Small business formation is booming in the United States. We look at the types of new businesses that are booming and why this type of trend has been synonymous with economic growth in the past.
AILSA CHANG, HOST:
There’s a boom in new businesses in America. It goes back to the summer of 2020, during the pandemic, during the lockdowns and the pandemic aid that was pouring in. For a while, it looked like it was going to be a short-lived blip, but it’s still going. And to talk more about this, we have Greg Rosalsky from Planet Money on NPR. Hey Greg.
GREG ROSALSKY, BYLINE: Hi, Ailsa.
CHANG: OK, so why is this startup boom so persistent? What’s driving it?
ROSALSKY: Initially, these businesses were created for a variety of reasons related to the pandemic. We saw a boom in online retail, warehousing, and trucking. Also, some unemployed people may have turned to entrepreneurship out of necessity or used pandemic relief to try to realize that long-held entrepreneurial dream they’ve always had. But now, four years later, we’re seeing a broader boom in new businesses.
We’ve crunched some numbers here at Planet Money, comparing the three years before the pandemic hit to the three years since. The data suggests that there are now an average of nearly 60% new businesses being created each year.
CHANG: That’s very interesting. And of course, other people are interested because startups are a source of job creation and innovation, right? So what kind of companies are we seeing coming out of that?
ROSALSKY: There are two broad categories. I talked to a guy, John Haltiwanger. He’s one of the top experts on startups in the United States. He says the first broad category is companies that are capitalizing on a huge shift in the population post-pandemic. Many office workers are no longer spending five days a week in the office in city centers. They’re working remotely or in a hybrid way.
JOHN HALTIWANGER: We know that this has had an impact on downtown areas. So we know today that in major cities there is a ripple effect in terms of an increase in the number of new businesses.
CHANG: A donut effect? What does that mean?
ROSALSKY: A doughnut effect – it’s like this hole that’s lacking in new business creation in the inner cities and then, like, a delicious fried dough of business opportunity in the suburbs.
CHANG: (Laughs).
ROSALSKY: Yes, it makes sense, right? People need their coffee, their sandwiches, their gym closer to their office, which is now more often at home.
CHANG: Okay. So there are a lot of new businesses in the suburbs of cities, but I imagine there are also a lot of businesses that have closed in the city centers, right? Considering that, how big is this boom?
ROSALSKY: You know, I think you’re right to ask that question, because if the startup boom were just a redistribution of economic activity to new places, the benefits to the economy would be pretty limited. For example, if you were in Manhattan, there would be more coffee shops in New Jersey and Brooklyn. That’s why Haltiwanger is much more enthusiastic about the other big group of new companies, tech startups.
CHANG: Wait, so you’re saying this is more than just the usual hype around tech startups?
ROSALSKY: Yeah. Actually, what’s interesting is that there was a period where venture capital seemed to dry up after the Fed started raising interest rates. That hurt some Silicon Valley startups. But now we’re seeing a rebound and an increase in the number of startups working in the AI space.
This is where new companies play a special role in reviving the economy. They are smaller and more dynamic, and they tend to be the ones that test new technologies. They experiment, they force their competitors to adapt, to innovate and to become more efficient.
And it’s something that can make the economy more productive overall. It can make products and services more abundant and cheaper. It’s like sprinkling fairy dust on the economy, which improves people’s living standards. The last time we saw a significant increase in productivity growth was in the 1990s, during the dot-com boom.
CHANG: Wow.
ROSALSKY: This may be good news for America.
CHANG: Hopefully this is good news. Thank you very much, Greg.
ROSALSKY: Thank you.
CHANG: That was Greg Rosalsky, who writes the Planet Money newsletter. That’s where this article originally appeared. Sign up for the Planet Money newsletter at npr.org/planetmoneynewsletter.
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