Startup Surge

They say in Silicon Valley that you have to innovate your way out of a recession. It seems that U.S. entrepreneurs from high-tech to low-tech have been doing just that since politicians began turning society upside-down in their panicked response to Covid in 2020. Amid all the personal and financial destruction wrought by the lockdowners, we may finally be able to confirm a silver lining.

To be clear, the political storm clouds have never really dissipated when we consider the higher and unsustainable levels of federal spending that have now become the norm. Total federal debt is approaching $33 trillion and Washington’s fiscal habits are not improving. The Congressional Budget Office recently reported:

The federal budget deficit was $1.4 trillion in the first nine months of fiscal year 2023, the Congressional Budget Office estimates—$875 billion more than the shortfall recorded during the same period last year.

Our government is so massive that even after a nine-month period has ended, Congress’s official budget scorekeeper can only estimate the size of the deficit to the nearest $100 billion?

Dear reader, you were promised some good news and here it is. The necessity of dealing with misguided shutdowns seems to have been the mother of invention—and the inventions haven’t stopped since. Daniel Newman at the Economic Innovation Group notes:

Early-stage business activity across the United States remains robust through the first half of 2023, as the pace of new business formation actually strengthened over last year. Individuals filed nearly 2.7 million applications to start a business between January and June of this year, a 5 percent increase over 2022 and a staggering 52 percent increase over the same period in 2019. One-third of those filings were for new businesses likely to hire employees—a key subset of applications from the Census Bureau’s Business Formation Statistics demonstrating a “high propensity” to hire staff, if and when the business becomes operational. The volume of likely employer applications also remained well above prepandemic levels, surpassing the total from the first six months of 2019 by 36 percent. Startups and young companies—particularly those likely to hire employees—play an outsized role in job creation and wage growth.

Amen. Maybe the slow growth of the current economy continues to persuade would-be entrepreneurs to give it a go. There’s an important caveat here: bold, risk-taking capitalists fail a lot on the way to helping all of us enjoy new products and higher living standards. Mr. Newman writes:

Business applications serve as a timely and forward-looking indicator of economic activity and growth. However, it typically takes several months for an application for a new Employer Identification Number (or EIN, the underlying variable tracked in the data) to actually turn into a new business, and only a fraction of applications typically complete the journey. For instance, Census projects that about 9 percent of all applications filed in June 2023 will eventually become operational within the next two years.

Still, this welcome surge of private enterprise creation appears to be a durable trend—and a striking change from the preceding decade. Mr. Newman continues:

Business formation took a hit following the Great Recession and never fully bounced back—until the pandemic led to a gravity-defying jump that has entered its third year... The surge has stood firm against both inflation and recession fears—and even a banking crisis—such that likely employer filings are up more than 7 percent for the first half of this year compared to last. Assuming this trend holds, then the annual total is on track to be just shy of 2021’s record amount. That year’s total was supercharged by a wave of adjustments across industries and business models and a surge in Americans striking out on their own as the country adapted to the pandemic shock.

Take a guess where hardy capitalists are choosing to start these new companies. Mr. Newman reports:

Business application growth for the first half of this year continues to be strongest in the South, home to seven of the top 10 states with the largest increases since 2019. More granular data at the county level is available for total applications (rather than for likely employers) but only through the end of 2022. In general, county-level patterns reflect trends seen at the state level, with some of the biggest county-level increases in percentage terms seen across a band of southern states stretching from Mississippi to North Carolina. Much of the Mountain West also stands out for its above average performance.

Politicians will always bloviate about how much they intend to help underserved populations. But maybe the key is for all populations to have the opportunity to serve themselves by creating businesses that serve others. Mr. Newman cautions that more data is needed but sees interesting phenomena in recent business creation:

A persistent, open question... is why a large swath of the South has recorded some of the highest growth in recent years. In general, most business applications tend to be filed in places where lots of economic activity occurs—in populated urban areas and the surrounding metros—yet some of the strongest pandemic-era growth has been outside of these traditional hubs. Population growth, which has been particularly robust in parts of the South and West, can be a key ingredient for business formation, but many of the top-performing counties are actually quite rural... poverty rates and minority shares of the population are some of the strongest correlates with business application growth. Perhaps the economic, fiscal, or policy shocks related to the pandemic helped motivate or make possible entrepreneurship among certain demographics disproportionately.

Whatever their reasons, the entrepreneurial authors of this start-up surge give all of us new reason for optimism about America’s future.

***

Biden and Artificial Intelligence
Let’s hope that no would-be entrepreneurs are discouraged from challenging the current giants of technology. Among the skeptics of government policy in this area is Wayne Crews, who writes in Forbes:

Atop numerous directives and another of Washington’s periodic “Bill of Rights” proclamations misconstruing who is protected from what by such documents, Joe Biden is escalating federal power over the ascendance... of artificial intelligence (AI).

Biden’s newest White House foray includes an appeal for legislation and a “Fact Sheet” announcing “voluntary commitments” from select elite companies ( Amazon, Anthropic, Google, Inflection, Meta, Microsoft and OpenAI).

Mr. Crews recommends an alternative approach:

Job One is to discipline AI’s would-be regulators rather than further cartelize the sector with “blueprints” from a tainted Administrative State itself posing the primary societal risks from potential AI misuse.

You and I would have a tough time bringing any risky technology to market, especially one as allegedly fraught as AI. The government investment and steering artificially pumping it can disrupt necessary competitive disciplines, indemnifying companies from liability in ways that the free market might not allow.

The elephant in the room—billions in military outlays and government contracting pursuits for weaponry and intel—went unmentioned by Biden. But he announced seven new taxpayer-funded National AI Research Institutes, bringing the total to 25 and making AI even more remote from actual free enterprise capitalism than it already is.

***

James Freeman is the co-author of “The Cost: Trump, China and American Revival” and also the co-author of “Borrowed Time: Two Centuries of Booms, Busts and Bailouts at Citi.”

***

Follow James Freeman on Twitter.

Subscribe to the Best of the Web email.

To suggest items, please email [email protected].

(Teresa Vozzo helps compile Best of the Web.)

***