By James Pethokoukis and John Haltiwanger

Entrepreneurs have responded to
the COVID-19 pandemic with a surge of business creation. Why has this happened?
And is it likely to last? I recently discussed these questions with John
Haltiwanger.

John is the Distinguished
University Professor in the Department of Economics at the University of
Maryland. Last year, he was awarded the Global Entrepreneurship Research Award
for his statistical work in studying firm dynamics.

Below is an abbreviated transcript
of our conversation. You can read our full discussion here. You can also subscribe to my
podcast on Apple
Podcasts or Stitcher, or download the podcast on Ricochet.

Pethokoukis: Overall, how have entrepreneurs been responding to
the economic tumult of this pandemic?

Haltiwanger: They responded in a
surprising way. In the Great Recession, new business applications and startups
plummeted. And while we saw evidence that the same thing was happening in the
first six to eight weeks of the pandemic. There has been a surge in new
business applications starting last June. The surge was especially high last
summer and then tapered off a bit in the fall. But in 2021, it surged again. Overall,
seven of the highest months ever in the data are between July 2020 and now.

What do you think explains that?

New businesses are forming to enable remote activity between workers, businesses, and consumers. A full third of the surge in applications is in the e-commerce industry, and other sectors that have also surged also support online retailers, such as trucking and warehousing. We’ve also seen a huge surge in professional, scientific, and technical services — lots of computer design and software programming. Those are places where you might expect there to be a surge because there are new market opportunities to do business differently.

I
also think the businesses that started up last summer may be different than the
businesses that are starting up this spring. Last summer, there were
opportunities for businesses to step in and do necessary things temporarily.
Also, there was a huge surge in applications for what we call “non-employers”
(basically, self-employment activity). So I think some of last summer’s surge was
fueled by individuals who had lost their jobs or just saw temporary market
opportunities. Whereas we’re seeing another surge this spring — when the labor
market is recovering very rapidly. There are lots of employment opportunities,
but there’s also been a surge in new businesses.

So
perhaps the businesses that started last summer were the
“necessity”/”transitory” kind, while the businesses this
spring are a little more forward-looking. But we don’t have any evidence to
determine that at this point.

What do you think about the impact of the Paycheck
Protection Program? How may that have affected entrepreneurship? And do you
think the program struck the right balance between keeping viable businesses
intact and allowing the economy to adapt to the post-pandemic world?

I
actually think the PPP program worked against this surge, because it was for
businesses that existed in mid-February 2020, whereas we’re discussing new
business applications starting last July.

The
intent of the PPP program was to provide the liquidity for businesses that
would be viable after the pandemic. But when you support incumbents, you’re
going to reduce exit and reduce entry.
So I actually think the surge has been remarkable in spite of the PPP program.

We
don’t know yet whether we struck the right balance with PPP — we still need to
understand where these new businesses fit relative to the exiting businesses.
If, for instance, the same kinds of restaurants pop up in the same locations as
the pre-pandemic restaurants that failed, then those failures were probably
wasteful creative destruction. We don’t know how many of these “replacement”
businesses there are.

But
I think there are at least two other categories of businesses. The first kind
is literally doing something different — something more
remote-activity-oriented and flexible. The second is not well understood yet:
Since workers are not going to be spending their time in the same locations
that they were in February 2020 (we’re going to be more spread out geographically
and commute less), we may see many supporting businesses — lunchtime places,
dry cleaners, gyms, etc. — close down, particularly in cities like New York,
Chicago, and San Francisco. But they’ll shift out to other locations. While
those may seem like “replacement” businesses, they are actually facilitating
our spatial reallocation.

Your work has documented the 20-year decline of US business
dynamism, entrepreneurship, and labor market fluidity. Do you have a feeling
about what these trends will look like going forward?

I
wish I had a better answer. Right before the pandemic, those trends were
continuing, which was troubling. Startups play a critical role in
experimentation and innovation, and labor market flexibility enables us to
accommodate economic changes. Since 2000, the US economy has not had that
dynamism and flexibility.

Now
we have this enormous downturn and change in activity. So are we going to see a
temporary surge in dynamism and entrepreneurship? Almost undoubtedly, yes. Then
the question is, does this somehow unleash entrepreneurship in a way that will
start facilitating the innovation that lots of people expected we might see
from technological advances such as robotics and the powerful cell phones we
carry in our pockets? In spite of those technologies, pre-pandemic productivity
growth was anemic. But maybe the pandemic will stimulate entrepreneurship and we’ll
go back to pre-2000 dynamism and flexibility levels.

How should policymakers boost startups and dynamism?

There’s
room for improvement in policy areas such as non-competes and occupational
licensing. And immigration reform, particularly at the high-skill level, is
really important. The United States is a magnet for the best and the brightest
to come to get graduate educations — in particularly in STEM — and we ought to
keep as many of those highly trained individuals in the United States by
permitting them to stay and thrive, and to start businesses.

More
broadly, policy is often all about incumbents. We often think enough about the
businesses that aren’t there, but could be. And so we need advocates for new
and young businesses. I’ve often said that the Small Business Administration
would be better if it was the Young Business Administration — if it was asking,
“What are the barriers to entry? What are the obstacles in this particular
environment? Where are the market failures that are going on?”

James Pethokoukis is the Dewitt Wallace Fellow at the American Enterprise Institute, where he writes and edits the AEIdeas blog and hosts a weekly podcast, “Political Economy with James Pethokoukis.” John Haltiwanger is the Distinguished University Professor in the Department of Economics at the University of Maryland.

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