Narrowing of the American Dream
While there may be different ways to define the American Dream, I believe that entrepreneurship has been one of the important pathways for economic mobility of the American people. However, as a researcher at a foundation dedicated to the promotion of entrepreneurship, we have found one particularly concerning pattern about entrepreneurship. The data collected by the Census Bureau and scholarly research have demonstrated that the rate of entrepreneurship has generally declined over the last 35 years. Thus, this pathway for American Dream seems to be getting narrower.
The rate of entrepreneurship has generally declined over the last 35 years. Thus, this pathway for American Dream seems to be getting narrower.
We do not know the exact cause or causes of this decline. The Kauffman Foundation is funding a series of studies from different disciplines, but it’s such a complex problem that we will not get to a single answer. Some argue that it’s because of accumulated regulations and occupational licenses, from doctors and lawyers to nail polishers and 2nd hand jewelry sellers, all of which totals about 30% of jobs. If so many jobs are licensed and regulated, people cannot start new businesses tomorrow. Others argue that it’s because of the rise of giant and oligopolistic corporations, such as WalMart and Amazon, which have squeezed out mom-and-pop shops, bookstores, and other retailers. At the event of More Than a Dream, I talked about three other factors that have potentially contributed and may be relevant for the debate about American Dream.
Two factors are important for contributing to the decline in entrepreneurship: rising costs of living and educational attainment.
The first factor is the rising cost of living and educational development, specifically about college tuition and housing burden, two important moments of investment in your life. The college tuition has increased substantially over time, a lot faster than inflation. University of Kansas (KU) may be a more friendly place, with $10K for in-state and $26K for out-state tuition; U of Michigan, $13K for in-state, and $43K for out-state. At private universities, like Columbia University, you need to pay $53K every year. Universities found out that students and parents are willing to pay more and more for this important investment, as long as all other peer universities are doing the same. The result is the increased student debt, even in 6 digits.
The housing cost has similarly increased. It has not affected much in Lawrence or Kansas City, but it has gone crazy in California (where my wife and I could barely survive with our pitiful academic salary), other coastal areas, and even in places like Chicago. If you look at the housing burden ratio, how much people spend on housing out of total income, it has notably gone up for both renters and home owners in the last 30 years. These high costs for educational attainment and living make people risk averse and leave few career options. You want to work for big and stable companies after graduation and repay debt as soon as possible. The cost of starting a new company is not so high, a median of $80K and as low as $40K for home-based business, according to our Kauffman Firm Survey, but if you struggle to pay for monthly rent or mortgage on top of student loans, starting your own company will not be your choice.
The second factor is the continuous decline of primary and secondary education system. In many cities, including Kansas City and even San Francisco, the quality of public schools has declined. Yet the bigger problem is the geography of it. It is overwhelmingly the central and impoverished parts of large cities that have suffered this decline. In other words, for people with color and low-income, even if you are good and want to pursue a college degree, fewer options are available for basic and higher education.
These two factors are important for entrepreneurship because places with higher rate of high school completion and college graduation have higher rates of entrepreneurship. In other words, human capital is important, and it’s not just the best and brightest, but the overall size and quality matter, but the choice of many people is getting smaller.
A third factor — the decline of social safety nets at the expense of budget or debate for small government — may also be contributing to the decline in entrepreneurship.
The third factor is the decline of social safety nets at the expense of budget or debate for small government. There are some studies arguing that the less regulation and less intervention by government is better for businesses, including startups, and there are even rankings of state and local governments based on tax rates and government spending. In collaboration with thumbtack.com, I surveyed thousands of business owners nationwide for multiple years and tested what factors are associated with higher perception of business climate. I think the results are interesting. Tax rates, such personal income tax, corporate tax, or sales taxes, do not matter for the perception of business climate, except the property tax. More importantly, the government spending on social welfare is positively related to better business climate. We cannot know specifically which factors in social welfare were important. At the moment, it is the aggregate of food stamps, social security, Medicare, Temporary Assistance for Needy Families, and other public aid, but, in any case, business owners do pay attention to social safety net factors, yet it has become a blind political target.
So considering these three factors and the overall decline of entrepreneurship rate, I am concerned that the pathways for American Dream through entrepreneurship have become narrower over the last few decades.
Yasuyuki (Yas) Motoyama is a director in Research and Policy at Ewing Marion Kauffman Foundation.
These remarks were presented at an April 12th event, More Than A Dream: A New Social Contract for the 21st Century, which was held at The University of Kansas Hall Center for the Humanities. The event is summarized in a blog post, Shifting Paradigms: From American Dream to Social Contract.
Watch the full event here: