In the early 1990s, one of the main issues in the public debate, mainly in the U.S, was competitiveness. A common perception was that U.S. industry was losing the global economic race, and without governmental aid, living standards would suffer.
By 1996 it had become apparent to experts and others that profound change had occurred and the economic anxiety of four years earlier was no longer to be found in the electorate. After a quarter century of painful ups and downs, the U.S. economy was doing extraordinarily well. Unemployment in 1998 was just under 5 percent, the economy was growing at 3 percent a year, inflation was at bay, manufacturing productivity was rising by 4 percent a year, the dollar was strong, and the Dow Jones Industrial Average was breaking records almost as a matter of course. It seems clear that the U.S. economy has restructured, moving from an industrial economy to an information one, and has made the transition to the 21st century.
The impressive recent performance of the United States may be contrasted with the rather lackluster performance in both Europe and Japan, where GNP has grown at less than 1.5 percent per annum in the last five years. In the European Union (EU) the unemployment rate has remained in double digits, and in Japan the stock market has been stagnant since the early 1990s at half of its previous level.
But a comparison of only the last few years may be heavily influenced by cyclical elements that may distort more long-term developments. It is instructive, therefore, to compare the macroeconomic experience in Europe and the United States over the last few decades. In the 1960-1984 period, GNP grew at almost identical rates in Europe and the United States: by 3.3 percent annually in the European Union and 3.1 percent in the United States. But beneath this superficial similarity lie some fundamental differences. While total EU employment was virtually unchanged, it increased by 33 million in the United States. (Another 25 million jobs were added between 1983 and 1996.) At the same time, the capital stock increased by 3.5 percent per year in the European Community and by 2.4 percent in the United States. As a result, labor productivity rose much more rapidly in Europe than in the United States-but so did unemployment. The unemployment rate hovered around 5 percent in the United States from 1960 to 1975, while it stayed below 3 percent in the European Community. By 1982 it rose rapidly on both sides of the Atlantic to about 10 percent. The unemployment rate has remained around 10 percent in Europe while it has been cut in half, to less than 5 percent, in the United States.
What explains this divergent macroeconomic behavior? While number of factors can be cited, one is certainly - differences in competition, entrepreneurship and new firm start-ups. The U.S. economy has had extremely strong performance by new firms. Between 1960 and 1983, the number of corporations and partnerships in the United States more than doubled (from 2.0 million to 4.5 million) while the number of companies in Europe stagnated. It declined in Sweden, Denmark, the Netherlands, and Britain and increased only slightly in West Germany, France, Switzerland, and Italy.
Between 1990 and 1996, this trend has continued in the United States. The number of corporations and partnerships increased from 5.271 million in 1990 to 6.631 million in 1996. The number of sole proprietorships also increased from 14.783 million to 16.664 million, or 3.1 percent annually. The difference in business formation rates, in turn, reflects a number of other economic factors, such as consistently higher return on investment in the United States than in Europe, higher productivity, and lower unit labor costs. Other institutional factors such as less rigid labor and capital markets, freer competition, and lower industrial subsidies also play a role. According to Gary S. Becker, the 1992 Nobel laureate, “Europe’s regulatory roadblocks and onerous taxation keep the job growth enjoyed by the U.S. out of reach”
The U. S. economy reinvented itself by fostering and promoting entrepreneurial activity. There are at least three entrepreneurial stories to the U.S. success.
First, large firms that existed in mature industries have adapted, downsized, restructured, and reinvented themselves during the 1980s and 1990s and are now thriving. Large businesses have adopted and learned from smaller firms as they have downsized. In a word, they have become more entrepreneurial. As large firms have become leaner, their sales and profits have increased sharply. For example, General Electric cut its work force by 40 percent, from more than 400,000 20 years ago to fewer than 240,000 in 1996, while sales increased fourfold, from less than $20 billion to nearly $80 billion. This was accomplished in many cases by returning to the firm’s “core competencies” and by contracting out functions formerly done in-house to small firms.
Second, while these large companies have been transforming themselves, new and small start-up companies have been blossoming. Twenty years ago, Nucor Steel was a small steel manufacturer with a few hundred employees, which embraced a new technology called thin slab casting, allowing it to thrive while other steel companies were stumbling, in 1995, Nucor had 59,000 employees, sales of $3.4 billion, and a net income of $274 million. In fact, according to Lynch and Rothchild, 25 companies, some of which did not exist in 1975, have created 1.4 million jobs.
Third, thousands of smaller firms have been founded, many by women, minorities, and immigrants. These new companies have come from every sector of the economy and every part of the country. Together these small firms also make a formidable contribution to the economy, as many firms hire one or two employees. The cumulative effect of this new firm formation was evident during the recovery from the 1991 recession. Between March 1992 and March 1993 small firms with fewer than five employees together created more than 1 million new jobs. (small firms are defined as those with fewer than 500 employees).
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