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When Mitt Romney was in Rhode Island April 11 to campaign for the Republican presidential nomination, he said that President Obama’s policies were hurting the economy.
To demonstrate that point during his speech in Warwick, Romney pointed to the rate of new business start-ups around the nation.
"The number of new businesses started per year has dropped by 100,000 during this president’s term," Romney said.
Romney has made this claim in other speeches. In Colorado in February, he was more detailed, saying, "Last year, under President Obama, there were almost 100,000 fewer new business start-ups than there were three years before."
Start-up businesses are a crucial part of the nation’s economy. One recent study found that they account for only 3 percent of employment but almost 20 percent of gross job creation.
So it stands to reason that one explanation for the slow pace of recovery is a lack of start-up activity. In that context, we were interested to see if Romney’s claim was accurate.
A spokeswoman for Romney’s campaign refused to comment for this piece, so we did our own research.
We started with an item written March 23, 2010, by our friends at PolitiFact Ohio checking a claim by House Speaker John Boehner that "new business start-ups are at the lowest levels in 30 years." Boehner’s statement was rated True, because the rate of start-ups per thousand people and the total number of start-ups per year were lower than in 1977 -- the date cited by Boehner’s office. But that item was not directly attributing the rate to Obama, as Romney did.
We called Scott Shane, an expert on entrepreneurship who was a source for the PolitiFact Ohio Item. Shane is chairman of the economics department and professor of entrepreneurial studies at Case Western Reserve University in Cleveland.
He sent us a spreadsheet of Census Bureau data compiled by the U.S. Small Business Administration. His chart included the number of new firms created annually from 2005 to 2009, the most recent year that data is available.
The number of new firms increased from 2005 to 2006 but fell steadily each year afterward, going from 556,899 in 2006 to 403,765 in 2009.
The difference between 2008 -- George W. Bush’s last year in office -- and 2009 -- Obama’s first year -- was 84,499 fewer new businesses. Although it’s close, that’s not the drop-off of 100,000 new businesses that Romney claimed in his statement. But the available SBA data doesn’t cover Obama’s subsequent years in office, so it’s impossible to use it to make a conclusive ruling on Romney’s claim.
So we turned to another source of information that has data for more recent years -- the Bureau of Labor Statistics, the federal government’s official source for labor figures. The bureau also tracks the creation of new businesses, but its numbers are different from the SBA data.
While the SBA only includes start-ups, the BLS includes all new establishments. As Shane explained, if McDonald’s opens a new branch somewhere, then that branch is included in the BLS numbers but not in the SBA numbers. So the more-inclusive BLS number is generally larger than the SBA number for any given year.
Although the BLS number doesn’t correlate perfectly to the number of new start-up businesses, we believe it’s still relevant. Romney’s claim was made as a part of a broader criticism of Obama’s economic policies and the slow rate of recovery. Whether a new establishment is a completely new business or a branch of an existing one, it still creates jobs and contributes to economic growth.
According to the bureau’s Business Employment Dynamics statistics, the number of new establishments rose until 2006, when it was 667,341. It fell every year afterward up to 2010 by an average of 40,053 -- but then rose again in 2011 by 29,316.
Despite the recent increase, however, the overall decrease since Obama became president is close to 100,000. In 2008, the number of new establishments was 626,771. In 2011, it was 536,445 -- 90,326 less.
Because Romney’s campaign would not give us a source for his claim, we can only make an educated guess that he used the BLS number and rounded it up to 100,000. That may be reasonable, but there are still problems with Romney’s statement.
By saying that the number of new businesses dropped during "this president’s term," he is clearly implying that Obama is responsible. Later in the speech he gave in Warwick, Romney was more emphatic.
"This has not been a good time to start new enterprises," he said. "This president’s policies are responsible for the fact that this recovery has been postponed..."
In a past speech, Romney called Obama’s presidency a "war on enterprise."
At PolitiFact, we treat these types of blame/credit statements in two parts. We examine whether the numbers are right and how much experts say the person being blamed is responsible.
But the number of new business start-ups had been declining before Obama took office. The numbers tracked by both the Small Business Administration and the Bureau of Labor Statistics were down in 2007 and 2008, President George W. Bush’s last two years in office. The trend continued under President Obama.
