Maybe it's me but in the aftermath of the presidential election I don't pick up any frisson of victory and new beginnings among my students. There seems to be a sense of more of the same - only good thing is that Romney's supposed vision of doing bad things to certain groups has been headed off. If more of the same fails to excite, I think the likely reason is that no one sees the economy getting any better.
College students are among those suffering most in this economy. If it doesn't get better, the more likely future, they will see their economic situation worsen. One student recently said to me "I never really saw myself getting ahead, anyway." To me, the admixture of youth and despair is toxic, depressing, and a bad sign of what this economy is doing by way of enervating the youthful "animal spirits" that Keynes said drove economic growth.
Students have been known by labor economists to have an intuitive sense of what the future holds for them. They have known for a long time that college freshmen appear to make career decisions as if they knew what the economic returns to various occupational choices were going to be twenty years into the future. Despite changing technology, global competition, and other factors that radically change the demand for various jobs, young people seemed to have a miraculous sense of where markets are going to be before they got there. It is as if they are like Wayne Gretzky!
It is no surprise, then, that in the last ten years there has been such an explosion of interest among college students in entrepreneurship. Their intuition that technology, world markets, and the instability evident in big companies are pointing to a new labor market experience is likely correct. Forty years ago a graduating college student could anticipate a labor market so stable that on average he or she would have fewer than four employers in an entire career. Today, a college graduate will have five to six employers before he or she is thirty! Why wouldn't entrepreneurship captivate this generation? Owning one's own firm might hold the promise of stable employment!
But, the rate of starting new firms is way off. The data tell us it started in 2009. The average annual number of new starts has fallen from a steady state of roughly 700,000 to 500,000.
This fall off in the "lifeboat" career for enterprising college graduates who don't want corporate life, or who have a great idea and want to see if they are the new Steve Jobs, is related to the larger economy in ways that policy makers don't seem to get.
It comes down to the unemployment rate. While economists are beginning to say they think that 8 percent isn't really so bad after all, the implications for those entering the labor market are undeniably disastrous. To a graduating college graduate who wants to take a turn at starting a business, the three percent difference in the current unemployment rate and the 5 percent rate that is usual when our labor force is fully employed (5 percent of workers are between jobs) translates into whole magnitudes more risk. When unemployment is 5 percent, a failure as an entrepreneur means only lost opportunity cost, out-of-pocket expense and some embarrassment. A decent job is likely at hand and the erstwhile entrepreneur might be the better off for having tried and failed. When unemployment is eight percent the risk of failure is exponentially greater. Getting a job is not a sure thing. Not only are they just as scarce, the out-of-work entrepreneur is a year or two behind his or her cohort in accumulating skills and experience.
While statistics on these critical matters are difficult to come by, there is evidence suggesting that student career choice is signaling big changes in our economy ahead. Enrollment in graduate business schools is falling. And, the number of entrepreneurs is falling. Perhaps the dreams of running a big company, of owning a smaller one, or starting a new firm, are becoming weaker as the current near-recession/or dreadfully slow expansion drags on and on. Maybe the increased interest by college students in working for government, non-governmental organizations, non-profits, and "social-entrepreneurial" entities suggests a sense that the rigors of market competition in a down economy might best be avoided.
The unavoidable reality is that if fewer of our most talented individuals do not turn their attention to starting more new businesses, businesses that will be the scale firms of tomorrow, we will have fewer and fewer new jobs being formed. Startups create the majority of the new jobs in our economy every year. And, the net new wealth created in the U.S. every year disproportionately comes from the newest firms in our economy. So, simply, whatever else we attend to in the struggles over economic policy that lay ahead, we must encourage more entrepreneurs. In our new book, Better Capitalism, Bob Litan and I outline the critical steps needed. They boil down to lowering taxes on startups, relieving them of irrational regulatory burdens, permitting many more highly-skilled and highly-motivated immigrant entrepreneurs to come to the U.S., and to let businesses birthed in universities be freed from the unwieldy process of these institutions trying to profit from ideas that really belong to individuals.
These changes suggest the way back to low unemployment and GDP growth of 3 to 4 percent a year. If our "new normal" is to be 8 percent unemployment and 1 percent growth, Americans will begin to think small and to wish for less. We will find ourselves in further hock to the world and unable to make our economy grow fast enough to get us out. America had best find its entrepreneurial future fast, enlist college students in a crusade to get our entrepreneurial engine running again, or tomorrow's fiscal cliff will look like only a bump in the steadily descending road.
Carl Schramm is University Professor at Syracuse. He is coauthor with Robert E. Litan of Better Capitalism (Yale, 2012).