Polls are a perfectly acceptable way to gauge people’s attitude about the future, both their own and the country’s. But I also like to look at their actions, their substantive revealed preference. And one way to do that is by tracking entrepreneurship. As University of Maryland economist John Haltiwanger recently told CNBC, “Even with the volatility and the surge [earlier in the COVID pandemic] we’re still 30 percent higher in 2022 than in 2019. People are being optimistic about the future and that’s a good sign.” Some numbers from the piece:

The Census Bureau reported almost 433,000 new business applications in October, up from 313,000 in December 2019, before the Covid pandemic began, and 413,000 as recently as June. In between, new business applications soared, topping out at 552,000 in July 2020, declining to 350,000 by Christmas, and rebounding to 500,000 by mid-2021, according to the Bureau. 

This upturn is also good news in a longer-term context. It’s a good sign for an economy if it can shift, or “allocate,” capital and workers to their most productive use. A key mechanism for this process is the creation of new businesses. That’s why the next two charts are so unsettling. The first is from an excellent report from the Republican side of the Joint Economic Committee looking at business formation since the late 1970s:

And this chart, actually three of them, is from the Economic Innovation Group showing a broader slowdown in American dynamism:

So if you think creative destruction—the continual churn, the constant birth and death of jobs, firms, and industries—is an important factor driving employment, productivity, and living standards (and it is), the above info is worrisome. Likewise, the more recent data on business formation is good news. This from “Surging Business Formation in the Pandemic: Causes and Consequences” by Haltiwanger and economist Ryan Decker of the Federal Reserve:

Applications for new businesses surged during the COVID-19 pandemic. We find evidence that surging applications is associated with increased creation of employer businesses and related job and worker flows. Applications rose most in industries rooted in pandemic-era changes to work and lifestyles, with significant cross-industry restructuring. Surging applications were quickly followed by increased births of employer establishments with notable associated job creation, and establishment entry is positively correlated with business applications across industry and geography. We also observe a strong increase in job reallocation across firm age groups and a tight spatial correlation between applications and excess job separations (a proxy for quits). Within major cities, applications, net establishment births, and excess job separations exhibit a “donut pattern” with less growth in city centers than in the surrounding areas. Our findings strongly suggest that the pandemic surge in business applications was followed by true employer business creation with significant labor market implications.

So what does this upturn mean going forward, according to Haltiwanger and Decker? First, given the volatile nature of startups, it will take several years to see how this story plays out. Second, that multiyear analysis will indicate if the forces “dampening the pace of business entry and business dynamism more generally” in recent decades have faded or are just being overwhelmed by new pro-dynamism forces. Third, it remains to be seen if this startup surge “is associated with a burst of innovation, with startups being an important component of the experimentation leading to that innovation.” Which would be awesome. The economists point out that “[h]ints of this possibility may be seen in the industry composition of surging applications and establishment openings, with high-productivity industries like nonstore retail, software publishing, computer systems design, and data processing apparently seeing especially elevated entry.”

The bad news here: The possibility of Federal Reserve rate hikes causing a recession. Again, from the paper: “The young businesses started during the pandemic, and the continued elevated trend of business applications, may be at risk in the event of a broad economic slowdown.”

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