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Manufacture This

The blog of the Alliance for American Manufacturing

New report finds dynamism is on the decline. It’s hurting America’s economic well-being.

Dynamism is in retreat.

That’s the conclusion of a new report released on Wednesday by our friends at the Economic Innovation Group (EIG) that looks at the creation of new business in America. What EIG discovered is that the rate of new business formation has fallen by half since the late 1970s, and suffered a steep decline during the Great Recession.

This matters because new companies long have fueled America’s prosperity. When an old business closed, or even an entire industry died out, new innovative businesses would be there to “help keep the economy in a constant state of rebirth," according to EIG.

The Great Recession challenged this dynamic. Things were so out of whack that from 2010 to 2014, America lost more businesses than it created.

The new businesses that were created in this period were heavily centered in five key metro areas — New York, Miami, Los Angeles, Houston, and Dallas. The fierce five “produced as big of an increase in businesses as the rest of the nation combined,” EIG reports.

Meanwhile, the rest of the country struggled, including states that make up the industrial heartland — think Michigan, Ohio, Indiana, Pennsylvania, Wisconsin, etc.

And the lack of new business meant that current businesses face less competition. That lead to a rise in profits, but the vast majority of those profits have been “in the hands of a few dominant players,” leading to fewer opportunities for workers and slower job growth.

EIG reports that these missing new businesses cost nearly 1 million U.S. jobs in 2014 alone.

“The rapid retreat of dynamism from all but the largest and fastest-growing metro areas intensifies the geographic inequality being felt across the country—and the most vulnerable areas are falling the furthest behind,” EIG reports.

In previous decades, Americans in struggling areas would move to the places driving economic growth. But the high cost of housing in those five cities meant that many workers simply couldn’t afford to move. So they were stuck — and struggled.

We know from previous research that manufacturing workers were heavily affected by the loss of businesses during the recession. Researchers like David Autor labeled it the “China Shock,” and it is considered among the reasons why President Trump won the 2016 presidential election.

EIG’s report adds a new piece to the policy puzzle, showcasing the importance of not just helping current American companies thrive, but also working to ensure innovative new companies can be born in all areas of the country.

Here’s EIG:

Economic policy should be viewed through a new lens—with a focus on addressing geographic inequality and business creation first and foremost… If we can make the economy work again for entrepreneurs in a greater cross-section of America, we can start to rebuild the broken pathways to the American dream.

Manufacturing has a major role to play in the effort to kickstart business growth, as the sector punches well above its weight when it comes to innovation. Manufacturing accounts for 90 percent of new patents — 90 percent! — and about 70 percent of private-sector research and development.  

The Obama administration made innovation a key part of its effort to grow manufacturing through Manufacturing USA. This network of more than a dozen manufacturing institutes bring the public and private sectors together to work on developing and implementing cutting-edge technology and driving growth.

America Makes, located in Youngstown, Ohio, works on efforts to accelerate additive manufacturing and 3D printing, for example. The Advanced Regenerative Manufacturing Institute in Manchester, N.H., meanwhile, is working to develop technology to “create life-saving cells, tissues, and organs.”

The institutes are relatively new — Congress formally authorized the program in 2015, and several of them were just announced in December 2016 — so they haven’t come close to reaching their potential. But along with taking on unfair trade and investing in our infrastructure, the Trump administration would be wise to follow the lead of the previous administration and make innovative programs like Manufacturing USA a part of the overall strategy to spur job growth and boost the economy.

As EIG found, it’s not just about helping the companies that already exist — it’s also about making sure that the innovative companies of the future will be born here.