Poor People Are Starting Lots of New Businesses... It's Destroying The Economy

The Classic Story of Small Business#

You know how the story goes: small business is the backbone of our economy. It’s about entrepreneurs taking a chance on themselves. These folks have:

Provided jobs for millions.
Created cool, innovative products and services we use daily.
Found financial success levels tough to hit with a regular job.

The general message out there is: you’d be silly not to try starting a business at least once, right?

A Seeming “Golden Age” of Entrepreneurs#

Millions have heard that message loud and clear. Looking at the numbers, you’d think we’re in a golden age of new entrepreneurs.

We’re seeing twice as many new business applications processed every month compared to before the pandemic.
Politicians from all sides are quick to claim credit, calling this the personification of the American dream.
The Census Bureau reports a record 5.15 million people applied for a small business application last year.
The number of applications to start a new business has absolutely surged over the last few years.
The Small Business Administration (SBA) recently increased the share of funding for small businesses with fewer than 10 employees by nearly 60%.

Why More New Businesses Traditionally Look Good#

Usually, a lot of new businesses starting up is a really positive sign for the economy.

Confidence: People generally only start a new business when they feel good about their own future and the market they want to enter. If you thought a recession was coming and worried about paying bills next month, you probably wouldn’t start a business.
Financial Security: Starting a business often needs significant money upfront for things like:
- Renting commercial space.
- Buying equipment.
- Purchasing inventory.
- For many, hiring staff.
Bearing Initial Costs: Most new owners expect to go some time without taking a salary until the business makes steady cash. So, if lots of people are starting businesses, it suggests lots are financially comfortable enough to handle these costs.

How New Businesses Help the Economy#

It’s more than just a sign things are going well; they actually help make things go well.

Job Creation: They create jobs for people just looking for work.
Improved Productivity:
- New business owners, on average, put in way more time and effort than in a regular job, leading to more output.
- Successful new businesses bring valuable products or services to the market.
- Example: A business-to-business company developing software to streamline AI-generated LinkedIn appreciation posts could save millions of wasted hours, letting workers do more productive things.
- Example: A business selling a consumer product adds competition, potentially lowering prices or improving quality.
- Example: Developing a totally new product could make people happier, healthier, smarter, or just keep them entertained.
Societal Benefit: Sure, most new businesses fail. But for society overall, the few that succeed are usually a really good thing.

The Catch: Why This Record Isn’t Exactly Great News#

So, given all that, why is this record level of business creation in America not being seen as great news? Well, there are actually three main reasons.

Reason 1: Location and Underlying Motivation#

The first reason ties into why these businesses are starting.

A 2023 paper by Ryan Decker of the Federal Reserve Board and John Halawinger of the University of Maryland looked into these new businesses and found some interesting stuff.
Where they are: New businesses were mostly forming in states and counties with lower average incomes. While most areas saw increases, the outskirts of cities, especially in states hit hard by economic issues, saw much bigger jumps.
Potential Explanation: The authors suggested some of this was just businesses closing in city centers (which lost foot traffic) and reopening in the suburbs (lower rent, catering to remote workers).
- Note: This wouldn’t actually increase business activity overall, just move it. Also, closed businesses can stay registered long after they physically shut down.
- Issue: While moving businesses might not hurt, this doesn’t explain the entire trend.
The Hard Truth: A lot of the other people starting new businesses aren’t doing it to chase a dream. They’re doing it because they have no other option.
The Impact: This situation is likely making things much worse than we might realize.

Understanding How Money Works#

To really get how a record number of businesses could be quietly causing problems for the economy, we need to look at how we measure things.

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The Challenge of Measuring the Economy (and Jobs)#

Figuring out exactly how our economy is doing is something governments really struggle with.

Collecting data on hundreds of millions of people, millions of businesses, and billions of transactions is incredibly hard.
Agencies often use calculated guesses based on historical patterns.
Job Data Issues: Even if the Bureau of Labor Statistics tried to scrape every job posting (which would be impractical), it wouldn’t be accurate.
- The rise of ghost job listings means there are almost twice as many job postings now as there were 5 years ago.
- But, as anyone who looked for a job in the last 24 months knows, businesses aren’t exactly rushing to hire.
- This is a big problem because government agencies use job creation data to make crucial decisions about budgets and interest rates. It means “we really shouldn’t be making [bleep] up.”

Reason 2: More Business Creation No Longer Equals More Job Creation#

One historical assumption was that more businesses starting means more jobs being created because businesses need employees. This used to make sense.

