Liberalism and Its Discontents – Francis Fukuyama 2022

US politics are very polarized. Left and Democrat are nearly synonymous. Right and Republican are nearly synonymous. Professor Fukuyama sees an even greater threat from the challenges of the “New Left” and the “Hard Right” to the core principles of the “classical liberal” political system of the United States.

The book is a defense of “classical liberalism”. Limited government power. Legal institutions protect individual rights.

Not US center-left political liberals or EU center-right political liberals.

Classical liberalism is under attack from right – nationalist, cultural, authoritarian and from the left – postmodern theory, inequality, identity politics, group rights.

Classical liberalism born of history, 1700-1800, rationalism, science of enlightenment, anti-conservative aristocracy, church, tradition, favored groups. Partial solution to the post-Reformation religious wars. Dominant world view 1945-1990 as communism and fascism lost war of ideas. But, also opposed by romantic movement 1800’s, nationalism late 1800’s, communism 1900, fundamentalist religion, etc.

Inherently a practical solution to a world with unavoidable diversity of opinion and interests: religious, ethnic, state, culture, race, gender, class, etc. Privileges individual over community. Privileges institutions (law, military) over individual political actors. Privileges pragmatism over theoretical cleanliness. Privileges conflict avoidance above utopian justice. Privileges incremental change to revolution. Privileges all individuals’ rights versus just the most valuable individuals’ rights.

In a more diverse, global world, “classical liberalism” remains a solid choice for organizing society. The burden for promoting change lies with the critics.

1. What Is Classical Liberalism?

A. Individualist. Claims and rights of individual get priority over claims of any group.

B. Egalitarian. All individuals have an equal legal and moral standing in society. This contrasts with systems and philosophies where groups are more important. Nations, monarchies, aristocracies, oligarchies, autocracies, religion, class, race, etc.

C. Universalist. Humanity as a species is first. Specific historical forms, institutions, groups, leaders, cultures, etc. are secondary.

D. Meliorist. Social and political institutions and arrangements are imperfect, subject to improvement or decay. Liberalism is inherently pragmatic, accepting that no system or policy will meet the needs or reflect the values of all citizens. Compromise and tolerance are required to govern a state with unreconcilable differences. Liberalism sought to end the “wars of religion” where opposing sides were certain they were right and willing to fight. Liberalism accepts the need for a “strong state” to militarily offset the powers of “strong men” or “strong groups”, echoing Thomas Hobbes.

Individuals have rights because they are human. These rights are more important than social, political, economic and cultural institutions. Freedom of speech, association, belief and politics. Right to own private property and transact by choice. The right to vote and influence political decisions were added through time. Starting with these principles, governments are freely formed by individuals (contract theory) in order to protect individuals and preserve these rights.

Critically, “liberalism” is based on ideas, rational philosophical ideas, rather than history, tradition or power, per se. It is not only based on ideas, but also on history and experience. The “rational” dimension of “liberalism” can cause proponents and defenders to take positions that are considered “extreme” by others.

Contrast “liberalism” with “democracy” which is “rule by the people”. Democracies provide voting rights to most citizens and limit the power of strong groups to restrict the vote of the people. Not all liberal states are democracies. Democracy has expanded greatly during the 20th century. “Liberalism” provides an infrastructure that supports democracies and buffers attacks on them.

The emphasis on individual rights in “liberalism” causes an emphasis on laws and the rule of law, independent of the exercise of direct political power. The history of powerful rulers disregarding any inconvenient “rights” made the early proponents and adopters of “liberalism” champions of this “checks and balances” approach to governance. Again, critics of “liberalism” point out that highlighting just legal rights can lead to unbalanced political systems and societies that downplay other values and interests.

“Liberalism” claims to be a moral system. It honors human dignity, autonomy and choice. Individual choice is supported in most areas of life, constrained only by legal and regulatory limits agreed upon by political representatives. This right to choose applies to all people.

Economic benefits stem from property rights, freedom to transaction, legal institutions and the “rule of law”. Individuals invest in potentially profitable opportunities because they are confident that they will be able to capture and maintain most of the benefits from successful ventures. Historically, this has delivered strong economic growth with positive spillover benefits. Some critics question the use of economic measures such as GDP and growth as proxies for society, but the “order of magnitude” growth levels under “liberal” economic systems clearly provide enough benefits to allow society to prosper and redistribute as desired. Liberals also tend to support “free trade” policies for the movement of goods, services, finances and people because these voluntary trades result in net added benefits to both sides.

“Liberalism” is strongly associated with the “enlightenment” and the “scientific revolution”, relying upon logic and evidence to make objective decisions. It is also linked with the “scientific method”, noting that the free marketplace of ideas is effective in evaluating competing claims and drawing conclusions, even if those conclusions are only formally probablistic, rather than certain.

