By James Pethokoukis and John Haltiwanger

Before the COVID-19 pandemic,
American dynamism was in decline, with business creation and labor market
fluidity consistently falling since the year 2000. How has the shock of COVID
affected these trends? Has it accelerated them by encouraging further risk
aversion? Or have entrepreneurs risen to the occasion and met Americans’
changing needs over the past 18 months? I recently discussed these questions,
and more, 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.

What follows is a lightly edited transcript of our conversation. You can download the episode here, and don’t forget to subscribe to my podcast on iTunes or Stitcher. Tell your friends, leave a review.

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

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

What do you think explains that?

We’re
still trying to figure that out, but I think we actually have a reasonably good
handle on what’s happening.

First,
the detailed industry data that’s been released shows that the applications are
coming in precisely where you would expect: New businesses are forming to
enable various kinds of remote activity — whether it’s remote activity between
businesses and consumers or between businesses and workers. A full third of the
surge in applications is in the industry called “non-store
retailers,” which is essentially e-commerce. And other sectors that have
also surged are the areas where you would expect there to be support activity
for online retailers, like trucking and warehousing.

We’ve
also seen a huge surge in professional, scientific, and technical services.
That’s an important part of high-tech activity with lots of computer design and
software programming and the like. Again, those are places where you might
expect there to be a surge because there are new market opportunities to do
business differently.

And
second, I think there’s increasing evidence that we’re headed towards a new
normal. This new normal will not be everybody going in five days a week to some
central location. It’ll be more hybrid activity, with lots of remote activity.
And in many ways, the entrepreneurs since July have been anticipating this
restructuring. I think they’ve been trying to facilitate the remote activity
during the pandemic, but there are post-pandemic market opportunities as well.

I find that super interesting because, at least as I see
it, there are two issues. The first is the quantity of lost jobs and businesses
that we saw with this huge economic shock. This surge helps mitigate that.

But then there are also the kinds of businesses people
chose to start. In 2020, I wondered whether we were sort of freezing the
economy and then it was going to go back to the way it was, or if we would see
some creative destruction as new kinds of dynamic businesses responded to
changing circumstances. It sounds like the latter has been happening.

I
think that’s right. And in some respects, what we’re seeing is an acceleration
of pre-pandemic trends. Retail trade is a perfect example of this. It was
already the case over the last decade that e-commerce was rising while
brick-and-mortar retail was losing market share, and now that’s just changed
dramatically — I don’t think we’ll ever go back to the same kind of
brick-and-mortar retailer.

When
I talk to industry experts in retail, it sounds like brick-and-mortar is going
to go away, but what’s kind of interesting is that the successful existing
retailers have pivoted so that their stores now serve multiple activities. They
used to be places that individuals come to shop at, but they’re also becoming
fulfillment centers for deliveries and have also become pickup spots for online
buying.

Given
that amount of restructuring and change, I think the businesses that have been
hit the hardest are actually the small businesses in places like retail, food,
and accommodations that did not have online activity and weren’t able to do
this kind of pivoting. And this is creative destruction — there are some
painful parts of this, which we don’t even have fully the data on yet. But
indeed, particularly in retail trade as well as food and accommodations, we’re
doing things differently.

So
I think existing businesses that have pivoted well are doing things differently,
and these new businesses are coming in, both to literally facilitate the
pivoting of existing businesses and also to do things differently themselves.

Do you think part of this had to do with the nature of the
downturn? If people thought the downturn would be a short thing, maybe they
were more optimistic that they could start something successful and the economy
would be good around them?

We
won’t fully know until we see how this all shakes out. I actually think there’s
a chance that the businesses that started up last summer may be different than
the businesses that are starting up this spring, for reasons closely related to
what you just said. Last summer, the uncertainty was enormous, but it was clear
— given all the lockdowns and shutdowns — that there were opportunities for
stepping in and doing things temporarily, right? So in many ways, I think they
were opportunistic, “necessity” kinds of businesses.

We
need to remember there was both a surge in applications for businesses that
were headed to be new employers, which often takes at least some resources —
you don’t open up a business and hire people unless you’ve got some resources —
and also a huge surge in applications for what we call non-employers (basically
self-employment activity, but where you needed an employer identification
number). And I think, particularly in the latter case, some of that was fueled
by individuals who had lost their jobs or just saw temporary market
opportunities.

Whereas
what’s striking this spring (and again, we’ll have to see how this shakes out)
is that we’re seeing another surge during a period of time when the labor
market is recovering very rapidly. So if you’re an individual thinking,
“Well, gee, what should I be doing with my time and career?,” there
are lots of wage and salary opportunities. But in spite of that — or maybe
because of that — there’s also been a surge in new business startups.

So
the question is whether the businesses that started last summer were the
“necessity”/”transitory” kind that took advantage of the
fact that there were lots of pandemic-related needs in the economy, and whether
the businesses this spring are a little bit more forward-looking and will maybe
even persist a little longer. We don’t have any evidence to determine the
answer at this point.

