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HomeTechA silver lining from the pandemic: A surge in startups

A silver lining from the pandemic: A surge in startups

The COVID-19 pandemic hurt the U.S. economy in a lot of ways. It choked global supply chains, sent consumer prices soaring and briefly knocked millions of people out of work. But it might have also broken America out of a decadeslong entrepreneurial slump.

New research from economists at the University of Maryland and the Federal Reserve presented Friday at the Brookings Institution, a think tank in Washington, documents a potentially durable surge in Americans starting businesses during and after the pandemic. The new companies range from restaurants and dry cleaners to high-tech startups.

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That surge appears to be a direct response to how the fallout of the virus quickly but permanently changed how many Americans live and work.

Those changes opened doors for entrepreneurs, who, economists often contend, are best able to respond to sudden business opportunities. The opportunities came when the federal government was showering Americans with trillions of dollars in pandemic assistance, which may have given many people the capital needed to start a company and hire workers.

Federal statistics showed early signs of the business-creation burst. Some economists dismissed it initially as a fluke of the pandemic – one likely to quickly fade.

That hesitancy was based in part on studies showing that startup activity had been declining for several decades. A paper this month by economists at the University of Chicago and the Fed showed that startup activity and employment, as a share of the economy, had fallen since the 1980s. A handful of large firms increasingly dominate industries.

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But the new paper by John Haltiwanger of the University of Maryland and Ryan Decker of the Fed, two of the nation’s leading researchers in the study of economic dynamism, suggests that the pandemic may have broken those trends. “We find early hints of a revival of business dynamism,” Decker and Haltiwanger wrote.

They cautioned that “in many respects it is too early to ascertain whether a durable reversal of pre-pandemic trends is occurring,” in part because the revival is still so young.

Champions of policies to increase dynamism were less restrained. “This is evidence of a genuine resurgence of economic dynamism led by a spike in startup activity unlike anything we’ve seen in the post-Great Recession era,” said John Lettieri, the president and CEO of the Economic Innovation Group, a think tank in Washington.

Haltiwanger and Decker drew evidence from a wide variety of publicly available sources on new and existing businesses. They found evidence of a sustained increase in new-business activity – and job creation from those businesses.

The maps of that entrepreneurship track closely with the new realities of an economy in which more Americans work from home, with fewer startups in downtowns and a large increase of them in suburban areas.

Monthly applications for new businesses that are likely to create jobs are 30% higher than they were in 2019, on the eve of the pandemic, the economists report. Those applications spiked shortly after the pandemic hit, when Congress first pumped stimulus into the economy. They fell briefly and then jumped again around the end of 2020 and the start of 2021, when lawmakers sent more money to people and companies. In that time, relatively young companies have grown to account for a larger share of employment and total firms in the economy.

The paper suggests those trends might be an overlooked reason that businesses spent the past several years complaining of a labor shortage in the United States, even as workers returned to the labor force faster and in greater numbers than after any other recession this century. Put simply, existing companies may have suddenly found themselves competing for workers with many more startups than they were used to.

One question the study does not address directly is whether President Joe Biden can rightfully claim any credit for those developments, as he has repeatedly tried to do.

“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,” Biden said this spring.

White House officials said Thursday that they were encouraged by the study and continued to believe that the $1.9 trillion American Rescue Plan, which Biden signed into law in early 2021, helped support an entrepreneurial surge. It sent money to people, businesses, and state and local governments.

“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,” Jared Bernstein, the chair of Biden’s Council of Economic Advisers, said in an email. “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.”

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