Liberalism emphasizes tolerance and compromise as virtues in order to defuse strongly held differences of opinion. Hence, it is inherently in conflict with any religious or political view or system that believes that it holds the only “truth” and that this “truth” must be consistently reflected in political, regulatory, judicial and social decisions. This tolerance for differences aligns liberalism with ecumenical religious groups and “relativist” ethical philosophies. It also aligns liberalism with a more dovish foreign policy approach recognizing the “rights” of all states and the global community as valid. Because of its tolerance for diverse religious views, liberal secular states are sometimes seen as opposing religion or supporting atheist or agnostic religious positions.

Historically, liberal states have resorted to war to protect what they saw as essential national interests.

Liberal states focus on the philosophical principles that shape nation-states (freedoms, rights, liberties) rather than religious, ethnic or cultural dimensions (blood and soil).

Equal rights for all people was slow to develop in liberal states, even when the principles were enshrined in declarations, constitutions and bills of rights. On the other hand, the ideals of equality played a role in expanding equality through time.

Historically, the new “liberal” systems were supported by groups opposed to the existing, “conservative” powers: monarchy, state churches, aristicracy, landed gentry. Capitalists, property holders, traders, urbanites and professionals supported “liberal” systems which provided them with greater economic, political and social rights than the received systems. Through time, the more ancient powers lost influence and the new “middle class” accumulated power and influence in the “liberal” system.

“Liberals” celebrated the defeat of fascism and Nazism after WWII and the defeat of Soviet communism in 1990. Fukuyama’s 1992 book “The End of History and the Last Man” documented this achievement. The widespread adoption of basic liberal principles and “mixed capitalist” states was a clear economic success and no clear competitor remained in 1992.

Left- and right-wing political groups emphasize different parts of autonomy or free choice in the “liberal” state. Conservatives and neoliberals (Reagan, Thatcher, free marketers) emphasize free economic choices and a corresponding limit to government economic roles. Democrats, leftists and progressives emphasize personal social autonomy. Libertarians emphasize all freedoms and oppose large government roles of any kind.

2. From Liberalism to Neoliberalism

The post-WWII “good times” rolled for 3 decades, but the growth of government activities, slower economic growth, stagflation, international crises and growing political opposition to the “status quo” lead to a reaction against the general economic and political consensus that a “mixed economy” was “good enough”. Reagan and Thatcher won solid election victories with clear messages of “less government”.

This pro-business, anti-government philosophy became known as neoliberalism and was broadly adopted in many western countries, with left-leaning parties adapting with more pro-business policies and less government activism (Clinton).

Fukuyama points to inefficient, ineffective and overreaching government as drivers of this major change in political views. He notes that reduced regulations, outsourcing, divestiture and lower taxes did lead to more competitive industries and economies leading to increased growth and employment.

He also paints neoliberalism as an extreme view, discounting any role for government and unduly emphasizing just the economic dimension of public policy. He doesn’t see a close tie between “classical liberal” political states and neoliberal political philosophy and tactics. Like most “liberals” and economists, he sees various roles for the government in a modern state due to inherent “market failures”. Basic consumer and environmental regulations, military and public safety, anti-trust, financial market regulation, public goods (education, infrastructure), regulated natural monopolies, limits to inequality. He suggests that public policy should focus on the effectiveness of government services first and the share of government services second, without and demonization of government or lionizing of “free enterprise”. He notes that the share of government services provided is a political choice made within a “liberal” system that could be very low (20%) or very high (80%).

Fukuyama outlines the basic economic argument for “free trade” (opportunity to make both parties and societies better off) and notes that this is of little succor to those who lose from free trade (workers, businesses, localities), especially when policies and programs to help them recover are non-existent, underfunded or ineffective.

He observes that the political failures to ensure efficient governments, effective politics (vetocracy), limits to inequality, proper financial regulation and balanced trade have driven opposition to government, politicians and political parties on the left and the right from critics on the left and the right!

3. The Selfish Individual

The author sees neoliberalism and its libertarian cousin as distortions of “liberalism”, focusing solely on an extreme view of individual economic results alone.

Property rights matter, but no more than other rights of choice. Property rights are supported by government institutions, so the quality of government matters. The original distribution of property is an important factor which cannot be “assumed away”. There is no reason to prioritize financial rights or physical property rights over intangible property rights or other things which humans value. Economic efficiency and growth are valuable, but tradeoffs exist with other socially valuable goals: peace, security, opportunity, expression, speech, association, equality, fairness, solidarity, growth, etc.

Consumption is not the highest priority. Production matters, not supply-side economics, but human connection to producing. Pride of authorship.

Anti-trust regulation is required to offset monopoly power. Political action is needed to offset regulatory capture.

Libertarian approved theory of “spontaneous order” has little historical or theoretical support. Markets, common law and social Darwinism are not simply “facts”.

The state also has a role in international trade policy, industrial policy, R&D, defense, public goods airports, etc. Not either/or.

The economics discipline’s reliance on selfish utility maximizing agents is not supported by casual observation or behavioral economics. People use crutches to make decisions. They work from habit. They are OK with “good enough”. Individuals value social goods like friends, status, respect, pride, safety and power. They consider “fairness” and other principles. Choices are influenced by social norms.

