Will America’s Startup Boom Transform the Economy? : Planet Money : NPR

In 2020, as the world was going through the hell of the COVID-19 pandemic, economist John Haltiwanger discovered something truly strange about the American economy: Americans were starting new businesses at a record pace.

Haltiwanger is one of the foremost experts on business formation in the United States. He even helped the U.S. Census Bureau compile official statistics to track the phenomenon. According to Haltiwanger, an increase in new businesses is generally a good sign for job creation, innovation, and productivity growth in the economy. But until 2020, the data painted a rather bleak picture. Haltiwanger wrote research papers titled “Top 10 Signs of Declining Business Dynamism and Entrepreneurship in the United States.”

So in the summer of 2020, when Haltiwanger first saw the data suggesting a startup boom, he and his colleagues were stunned. “At first, we thought, ‘There must be something wrong,’” Haltiwanger says.

In November 2020, when I first spoke to Haltiwanger for the Planet Money newsletter, it was clear that the startup boom was real. But it wasn’t clear that the surge in new businesses was simply a pandemic-related phenomenon that would quickly fade. Much of that boom was visible in the online retail sector.

But the startup boom continued… well, to grow. We saw a second wave of new companies starting in 2021. So I spoke to Haltiwanger again in June of that year. At that time, he was more optimistic that the surge in new companies was a harbinger of great things to come for the economy. He was particularly struck by the revolutionary changes that widespread remote work had brought to corporate life.

But, to be honest, I was still a little skeptical about this boom. Many small businesses were devastated by the pandemic and closed up shop. Many people lost their jobs. Perhaps many of them were starting new businesses in a desperate attempt to pay their bills or get more federal aid, or simply out of boredom.

The most plausible one, in my view: Maybe this surge in new businesses was just a reflection of the abrupt shift we had experienced from a weird pandemic economy to a return to normal. The first shift created one-off business opportunities, like selling hand sanitizer or masks, or delivering cheeseburgers and fitness equipment to homes, etc. Then, when we returned to normal and consumers started spending money outside of their homes again, it created new opportunities for the revival of brick-and-mortar businesses, like bars, gyms, and restaurants. These were the same types of businesses that had been devastated by the pandemic. Maybe, I thought, this was all just a long, arduous journey that eventually brought us back to square one, with limited long-term benefits to the economy.

But we are now well past the pandemic crisis and even the economic recovery. It’s been almost exactly four years since the startup boom began, and there is still a bonanza of new business creation in the United States. It’s harder to underestimate that.

“I would say we are at a new plateau that started in 2021,” Haltiwanger says. Comparing the three years before the pandemic began with the three years since, the data suggests that there are now, on average, nearly 60% new businesses being created each year.

The boom is real. It’s sustainable. It’s visible in both one-person businesses that are starting out on their own and those that are likely to grow and employ people. It’s visible in traditionally underrepresented minority communities. And, Haltiwanger says, the boom may be a sign that something fantastic is about to happen in the American economy: a long-awaited surge in productivity growth, which is the magic bullet for making society richer.

But what is driving this boom? And how optimistic can we be about the positive impact it will have on the country?

What is driving this boom?

Haltiwanger says that basically two large groups of new companies are being created these days.

The new companies in the first group are capitalizing on a huge post-pandemic demographic shift. Many office workers are now working either fully remotely or in hybrid mode. “People don’t spend five days a week in the office in big city centers,” Haltiwanger says. Where people spend their time, they spend their money. Bad news for downtown businesses. Good news for businesses where office workers live.

That’s why one of the biggest growth opportunities for businesses is in the food and hospitality sector, especially in the suburbs. Haltiwanger and Ryan Decker call it the “donut effect.” There’s now a void in many major business districts that lack vibrant economic activity, and a delicious array of new business opportunities in the suburbs that surround them. Office workers need their donuts, coffee and sandwiches close to their desks, which are now more often than not at home.

But if the story of the new economic boom were limited to suburban delis, gyms, and doughnut shops, the benefits would be somewhat limited. Sure, remote and hybrid work is a revolutionary change for much of the workforce, but the economic boom it has fueled could be seen primarily as a simple geographic redistribution of economic activity. Fewer coffee shops in Manhattan. More in New Jersey or Brooklyn. It would likely have only a limited positive effect on the economy.

That’s why Haltiwanger is much more enthusiastic about the other big group of new companies he identified in the data: tech startups. This boom, he says, is proving to be the most persistent. These tech startups come in many guises, but one subcategory has really caught his and other economists’ attention: startups working in artificial intelligence.

“I think we’re in a new wave of technology,” Haltiwanger says. “I think AI is the perfect example of that.”

What this boom could mean for the economy

The last time the United States saw a significant increase in productivity was in the 1990s, during the dot-com boom. Productivity growth means we can produce more stuff in less time, which translates into a greater abundance of products and services and lower prices. It’s like pixie dust being sprinkled over the economy, improving society’s standard of living.

“The first thing that happened in the early 1990s was not an increase in productivity or anything like that,” Haltiwanger says. “That came later.” What happened first, he says, was an increase in the number of new startups. He calls the startup boom a “leading indicator” of this virtuous cycle for the economy.

According to Haltiwanger, the startup boom is both a reflection of technological innovation and a powerful driver of innovation. Startups discover how to use new technologies. They experiment and develop new products with these technologies. They force their competitors to adapt and innovate.

I should mention, however, that when I spoke to Haltiwanger in 2021, he was also optimistic that the startup boom would lead to a long-awaited increase in productivity. But three years later, he admits, we still don’t see it. “The productivity statistics are pretty anemic,” he says.

There is a cliché used in articles about whether technological innovations will ultimately lead to productivity increases: references to economist Robert Solow. In the late 1980s, as the personal computer was spreading like wildfire in the United States, Solow wrote, “The computer age is visible everywhere except in the productivity statistics.”

Haltiwanger points out that Solow wrote this in 1987. And, he says, “the productivity increase didn’t really show up until the mid-1990s.” That takes time.

Economist Erik Brynjolfsson and others have conducted research suggesting that the effect of new technologies on productivity growth may even follow a “J-curve.” In other words, productivity may actually fall before it rises, because companies must invest in the new technology and spend time figuring out how to use it. Only then will they, and the economy as a whole, see tangible results.

It’s possible, however, that AI will show up in productivity statistics sooner than it did when the personal computer became widespread. With personal computers, it took a long time for people to buy the physical hardware, figure out how to use it, and then restructure business processes around it. Most AI consumers don’t need new hardware. AI is also smarter than traditional computer programs and can require less user intervention to improve workflows. Still, Haltiwanger says, it may take some time for companies to figure out how to leverage AI to improve productivity.

There is currently a big debate about whether AI will revolutionize business processes and boost productivity in the economy. Economists like Daron Acemoglu believe that AI will have only limited potential for productivity growth in the near future. Others, like Brynjolfsson, are more optimistic.

Haltiwanger, who focuses on the startup boom, continues to ask big questions. Is it just a coincidence that we’ve seen a distinct wave of new tech and AI startups at the same time we’ve seen waves of new companies created in response to the pandemic and the population shift to remote work? How much of this is simply a desire for people to be their own bosses or to achieve a better work-life balance? Will the boom finally lead to the long-awaited revival of productivity growth? Haltiwanger says he’s also keeping an eye out for the possibility of “gazelle companies” taking off and racing to transform our economy, much as Google and Amazon did around the world in the 1990s.

Whatever this startup boom ultimately means for the economy, we look forward to speaking to Haltiwanger again—in the years to come—as the data continues to flow.