Viewpoint August 6, 2010, 2:55PM EST

Entrepreneurs Don't Love the Great Recession

Business owners are reeling from the downturn. Promoting the benefits of starting or running a company right now takes the pressure off Washington, says Scott Shane

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(Corrects the percentage in the sixth paragraph.)

Over the past decade, I've seen a bunch of articles arguing that recessions are good for people who run their own businesses. With headlines such as "Entrepreneurs Should Love a Recession," these authors claim that the down economy isn't "bad news for entrepreneurs." Instead, they argue that recessions are "one of the best times to start, nurture, and incubate a small company". Because entrepreneurs have "less to lose" in recessions and because recessions "enliven" entrepreneurship, are "a motivational boost" to would-be entrepreneurs, offer "excellent employee choices," and "spur booms in innovation," these authors seem to believe that the Great Recession is no problem for America's entrepreneurs.

While their optimism is uplifting, their arguments are flawed. The Great Recession has been bad news for small business owners on almost every dimension one can measure.

What the Numbers Show

The data paint a stark picture of entrepreneurship during the recession. For instance:

• Fewer people are starting businesses. Numbers from the Bureau of Labor Statistics show that on a per-person basis, the rate at which people started new establishments fell 13.3 percent from 2007 to 2009. Similar declines can be seen in the rate at which new businesses with employees have been formed. From 2007 to 2008 (the latest year for which data are available), Census Bureau numbers show a 6.1 percent decline in the per-person rate at which new employer businesses were started. The search firm Challenger, Gray & Christmas reports that from the first three months of 2007 to the first three months of 2010, the share of those in its outplacement services who started businesses declined from 10.6 percent to 3.4 percent.

• New and small businesses are dying at a rapid pace. In the first three months of this year, the number of business bankruptcies was more than double the level in the initial quarter of 2007, according to the American Bankruptcy Institute. In addition, from 2007 to 2008, the Census Bureau reports that the number of non-employer businesses in the U.S. declined 357,000. The BLS reports that from 2007 to 2009, the number of self-employed people fell by 562,000, with 270,000 of the lost self-employed having previously run incorporated businesses.

• Small business employment has shrunk dramatically. According to the monthly ADP Small Business Report, 6.4 million small business jobs were lost from December 2007 to June 2010. This decline occurred amid evidence from several sources that hours worked and compensation at small businesses had also fallen. Even at newly formed businesses, employment declined. The BLS numbers show that the number of employees hired by the average startup fell from 4.32 to 4.18 in the 2007-09 period, a 3.2 percent decline.