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CBO provides ideas to counter entrepreneurship’s four decade decline

January 14, 2021

Entrepreneurship in the U.S. has declined significantly over the past four decades, which has contributed to an annual productivity growth of 3 to 4 percent less than it would be if entrepreneurship had remained unchanged since the early 1980s. Those are among the findings a report from the Congressional Budget Office (CBO), which points to three contributing factors for the decline and outlines measures policymakers could put in place to help spur entrepreneurship.

With the current state of the economy, CBO’s assertion that past recessions have been a contributing factor to entrepreneurship’s decline should raise a greater drive to combat those effects. The report notes that the recession of 2007-2009 in particular played a role, when firms faced restricted access to financing and a weaker economy. The burst of the dot-com bubble in the late 1990s seems to have been a significant and negative turning point for productivity gains by new, technology-focused businesses.

CBO also notes that demographic forces have affected entrepreneurship, such as a slower growth rate of the labor force after 1980. CBO also expects a drop in net immigration to the U.S. resulting from the pandemic. Regulation is another factor, but CBO points out that a linkage to changes in the regulatory environment has not been clearly established in research literature.

When looking at federal policies that could help address many of the factors that inhibit entrepreneurship, CBO says policymakers could create a programs to give new firms access to credit. The reports also points out that the Small Business Administration’s (SBA’s) existing credit programs could be expanded, although CBO does not expect much additional productivity or entrepreneurship gains from the portion of those programs that provide benefits to small businesses that are not new ones.

The CBO provides other ideas for policymakers to support entrepreneurship, including:

  • direct a share of the federal government’s spending on R&D to be set aside for new companies;
  • subsidize products that are more likely to be supplies by cutting-edge new firms, or make tax preferences used primarily by small business more generous;
  • expand programs that provide visas for highly skilled workers and entrepreneurs immigrating to the U.S.; and,
  • make regulatory policies less burdensome for new firms.

The full report, Federal Policies in Response to Declining Entrepreneurship, is available here.

entrepreneurship, policy recommendations