The decline coincided with the onset of the global economic recession. Not surprisingly, the biggest year-on-year drop-off in new businesses -- 17 percent according to the SBA and 12.5 percent according to the BLS -- occurred from 2008 to 2009, when the recession was at its worst. Obama took office in January 2009.
In general, because of the complexities involved, PolitiFact has been leery of attributing the health of the economy to the policies of a president. We’ll borrow a quote from a recent PolitiFact National item to explain.
"A recession that is under way or begins soon after a president or governor takes office is in no way the fault of the new office holder," said Gary Burtless, an economist with the Brookings Institution, a Washington think tank. (Burtless has provided advice to the campaign of Republican John McCain and contributed money to Obama.)
"The flip side is that chief executives cannot claim much credit for a strong economic recovery that begins shortly before or after they take the oath of office."
So what are some reasons for the drop in new business start-ups? In testimony to the House Committee on Small Business, Martin Neil Baily, another economist at Brookings, said that a reduction in home equity -- an important source of funds for start-ups -- and a tightening of banks’ lending standards are partly to blame.
It’s important to note that the recession didn’t just affect start-ups in the United States. A 2010 World Bank study of 95 countries found that "nearly all experienced a sharp drop in business entry during the crisis."
We should also add that it is extremely difficult to accurately measure the rate of business start-ups. We found one study that showed entrepreneurship rising in 2009 before falling in subsequent years. Another showed the rate rising in 2009 and 2010 before falling last year.
"No single measure captures entrepreneurial activity perfectly," Shane wrote in a commentary last year.
Finally, it’s telling that in 2011, as the United States started moving toward a recovery, the rate of new establishments tracked by the Bureau of Labor Statistics increased for the first time since 2006. Romney didn’t mention that in his speech.
Mitt Romney said: "The number of new businesses started per year has dropped by 100,000 during this president’s term."
Many studies have found that fewer businesses have been created during the recession than in previous years. But we couldn’t find any that attributed a drop-off to Obama’s policies or, for that matter, Bush’s policies.
There is some truth in Romney’s claim, but he neglected to say that the rate of new business start-ups was dropping before Obama took office. Or that by one measurement it has increased recently.
Because Romney "leaves out important details or takes things out of context," we rate his statement Half True.
(Get updates from PolitiFactRI on Twitter. To comment or offer your ruling, visit us on our PolitiFact Rhode Island Facebook page.)
PolitiFact.com, "U.S. House Speaker says new business start-ups are at the lowest level in 30 years," March 23, 2012, accessed April 13, 2012
TheDenverChannel.com, "Mitt Romney’s Denver Remarks," Feb. 7, 2012, accessed April 19, 2012
Interviews and emails, Scott Shane, professor of entrepreneurial studies, Case Western Reserve University, April 13-17, 2012
EconWeb.UMD.edu, "Who Creates Jobs? Small Vs. Large Vs. Young?," John Haltwinger, Ron S. Jarmin and Javier Miranda, August 2011, accessed April 18, 2012
SBA.gov, "Firm Size Data: Statistics of U.S. Businesses, Business Dynamics Statistics, Business Employment Dynamics, and Nonemployer Statistics," Small Business Administration, accessed April 16, 2012
BLS.gov, "Number of private sector establishments by age," Bureau of Labor Statistics, updated Feb. 1, 2012, accessed April 16, 2012
Articles.ChicagoTribune.com, "Romney seeks big wins Tuesday to elbow out Santorum," April 3, 2012, accessed April 18, 2012
Brookings.edu, "The State of American Small Business," Martin Neil Baily, Brookings Institution, Feb. 1, 2012, accessed April 17, 2012
WorldBank.org, "New Firm Creation -- What Has Been the Effect of the Financial Crisis?," Leora Klapper and Inessa Love, World Bank, September 2010, accessed April 17, 2012
ChallengerGray.com, "Challenger Index: Start-up Activity -- Lowest Start-up Rate on Record as Jobs, Fragile Economy Deter Entrepreneurship," Challenger, Gray & Christmas, Feb. 14, 2012, accessed April 13, 2012
Kauffman.org, "Kauffman Index of Entrepreneurial Activity," Ewing Marion Kauffman Foundation, updated 2012, accessed April 13, 2012
ClevelandFed.org, "The Great Recession’s Effect on Entrepreneurship," Scott Shane, Federal Reserve Bank of Cleveland, March 24, 2011, accessed April 13, 2012
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