Decline in U.S. startups collapses growth, manufacturing, and the economy

(Chen Yeh is an economist in the Research Department at the Federal Reserve Bank of Richmond, “Why Are Startups Important for the Economy?,” pg online @ https://www.richmondfed.org/publications/research/economic_brief/2023/eb_23-06 //um-ef)

Effects of the Fall in the Startup Rate How significant is the fall in the startup rate for aggregate outcomes such as employment and productivity? Early evidence from the 2001 book chapter "Aggregate Productivity Growth: Lessons From Microeconomic Evidence" indicates that the consequences of a fall in the startup rate could be large. The authors find that more than 25 percent of aggregate productivity growth in the U.S. manufacturing sector is due to the net entry margin, or the role of entering net of exiting firms. While these numbers are a good indicator for the importance of startups, they do not provide quantitative evaluations for the secular decline in the startup rate. Two studies have filled this gap, however. First, the 2016 paper "Older and Slower: The Startup Deficit's Lasting Effects on Aggregate Productivity Growth (PDF)" shows that the fall in the startup rate has sizable effects on aggregate productivity. In their counterfactual exercise (holding the economy's startup rate and firm age distribution constant at their 1980 values), the paper's authors find that aggregate productivity over the period 1980 to 2014 could have been 3.1 percent higher. To put this "startup deficit" in perspective, real income for a median family would have been $1,600 higher in 2014 alone. Second, the 2019 paper "Grown-Up Business Cycles" finds that the observed secular decline in the startup rate has a significant impact on aggregate employment. If the startup rate had remained constant between 1987 and 2012, aggregate employment would have been, for example, 11.4 percent higher in 2008. Furthermore, there are important implications for the economy at business cycle frequencies. In one of their examples, the authors show that aggregate employment would have recovered almost a full year earlier after the Great Recession if the startup rate decline would not have occurred. All in all, several studies have indicated that startups' dynamics are important for understanding aggregate outcomes. Given the observed secular decline in startups, does this imply that we should subsidize entrepreneurs to promote new business entry? This is not a straightforward question since startups show up-or-out dynamics: Untargeted subsidies could fall in the hands of entrepreneurs who lead failing businesses. Obviously, one would want to subsidize gazelles instead.