American Stasis

Disruption. This is the big buzzword when it comes to startups and Silicon Valley. Many of the top tech businesses today have caused major disruptions in their industries – from Uber, to Airbnb, and even Facebook, these tech giants are changing the game. However, if we peer outside of this small window, the narrative of fast-paced innovation and a rapid rise in startups falters.

In fact, the rate of startups forming has trended lower and lower beginning in the 1980s. Younger firms are also less likely to become successes than they have been in the past. Outside the sphere of the few highly-visible companies that have made strides in improving our standard of living, the U.S. economy is stagnating.

Lots of older firms with a lower rate of new ones starting up means fewer jobs are being created and destroyed. Established firms are enjoying a larger share of the market. Giants are sitting on their piles of cash, and sometimes acquiring other large firms, instead of investing in new ideas. This lack of dynamism shows in productivity growth, which has mostly been on the decline since 1973.

For employment, fewer young firms means less job mobility. People are, again contrary to the usual narrative, staying in the same jobs for longer than ever before. And that slowdown in productivity growth shows up in places like real wages. In fact, if the U.S. had continued at pre-1973 productivity growth, the median American household income would be about $30,000 higher.

Finally, U.S. federal revenue is increasingly on auto pilot. In 1962, roughly 65% of federal revenue fell under “fiscal discretion,” allowing for new allocations each year. Today, the vast majority of federal revenue is wrapped up in predetermined spending like debt, Medicaid, social security, and Medicare. By 2022, less than 10% of U.S. federal revenue might be considered discretionary.

All of these factors lead to a more “boxed in,” less flexible, less dynamic economy. This is not an advantageous position – living standards are increasing more slowly, sowing seeds of discontent, and it’s difficult for a federal government with little discretionary spending to respond to a crisis.

In upcoming videos, we’ll look at some of the discontent currently happening in the U.S. and what might happen if a crisis were to occur and our lives were to be truly disrupted during this time of economic stagnation.

Teacher Resources


The buzzword in Silicon Valley is 'disruption': Uber disrupting taxi service, Airbnb disrupting hotels, Facebook disrupting traditional media. Indeed, we hear all the time, "This is a golden age for disruption and for startups." Unfortunately, what you hear isn't exactly right. Yes, those companies are wonderful. They have innovated a lot, they've raised our living standards. But they're also highly visible so, you think of them all the time. But if you dig deeper and you look at the American economy as a whole, companies like that - they're the exception, not the rule. So, the rise of a small number of supercompanies - that's obscuring the underlying trend in the rest of the economy toward relative stagnation and stasis. This stasis pops out from the data. The rate of startups forming is trending lower and lower each decade since the 1980's. And yes, this includes the tax sector, and it's true, even if we look only at California. Not only are there fewer startups in percentage terms, but startups are less likely to become big successes than in the past. This matches into the fate of workers. So, employment is trending away from younger firms toward older, larger firms with more concaentrated market share. So, our companies are getting older, just as the American population is getting older. And our economy acts old, too. 

First, contrary to what you sometimes may hear, people are staying at their jobs for longer than ever before. They're less likely to switch jobs and more likely to just stay on. So, there's less job mobility in our economy. And that matches to the age structure of our firms. Given that young firms create and destroy jobs about twice as fast as older firms, that's not surprising. Fewer young firms means less opportunity to switch jobs.

Second, we see established older companies sitting on large piles of cash, rather than pursuing ambitious new ideas. Sometimes, they'll just buy up other large established companies. Large corporate cultures and these bureaucratized entities - they often stress law and public relations - two inherently conservative corporate departments that are rarely major sources of innovation.

In another video, I've described how Americans have increasingly boxed themselves in, seeking safety and comfort, rather than change. Well, in many regards, American industry is following suit - boxing itself in with older more static business models. This lack of dynamism is born out in the productivity data, which measures how effectively we're using new ideas to create more output. And keep in mind, if productivity growth is slow, living standards are going to grow slowly as well. Now, American productivity – it boomed throughout most of the 20th century. But starting in 1973, we see a sharp decline in productivity growth. And that has continued, except for one exceptional period in the middle of 1990s. You can see this slower productivity growth in a slower growth in living standards. Lower productivity means goods| and services grow at a slower rate and real wages will grow at a slower rate, too. If we go back to when our productivity decline began - 1973 - and we imagine an America that had continued at previous rates of productivity growth, what would the world be like today? Basically, the typical American household would be $30,000 richer. Now, some commentators will say, income and equality is a bigger issue, but I think the numbers show, it's really productivity that's the more significant problem. If we go back to 1973, and we imagine the level of inequality back then, persisting today… Well, the median household income would improve by about $9,000. That's something, but it's much less of a gain than we would have gotten from maintaining a comparably high productivity rate.

Let's look at another sector in our economy: the government. More and more of the federal budget is dedicated to decisions made in years passed, to borrow money, or to create hard-to-change entitlements, such as Social Security or Medicare. Politically speaking, most of this spending is virtually automatic; it's locked in. In 1962, about two-thirds of federal government spending was not preordained in that way. It fell under, what is sometimes called, fiscal discretion. That is, it could be decided anew each year how that money should be spent. But fiscal discretion has been falling, from two-thirds of the budget to about 20% of the budget in 2014. And it's projected to fall below ten percent of the federal budget by 2022. A lot of this is coming from the aging of the American population. If you commit to spending money on elderly people, and more people become old, that will lock in more and more of the spending. So, in essence, a higher and higher percentage of our federal government is running on a kind of autopilot. Whether you think these decision made years ago are good or bad - that's not the point here. What's clear is that predetermining so much of federal government spending boxes our government into a stasis of its own.

So, to recap, we have startups as a smaller percentage of our overall business environment. We have slower rates of productivity growth. We have aging firms We have lower rates of innovation. We have less flexibility. And all of this translates into a slower growth of living standards, which in turn, plant the seeds of discontent. Then we add a federal government, whose hands are somewhat tied, should it need to react to a sudden crisis. This is troublesome. And it's why I predict that a great reset is approaching. At some point in the future, a crisis will take us by surprise. But we won't be able to respond in the right way. We won't have enough flexibility in our businesses. We won't have enough innovativeness. We won't have enough fiscal freedom in our government. And we won't be able to respond to that crisis in the correct manner. Before we talk about what this crisis might possibly entail, let's first look at a group of people who bear some especially high costs from this arrangement, namely, working-age males.

Next up, Tyler discusses the missing men in the American economy. If they're not working or looking for work, what are they doing? Click "Next Video" to find the answer. Still here? Check out Marginal Revolution University's other popular videos.



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