A myth busted?

Political and business junkies will have one eye firmly focused on Washington this weekend, as the deadline looms in crucial talks between the Republicans and Democrats which continue to threaten a shut down of the entire US Government.

President Barack Obama needs to get a deal done with the Republicans on budget cuts that are aimed at slashing the nation’s massive budget deficit. The Republicans want $61 billion worth of cuts, but the Democrats claim these go too far and want to make $33 billion worth of cuts.

If a deal can’t be done by Saturday, 800,000 federal workers will need to stop work, as they can’t get paid. A shutdown of one week could cost the nation $8 billion, according to estimates from Goldman Sachs.

It’s yet another example of how ugly things remain in the United States. While there are good signs that corporate America is getting back on its feet, unemployment remains high and the sheer size of the national debt has some worried about the long-term possibility of the US defaulting.

That’s just too awful to think about.

Of course, the great saviour of America has always been its entrepreneurial culture. And the long-held belief has been that during downturns is when entrepreneurs come to the fore.

However, new research from the Federal Reserve Bank of Cleveland has called that idea into question.

The research suggests the total number of self-employed Americans fell from 10.2 million in November 2007 to 9.8 million in June 2009, with almost 70,000 more businesses closing in 2009 than in 2007.

“Despite the claim that recessions are a time of opportunity for entrepreneurs, the Great Recession had a negative impact on US entrepreneurship,” report author Scott Shane wrote.

“At the end of the recession, the United States had fewer businesses and self-employed people than it had before the downturn began. While some measures indicate that a big part of this decline came from the increased closure of existing businesses, the largest effect came from a decline in new business formation, particularly for businesses with employees, the more economically substantial type of business.”

In other words, America is having great troubles creating businesses that actually employ people.

What can we take from this?

Well, for starters it is clear that we shouldn’t be whinging too much about current conditions facing Australian SMEs – the environment in the US sounds very tough and SMEs may have fared worse than any other segment of the business community.

But mainly, this is just another little myth that appears to have been busted. The idea of “necessity entrepreneurship” has often been sold as one of the few benefits of a downturn, but it just doesn’t seem to ring true.