America doesn’t have a small business problem. It has a startup problem.

at 09:46 AM ET, 10/31/2011

We’ve seen before that America’s small-business sector is surprisingly tiny compared to other countries. What’s more, small businesses aren’t even the main driver of job growth in the United States. And that’s not necessarily a bad thing. After all, Italy and Greece both have disproportionately large small-business sectors, and no one thinks the United States should try to be more like Italy or Greece. The obsession with small businesses is a little misguided.

(Jin Lee/Bloomberg)
Instead, as economists have found, young firms are the key drivers of growth. New businesses are the real job creators. So how does America stack up here? Actually, not so well. As James Wimberly finds, back in 2007, before the financial crisis hit, the United States ranked just 23rd among wealthy countries in new businesses formed per thousand working adults. That’s below countries like New Zealand, Iceland, the United Kingdom, Canada, Sweden and Norway. But we're also, a little unexpectedly, lagging behind countries like Hungary and Slovenia.

America’s low-ranking seems a little surprising. After all, many erstwhile U.S. startups — Google, Apple, Boeing, FedEx — are now the envy of the world. So why don’t we have more of them? Wimberly suggests that the thin U.S. safety net might be a factor. It’s easier, after all, to take a risk, quit your day job, and start a new business if you don’t have to worry about getting health-care coverage. One piece of evidence on this score: A 2010 RAND study found that Americans are much more likely to start new businesses as soon as they turn 65 and qualify for Medicare.

Alternatively, perhaps startups are having trouble securing financing. In October, the White House Council on Jobs and Competitiveness put out a report noting, among other things, that IPOs under $50 million have plummeted since the 1990s. The council recommended loosening some of the financial disclosure rules in Sarbanes Oxley for small startup firms. To take one example, Annie Lowrey has noted that SEC rules currently prevent new businesses from getting “crowd-funding” from a slew of small investors.

How much of a difference would these tweaks make? It’s unclear, and the report provides no estimates. It does, however, note that the number of new businesses formed in the United States has dropped 23 percent since 2007. If the rate of start-ups had simply continued at its pre-recession pace, there’d be 1.8 million more jobs in the United States right now. It’s hardly a given that boosting the number of start-ups further is the key to prosperity — after all, per Wimberley’s figures, countries like Germany and Austria seem to get by just fine with dismal startup rates. Still, focusing on new businesses seems like a better target for policy than focusing on small businesses per se.

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