“The President unfortunately has taken every single path that has led towards a restriction in job growth, has made it harder for new businesses to start up. As a matter of fact, the number of new business start-ups per year has dropped by 100,000 per year. This is just unacceptable and it’s one of the reasons why it has been so hard for this economy to recover.”
--Mitt Romney, on “Fox & Friends,” April 19, 2012
The uncertain economic environment continues to form the core of former Massachusetts Gov. Mitt Romney’s campaign, as witnessed by his comments made last week. A reader asked whether these statistics on new business start-ups were correct, so we decided to investigate.
The Romney campaign directed us to congressional testimony earlier this year by Brookings scholar Martin Neil Baily, who was chairman of the Council of Economic Advisers under President Bill Clinton. In the testimony, titled the “The State of American Small Business,” Baily noted that “the number of start-up establishments has fallen off to a greater extent in this recession than in the 2001 recession.”
His testimony was accompanied by a chart, prepared by McKinsey Global Institute using Bureau of Labor Statistics data, that gave the year-to-year figures through 2011, starting in March. (The BLS uses March-to-March figures because the data is less affected by holidays and other factors.) The Romney campaign used the 2008 figure, 627,000 new businesses, and subtracted the 2011 figure, 536,000 new businesses, for a decline of 91,000.
Eric Fehrnstrom, senior advisor to the Romney campaign, said, “2009 is the first Obama year and he is responsible for the decline during that year. 2008 is the baseline.” So, he said, when using annual numbers, “we use 2008 (which covers Jan 2008-Dec 2008) as the baseline and treat 2009 as the first year of Obama’s term.”
But here’s the rub. The McKinsey chart — and the BLS Web site on this data — says the figure reflects the companies created the year before. In other words, the 2009 number would reflect start-ups created from March 2008 to March 2009, which is very close to the Jan. 2008-Dec. 2008 baseline first cited by the Romney campaign.
Fehrenstrom then acknowledged it was March to March data, but added: “The point is the same -- we are comparing activity under Obama to activity that largely took place before Obama took office.”
However, the 2008 number counts start-ups created from March 2007 to March 2008 — which includes many months before the recession even started in December 2007.
David Talan, a BLS economist who works on this data, said the correct starting point for measuring the change in new business creation under Obama would be the 2009 figure.
Baily also said that the correct starting point would be 2009, not 2008--as did Susan Lund, director of research at the McKinsey Global Institute and co-author of the report that originally contained the chart.
Using 2009 as our starting point, we end up with a result that is vastly different than Romney’s claim of a 100,000 plunge. The figure for 2009 is 548,000 start-ups, so that’s a decline of 12,000 by 2011. But let’s not forget the recession did not end until June 2009. From 2010 to 2011, the number increases by 29,000.
“As a factual matter, of course it is correct to say that start-ups declined in the years Obama was president,” Baily said.
“Who is responsible for that? That is a judgment call,” Baily added. “Overwhelmingly, economists would tell you that demand/sales were falling or weak over this period and that this is the Number One reason why start-ups fell and small business employment fell. And Obama inherited an economy that was falling like a stone and a financial sector that was on the verge of collapse. So the deep business cycle recession that Obama inherited is the main reason for the decline of start-ups.”
The March 2012 data will not be available for another seven months; there is a lag because these figures are based on filings of unemployment insurance taxes. But we can get a peek at the trends by looking at the quarterly data available on the BLS Web Site. (The quarterly numbers may include businesses that fail in less than a year, so the figures are not directly comparable to the annual tally.)
The figures show that 333,000 businesses were created in the first quarter of 2009, compared to 342,000 in 2010 and 340,000 in 2011. For the second quarter, the equivalent figures are 351,000 in 2009, 356,000 in 2010 and 356,000 in 2011. So, the numbers suggest some improvement, but a bit of a stall this year.
“The decline in new business formation is due to the sharp fall in aggregate demand in the recession and continuing uncertainty over the recovery, combined with a big hit to funding sources.” Lund said. “One of the main sources of new business funding is the entrepreneur’s own credit cards and mortgage and investments and loans from family and friends,” but household wealth has plunged and there are tighter standards for mortgages and home equity lending.
Any president ultimately is responsible for the economy under his watch, but we have long argued that it makes little sense to assume economic trends turn as soon as he takes the oath of office. Much of what happens in the economy has little to do with presidential decisions.
“As I recall, the George W. [Bush] economic team, which is the same as the Romney team, expended a lot of effort arguing that the 2001 recession was Bill Clinton’s fault, so it is ironic that they now want to blame Obama for everything that happened after January 2009,” Baily said.
The Pinocchio Test
The bottom line is that experts at the agency that generated the data and the organization that analysed it, as well as the person who used it in congressional testimony, all say Romney is starting with the wrong date.
By using the 2008 numbers, Romney essentially is comparing pre-recession figures with post-recession figures, not data that reflects what happened under President Obama. Just as with job creation under this president, the results starting from 2009 are not great, showing a slight overall decline and then modest improvement once the recession ended.
As the president well knows, that uncertain result has made for a challenging reelection campaign. But Romney has goosed his figure so much that it has little credibility.
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