Explaining Southern California's economy

Why entrepreneurs can't save the U.S. economy

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Sheila Collins protests with others outside of U.S. Senator Charles Schumer`s office to demand more jobs on April 1, 2011 in New York City.

America loves entrepreneurs. And in the current dreadful economy, we're looking to the risk-takers and idea-guys more than ever to get us out of our unemployment rut. In some respects, you could call the entire Republican economic platform a formula for spurring entrepreneurship, with its combination of tax cuts and reduced regulation. Then again, you could say the same thing of the Democrats, who want the government to spend more money to stimulate demand for the products that entrepreneurs would create.

KPCC's Shereen Marisol Meraji reported from Los Angeles' entrepreneurship central today on the Madeleine Brand Show. She visited a co-working space and investigated the process of business-building at its most grassroots level. I'm energized by stuff like this, but I also have to throw a small amount of cold water in the face of the idea. The fact is that as important as entrepreneurs are to the economy, it's unlikely that they'll be able to create enough jobs to hammer down a 9.1 percent unemployment rate nationally and a 12-plus-percent unemployment rate in LA County.

Here's a good take on the problem, from Scott Shane at Small Business Trends. He wrote this in the guts of the downturn in 2008, so the situation now isn't nearly as dire. But the basic problem persists:

[I]n an average month [in 2007], 212,367 new businesses were created to generate the 201,478 new jobs. That means that to create enough jobs to replace the 533,000 jobs lost in November [of 2008], we would have needed approximately 561,033 new business starts. That’s a lot of entrepreneurial effort.

But we’re not finished yet. To create this number of start-ups, we need many more people trying to become entrepreneurs. Only about one-in-three people who begin the process of starting a business actually create a business within seven years. So, we would have needed about 1.68 million people to have initiated the start-up process some time before November 2008 to have replaced the jobs lost during the month of November. That’s huge amount of entrepreneurial effort.

What’s my point? It’s not to depress you. It’s to illustrate an important issue. As valuable and important as entrepreneurship is in this country, the scale of the economic downturn is so large that we can’t offset it just by boosting our level of entrepreneurial activity. We need to do something to fix what’s going on in the big companies too.

His last point really gets to the crux of the matter. Entrepreneurs can nibble at the edges of the challenge, but for industrial-scale job creation to take place, the big boys — a.k.a industry — need to get in the game. We've actually seen some positive activity this year in the auto industry, where demand for new cars and trucks has remained solid and hiring has accelerated in Detroit as General Motors, Ford, and Chrysler recover from their worst period since the the Great Depression.

What's holding corporations back — and they are holding back, sitting on piles of cash from profits that they're essentially afraid to deploy — is the absence of demand in the economy. Consumers are shedding debt, which has made them into savers rather than spenders. In an economy where the consumer represents 70 percent of activity, this is a real drag on the incentive for businesses to ramp up production and add new workers.

Of course, there is a positive, for the entrepreneurs of the the world. On the one hand, they're probably going to be creating jobs mainly for well-educated "knowledge workers," whose unemployment rate is in the single-digits, versus, say, construction workers, whose opportunities have been decimated by the housing crisis.

On the other hand, many entrepreneurs are actively engaged in what economists and MBA-types call "disruptive innovation." They're focused on the technologies that will change the way we do business in the future. Over the long haul, this is where true wealth comes from. But in the short term, we need a quicker fix. So bring on the entrepreneurs. But bring on something else, too.

Follow Matthew DeBord and the DeBord Report on Twitter.

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