5 Questions for John Haltiwanger on How the Pandemic Has Changed US Entrepreneurship

By James Pethokoukis and John Haltiwanger

Entrepreneurs have responded to the COVID-19 pandemic with a surge of business creation. Why has this happened? And is it likely to last? I recently discussed these questions with John Haltiwanger.

John is the Distinguished University Professor in the Department of Economics at the University of Maryland. Last year, he was awarded the Global Entrepreneurship Research Award for his statistical work in studying firm dynamics.

Below is an abbreviated transcript of our conversation. You can read our full discussion here. You can also subscribe to my podcast on Apple Podcasts or Stitcher, or download the podcast on Ricochet.

Pethokoukis: Overall, how have entrepreneurs been responding to the economic tumult of this pandemic?

Haltiwanger: They responded in a surprising way. In the Great Recession, new business applications and startups plummeted. And while we saw evidence that the same thing was happening in the first six to eight weeks of the pandemic., there has been a surge in new business applications starting last June. The surge was especially high last summer and then tapered off a bit in the fall. But in 2021, it surged again. Overall, seven of the highest months ever in the data are between July 2020 and now.

What do you think explains that?

New businesses are forming to enable remote activity between workers, businesses, and consumers. A full third of the surge in applications is in the e-commerce industry, and other sectors that have also surged also support online retailers, such as trucking and warehousing. We’ve also seen a huge surge in professional, scientific, and technical services — lots of computer design and software programming. Those are places where you might expect there to be a surge because there are new market opportunities to do business differently.

I also think the businesses that started up last summer may be different than the businesses that are starting up this spring. Last summer, there were opportunities for businesses to step in and do necessary things temporarily. Also, there was a huge surge in applications for what we call “non-employers” (basically, self-employment activity). So I think some of last summer’s surge was fueled by individuals who had lost their jobs or just saw temporary market opportunities. Whereas we’re seeing another surge this spring — when the labor market is recovering very rapidly. There are lots of employment opportunities, but there’s also been a surge in new businesses.

So perhaps the businesses that started last summer were the “necessity”/”transitory” kind, while the businesses this spring are a little more forward-looking. But we don’t have any evidence to determine that at this point.

What do you think about the impact of the Paycheck Protection Program? How may that have affected entrepreneurship? And do you think the program struck the right balance between keeping viable businesses intact and allowing the economy to adapt to the post-pandemic world?

I actually think the PPP program worked against this surge, because it was for businesses that existed in mid-February 2020, whereas we’re discussing new business applications starting last July.

The intent of the PPP program was to provide the liquidity for businesses that would be viable after the pandemic. But when you support incumbents, you’re going to reduce exit and reduce entry. So I actually think the surge has been remarkable in spite of the PPP program.

We don’t know yet whether we struck the right balance with PPP — we still need to understand where these new businesses fit relative to the exiting businesses. If, for instance, the same kinds of restaurants pop up in the same locations as the pre-pandemic restaurants that failed, then those failures were probably wasteful creative destruction. We don’t know how many of these “replacement” businesses there are.

But I think there are at least two other categories of businesses. The first kind is literally doing something different — something more remote-activity-oriented and flexible. The second is not well understood yet: Since workers are not going to be spending their time in the same locations that they were in February 2020 (we’re going to be more spread out geographically and commute less), we may see many supporting businesses — lunchtime places, dry cleaners, gyms, etc. — close down, particularly in cities like New York, Chicago, and San Francisco. But they’ll shift out to other locations. While those may seem like “replacement” businesses, they are actually facilitating our spatial reallocation.

Your work has documented the 20-year decline of US business dynamism, entrepreneurship, and labor market fluidity. Do you have a feeling about what these trends will look like going forward?

I wish I had a better answer. Right before the pandemic, those trends were continuing, which was troubling. Startups play a critical role in experimentation and innovation, and labor market flexibility enables us to accommodate economic changes. Since 2000, the US economy has not had that dynamism and flexibility.

Now we have this enormous downturn and change in activity. So are we going to see a temporary surge in dynamism and entrepreneurship? Almost undoubtedly, yes. Then the question is, does this somehow unleash entrepreneurship in a way that will start facilitating the innovation that lots of people expected we might see from technological advances such as robotics and the powerful cell phones we carry in our pockets? In spite of those technologies, pre-pandemic productivity growth was anemic. But maybe the pandemic will stimulate entrepreneurship and we’ll go back to pre-2000 dynamism and flexibility levels.

How should policymakers boost startups and dynamism?

There’s room for improvement in policy areas such as non-competes and occupational licensing. And immigration reform, particularly at the high-skill level, is really important. The United States is a magnet for the best and the brightest to come to get graduate educations — in particularly in STEM — and we ought to keep as many of those highly trained individuals in the United States by permitting them to stay and thrive, and to start businesses.

More broadly, policy is often all about incumbents. We often think enough about the businesses that aren’t there, but could be. And so we need advocates for new and young businesses. I’ve often said that the Small Business Administration would be better if it was the Young Business Administration — if it was asking, “What are the barriers to entry? What are the obstacles in this particular environment? Where are the market failures that are going on?”

James Pethokoukis is the Dewitt Wallace Fellow at the American Enterprise Institute, where he writes and edits the AEIdeas blog and hosts a weekly podcast, “Political Economy with James Pethokoukis.” John Haltiwanger is the Distinguished University Professor in the Department of Economics at the University of Maryland.