Entrepreneurship Is Falling—and That's Great News

Too much of a good thing is a bad sign for the economy

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Entrepreneurship is a bit like white blood cells. It's a good thing, of course, and something we need. But more of it isn't necessarily good news. It fact, heightened levels of it can be a sign that something is wrong.

Take New Orleans, for example, where per capita start-ups have shot up since Katrina. A resurgent economy needs younger talent, but this is also a sign of a broken city with more cultural appeal than business opportunities, which has forced new residents to start their own companies rather than join existing, thriving enterprises.

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In the U.S., start-up-rates perked up after the recession (see chart at the top) and then fallen fast. National media made something of a fetish of entrepreneurs, since this uptick corresponded with a ostensible golden age in Silicon Valley start ups. But many of them were reluctant entrepreneurs, or last-resort entrepreneurs. They weren't starting a company just because they had a great idea. They were starting a "company" because it was an alternative to fruitlessly emailing human resources departments all afternoon.

"It's likely not a coincidence that the number of new businesses created dropped when the economy improved last year," said Dane Stangler, director of research at the Kauffman Foundation. "While a stronger economy is good for business growth, it also means the unemployed find jobs instead of starting firms."

This isn't a new trend. A historical study out of the University of California and RAND found that higher local unemployment rates consistently predicted higher rates of start-ups -- especially sole proprietorships and other firms that never grew beyond one person.

The sort of start-ups that an economy wants -- and that people like Steve Case rightly praise -- are the kind with ramp-up potential. With multinational corporations mostly expanding their hiring abroad, the burden falls to fast-growing start-ups in competitive sectors to support local job creation. In the data, an out-of-work dad who starts a one-man-operation to sell his welding skills might look as entrepreneurial as two in-demand software engineers with huge potential to scale their smartphone app. We want less of the first, more of the second.