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Analysis

Hart: Has Arizona's entrepreneurship sailed?

These are far from fat times for the economy, in Arizona or most of the country. Growth is sluggish, technology is making jobs disappear, firms are sending work overseas, and we're facing increasingly stiffer international competition, some from countries we'd hardly heard of before. But there's one potent economic weapon we can still rely on: our entrepreneurial spirit.

Take Arizona: With its rapid growth, pioneering ethos and light governmental regulation, it's been hailed as being especially attractive to entrepreneurs. Here as elsewhere in America, we celebrate our restless search for something bigger, brighter, better.

We innovate, we invent, we risk it all to create new ventures. Or, we did. Lately, it seems, not so much.

In fact, the American economy is less entrepreneurial now than at any point in the last three decades, according to a new study from the Brookings Institution, a respected Washington, D.C. research organization. Researchers reached this unhappy conclusion by comparing the rates of new business creation and destruction between 1978 and 2011. Overall, they found, new businesses creation – measured as the share of all businesses less than one year old – declined by nearly half from 1978 to 2011.

The nationwide average decline was 47.2 percent, according to the study, with the sharpest drops occurring in Alaska, Hawaii, Vermont, New Mexico and Wyoming. The five states showing the smallest declines were New York, Illinois, Texas, New Jersey and Missouri.

Arizona came in just above the national average, with a 53 percent decline.

What happened? The study's authors don't claim to know. But they do warn that "business dynamism" – the process by which firms continually are born, fail, expand, and contract – "is vital to productivity and sustained economic growth."

Another way of expressing it is the phrase "creative destruction," famously coined by Austrian economist Joseph Schumpeter to describe how the free market drives progress by constantly replacing older, outmoded goods, services and jobs with newer, better ones.

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Well, at least we have the "destruction" part down.

Some other points from the data also bear mention:

The broad decline in business dynamism is not isolated to a few regions but in force throughout the country.

Older and larger businesses are doing better relative to younger and smaller ones – which seems to contradict the oft-cited adage that new, smaller firms are the key engines of economic growth

A Washington Post article about the study found no correlation between this measure of a state's economic dynamism and its corporate tax level as reported by the Tax Foundation. For example, New York, with a relatively high tax burden, showed the least decline in new businesses; Wyoming, which imposes a low corporate tax burden, witnessed among the largest declines in new firms.

Again, none of these authors purports to explain why this is happening – and they point out that their most recent data is from 2011. Still, the portrait suggested here is of a country of wary, risk-adverse firms and individuals, with the former keeping lean workforces and hanging on to their cash, and the latter launching fewer firms and sticking with the status quo.

Whatever we call this sort of economic climate, it sure isn't entrepreneurial.

Morrison Institute for Public Policy is a leader in examining critical Arizona and regional issues, and is a catalyst for public dialogue. An Arizona State University resource, Morrison Institute uses nonpartisan research and communication outreach to help improve the state's quality of life.

Bill Hart is a senior policy analyst at Morrison Institute for Public Policy.

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