For decades, U.S. tech startups have been the beating heart of Silicon Valley. But almost unnoticed by economists, they are now in the same funk dogging some other sectors of the American economy.
Quick take: American startups are in a 13-year slump, their numbers shrunken from their heyday and, with a few conspicuous exceptions, their inventions not the financial world-killers of prior kin, according to new research.
Why it matters: In the booming 1980s and 1990s, much of U.S. job and productivity growth was the handiwork of a few young startups and their hit innovations. But the decline, which began in 2005, has stripped the economy of one of its most vibrant engines of wage and productivity growth, says John Haltiwanger, an economist at the University of Maryland.
- As you see in the chart below, the decline began long before the financial crash — in fact, halted there — and entrepreneurs have barely picked up the pace since then despite the economic recovery.
The background: For years, economists have been trying to figure out why productivity growth in major western economies has been flat despite soaring corporate profit, low joblessness and low inflation. Among the reasons they have come up with:
- We've created all the big inventions: The University of Chicago's Robert Gordon says in his seminal 2016 book, The Rise and Fall of American Growth, that we have already produced the most consequential inventions like electricity and internal combustion. Anything else isn't going to have the same punch.
- We're in a transition period: Economists from MIT and the University of Chicago cite a lag between the launch of a new technology, such as artificial intelligence, and its visibility in productivity numbers. We are in that period now, they say (see next post).
Haltiwanger dismisses neither of those reasons, but tells Axios that the loss of the propulsion of startups is a primary reason for the current malaise. He speculates that Big Tech companies may be buying up a lot of them before they make their big splash, thus smothering their potential.
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