People play various roles in groups. The simple rational model of principal-agent is inadequate to explain behavior. People follow leaders, norms and procedures. They discriminate based upon prejudices even when it is economically irrational. People belong to many groups which influence their behavior: nation, class, religion, family, neighborhood, profession, gender, gender preference, age, marital status, civic, artistic, political, social, athletics, etc. The materialist, determinist, rationalist, objective, calculating model of human behavior is clearly inadequate.

4. The Sovereign Self

The individual, good inner self evolves to become a self-worshipping god.

When the “liberal” model first evolved, a Christian (or at least deist) religious framework existed in most societies which provided a moral basis for politics and society. Freedom of choice was made within a largely fixed moral framework for most citizens. Through time, the individual grew relative to the community and individuals were then positioned to choose their own moral framework. This positioned individual autonomy to be the supreme virtue, above all others.

Autonomy evolved from individual choice to group choice and rights. This resulted in questions about the underlying basis of “liberalism”: individual versus group, universal human rights or differences, and the requirement of tolerance.

Martin Luther’s focus on “salvation by grace alone” focused on the individual, especially the internal individual’s thoughts in contrast with the mediation of salvation through the authority of the church and priests and the works of man. Jean-Jacques Rousseau’s vision of uncivilized man as inherently good further focused attention on the individual, since it was possible to shape this blank slate which could be perfected, in contrast with the doctrine of “original sin”. Immanuel Kant used reason to define the limits of reason and to develop a rational basis for morality, essentially the golden rule, optionally expressed in the maxim that man should always be an “end”, but never just a “means”. Again, the individual was highlighted and separated from religion. In this context, the ability of each man to reason and make choices was elevated as a supreme virtue, potentially above morality itself.

Fukuyama indicates that the basis for extreme individualism was available from the start, but only in the 20th century, after two world wars, Darwin, Freud, Marx and Hitler, was this variety able to blossom. He stresses the growth of the self-help movement as a key accompaniment to the philosophical, political and academic evolution. Therapists replaced priests and ministers as the guides for personal growth.

The author focuses on the philosophy of John Rawls in his 1971 “Theory of Justice”. Rawls provides a theoretical framework of choosing society’s rules in a “veil of ignorance”, where each individual does not know what his or her abilities, talents, wealth and opportunities will be. Rawls argues that a “rational man” in this situation would set rules that would protect him from the worst-case circumstances, even if that required transfers of resources and limits to opportunity and overall output. This matches the rational “mini-max” principle developed in post-WWII game theory. This provided American political liberals with a justification for their preference to reduce inequalities of income and wealth through government redistribution.

Fukuyama argues that Rawls goes “too far” in removing any moral basis from society. This “moral” choice is made almost mechanically on the basis of thought alone. The political influence of real individuals is ignored. “Justice” is defined without reference to “the good”. Rawls says that the human subject is separate from his attributes (wealth, status, character, genes) which are assigned arbitrarily. Hence, all property belongs to the state and can be redistributed as required.

Robert Nozick’s 1975 book “Anarchy, State and Utopia” challenges this view, arguing that individual rights cannot so easily be acquired by the state based upon a philosopher’s story. Resurgent libertarians argue that the individual owns all property before the state has any rights. Philosophers since that time have been busy contrasting the “individualist” and “communitarian” views of ethics ever since. Even left-leaning philosophers like Michael Sandel criticize this “thin moral world” of choices without communities, traditions or other moral values. Fukuyama says that this most modern view of ethics compared with historical ethics is parallel to the evolution of liberalism to neoliberalism. A valid principle has been elevated to an absolute standing and lost its rationale and practical effectiveness.

Fukuyama claims that Rawls’ provides a philosophical basis for moral choice that is solely individual, independent of society. He notes that many commentators on “liberal” political systems see a requirement for some level of shared moral belief, including tolerance and public-spiritedness. The growth of the self-help movement, personal growth and self-actualization in the postwar era provided practical experience of the self, detached from religious and social norms. Rawls’ philosophy said that is “fine”. Existentialist philosophy evolved into postmodernism and complemented Rawls’ political and ethical philosophy. Fukuyama argues that these views undercut the social basis required for a liberal political system and that individuals lured into believing that total personal autonomy is possible will be dismayed when they learn this is not so and thereby reject historical individual based political views and pursue group-based views (next chapter).

5. Liberalism Turns on Itself

In the next two chapters the author outlines how modern “new left” thinkers have created a political theory that is quite opposed to “classical liberalism”, especially as outlined by John Rawls. “Critical theories” and postmodern philosophy reject any strong individualistic philosophy that does not give strong weight to groups, communities and society. Ironically, in this debate, classic conservatives and “new left” progressives are aligned, raising up the group as a critical basis for ethics, morality and a just political state.

