FACT CHECK: Rubio is accurate on business starts and deaths

Jason Noble - In his presidential pitch in Iowa and elsewhere, U.S. Sen. Marco Rubio calls the 2016 election a "referendum on our identity."

The United States must pursue new policies on taxation, economic competitiveness and foreign policy, he says, or risk losing the exceptional qualities that allowed the nation to thrive throughout the 20th century.

In a meeting with The Des Moines Register's editorial board last month, Rubio illustrated the erosion of American dynamism with a worrying claim: The number of small business closures now exceeds small business startups.

We rate this statement TRUE.

The number of business "deaths" exceeded new businesses created in the four-year period from 2009 to 2012, U.S. Census data show, although the gap is narrowing.



CONTEXT

Here's what Rubio told Register reporters and editors in a meeting on April 25:

"There are people trying to start a small business who can't. For the first time in 35 years, small business deaths outnumber small business births. That's the uncertainty we have. That's why people are so insecure about today and fearful of the future. But if we change that, we're going to have another American century."

When asked for the data supporting the statement, a Rubio campaign spokeswoman cited reports published by the business analytics firm Gallup. Gallup's numbers, in turn, are rooted in data captured by the U.S. Census Bureau in its Business Dynamics Statistics.

Those statistics represent a rich data set, including year-by-year figures dating to 1977 on business births and deaths broken down by the firm location, age and size, among other metrics.

ANALYSIS

The census data on business births and deaths has been widely reported, showing up not just in Gallup but also the New York Times, FiveThirtyEight and scholarly publications. It's important to note, however, that Rubio puts a finer point on the data than those sources.

While Gallup and others refer to deaths outnumbering births for all U.S. businesses, Rubio told the Register's editorial board that fact was true for small businesses, the subset of firms generally defined as having fewer than 500 employees.

(The Small Business Administration's criteria for small business varies by industry. In some fields, a small business may have 750 or 1,000 employees. Others are measured by average annual earnings.)

The census data includes breakdowns of business births and deaths by number of employees, allowing us to evaluate Rubio's claim.

First, in relation to all businesses: The Business Dynamics Statistics confirm that startups exceeded business closures every year from 1977 through 2008, but went negative in 2009, when almost 91,000 more businesses closed their doors than opened them. That annual figure has remained negative through 2012 — the most recent year for which data is available — although it's gotten progressively smaller.

In 2012, about 410,000 new firms were formed, compared to almost 417,000 that closed, a difference of about 7,000.

And because firms with fewer than 500 employees represent the vast majority of businesses in America — 99.6 percent in 2012 — the numbers for small businesses are similar.

Births outnumbered deaths at small firms from 1977 through 2008 and then went negative for the next four years. In 2009, about 91,000 more businesses closed than were started. By 2012, that figure had declined, but small business closures still outnumbered startups by about 15,000.

Another measure of the same data — firm entry and exit rates — shows a similar progression for businesses in general and small businesses specifically.

The percentage of all businesses that began operations in a given year has trended downward for decades, while the percentage of businesses shuttering in a given year has remained relatively flat.

In 1978, for example, 14.6 percent of businesses were formed that year, compared to 10.5 percent that closed. In 2012, 8.2 percent of all businesses were opened during that year, while 8.4 percent closed their doors. The death rate has exceeded the birthrate since 2009.

The story is virtually the same for small businesses. The death rate has exceeded the birthrate since 2009 and the percentage of small businesses that opened in a given year has been trending downward since 1977, the first year for which data is available.

In 1978, for example, 14.6 percent of all small businesses were less than a year old, while 10.5 percent went out of business. For 2012, 8.2 percent of small businesses were newly opened, while 8.5 percent left the market.

Experts worry that the long-term downward trend in startups — which is apparent in the raw numbers as well — signifies a structural problem with American entrepreneurialism, rather than a blip caused by the Great Recession.

"Overall, the message here is clear," economists Ian Hathaway and Robert E. Litan write in one widely cited study. "Business dynamism and entrepreneurship are experiencing a troubling secular decline in the United States."

Although it's clear business creation is declining, the reason why remains uncertain. Among the theories are slower population growth in key regions; slowing innovation and productivity; the U.S.'s aging population; increased business consolidations; and taxes, regulations and licensure requirements.

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