How the Growing Income Gap Is Killing Entrepreneurship

Source: Thinkstock

Source: Thinkstock

A downward slide has been slowly shifting the business landscape for years. Beginning sometime in the 1960s or 70s, an economic force silently started to take hold in America, taking with it jobs, traditions, and livelihoods. Mom and pop shops quietly started closing across the country, and small businesses from every sector — retail, dining, manufacturing — all started to close up shop. Several decades ago, something shifted that started to kill entrepreneurial spirit, and it persists to this day.

The data speaks for itself — and entrepreneurship across the board is on the decline. Although magnified recently by the financial crisis, the trend isn’t new. According to FiveThirtyEight, Americans started 27 percent fewer businesses in 2011 than they had done five years before that. But across the board, entrepreneurial efforts from all sectors have been declining for more than 30 years. Not only is entrepreneurship in trouble, but the process of business dynamism — a process in which companies are established, grow, contract, and shut down — has also hit rock bottom, as at some point in 2008, the country saw more companies shutter than open up. Entrepreneurs, or those who take it upon themselves to organize and manage a new venture, often take great risk when chasing their ideas, and they themselves play a critical role in driving business dynamism.

Around the same time that entrepreneurs started to slow down and business dynamism rates began to trend downward, the income inequality gap started to increase. Roughly around 1980, corporate tax rates started to see a decline and profits started to climb. Several years before tax rates started to recede, something else happened that sent corporate profits skyrocketing: worker productivity went through the roof, while compensation stayed more or less the same.

A combination of increased productivity driving massive profitability, along with leaner taxation, has led to corporations reaching levels of wealth and influence rarely seen in the world before — if not only by monarchs and old money aristocrats still clinging to fortunes of generations past. With massive amounts of capital at their beck and call, and armies of lobbyists to work over Congress, big business has put itself in a very strong position. This positioning leads to collusion and anti-competitive behavior to keep newcomers out of the game completely, stifling innovation and using legislation to protect the interests of the incumbents. The blend of economic forces at work against middle and lower class workers has metastasized into an environment where being the “little guy business owner” in the marketplace is not only difficult, but possibly not even worth it.

One example of this in action is within the automotive industry, where for years big name car makers worked together to keep products like the electric car off the market. A recent upstart that has actually been able to break through is Tesla (NASDAQ:TSLA), who has been dragged into courtroom after courtroom, fighting for its very existence almost since it opened its doors. The barrage of lawsuits trying to keep Tesla off the radar has been spearheaded by car dealers and watched over by manufacturers in an obvious attempt to use legislation as a protectionist tool against a new challenger. One of the main reasons Tesla has been able to break through and experience some success is due to the capital put behind it by CEO Elon Musk.

Another example would be to look at the retail sector. What entrepreneur would truly have the resources — and the courage — to take a shot at opening up a standard retail shop with the likes of Wal-Mart (NYSE:WMT) and Amazon (NASDAQ:AMZN) dominating the market? The odds of survival are very low. Of course, entrepreneurs are savvy, and can find a niche that has so far gone ignored by other businesses. However, with the far reach and resources of the bigger companies, it wouldn’t be long until big business did decide to point its guns at an emerging market, or acquire the new business directly as to eat up competition.