The Data Shift: The data has actually started showing the opposite.
In the report on the rise in new business applications, Decker and Halawinger found that counties with a higher rate of business creation were actually correlated with a higher rate of job destruction.
Confirmation: This data largely just confirmed what many people already suspected: folks weren’t starting businesses because of amazing opportunities; they were starting them because they had no other choice.

The Rise of the Gig Economy#

This shift is heavily linked to the growth of the gig economy.

According to a broad market survey, 36% of the American workforce is now involved in the gig economy.
Some do this alongside a regular job for extra cash, but whatever the specifics, that’s a significant increase from just 5 years ago.
Gig Worker as a “Business”: Gig workers are encouraged to register as a business and track their income and costs, just like any other business.
Key Difference: Unlike other businesses, none of these people are going to be hiring employees or investing much money into the broader economy.
Past vs. Present:
- In the past, new business owners usually had some experience in their field and some savings or investors to get going.
- Most of these new gig economy “businesses” are started by people who don’t have enough experience to get a traditional job and don’t have any cash saved up.
The Upside: For some, the ability to sign up instantly for gig work (bypassing job interview hurdles) is a big reason these platforms are popular.
The Downside: These jobs shouldn’t be sugarcoated. They are:
- Insecure.
- Don’t pay well.
- Quite dangerous.
Impact: This technology is truly unprecedented and has already reshaped what “work” means in its short existence. Whether that’s for better or worse is really up to you.

Reason 3: The Growth of “Independent Contractors” (Often Without Real Independence)#

Even highly skilled workers with lots of experience haven’t avoided this trend.

The number of people working as independent contractors jumped significantly as businesses moved away from full-time hires and the worker protections that come with them.
Traditional View: Typically, independent contractors should have the freedom to work when and where they want, as long as they deliver the agreed-upon product/service on time.
The Reality: A lot of businesses have quietly required contractors to be in the office, just like regular employees, but without the security or benefits.
Further Erosion of Rights: A study by the National Employment Law Project found many independent contractors were forced to sign non-compete agreements as part of their contract.
The Result: This means they had “all the independence of an employee combined with all the safety of someone in business for themselves.”
Who Benefits (Sometimes): For certain people at the top of their field, being an independent contractor is a great deal – they can work for multiple companies and charge much higher hourly rates than typical employees.
The Majority: However, these top-tier contractors didn’t suddenly double in number. Most of the growth is simply people working full-time jobs but under contract conditions.

Impact on Real Job Opportunities#

This situation also means that actual job opportunities aren’t as plentiful as the numbers might suggest. Even if the data shows lots of “new jobs” (including gig/contract work), they are likely being done by people who already had a job but needed a second or third source of income just to keep up with living expenses.

Why Government Agencies Might Ignore This (Intentionally)#

You might think this is just another case of a slow government struggling to keep up with fast-changing technology that’s reshaping the workforce. But there are actually two main reasons government agencies have tried hard to intentionally ignore this trend:

Good Headlines for Re-election: Headlines about job creation and business development are great politically. Nobody wants to be in charge when data collectors change methods and reveal millions of supposed jobs don’t really exist or aren’t what they seemed.
Making Big Programs Look Effective:
- Late last year, the Small Business Administration (SBA) put out a press release boasting about the success of a business loan program aimed at minorities.
- They highlighted how groups previously underrepresented were starting a record number of businesses.
- Note: Putting the political/socioeconomic debate aside (yes, loans based on need are a separate discussion), the statistics showed the same trend.
- The Misinterpretation: The SBA thought they had successfully empowered a new group of business owners. What they had actually recorded was these groups registering to work for Uber Eats or similar platforms.

The Need to Acknowledge the Problem#

I know many watching this already know this stuff. But ignoring this issue will probably make it worse.

These economic charts aren’t just there for me to make depressing videos; they should guide policy decisions.
If we can’t even admit there’s a problem, it’s much harder to fix it.

What About Encouraging Genuine Business Activity?#

If we genuinely want to encourage real business activity (which is a good goal!), there’s a lot we could do. But these things are hard:

Actually banning non-compete agreements.
Making it easier for business owners to save for retirement.
Making access to healthcare easier for people who don’t get it through an employer.

Who Benefits from Things Staying This Way?#

There’s one other group that really prefers everyone keeps looking the other way: the platform businesses that have made all of this possible in the first place.

Wrapping Up#

So, maybe we aren’t actually living in the golden age of entrepreneurship after all. But if you want to learn more, check out the next video to find out why we are living in the golden age of middlemen.

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