Rhode Island’s Poor Entrepreneurial Performance

The word “entrepreneur” has been thrown around Rhode Island a lot in recent months and years.  To most people, one suspects, concepts like economic development, entrepreneurialism, knowledge economy, twenty-first century workforce, and skills gap blur into a mosaic of sounds-good promises.  The idea is that “they” (the folks in positions to modify public policy) are trying to do something, and this stuff has a feel of the future… whatever it might look like and however “they” might bring it about.

The first problem with chasing this star is that, largely thanks to “them,” the fundamentals do not exist in Rhode Island for real economic growth to take hold.  The rules that the state’s various governments impose are stringent; they are constantly in indecisive flux; and as evidenced in the judges call for mediation of a statute, the folks who hold power are far too prepared to disregard the rules in the name of simply doing what they deem to be necessary or right.

The second, much more important, problem with the attitude described above is that economic growth is not something that “they” accomplish by sparking action by some class of people with ideas and insights beyond normal imagining.  Economic growth is something that we accomplish — the Rhode Islanders who are already here, supporting their families and building their lives.

That point is emphasized in a counter-intuitive finding highlighted on the Current back in March.  Local progressives were promoting a review of studies performed by Political Economy Research Institute (PERI) researcher Jeffrey Thompson, which found that “higher taxes lead to more new small business ventures and self-employment.”  At the time, I suggested that “if higher taxes depress the economy, limiting opportunities for regular employment,” it might be “forcing workers to set out on their own.”  After all, business ventures and self-employment include blue-collar trades, retail shops, and other occupations not typically labeled with a fancy word like “entrepreneur.”

A report (PDF) on “entrepreneurial activity” in the individual states by University of California Economics Professor Robert Fairlie that the Kauffman Foundation on Entrepreneurship released last spring provides further evidence.  The following chart from the report adds evidence for the conclusion that down economies lead to business starts.

The dotted line shows the percentage of the adult “non-business-owner” population who started businesses in the average quarter of that year.  During periods of downturn in the early and late ’00s, the line leaps up, indicating an increase in new businesses.  The solid line shows the portion of those businesses that had employees other than the owner, with inverse trends.  It appears that down economies force workers to start their own businesses, probably to compensate for lost jobs or reduced hours, which makes them relatively unlikely to hire additional employees, themselves.

Other charts, comparing subgroups, contribute to this interpretation.  Men are more likely than women to start businesses during down economies. The construction industry experiences the most new businesses during those periods.  Latinos are more likely to start them, as are immigrants.  And people in the age ranges of 35-44 (early career, often with families) and 55-64 (late career, headed toward retirement) are most conspicuous.

If we accept the proposition that a struggling economy leads more people to start their own businesses in order to generate their own income, then Rhode Island’s position on the Kauffman Index’s ranking is worrisome.  The Ocean State ought to be highly entrepreneurial, because its employment situation is so bad.  The other two states with unemployment rates above 10% are near the top of the entrepreneurialism list.

Rhode Island is tenth from the bottom.  That may be related to the fact that Rhode Island appears to be one of only two states losing population.  It’s small enough that people who can’t find work can move to neighboring states and still be within visiting distance, and its regime of taxes and regulations is oppressive enough that many who might otherwise start businesses don’t bother.

That makes the state a picture of stagnation, and with an apparent aversion to innovation and change, stagnation over the long-haul will equate to decline. New state-level employment numbers will be released later this morning, but an interesting observation leaps off this chart of the states’ distance from their pre-recession peak employment: All three of the worst performing states — Michigan, Rhode Island, and Indiana — began 2012 as non-right-to-work states.  Only Rhode Island will end the year as one.

That doesn’t (necessarily) mean that such a reform would be right for Rhode Island.  What it does indicate is the openness in states other than Rhode Island to dramatic changes in public policy to address economic suffering.


The featured image for this article comes from the March 2012 Kauffman Index of Entrepreneurial Activity report.

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