the country’s banking system has remained strong. Neither house prices nor household incomes have fallen, providing a kind of basis for starting a new business. Inevitably, however, the novelty of business growth has raised questions as to whether the trend continues and how important it is. After all, an employer identification number is just a piece of paper.

Barriers exist, including rising wages and a strong demand for labor, as well as government subsidies to stay at home. Tax and regulatory policy can become increasingly intrusive, costly and hostile. But assuming these can be bypassed, the historical trend has been that business creation was followed by high levels of job creation, innovation and productivity growth within one or two years.

This article appeared in the United States section of the print edition under the title “Down and up”

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