This article was originally published on our Forbes blog and can be found at: http://www.forbes.com/sites/thesba/2012/04/09/30-year-low-lets-stimulate-the-startups/.
The decline in new business formations and the decrease in number of jobs per new start up are causing innovation stagnation…why? Consumer confidence is very low.
According to a recent article from the Brookings Instution, small and medium-sized businesses are still closing down at a frightening pace, and new business formation is at historic lows. The U.S. workforce participation paradoxically lies among the lowest in the industrialized world.
How do we fix this?
It is imperative that we determine the correct policies that will improve the environment for entrepreneurs to start and grow businesses. Government and businesses need to communicate and do a better job as to how they can serve each other and work together. Business owners need deficit reduction, smaller government, and lower taxes. The financial crisis and access to capital is limiting new business formations and growth.
Why are new businesses an engine of growth for the economy?
The decline in new business formations has led to the failure of the job market bouncing back. Without new business formations, our hiring numbers will not improve. New businesses are a sign of stimulated entrepreneurship and innovation; both are key to improving the overall economy. The United States needs to keep up with competitiveness through research, development, and ultimately, new businesses.
When a new business is formed, there are typically many things that occur which stimulate the economy. They are things like:
- A new commercial lease is signed for business real estate
- New employees are hired up from zero
- Accountants are hired
- Lawyers are hired
- Plant and equipment are purchased
- Computer hardware is bought
- Software is bought
- Taxes are paid in various ways to state, federal, and local government.
New business formation has a multiplier effect on the economy and drives lots of business activity. Of course, we understand that not all new businesses will stay in business. Simply said, the economy operates off of supply and demand.