What do you think about the impact of the Paycheck
Protection Program? How may that have affected entrepreneurship and the startup
sector?

Actually,
I think it worked against this, because the PPP program was for existing
businesses — you really needed to document that you had business activity as of
mid-February 2020. And we’re discussing new business applications starting last
July.

Also,
almost all PPP loans went to employer businesses, while a relatively small
fraction — about a seventh — went to non-employer businesses. Now, there’s some
possibility that the causality actually went the other way: If you got a PPP
loan, you might’ve had an incentive if you were a self-employed individual to
go apply for an EIN, because then you could get a business bank account, and
business bank accounts do require an employer identification number. So you
might have gone through this application process. But that was a relatively
small fraction of the overall PPP loans and not anywhere close to the number of
new applications for non-employers.

The
economic theory says if you actually support incumbents, that reduces exit. And
that was the intent of the PPP program — there was lots of discussion about how
this was transitory and how it made sense to provide the liquidity for
businesses that would be viable after the pandemic. But when you support
incumbents, you are going to reduce exit, and you’re also going to reduce
entry. So I actually think the surge is remarkable in spite of the PPP program.

That’s a very interesting trade-off. If the pre-pandemic economy was going to look a whole lot like the post-pandemic economy, then maybe we’d want to focus on keeping those otherwise viable businesses intact. But if the economy was going to change in some key ways, then we’d also want to make sure that labor and capital are being used as efficiently as possible in this altered new economy. And in that case, you’d want that creative destruction to happen.

Do you think we just about got it right with the PPP
program and other efforts, given that dynamic?

That’s a first-order question that I don’t think we know the answer to. So it would be interesting, as we learn more, to understand where these new businesses fit relative to the exiting businesses.

Let’s
think about restaurants. There may have been restaurants that, in spite of PPP,
just could not stay open given the burden of the pandemic. And if what we
mostly see is the same kinds of restaurants pop up in the same locations as the
pre-pandemic restaurants, then in many ways this was probably wasteful creative
destruction. It means you shut down a business, then you opened up something
else, and there was an enormous amount of disruption. You spent a lot of
resources basically doing the same thing that you were doing back in February
2020. And I don’t think we know how many literal “replacement”
businesses there are.

But
I think there are at least two other categories of businesses. One is the kind
of business where they’re literally doing something different, and their
business model is different. It’s more remote-activity-oriented and flexible.

Another
one, which I think is also not well understood yet, is this: The daytime,
working-age population is not going to be spending their time in the same
locations that they were in February 2020. We’re going to be more spatially
spread out, and commuting is going to be down. So there’s a whole set of
businesses that were basically supporting the fact that — particularly in
downtown areas in cities like New York, Boston, San Francisco, and Chicago —
there was an enormous influx of activity during the day, which those businesses
were there to support: the lunchtime places, dry cleaners, gyms, and other
kinds of activities.

So it very well might be that we’re going to see many of those businesses close down because the needs aren’t the same, but they’ll shift out to other locations. And you might say, “Well, gee, those just seem like ‘replacement’ businesses as well.” But not necessarily, because they’re actually facilitating the spatial reallocation. And indeed, if what we’ve figured out is that we can actually do what we used to do at least as well, or even better, with the changing spatial activity, then these new businesses may facilitate it.

And
then there’s the middle category, which we may be especially interested in: the
set of businesses that really are doing things in such fundamentally different
ways that five years from now, we’ll go, “Whoa, okay, the economy is
operating in a completely different way, and these are the new high growth
businesses.” Think back to the 1990s, when we had a tremendous
restructuring associated with the high-tech sector. The companies like
Microsoft, Apple, and Amazon were not household names in the first half dozen
years, right? They were struggling, almost all of them started very small —
under 10 people — and then of course have become the mega businesses of today.
This is the crystal ball we don’t have: understanding which businesses are
going to become the new superstar businesses of the future, in part potentially
induced by the pandemic.

I first became familiar with your work due to your
discovery and documentation of this pervasive decline of business dynamism,
entrepreneurship, and labor market fluidity. So what did those trends look like
right before the pandemic? And do you have a feeling about what they’ll look
like down the road?

Yeah,
this is a fantastic question. I’ve been thinking about it a lot, and I wish I
had a better answer.

Part
of what I know is this: Right before the pandemic, those trends were
continuing. And I think those were troubling trends for the US economy. The
declining entrepreneurship and declining fluidity meant we were a less
innovative economy. There’s lots of evidence that startups play an especially
critical role in experimentation and innovation. The dynamism and flexibility of
the labor market are what have enabled us historically to absorb and change in
the way that we do business. And I think in the post-2000 period, the US
economy has not had that dynamism and flexibility.

Back
in the 1990s and even the 1980s, the US policymakers would often say to Europe,
“Make your labor markets more flexible. Make your product markets more
flexible. And you’ll be able to absorb the kind of changes that are going
on.” And we would point to evidence that suggested we were able to
accommodate all the changes that were going on during that period. But I think
that we became much less able to do that.

