The Cure For All Ills: More Immigration

Here’s a paper that lots of people are citing about “declining business formation dynamism” and decline in job relocation.

Declining Business Dynamism in the United States: A Look at States and Metros

By: Ian Hathaway and Robert E. Litan

Business dynamism is the process by which firms continually are born, fail, expand, and contract, as some jobs are created, others are destroyed, and others still are turned over. Research has firmly established that this dynamic process is vital to productivity and sustained economic growth. Entrepreneurs play a critical role in this process, and in net job creation.

But recent research shows that dynamism is slowing down. Business churning and new firm formations have been on a persistent decline during the last few decades, and the pace of net job creation has been subdued. This decline has been documented across a broad range of sectors in the U.S. economy, even in high-tech.

Here, the geographic aspects of business dynamism are analyzed. In particular, we look at how these trends have applied to the states and metropolitan areas throughout the United States. In short, we confirm that the previously documented declines in business dynamism in the U.S. overall are a pervasive force throughout the country geographically.

In fact, we show that dynamism has declined in all fifty states and in all but a handful of the more than three hundred and sixty U.S. metropolitan areas during the last three decades. Moreover, the performance of business dynamism across the states and metros has become increasingly similar over time. In other words, the national decline in business dynamism has been a widely shared experience.

While the reasons explaining this decline are still unknown, if it persists, it implies a continuation of slow growth for the indefinite future, unless for equally unknown reasons or by virtue of entrepreneurship enhancing policies (such as liberalized entry of high-skilled immigrants), these trends are reversed.

You know, I realize this may come as a surprise, but we’ve actually had a certain amount of immigration during these recent decades of declining economic dynamism. So, before we rush into even more immigration, maybe we should consider the possibility that immigration discourages business formation and job relocation among Americans.

I thought through the logic last year in conversations with my wife’s nephew, when he was visiting us in Los Angeles from his small town in the Midwest. He played on a couple of informal soccer teams here, one otherwise all-Mexican, one otherwise all-Russian. The friendly Mexicans called him “Hollywood” because he looks like the kind of All-American handsome young man associated with movie stardom. (The brooding Russians called him “you.”)

But, assuming you aren’t going to be the next Brad Pitt, does it make sense for an American to relocate for economic reasons to Los Angeles, the immigration capital of America over the last generation?

First, it’s really expensive in part because of the steady population increase, and in part because it attracts immigrants from cultures where extended families crowded into one house are standard.

Second, wages are not very good here relative to the cost of living. That has something to do with the esoteric concept known as supply and demand.

Third, lots of people make lots of money owning small businesses in Los Angeles, but for an American outsider without many family connections, it can be a baffling maze of ethnic specialties and unfriendly extended family business networks.

What’s your best field? Well, in Los Angeles, a lot of fields are not particularly open to random Americans moving up into management, so good luck. Maybe you’ll stumble into one that doesn’t turn out to discriminate against you. Or maybe you’ll waste a few years before you figure out that the good jobs in the field where you are an entry-level employee only go to, say, cousins from Yemen.

Fourth, California imposes numerous regulations and taxes on businesses, which makes it a difficult business environment for law-abiding Americans. In turn, it attracts a large number of immigrants from cultures where everybody cheats. (Here’s my jury duty story about the Iranian used car dealers who stole two million dollars in sales tax revenue.)

It’s hard to compete when you are burdened with small town Midwestern values against businessmen who think Americans are chumps.