Business dynamism – the process by which companies are born, fail, expand and contract – has slowed significantly in Maine and across the United States since the late 1970s, according to a report issued by The Brookings Institution.

The reasons are unclear, but the consistent decline in business dynamism bodes poorly for future economic growth and job creation, the report says.

Maine specialists on entrepreneurism said the points raised by the report are valid, but difficulties in obtaining accurate data may have made the situation appear worse than it actually is.

According to the report, by Ian Hathaway and Robert E. Litan, the U.S. economy is in a constant state of churn.

“Historically, one new business is born about every minute, while another one fails every 80 seconds,” it says. “In 2012, there were 13.4 million private sector jobs created or destroyed each quarter – that’s equivalent to one in eight private sector jobs.”

But the rate of churn for both businesses and jobs has been in constant decline over the past 25 years in Maine and across the U.S., the report says.

In Maine, the rate of new business starts declined by more than 50 percent from 1978 to 2011, reducing the rate at which workers moved from one job to another, the report says. Nationally, the rate of business starts declined by about 42 percent during the same period, it says.

Business dynamism is inherently disruptive, but it is also critical to long-term economic growth, according to the report.

The process of “creative destruction” is essential to productivity gains, the supplanting of outmoded business models by more successful ones, and the movement of workers into jobs to which they are better suited, it says.

“In other words, a dynamic economy constantly forces labor and capital to be put to better uses,” the report says.

But there is evidence that the economies of nearly every state, including Maine, have grown steadily less dynamic over time.

Three metrics that the report’s authors used to gauge business dynamism were the creation of new companies, business failures and the reallocation of jobs. All three metrics were calculated based on three-year averages.

Business creation was measured as the percentage of businesses less than one year old as a share of all businesses. In Maine, that share decreased from 12.5 percent in 1978-1980 to 6.2 percent in 2009-2011, the report says, a decline of 50.3 percent.

Among the state’s three largest metropolitan areas, Portland suffered the steepest decline in business starts – 52.4 percent, it says, while Lewiston-Auburn had the most modest decrease – 47.1 percent. In Bangor, the rate decreased by 50.8 percent.

The rate of business failures was measured as the percentage of failing businesses as a share of all businesses. In Maine, it decreased from 9.3 percent in 1978-1980 to 7.7 percent in 2009-2011, a decline of 17.3 percent.

Job reallocation was measured by adding together the job creation and destruction rates, based on the premise that both employment gains and losses cause workers to change jobs.

In Maine, the job reallocation rate decreased from 31.9 percent in 1978-1980 to 23.5 percent in 2009-2011, a 26.3 percent drop.

But some experts said they question those findings because the data upon which they are based are inherently inaccurate.

Economist Charles Colgan, chairman of the Community Planning & Development Program at the University of Southern Maine’s Muskie School of Public Service, said U.S. Census Bureau data on business starts and failures do not include sole proprietorships, which are a sizable component of Maine’s economy. Because of the missing data, it is impossible to know how severe Maine’s decline in business dynamism really is, he said.

“I’m not sure the drop was as dramatic as it appears in the study,” Colgan said.

Another problem for Maine is that it has a relatively small sample size of businesses, which also tends to make the data less reliable, he said.

Still, Colgan said the fact that all 50 states experienced similar declines is a sign that the Brookings researchers have identified an important economic trend.

“There’s clearly something going on here,” he said.

Jess Knox, state “innovation hub leader” for Blackstone Accelerates Growth, a pro-entrepreneurship initiative funded by the New York-based Blackstone Charitable Foundation, also was skeptical of the report’s findings.

Knox said different ways of measuring business dynamism can lead to various conclusions, and that Maine’s recent rise in entrepreneurial activity is not reflected in the report.

“There’s no consensus on the right way to measure this,” he said.

Knox also objected to the range of years the researchers chose for their study, particularly because it ended with the Great Recession.

He said that “1978 and 2011 were very different economic periods in Maine. That calls into question, to me, all the conclusions in the report.”

Hathaway, one of the Brookings report authors, said the time period chosen covers all the years for which comparative data on business starts, business closures and job reallocations are available.

According to the report, business starts decreased by at least 35 percent in all 50 states. Alaska experienced the biggest decline, 60.9 percent, and Illinois had the most modest decline, 35.6 percent.

The rate of business failures varied far more widely from state to state, it says. For instance, business failures in Nevada increased by 46.3 percent from 1978 to 2011, while in Alaska, business failures fell 41.8 percent during the same period. The national average was a decline of 3.1 percent.

The job reallocation rate decreased in each of the 50 states, according to the report, ranging from a decline of 8.7 percent in Michigan to a 49.5 percent drop in Alaska. Nationally, the average was a drop of 21.8 percent.

Overall, every state experienced a decline in business dynamism, as did most major metropolitan areas, the report says.

“The performance of business dynamism across the states and metros has become increasingly similar over time,” it says. “In other words, the national decline in business dynamism has been a widely shared experience.”

J. Craig Anderson can be contacted at 791-6390 or at:

canderson@pressherald.com

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