Now
we have this enormous downturn and changing activity. So are we going to see a
temporary surge in dynamism and entrepreneurship that enables us to get to a
new normal? I think, almost undoubtedly, the answer to that question is yes. Then
the question is, did this somehow unleash entrepreneurship in a way that will
start facilitating the kind of innovation that lots of people expected we might
see from all the technological advances that we’ve seen over the last 10 or 15
years?

Remember,
there’s a big puzzle going on. The technological optimists have pointed at all
the developments in AI, automation, and robotics. And the cell phones that we
carry in our pockets are just incredibly powerful and enable us to do so many
things. But in spite of all that, productivity growth has been just anemic
pre-pandemic.

Chad Syverson at Chicago said something along these lines at a conference: “Maybe what the pandemic is going to be is a shot in the arm for entrepreneurship.” The question is whether it stimulated the kind of entrepreneurship that used to have an enormous payoff in the US. And I think we just don’t know whether this is going to be a transitory surge in dynamism entrepreneurship, or if things have changed in such a way that indeed we’ll go back to the times when we had this pre-2000 dynamism and flexibility.

When you’re looking at these pre-pandemic trends of
startups, do those trends include what’s happening in Silicon Valley? Because
it seems like they’ve had a lot of successful startups. So are you saying that,
even with all that activity in Silicon Valley, we’ve had disappointing startup
activity? And is the disappointing activity just in smaller companies, or does
it also include these high-impact startups?

I
think it does include the latter, but let me start from a slightly different
angle: What we have seen is that, especially in the high-tech sector,
productivity growth has been very low.

Now, lots of people will push back — particularly folks from the Silicon Valley — saying, “We don’t think you’re measuring our contribution appropriately.” And that debate’s still going on. And I’m at least sympathetic — that measurement is really hard, in terms of the value added by all the things that we can do with cell phones and the like, how we manage our activities, the consumption value of all those things, and so on.

Here’s
where it gets complicated. Back in the 1990s, if you were a high-growth
startup, you wanted to be the next Google. In fact, you were the next Google.
Whereas as we moved through the post-2000s, you wanted to be bought by Google.
And so what we’ve seen is increased acquisitions going on by Big Tech of
businesses that arguably would have shown up in the data as high-growth
businesses. That’s because going public is often associated with high growth.
Now, the causality is not from going public to growth. It’s “Oh, if you
have an IPO, you’re obviously a business that has the potential to do just
amazing things and you’re looking for the resources to be able to make that
happen.”

So
we’ve seen this shift away from IPOs to acquisitions. And this is a core part
of the debate about what’s going on with Big Tech right now: Are these
acquisitions productivity enhancing, or are these killer acquisitions?

Right, the question is: Is Big Tech snuffing out these
promising companies, and whatever value they would give society ends up getting
lost? I would love to know the answer to that question.

I
don’t think we know the answer, and I often, in response to that, say “No,
we don’t have great evidence on this.” But then I come back to the
productivity numbers. I say, “Well, what if this was all good news, and it
was actually the Big Tech guys taking advantage of the fact that they’ve got
the global presence and the network externalities to take advantage of?” It
makes sense in this Big Tech world that if somebody has a good new idea, they
should go onto the Google platform, go onto the Facebook platform, go onto the
Apple platform, and so on. You could make that case. And then I say to myself,
“Well, if it was all good news, why is productivity so low?” So
that’s why I’m skeptical that all has been well out of the high-tech sector —
mostly because of the productivity numbers.

I’m not going to ask you for a 25-point plan to boost
startups and dynamism, but do you have an idea or two for policymakers?

Well,
it’s more of a general view, and then maybe there are some specifics that go
with it. And it’s even related to our discussion of the PPP program. Again, I
don’t want to be critical of that program per se. But oftentimes, policy is all
about incumbents, right? It’s “okay, what do we need to spur growth and
innovation for incumbents?” We often don’t think enough about the
businesses that aren’t there and that could be there. And so I think that, in
general, you need someone to be an advocate 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?”

Some
of the ideas for dynamism and entrepreneurship that are out there — and
actually showed up in the executive order a couple of weeks ago — I think
there’s potential support for. Non-competes, occupational licensing, and things
of that sort are areas where there could be improvements.

Immigration
reform, particularly at the high-skill level, is something that’s often been
discussed, but it’s really important. The United States is a magnet for the
best and the brightest to come to get graduate educations — in all fields, but
particularly the STEM fields — and we ought to keep as many of those highly
trained individuals in the United States by permitting them to stay and thrive,
to start businesses, and to bring their expertise.

Basically, the point is to have a mindset that advocates via policy for the new and young businesses. And quite seriously, in many ways I think the Small Business Administration could do more good — and would do more good — if it was the Young Business Administration.

My guest today has been John Haltiwanger. John, thanks so much
for coming on the podcast.

All right, thank you very much!

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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