Fukuyama focuses on the nature of the individual self in Rawls’ philosophy compared with that of others who propose “critical theories”. While most citizens don’t really want to dig this deep, Fukuyama and other philosophically minded academics, critics and political leaders consider this essential. In the Rawls model, and in other “classic liberal” models, the focus is on the rational individual facing a world of choices. From this existential situation, the need and desire for certain rights and freedoms to support these choices by the “choosing being” are developed and a consistent political and ethical model is developed. As with the ultra-skeptical Rene Descartes, the mathematical Newton and the medieval philosopher of science Occam, “less is presumed to be more” in “classical liberal” philosophies. If a few assumptions and observations about individuals are sufficient to create a robust and effective model, why make reference to groups or specific moral goods, especially after many philosophers wrestled with the distinction between facts and values, is and ought, descriptive and evaluative claims and concluded that these two groups of ideas simply don’t exist in ways that they can be combined and evaluated. In practical politics, liberals of all stripes are ready to insert and advocate for their “progressive” values, including the importance of groups and specific moral values. But this is missing from the philosophical model.

Philosophers have long seen individual identity as a crucial aspect of being a person, especially as a choice making agent. Without self-awareness and a personal identity, how can one make choices? For “liberals” the choosing agent makes choices which build that identity, preferences and moral framework to guide choices. Per Rousseau, the individual starts with a “blank slate” and constructs this identity. The individual is first; the environment, including family, groups and society is secondary.

For “critical theorists”, some group characteristics that are imposed upon the individual (race, ethnicity, gender, gender preference, culture) are much more fundamental. The individual may begin with a “blank slate”, but society forces its perceptions and values regarding these group characteristics upon the individual no matter how hard he or she may try to choose for him- or herself. The critical role of society, the group, the system, the power structure is unavoidable.

To the common man, even a very interested “John Q Public”, this seems to be “much ado about nothing”, senseless quarreling over “nature versus nurture” or “which came first, the chicken or the egg?”. But for philosophers, academics, theorists and advocates, getting to the “root cause” is precisely the most important topic.

“Identity politics” is aligned with the view that an individual’s identity based on these key groups is essential. Those with power in any society use that power to create ideologies, structures and norms that define these group identities in ways that benefit the elites of that society. Hence, individuals in the non-preferred categories are unwittingly deprived of their rightful power and marginalized. Individuals shaped and governed by society’s messages, institutions, laws, thoughts and actions must be re-educated to understand the “real” situation and combat their exploitation. This sounds very much like the Marxist view of western society before communism was discredited by the real-world actions and results of the Soviet Union. The marginalized groups replace the marginalized workers, both needing to be enlightened by the few who have “true insight”.

From the 1960’s “New Left” forward, proponents of “critical theories” and “identity politics” have rejected “classic liberalism” as being an ideology of the powerful classes designed to maintain power and exploit the “masses”. The progressive left rejects individualism alone as a valid basis for any meaningful political philosophy. It observes little progress on reducing inequality or helping individuals to develop their true identities free from socially imposed masks. Unconstrained capitalism is linked to “classical liberalism” and found guilty of supporting the elites and oppressing the marginalized groups. The divide between the center-left and far-left is very deep.

In 1964 Herbert Marcuse outlined the basics of this transition from Marxist to “new left” political thought in “One Dimensional Man”. So-called liberal democracies did not promote equality or autonomy. The elites captured the corporations and legislatures and controlled society to maintain political, economic and social control by the elites. Charles Reich’s 1971 The Greening of America provided a more digestible best-seller with a similar message. “Free speech” was deemed a tool of the powerful and questioned. The “working class” was determined to be coopted in a consumer society where Vance Packard’s “hidden persuaders” forced them to consume ever more, work ever more and envy others. Individuals didn’t really choose; they only had the illusion of choice.

The New Left questioned the individualistic “contract theory” underlying “classic liberalism’s” political model, highlighting examples of slavery, worker and marriage contracts that were clearly imposed rather than negotiated. They argued that the exploitation of society by capitalists, dominance of neoliberal ideology and capture of regulatory agencies were inevitable. They outlined the long history of colonialism, imperialism, destruction of natives and presumption of a superior “western civilization” as evidence that the powerful groups would always do whatever is required to maintain control. They documented the ways in which political “checks and balances” provided the ruling elites with additional levers of power. They concluded that “classical liberalism” was intellectually and historically bankrupt.

Fukuyama presents some counterevidence to oppose these claims. Liberalism does not exclude groups, morals, society or other values. Real-world liberal political systems incorporate these values. An extreme form of liberal philosophy (Rawls) is just a straw-man, not representative of how actual liberal political systems work. Liberal states have made social progress through time, voluntarily investing more individuals and groups with greater rights. Economic progress is obvious. Liberal states invest heavily in social welfare programs. Liberal political states make it possible for progressives, liberals, conservatives and hard right groups to all have voice and political influence. International trade and economic growth make possible individual choices, health, art, safety, security and self-actualization. The individual focus of the liberal state frees individuals from the constraints of traditional family, kin and religious bonds. Meritocracy is consistent with a wide range of human development and actualization ideals. Migration continues to flow from states with limited individual rights to those with liberal rights, the rule of law and economic advantages. Liberal states support multicultural societies. The worst “sins” of “western civilization” and liberal states, including colonialism, are receding into history. Eastern European, East Asian and other states have successfully adopted the liberal state model. “Checks and balances” result in sustainable political changes and prevent authoritarian rule.

