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Home Publications Blogs Beat the Press The NYT's Romance of Start-up Businesses

The NYT's Romance of Start-up Businesses

Friday, 05 October 2012 05:09

Politicians and the media just LOVE start-up businesses. We got another example of this relationship in an NYT piece on start-ups hiring fewer workers that told readers:

"But the implications for the American work force are worrisome, and may help explain why economic output is growing much faster than employers are adding jobs."

Actually the economy always grows faster than employers add jobs because of productivity growth. It would be very scary if productivity growth vanished, which would mean that we are not getting wealthier collectively. In other words, there is zero mystery to be explained, businesses are not hiring because the economy is not growing fast enough.

The relationship more generally between start-ups and job growth is also misrepresented. The piece told readers:

"For decades, new companies have produced most of the country’s job growth. Without start-ups, the country would have had a net increase in jobs in only seven years since 1977."

This assertion likely will lead readers to believe that we would need start-ups to create jobs. That is not true. Start-ups are a substitute for expanding existing businesses, often by choice. In many cases businesses find it more attractive to buy up a new firm in a sector that can show that it has a successful business model rather than expanding its own operations. If it lacked the opportunity to buy a new firm then it would simply expand itself.

The NYT piece is trying to imply that this accounting relationship (that job growth was concentrated in new firms) into a causal relationship. This would be comparable to a situation in which we found that all the hob growth in the United States was in states west of the Mississippi and thereby concluding that if we did not have the West there would have been no job growth. This is of course not at all an implication of finding that the job growth had been located west of the Mississippi. If firms did not have the option of expanding west of the Mississippi then they would have expanded east of the Mississippi.

While it's great that people have the opportunity to start businesses and pursue their aspirations, that is not an excuse to make up stories about how they affect the economy. The NYT should know better.

Comments (5)Add Comment
Romancing Shutdowns of Start-Ups by Winner-Take-All Economic Predators
written by Last Mover, October 05, 2012 6:40
Why not romance the crowding out of what could have been vibrant start-ups by winner-take-all predators who crush other start-ups in the cradle?

After all, harvesting economic rent with massive market power by taking over natural and network monopolies, merging with each other and buying up patents and the like does create well paying jobs requiring little effort since they redistribute the economic pie to themselves rather than grow it.

It also assures that output cannot grow faster than jobs are added since the essential goal of a monopoly is to produce less at higher prices.

Given the standard propaganda line from corporate America to improve efficiency with win-win outcomes every time another move is made to kill off competitive start-ups, MSM could report this also solves the problem of excess supply output per worker since each worker is so efficient, wages explode upward so high that consumption demand maintains full employment as far as the eye can see.
written by skeptonomist, October 05, 2012 8:12
Productivity growth is probably strongly dependent on startups. Old businesses tend to keep the same old equipment and methods, whereas new businesses will normally buy the latest and most efficient equipment. Totally new products are in many cases more labor-saving than old ones - this has certainly been the historical trend - and new products often mean new businesses.

If this is correct, then startups should be more capital intensive than old businesses (testable) and should as a rule use fewer employees (consistent with the NYT story).
written by skeptonomist, October 05, 2012 8:23
Low interest rates make it more attractive for businesses, whether old or new, to buy expensive new labor-saving equipment rather than use old inefficient equipment.
US startup facts 1980-2012
written by RC, October 05, 2012 1:56
I ran across this interesting paper about the decline of startups over the last 30 years in the US. These are all startups and not just tech. Funny thing is that it appears that the increase in H1Bs and VC funding haven't produced the big strides in startups that we've been lead to believe. Maybe there is more to the recipe than hype,STEM employees and VC funding?


On BusinessInsider there is a piece I was reading which considers the US place in the startup and innovation race globally. In this piece the author takes a contrary position to the mainstream and shows some reasons we should not be too full of ourselves.

Start-ups lose jobs, too
written by Red Planet, October 06, 2012 1:11
The flip side of the start-up job creation numbers is that most start-ups fail, losing large numbers of jobs. And successful start-ups destroy jobs. It's part of the jobs myth we don't like to look at. So, start-ups good, but not miraculous engines of the economy.

Small businesses in general are often touted as the creators of most new jobs in America; 70%, we're told. But small businesses go out of business at a pretty brisk rate, so the net gain is not nearly so impressive.

And some start-ups are not all that good for the economy. Not long ago, Walmart was a start-up. Now it is a magnificent engine for shipping the disposable income of Americans to China, skimming some cream along the way for one super-patriotic American family. The jobs and small businesses destroyed in the process would fill a cemetery the size of the intermountain West.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.