It’s no coincidence that a movie’s main character’s new business went under during the recession. High unemployment will keep entrepreneurs hamstrung.
The movie Bridesmaids has had a strong second weekend, dropping only 20% as a result of positive word-of-mouth. This hopefully shows that a movie that passes the Bechdel Rule can go on to make $100 million dollars and will encourage Hollywood to produce more movies with female screenwriters and a diverse cast of talented female actresses. I’d recommend reading Aaron Bady, Millicent and Carla Fan‘s critical comments on the movie, because I want to get into the macroeconomics angle.
In addition to all the good things you’ve heard about the movie, it’s a useful starting point to discuss an important part of this recession and Keynesian economics more generally. A few slight, minor spoilers will follow, ones that are in all the reviews. The main character Annie (played by Kristin Wiig) is in a depressed slump because her bakery business failed during the recession. Most of the reviews I’ve read say that the recession wiped out her business. A subtle, yet important, plot point is that she opened her bakery during the recession and it didn’t take off. In one of the few times Annie directly mentions what went wrong with her business, she blames herself for the timing of the opening, saying something disparaging like she was the genius who decided to open a business in a recession. This left her alone, broke, and the victim of a vicious case of bad timing while the timing for her best friend works out very well.
Is Annie alone? Annie was one of the few to try and start a business in this recession. Most other entrepreneurs have taken the recession off. Let’s start with data from the Bureau of Labor Statistics on Business Employment Dynamics, Establishment Age and Survival Data (this text file specifically). The data only goes back to 1994, and I’m told it’s hard to get before then. There is a record low number of business starts in this recession:
In that graph, each data point is the number of businesses opened over the course of one year previous to May of that year. And as you can see, fewer people have opened businesses in the past two recessions and many fewer businesses are opening right now. These numbers aren’t normalized, so even though the economy is larger and there are more people than in the early 1990s, there are far fewer businesses opening.
But maybe Annie should actually feel worse about her ability to manage a bakery. If there are fewer businesses starting up, perhaps it is because the only people who can get loans tare the best suited to do so. Maybe only the best of the best can get the resources to start businesses and dumb ideas are left in loan officers’ garbage cans. If this is the case, then the survival rate for businesses opening in a recession should be the same, if not higher, than those that open outside of a recession. How does this turn out?
This is the one year forward survival rate for businesses that have launched in the previous year. So a business that launched between March 2008 and March 2009 has only a 76.3% chance of being around in March 2010. As you can see, it’s actually lower than that. It’s really hard to open a business in a recession.
This is an important point that goes against the “creative destruction” view of recessions. Those who believe that kind of classical theory think that the “work” of a recession is to let the economy recalculate what goods and services are needed going forward, while also letting the virtuous and hard working purge the incompetent and the lazy out of the system. But recessions are terrible for new entrants! Good ideas or bad ideas, who wants to launch a business in a climate with 10% unemployment? Even if you are the best manager, even if your idea is killer, if all your customers can barely pay their own bills it is unlikely that your work will pay off. The realization that this depressed state could perpetuate itself was an important breakthrough for macroeconomics. The government needs to step in to jump start the economy so that the normal trucking and bartering and allocation of a market economy can function.
If you’ve been paying attention to the headlines, you’ll note that the political economy is all wrong about what needs to be done to fix this. Most of the major discussions have been about how to make the established business community feel more encouraged. From writing regulatory rules to slashing the social safety net to extending high-end tax cuts, our hopes seem entirely to rest on whether or not we can get millionaires to work an additional 10 minutes and feel properly appreciated rather than having customers with money in their pockets available for new businesses.
The Polish economist Michal Kalecki wrote an excellent 1943 essay called Political Aspects of Full Employment that warned us about this problem. If during a recession and a weak economy the government doesn’t step up to ensure full employment, then suddenly the business community has powerful indirect control over the economy. Governments give credits and rebates for established companies to expand, businesses spend the money on M&A and consolidation and, most importantly, incumbents expand and entrench their powers. This kind of confidence building isn’t going to help a small bakery that’s trying to open.
If you want to know what is hurting small businesses, you should ask one. And when you ask a bunch of them and aggregate the information, they’ll tell you it isn’t some sort of Obama-anti-business agenda but poor sales, exactly what you’d expect from high unemployment:
It’s telling that the only character who comments on purchasing something from Annie’s bakery is a Wisconsin state police officer, as civil servant wages and employment are sticky and haven’t taken the same hit as the private sector.
Annie’s character in Bridesmaids feels like the timing and progression of her life has gone into a ditch. That the next step in her baking career happened to coincide with the collapse of the mass securitization of bad debt and an over-the-counter credit derivative protection market is really bad luck. But it shouldn’t mean that her ability to launch a new business, to exercise and refine her talents and skills and have her employment give her a proper sense of self and purpose, should be ruined indefinitely. Full employment is the friend of new business owners. It would be great if either of our political parties would emphasize that in a time of 9% unemployment.