6. The Critique of Rationality

“Classical liberalism” is also closely associated with a rational approach to determining truth. Historically, logically and currently it uses and supports the “scientific method”. An objective reality exists and can be discovered by observation. Theories begin with self-evident assumptions and are fleshed out using logic. Theories are evaluated by the testing of predictions. Theories build credence as they develop more testable hypotheses which are validated or not invalidated. Humans can understand this objective reality and use science and technology to control nature. Scientists keep facts and values separated. Scientific conclusions (theories) are inherently probabilistic, but relative confidence can be determined and agreed upon. Techniques to verify propositions are agreed upon by professional scientists. Evidence is more highly regarded than individual assertions. Testing is defined so that it can be repeated and verified. Progress accumulates, although changes in scientific theories do occur. Science, like the courts, journalism and the military, is led by professionals who are largely independent of political power.

“Critical theory” proponents treat science and rational discourse as another social institution subject to control by the powerful elite.

In 1882 Friedrich Nietzche proclaimed “God is dead”. The decline in religious belief and influence in western Europe, especially in elite circles, allowed this to be stated and analyzed. Nietzche was saying that society had substitutes for the concept of God as a way to explain the world and manage suffering, so God was no longer necessary. He saw that Christian morality underpinned western society and politics and that the loss of this framework was a radical and threatening change. In such a world without shared morality, the only virtue or value was power. Nietzche outlined the contrasting lives of those living by the Christian “slave morality” and those of a noble superman who sees himself as the measure of all things. He concluded that “there are no facts, only interpretations”. Nietzsche did not convince many of his views then or now, but he opened the door to considering such different viewpoints. No morality. Only power. No objectivity.

Nietzche was a precursor to the philosophical approaches that lead to postmodernism. Nietzsche’s professional training was in philology, the study of a language’s grammar, history and literary tradition. His contemporary, Ferdinand Saussure, was a pioneer in the development of linguistics as the science of language. He separated words from a direct link to reality. For him, the human process of speaking is dynamic and the meaning of words are shaped by the speaker, disrupting the naive view that words simply signify things. The act of speaking also shapes the worldview of the speaker, making language a subjective entity.

Saussare’s subjective approach to language and meaning lead a series of French intellectuals including Jacques Derrida in the 1960’s and 1970’s to develop an extension of this view. The claimed that the external world is actually created by the words that we use to describe it. Other philosophers had considered what was “really real” previously and some had proposed that reality is really a subjective creation of the mind rather than an objective, material fact but this approach had limited impact outside of philosophy. As philosophers focused on language as a primary topic during the twentieth century, this idea became more attractive and, in some sense, “plausible”. The next step was to link language back to the power structures which determine language. Now, we have the power structure determining language which determines thought which creates reality. With this “structure”, a critic could “deconstruct” the underlying meaning of any important writings and show how the power structure guided the writer to reinforce the beliefs and interests of the power structure. Many doctoral dissertations could be written to show that all of “the western canon” was comprised of individuals unwittingly working for the power structure.

Michel Foucault expanded from this criticism of the true meaning of written language to a broader attack on all modes of thinking done within the framework of language guided by the “powers that be”. A subject like cross-cultural studies was inherently defective due to assumptions shared by the ruling western culture. The liberal idea that all individuals share an underlying moral core was rejected by Foucalt and the postmodernists. Instead, the shared lived experience of group identity is considered most important and differs from person to person. A privileged white American male simply cannot understand the experience of a marginalized non-white non-American female. The group experience is most important. The combination of various dimensions results in the concept of intersectionality which defines the most relevant group in even finer terms. By denying the ruling group member’s ability to understand the experience of the minority group member, this approach undercuts any authority of the ruling group member.

Fukuyama says that some of these insights about the role of language, subjectivity, tools of power, self-deception, alignment of interests, hidden biases, unconscious prejudices, etc. are valid in some historical situations. However, he does not agree with the philosophical or political conclusions that have been drawn. He notes that the deconstructionists and postmodernists have written in ways to make their theories difficult to describe or evaluate. He asserts that the extremely broad use of power as the driver of all activity is inherently flawed, asking if Foucalt’s analysis is also driven by the power structure. He notes that this framework can be used effectively for political purposes, to fence off criticism from others with differing views and to force others to consider societal or systematic components of social challenges instead of focusing on individual moral choices.

The author concludes the chapter by noting that modern identity politics can be a tactic used to help left-leaning partisans increase the sharing of equal rights, opportunities and outcomes for all members of less-privileged groups within the framework of the liberal state model. Or identity politics can be a threat to the liberal model, denying universal modes of comprehension and experiencing reality and promoting groups as the primary political actors. He notes that the hard right often takes this same point of view, denying the authority of science or elites, creating its own language, denying free speech, challenging facts and elevating racial and national groups above the rule of law and universal rights of individuals.

