Monthly Archives: August 2014

Douglas Holtz-Eakin on Fiscal Stimulus

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He writes,

Discretionary Keynesian stimulus is built on the notion of propping up the existing firms, labor market relationships, and purchase patterns. In the aftermath of the Great Recession and Obama Administration stimulus efforts, new-firm creation dropped dramatically in the U.S. and the recovery proved modest at best. This is not a coincidence. Interfering with the core mechanisms for reinvention harms the capacity of the economy to transform itself for the future.

Sounds like a PSST story.

Holtz-Eakin’s piece is on a new conservative web site called Opportunity Lives. I like the look of the site, and almost every link on the front page tempts me to click. However, I was a bit disappointed that some of those links took me to teasers that linked to columns published elsewhere. If you are going to tease-and-link, then do so in a blog-like manner, without making me waste a click on my way to the actual article. See Arts and Letters Daily.

Meanwhile, the IGM forum recently reaffirmed that the economists on their panel think that the fiscal stimulus was just the cat’s meow.

Gentrification’s Flip Side

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Elizabeth Kneebone writes,

The economically turbulent 2000s have redrawn America’s geography of poverty in more ways than one. After two downturns and subsequent recoveries that failed to reach down the economic ladder, the number of people living below the federal poverty line ($23,492 for a family of four in 2012) remains stubbornly stuck at record levels. Today, more of those residents live in suburbs than in big cities or rural communities, a significant shift compared to 2000, when the urban poor still outnumbered suburban residents living in poverty.

I got to this by reading an article linked to by Tyler Cowen.

You may recall the Haiku I wrote based on my road trip:

Gentrification
Bike-friendly beyond all sense
Poor people moved…to where?

Basically, I explain the phenomenon as follows.

1. Spending shifts from goods to education and health care (long-term trend. See Kling-Schulz, The New Commanding Heights)

2. Inner cities become impoverished, as manufacturing relocates and urban blight drives out the middle class.

3. The biggest urban employers become universities and hospitals. As they expand their presence in cities, they employ a lot of educated professionals. This leads to gentrification.

4. The urban poor get pushed out to the suburbs.

It seems to me that a lot of economic trends can be explained by the New Commanding Heights story.

Entrepreneurs and Development

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Rafael La Porta and Andrei Shleifer write,

the bottleneck is the supply of educated entrepreneurs–people who can run productive businesses. These entrepreneurs create and expand modern businesses…This is how the informal economy dies out in the process of development…the policy message for how to grow the formal economy and shrink the informal one is to increase…the supply of educated entrepreneurs.

An interesting combination of two themes in the latest issue of The Journal of Economic Perspectives–entrepreneurship and development. But I worry that causality may not be established. That is, the increase in the supply of educated entrepreneurs could be a symptom rather than a cause.

Start-ups as Experiments

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William R. Kerr, Ramana Nanda, and Matthew Rhodes-Kropf write,

The costs of running experiments play a big role in entrepreneurship. Technological change in the laqst decade has dramatically lowered these costs, particularly in industries that have benefited from the emergence of the Internet

Right. But then why do we see the decline in the rate of start-up formation that I have discussed in other recent posts?

Later, they write,

Large corporations…often find it difficult to terminate experiments that aren’t working out.

Right again. And government is even worse at terminating failed experiments, of course.

I have to say that I found little in this article that wasn’t obvious to me before.

Others on the Aging of U.S. Firms

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Ryan Decker, John Haltiwanger, Ron Jarmin, and Javier Miranda write,

the typical young firm (as captured by the median) exhibits little or no growth even conditional on survival…however, among all the young firms, a few do exhibit very high rates of growth which yields a high mean growth rate.

Later,

the annual startup rate declined from an average of 12.0 percent in the late 1980s to an average of 10.6 percent just before the Great Recession, when it plummeted below 8 percent.

Still later,

firms aged five years or less made up about 47 percent of all firms in the late 1980s, but this number declined to 39 percent of all firms before the start of the Great Recession, and has declined further since then.

They point to one factor that I had thought of, which is that large retailers are reducing entrepreneurial activity in the “mom and pop” sector.

They also point to the possibility that startups now must spend more resources assembling a trained work force. That sounds to me like an intriguing notion. It might be the case that older, more experienced firms are better able to take advantage of the Great Factor-Price Equalization. In any event, it is probably hard to find a profitable strategy that involves creating lots of new jobs for unskilled workers in the U.S.

Let me also propose a New Commanding Heights explanation. The economy is shifting inexorably toward a larger share of spending on education and health care. Those are sectors where it is relatively hard to create a successful start-up. Do you compete against the incumbents, which have huge advantages in terms of reputation and government suppport? Or do you try to sell to the incumbents, in which case you have to overcome their bureaucracy?

Sure, there are lots of start-ups in education and health care. But my guess is that if you could come up with a way to measure the amount of effort required to be successful in a start-up, that amount would be higher in education and health care than in sectors, such as manufactured goods, on which the share of spending is declining.

Remember this story?

Health is just so heavily regulated, it’s just a painful business to be in. It’s just not necessarily how I want to spend my time. Even though we do have some health projects, and we’ll be doing that to a certain extent. But I think the regulatory burden in the U.S. is so high that I think it would dissuade a lot of entrepreneurs.

If demand shifts to sectors where entrepreneurship is harder, the rate of entrepreneurship is going to decline.

Robert Litan on the Aging of U.S. Firms

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He writes,

In a study just published on the Brookings Institution’s Web site, Ian Hathaway and I found that the share of mature firms, or those at least 16 years old, rose 50 percentage points between 1992 and 2011, from 23% to 34% of all firms in the U.S. economy. Not surprisingly, the share of all private-sector workers employed in such mature firms rose over the same time, from 60% to 72%.

This is, of course, the opposite of what I would expect, given the stimulus to entrepreneurship provided by the Internet. I would like to see more discussion of this finding on other economics blogs.

Robert Doar on the Ryan Plan

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He says,

He left out Medicaid, I think, because he recognizes that he couldn’t commit to preserving funding levels for it because it’s unrealistic as a fiscal matter. Unless we address Medicaid’s spending trajectory, we won’t be able to address our fiscal problems.

In other words, if he folds Medicaid in with other anti-poverty programs, he either has to cut the total amount spent on poverty or leave in place a fiscal doomsday machine. I’ll have to think about that argument.