Under the title “Rotting-Flesh Reaganism,” R. R. Reno argues that Reagan’s campaign for economic freedom “made sense in 1980, a great deal of sense. But we’re in 2016 now, and we’re no longer suffering under suffocating collectivism and clotted, complacent capitalism... The politics of freedom is losing its salience.”
It surely is the case that the old Reagan message has less purchase now than it did a quarter-century ago. The word “entrepreneurship” hardly was spoken during the recent Republican primaries. That is disturbing, because the empirical evidence argues strongly that today’s capitalism is more “clotted” and more “complacent” than at any time for which we have data.
Here are some parameters that show just how cartelized the American economy has become:
First, and most alarming, startup businesses contributed virtually zero new jobs during the post-2009 employment recovery. Nearly all the employment growth since the depth of the Great Depression came among the 1,500 largest American public companies by market capitalization. In a February study for Asia Times, I showed that the reported employment growth of the S&P 1,500 companies was nearly identical to the total increase in payroll employment reported by the Bureau of Labor statistics during the past seven years.
That is a drastic and unprecedented reversal of historic patterns. As I observed in the Asia Timesstudy, “Economists from the US Census Bureau and the University of Maryland showed in a 2014 study that startup firms created an average of 2.9 million jobs a year between 1980 and 2010—twice the 1.4 million average increase in employment. In other words, startups created 2.9 million jobs a year while established firms lost 1.5 million jobs a year.”
Second, business formation dipped below the business closure rate. As a Gallup study reported, “The startup rate crossed a critical threshold in 2008, when the birth rate of new businesses dropped below the death rate for the first time since these metrics were first recorded.”
Innovation led by startups is the engine of productivity growth. In line with the disappearance of business startups, productivity growth during the past five years has fallen to the lowest level since the Bureau of Labor Statistics began keeping the numbers. The last time growth was almost this low was in the late 1970s, that is, the economic decline that Reagan successfully reversed.
Third, close to half of the increase in corporate profits during the past decade can be attributed to regulatory rent-seeking by large corporations, according to a June 2016 study by Boston University economist Jim Bessen. Bessen concluded that “investments in conventional capital assets and R&D account for a substantial part of the rise in valuations and profits especially during the 1990s. However, since 2000, political activity and regulation account for a surprisingly large share of the increase.”
One parameter that captures the transformation of once-creative technology companies into quasi-monopolies is the volatility of share prices. New market entrants offering innovations have far more upside and downside than established companies, and their stock prices consequently trade with greater volatility. We observe that during the late 1990s, the technology sub-sector of the S&P 500 Index traded with far greater volatility than the broad index. After 2008, the volatility of the tech sector converged on that of the index.
With so much evidence that American capitalism has become clotted and complacent, why haven’t the candidates given more attention to the problem? Ted Cruz spoke to the issue, but largely in the abstract. Donald Trump repeated that the system is rigged, and that resonated with the voters. Before the Great Recession, ordinary people could start businesses and get rich. Everyone knew someone who had gotten rich. With the disappearance of business startups, social mobility has declined. The voters conclude that the lottery is rigged, because they don’t see any winners.
More concerning is that the last three waves of entrepreneurs—the Internet startups of the 1990s, the real estate bubblers of the 2000s, and the horizontal hydrocarbon drillers of the last few years—have come to a bad end. It may be that what Keynes called the “animal spirits” of entrepreneurs are depressed by repeated failures.
What would it take to revive entrepreneurship? Unlike in 1980, when the top marginal tax rate was 70 percent, there is no single measure that will do the trick. Rollback of regulation is required. (The Congressional Budget Office estimated that Obamacare alone will prevent the creation of 2.3 million new jobs by 2021.) Aggressive funding of frontier research and development, comparable to the Kennedy moonshot and the Reagan Strategic Defense Initiative, is an indispensable part of the mix, as Henry Kressel and I argued in 2013 in The American Interest. Cuts in the corporate tax rate and capital gains tax rate would help. Shifting immigration priorities to ease residency requirements for prospective entrepreneurs also would make a difference.
Without innovation and entrepreneurship, America’s economy will continue to stagnate. As Reno argues, we need solidarity. But without productivity growth, solidarity amounts to serving narrower slices of a shrinking pie. We do not require much imagination to see where that will lead.