8. Are There Alternatives?

The author summarizes some of the major criticisms of liberal states from the right and the left. He acknowledges that liberal states are imperfect at delivering these desired outcomes, even when they might be broadly accepted by the citizenry. He does not really address the true strength of this criticism. He has three responses. Better results could be delivered within the existing system through more effective political strategies and improved rules. The far left and far right usually don’t offer structural solutions that are better conceptually or practically. The solutions that are offered are typically offensive to the liberal state’s individual protecting principles and a majority of the citizens’ political opinions.

Social conservatives say that the liberal state offers no moral core beyond a soft nationalism, universal human rights, rationality, tolerance, respect for the rule of law, deliberation and compromise. The state “allows” morality and allegiance to groups but does not promote them. Hence, society has weak communities, low trust, diluted morality, limited responsibility and the absence of any overarching purpose. The bureaucratic state tends to overreach, prioritizing secular over religious views and empowering judicial and administrative actors to intrude on individuals. Unchecked market capitalism undermines family, community and tradition. The emphasis on individual rights undermines the efforts of groups to maintain ethnic, religious or other group cohesiveness.

Progressives focus on the lack of progress on addressing equal rights, opportunities and results for the broad population, but especially marginalized groups.

10. Principles for a Liberal Society

A. The quality of government matters, as does trust and support.

B. Inequality of opportunity, rights and outcomes matters.

C. Federalism is an important tool for controversial, non-critical issues.

D. Freedom of speech is a core value that supports other freedoms.

E. Privacy is a core right requiring protection.

F. The scientific method and rational problem solving matter.

G. Individual rights are fundamental. Group rights are problematic.

H. Human autonomy/independent choice is not a trump card. Groups, ethics, morality, nation matter too.

I. The liberal state rests upon the commitment and participation of its citizens.

J. Moderation is a virtue.

New College of Florida Board Chair: Jenks & Harvey LLP, Power Couple

https://bizpacpbc.com/west-palm-beach-power-couple-judge-the-judges/

Debra Jenks was appointed to the New College of Florida board on January 6, 2023 by Florida Governor Ron DeSantis as part of his attempt to re-engineer the small public liberal arts honors college.

Debra is a 1980 New College grad, earning an Economics degree with a senior thesis on “Railroads”, sponsored by Dr. Dana Stevens. She earned a law degree from Lewis & Clark College and has practiced law in Florida for several decades.

Debra Jenks has been active in her local legal profession, serving as President of the North County section of the Palm Beach Bar Association in 2008.

Jenks married Robert John Harvey in 2010.

https://www.linkedin.com/in/robert-harvey-44190610/details/experience/

Robert Harvey continued with his separate legal practice after their marriage, but they worked together for 7 years from 2015-22.

Securities Attorneys

What does a “securities attorney” do? Robert and Debra were quoted as saying “For us, it means we’re either defending financial advisors and brokerage firms against lawsuits filed by customers or actions taken against them by regulators, or we’re representing customers. Firms must arbitrate disputes between each other. As a litigation firm, we defend our clients once the regulators like FINRA, the SEC (Securities and Exchange Commission), and state regulators come after them.”

https://pbcjolt.com/west-palm-beach-power-couple-judge-the-judges/?fbclid=IwAR2ksYfMk27K0HfTQ7mH96A_3LQgzueACL2PDy-iRuuZWfpISZtxtH7eN14

https://www.finra.org/arbitration-mediation

Judicial Nominating Committee (JNC) Members

Debra was first appointed to the 4th District Court of Appeals Judicial Nominating Committee in 2012 and has served as its Chairperson.

Robert was first appointed to the 15th Circuit Judicial Nominating Committee in 2015.

Political Donors

Their law firm donated $1,000 to the DeSantis campaign. (page 17)

https://www.tampabay.com/news/florida-politics/elections/2022/10/20/desantis-has-so-far-appointed-more-donors-political-posts-than-scott-did/

Federalist Society Members

https://www.facebook.com/groups/196338439232/

https://en.wikipedia.org/wiki/Federalist_Society

https://fedsoc.org/

Political Appointees of Governor DeSantis

For Debra, see the first link for her January, 2023 appointment. For Robert:

https://www.linkedin.com/in/robert-harvey-44190610/details/experience/

https://www.enterpriseflorida.com/about/efi-leadership/

What is Enterprise Florida, Inc? A separate organization used to promote Florida business. What is the Florida Opportunity Fund? A subsidiary that invests on behalf of the state of Florida.

There have been historical political battles about having a separate organization not directly accountable to the legislature and questions of spending and excessive compensation and political appointments. It appears that the governor and legislature found mutual ground in 2022 and revised the governing statute and agreed upon direct and indirect budgets.

http://www.leg.state.fl.us/statutes/index.cfm?App_mode=Display_Statute&Search_String=&URL=0200-0299/0288/Sections/0288.905.html

Employee compensation is not recorded on the state’s central website.

https://salaries.myflorida.com/

https://www.enterpriseflorida.com/about/transparency/

The governor describes this as a miraculous organization.

