The Decline of Creative Destruction

I’d expect such curves on approximation of the free market. Economy of scale → concentration of the capital → more work is redistributed without change of the employer.

This is not surprising…

Most jobs are created within new companies, see this chart (here) from an article on pando daily (here). If the company is older than 11 years, odds are that they are on average shedding more jobs than they are creating.

New business creation, even with all the tech startup craze of the last few years seems to be at a 30-year low (see here), and has been falling over the last decade… which seems to correlate with the graph showing less creative destruction and creation, since there are less businesses started (and destroyed) every year.

Bryan:

This downward trend goes back at least to the late 1970s. Prior that that time, we only have data for manufacturing–but in mfg the trend goes back even further. This is a long-run trend, though it does accelerate after the late 1990s.

Here is a paper documenting the trend and showing that it probably cannot be explained by composition effects (but, as Gabriel notes, the aging of the firm distribution explains some of it–see here and here).

Here is my comment on Marginal Revolution from a few months ago, discussing some of the composition stuff briefly. Here is a discussion of trends in establishment entry and exit, with big implications for understanding the Great Recession.

Finally, here is a summary of a recent paper that looks at the JC/JD trends as well as worker flows data (where a similar trend is observed).

What we know is that (a) this decline is observable in several dynamism series (job flows, worker flows, firm dynamics, establishment dynamics), (b) some composition effects–specifically firm age–can explain some of it (but we can’t explain what’s causing the age stuff); other composition effects (like industry) work in the “wrong” direction (ie, make the puzzle more puzzling), and (c) we don’t really know what’s going on.

Since we don’t know what’s causing it, we don’t know if it’s good or bad. We typically think of creative destruction as good, but how much of it do we need? Is the current amount too low, or was the previous amount too high? After all, exit and reallocation and job switching are costly. Are we closer now to the right amount, while previously the US economy was just a Rube Goldberg machine, doing a bunch of unnecessary churning? Or does the current level of dynamism reflect policy or technology barriers to efficient allocation?

BP–Great observations.

(1) Hyatt and Spletzer (2013) find that the aging workforce has some explanatory power, but not enough.

(2) Interesting point. We should think of a way to measure this. We can get at this question somewhat indirectly by looking at industry and occupation; my understanding is that those are also insufficient explanations.

Your final point is the key. Without knowing more, we can’t assume that the decline is a bad thing (or a good thing).

I wonder how temp jobs and underground (off-the-books) jobs figure into his number? Both have boomed in recent times.

It strikes me that the graph begins in 1990 and I can’t help but wonder if this amounts to cherry picking. Might it really be the case that both were unusually high by historic norms in the 90’s?

I guess this element of the argument is that higher turnover is better than lower turnover-or that the higher turnover in the past was better than the lower turnover in more recent years (ie, since ca. 2000). But I don’t think that is obviously true. The important element of capitalism is *that* there is creative destruction, not the *amount* of creative destruction. It would be more distressing if the two curves *didn’t* move together than if they were both flat or both going up, or what actually happened.

@Ryan- Thanks. So that means there are at least arguments that this trend probably did not just begin recently, but is a long term economic trend. As far as I can tell, you do agree in principle with what I said about this not *necessarily* being a bad thing. I would agree that we should want to know what is causing the trend to better determine whether it is something we should worry about.

One question I would ask is whether this is something unique to the US or if it might be something that has happened or is happening in other countries, which might give us a clue as to whether we should simply expect this kind of thing to occur in an increasingly large economy.

As far as I remember, Cowen’s theory is that we reached the great stagnation because of some limits in human mental capabilities.

Cowen at one point said that increased state power was accompanied with increased freedom, so it is explainable why he would think that the great stagnation would not be caused by a wide and thick web of regulations, but by us reaching our mental limits.

The theory sounded silly then and it didn’t get better with age.

Older data is usually restricted to manufacturing – see Haltiwanger’s website. The business dynamics program at Census might go back further than this, I forget when they start.

NBER has a series from the interwar period but I believe it’s just worker flows, not job flows that you’re interested in here.

I suppose you *could* make the case that a government that performs essential functions does need to remain proportional to the population or economy, but he isn’t speaking in the hypothetical, but of what has actually happened, where government has grow disproportionately.

I don’t think it is remotely true that has lead to an expansion of liberty or even been associated with one.

[edited with permission of commenter. –Econlib Ed.]

@Ryan-

Your question assumes that it’s even possible to have high per capita GDP growth with low creative destruction.

Can you cite an example of when/where this has happens or is happening (sustained, not just a short boom)?

Just off the cuff, the notion of a high-growth/low-risk/relatively static economy strikes me as too similar to the radio ads for some “investment” that promise “all the upside growth of the stock market, with NONE of the downside risk!”