The United States is experiencing a sustained startup boom.
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In 2020, as the world was heading down the hellish path of the COVID-19 pandemic, economist John Haltiwanger discovered something truly strange was happening in the U.S. economy: Americans were creating new businesses at record rates.
Haltiwanger is a leading expert on new business creation in the United States. He helped the U.S. Census Bureau compile the official statistics that track new business trends. A surge in new businesses tends to be a good sign for job creation, innovation and productivity growth, Haltiwanger said. But until 2020, the data painted a bleak picture. Haltiwanger had written research papers with titles like “Ten Signs of a Decline in Business Dynamism and Entrepreneurship in the United States.”
So when Haltiwanger and his colleagues first saw the data suggesting a startup boom in the summer of 2020, they were stunned. “At first we thought, ‘Something’s wrong,'” Haltiwanger says.
When I first spoke with Haltiwanger for the Planet Money newsletter in November 2020, it was clear that the startup boom was real. But it was unclear whether the surge in new business was a pandemic-related blip that would soon fade. Much of this boom was in the online retail sector.
But the startup boom continued, and 2021 saw a second surge in new businesses. So I spoke with Haltiwanger again in June of that year. By that time, he was more optimistic that the surge in new businesses was a sign of great things to come for the economy. He was especially struck by the revolutionary changes that the widespread adoption of remote work had brought to business life.
But, to be honest, I was still a bit skeptical of this boom. Many small businesses were devastated by the pandemic and closed down. Many lost their jobs. Perhaps many of them were starting new businesses, desperate to pay bills, get more federal relief money, or just to stave off boredom.
The most plausible explanation for me is that the surge in new business may simply reflect a strange pandemic-related economic ups and downs followed by a return to normalcy. The initial ups and downs created one-off business opportunities, like selling hand sanitizer and masks, or delivering cheeseburgers and fitness equipment to your doorstep. Then, as normalcy returned and consumers began spending money outside again, new opportunities for the revival of in-person businesses, like bars, gyms, and restaurants. These are the same types of businesses that were devastated by the pandemic. Perhaps, I thought, this was all just a long, hard journey that ultimately brought us back to where we started, with limited long-term gains to the economy.
But we are now well beyond the pandemic crisis and even the recovery from it. Nearly four years after the start-up boom began, new business creation is still thriving in the U.S., and it’s becoming hard to ignore this.
“You could say we’re on a new plateau that started in 2021,” Haltiwanger said. Comparing the three years before the pandemic to the three years since, the data shows that on average, nearly 60% more new businesses are now being created each year.
The boom is real and it’s enduring. We’re seeing it in both single-individual companies and, importantly, in companies that have the potential to grow and employ. We’re seeing it in traditionally underrepresented minority communities. And, Haltiwanger says, the boom could be a sign that something great is on the way for the American economy: a much-needed boost in productivity growth, the magic sauce that will make society more prosperous.
But what’s driving this boom? And how optimistic should we be that it will ultimately bring real benefits to the country?
What is driving the boom?
Essentially, Haltiwanger says there are two big new businesses emerging these days.
New businesses in the first category are taking advantage of a big demographic shift in the wake of the pandemic: Many office workers are now either fully remote or doing hybrid work. “In major downtown areas, people are not spending five days a week in the office,” Haltiwanger said. People spend money where they spend their time. That’s bad news for businesses in downtown areas, but good news for businesses in neighborhoods where office workers live.
So one of the big areas of growth for new businesses is food and lodging, especially on the outskirts of cities. Haltiwanger and Ryan Decker call this the “doughnut effect.” Currently, many major business districts lack vibrant economic activity, and the suburbs surrounding them are brimming with new business opportunities. Office workers need doughnuts, coffee and sandwiches close to their offices, which are increasingly being housed at home.
But the benefits would be somewhat limited if the story of the new business boom were limited to suburban delis, gyms, and donut shops. To be sure, remote and hybrid work is a revolutionary change for large segments of the workforce, but the resulting business boom can be seen primarily as a geographic reorganization of economic activity — fewer coffee shops in Manhattan, more in New Jersey and Brooklyn. In that case, the benefits to the economy would likely be limited.
That’s why Haltiwanger is excited about the other big cluster of new businesses he identified in the data: technology startups, which he says are proving to be the most sustainable. These tech startups come in all varieties, but one subcategory has caught his and other economists’ attention: artificial intelligence startups.
“I think we’re in the middle of a new technology wave,” Haltiwanger says, “and I think AI is a prime example of that.”
What the boom means for the economy
The last time the United States saw a major productivity boost was during the dot-com boom of the 1990s. Increasing productivity means we can produce more in less time, making goods and services more plentiful and cheaper. It’s like sprinkling magic dust on the economy and raising society’s standard of living.
“The first thing that happened in the early 1990s wasn’t productivity growth or anything like that,” Haltiwanger says. “That came later.” What happened first, he says, was a surge in new startups. The surge in startups is a “leading indicator” of a virtuous cycle in the economy, he says.
The startup boom is both a reflection of technological innovation and a major driver of it, Haltiwanger said: Startups figure out how to use new technologies, then use those technologies to experiment and develop new products, forcing competitors to adapt and innovate.
But I should add that when I spoke with Haltiwanger in 2021, he too was optimistic that the startup boom would translate into a much-needed productivity boost. But three years later, he acknowledges that we still don’t see signs of that happening. “Productivity statistics are pretty lackluster,” he says.
There’s a common refrain in articles discussing whether technological innovation will ultimately lead to increased productivity: a reference to the late economist Robert Solow. In the late 1980s, as personal computers were spreading like wildfire across the United States, Solow famously said, “The computer age is everywhere, but it doesn’t show up in productivity statistics.”
Haltiwanger points out that Solow wrote this in 1987, and says that “the productivity surge didn’t really occur until the mid-1990s.” It takes time.
Research by economist Erik Brynjolfsson and others suggests that the impact of new technologies on productivity growth may follow a “J-curve”: productivity may decline before soaring, as companies need time to invest in new technologies and figure out how to use them before they, and the economy as a whole, see measurable gains.
But AI may start showing up in productivity statistics sooner than personal computers, which took a long time to buy physical hardware, understand how to use it, and redesign business processes around it. Most consumers of AI won’t need new hardware. And AI may be smarter than older computer programs and require less user input to improve workflows. Still, Haltiwanger says it may be some time before companies understand how to use AI to improve productivity.
There’s a big debate right now about whether AI will revolutionize business processes and boost productivity in the economy. Some economists, like Daron Acemoglu, argue that AI will only bring limited productivity benefits in the near future, while others, like Brynjolfsson, are more bullish.
As he watches the startup boom, Haltiwanger has big questions. Is it just a coincidence that tech and AI startups are popping up at the same time that new businesses are springing up in response to the pandemic and population shifts caused by remote work? Is this just because people want to be their own bosses or find a better balance between their personal and professional lives? Will this boom finally translate into a much-needed productivity boost? Haltiwanger says he’s also watching to see whether “gazelles” emerge that will break away from the pack and compete to transform the economy, as Google and Amazon did in the 1990s.
Whatever this startup boom ultimately means for the economy, I look forward to speaking with Haltiwanger again in the years to come as the data continues to accumulate.