Enterprise Florida returns the favor, complimenting their funding from the governor and state legislature.

https://www.enterpriseflorida.com/news/enterprise-florida-applauds-governor-ron-desantis-freedom-first-budget-proposal/

https://capitalsoup.com/2023/02/06/enterprise-florida-commends-governor-ron-desantis-framework-for-freedom-budget-proposal-for-making-critical-investments-in-floridas-economic-development/

https://www.enterpriseflorida.com/about/

Summary

Debra Jenks and Robert Harvey are active political supporters of Florida Governor Ron DeSantis. Stakeholders of New College of Florida should consider this regarding her service on the Board of Trustees.

“We are a duo”.

https://www.sportsnet.ca/nhl/video/ovechkins-backstrom-star-hilarious-life-insurance-commercial/

https://pbcjolt.com/west-palm-beach-power-couple-judge-the-judges/?fbclid=IwAR2ksYfMk27K0HfTQ7mH96A_3LQgzueACL2PDy-iRuuZWfpISZtxtH7eN14

New College of Florida: Not WOKE

https://www.latimes.com/world-nation/story/2023-02-05/florida-liberal-arts-college-gov-ron-desantis-wants-to-take-over

The New College trustees could benefit from reviewing the actual current state of affairs. It’s easy to caricature New College as left and woke, indoctrinating students and not preparing them for careers. The college might take a random sample of students who graduated in 2012, 2002 and 1992 and summarize their experience, education and career results to provide some perspective.

I’ve taken my own non-random sample of 13 students from my time at New College: 6 that did a state legislature internship with me, 6 roommates/housemates and me. I’ll share their New College graduation status, major, senior thesis title, other education and quick career highlights.

Stephen Duprey. 1974. Public Policy. “The Concept of Representation”. JD, Cornell. New Hampshire State Representative. Investor. NH State Republican Party Chairperson. Advisor to many presidential candidates.

Josie Coster Martin. 1978. Political Science. “Candidates and the Mythic Presidency”. Republican New Hampshire State Representative. US House and Senate staff member. Lobbyist and communications director for a half-dozen national associations, including Pharmaceutical Research and Manufacturing of America (PhRMA). VP, Communications, Steward Health Care.

Darcy Ashman. 1978. International Relations. “Neighborhood Action”. Masters, International Relations, Fletcher/Tufts. DBA, Organizational Behavior, Boston University. Prolific author of academic papers. 30 years as project manager and consultant to international agencies. Recently, Technical Director, Management Systems International.

Betsy Crabtree. 1978. American Studies. “Split Seeds”. Recently President, SF Arts Media and Board Chair, Head-Royce School.

Janet Weisenford. 1977. Public Policy. “Things We Dreamt We Died For”. Masters, Public & International Affairs, U. Pittsburgh. 20 years Navy program manager. Senior Director, ICF Consulting.

Rick Kint. Music and IT. BM, Music, George Mason. MS, Info Systems, George Mason. Systems engineer, including a decade at Google.

Tab Uno. Political Science. BS, Political Science, Utah. MPA, Public Administration, Utah. MSW, Social Work, Utah. Therapist, licensed clinical social worker, candidate for Utah House of Representatives.

Bryan Sachse. 1979. Economics. “Inflation and Consumer Behavior”. MS, Finance, Cornell. MBA, Cornell. Vietnam Vet. Salesman.

Bridget Patton. 1978. Economics. “A Direct Test of the Tiebout Hypothesis”. law courses, CWRU.

Julia Carrasquero. 1978. Political Science. “Chief Justice Warren’s Legal and Socio-Political Theory”. Legal and post-grad studies at Sanford University. 30-year Army veteran. Training supervisor.

Glenn Hendrix. 1982. Political Science. “Islam and Politics in Egypt and Iran”. JD, Emory. Chair, Atlanta law firm Arnall, Golden Gregory.

Jane Marie Pinzino. Humanities. PhD, Religious Studies, U Pennsylvania. Humanities Librarian, Tulane U and Earlham College.

Tom Kapostasy. 1978. Economics. “Determinants of Migration”. MBA, CWRU. CPA. Executive finance and operations roles.

Summary

Some serious academic work in this sample. Ten of 13 completed New College degrees and defended their senior theses. Eleven added graduate degrees, a professional certification and other post-graduate work.

We have an arts executive, therapist, librarian and home professional, somewhat aligned with the New College stereotype. But we also have an international consultant, systems engineer, lawyer, investor, lobbyist, accountant, salesman, Navy program manager and Army trainer.

New College in the 1970’s had little “wokeness” and no “indoctrination”. Given the opportunity to focus on relevant coursework, we were highly engaged in learning and building learning skills. We argued politics. The faculty made sure that we always looked at multiple perspectives. There is always “room for improvements”, but I urge the trustees to apply their critical thinking skills to the current situation.

Popular Culture Index: 20 Blog Links

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Good News: Healthy State & Local Government Finances

https://www.oecd-ilibrary.org/sites/c6217390-en/index.html?itemId=/content/component/c6217390-en

One-half of US government spending is managed at the state and local level. Only 3 OECD (developed economy) countries have a higher share at the local level. The median level is one-third of the total and some countries limit local spending to just 10-20% of the total. The US federal government model ensures that a significant share of government is managed closer to “the people”, which is even more important today with 330 million people than it was 200 years ago.

State and local expenditures as a percentage of GDP is 19% for the US, on the high side compared with other OECD nations as expected based on the 50/50 local/national split.

Government employment is even more concentrated at the more responsive state and local government level. State and local government employees comprise three-fourths of total government employment. This total increased from 21 to 23 million across 20 years while total US employment grew from 132 to 152 million. The share of government to total employment eased down from 16% to 15%. Note that this is much lower than the 38% government share of GDP.

https://fred.stlouisfed.org/series/PAYEMS#0

Federal government employment has been essentially flat for many decades.

https://www.cbpp.org/research/state-budget-and-tax/its-time-for-states-to-invest-in-infrastructure

Setting aside land and defense assets, states and local governments hold a supermajority of government assets.

https://en.wikipedia.org/wiki/Government_spending_in_the_United_States#/media/File:Federal_state_local_percent_of_gdp.webp

The share of total government spending to GDP is the most important ratio to track. Since the 1960’s the federal government has moved spending responsibilities to the state for many programs. Spending drifted up to 25% of a growing post-war GDP by 1966. The Vietnam War and the Great Society programs pushed this up to 29% in 1975. The oil crisis, Japanese competition, inflation and recession pushed it up to 32% in 1976. Spending was still 33% of GDP 30 years later in 2007. The Great Recession drove spending up to 40% of GDP and then it declined back to 34% in 2014. State and local government spending has been relatively constant since 1976.

https://www.usgovernmentspending.com/local_spending_chart

Local government spending reached its modern level at 9-10% of GDP by 1990 and has mostly remained at that level.

https://www.urban.org/policy-centers/cross-center-initiatives/state-and-local-finance-initiative/state-and-local-backgrounders/state-and-local-expenditures

federalism.us

https://www.pgpf.org/budget-basics/how-is-k-12-education-funded

State and local governments provide a wide variety of services.

https://fred.stlouisfed.org/series/L319411A027NBEA

States and local governments routinely deliver solid budget surpluses in normal years and greatly exceeding the deficits encountered in recessionary years. State and local governments rely more on property and sales taxes which do not vary as much as income taxes. States have proactively reduced spending budgets whenever they have encountered recessions.

https://www.pewtrusts.org/en/research-and-analysis/articles/2022/05/10/budget-surpluses-push-states-financial-reserves-to-all-time-highs

States have built up a nearly 3 month cushion of reserves to buffer recessionary periods. States and local governments did much better during the pandemic recession than anyone expected. They reacted quickly to ensure fiscal stability and found ways to put the federal government transfers to good use. Some states have provided rebates to their taxpayers.

https://www.pewtrusts.org/en/research-and-analysis/articles/2021/10/15/states-financial-reserves-estimated-to-surpass-pre-pandemic-levels

https://fred.stlouisfed.org/series/SLGTFFQ027S

https://fred.stlouisfed.org/series/SLGTANA027N

State and local governments have continued to accumulate valuable assets, especially in the last 10 years.

States have generally improved their credit ratings since 2006, before the Great Recession. At that time, 9 states had the very highest AAA rating. 39 held very strong AA ratings. Just 2, Louisiana and California held “upper medium” A ratings. Recent data shows 7 more states, for a total of 16, at AAA ratings. 29 have strong AA ratings. 3 are at single A: Pennsylvania, Connecticut and Kentucky. 2 have fallen a step lower to BBB: Illinois and New Jersey. The median rating has improved from AA to AA+.

https://en.wikipedia.org/wiki/List_of_U.S._states_by_credit_rating

States have improved their pension fund percentage funding ratios, although some states remain at some risk of defaulting on their obligations.

https://www.urban.org/policy-centers/cross-center-initiatives/state-and-local-finance-initiative/state-and-local-backgrounders/state-and-local-expenditures

federalism.us

https://www.taxpolicycenter.org/statistics/state-and-local-general-expenditures-capita

State and local government spending per capita varies widely, reflecting local preferences. The mideast and far west are 15% above the national average while the southeast and southwest are 10% below the national average.

State spending varies even more widely. The national average is $6,900 per capita. California is 12th highest at $9,000 but neighbor Washington is much lower at $7,000 (26th). Massachusetts is also at $9,000 but its neighbor New Hampshire is at a very low $5,000 (46th). New York is lower than might be expected at $8,600 (15th). Nearby New Jersey, Pennsylvania and Virginia spend $7,200-7,500, a bit above the national average. Michigan, Ohio and Illinois spend less than the national average at $6,100-6,300, but nearby Indiana ($5,500), Kentucky ($8,500) and West Virginia ($10,300) have much different priorities. Georgia ($5,700), Alabama ($6,300) and Mississippi ($6,700) spend less than the national average. Texas spends only $4,700 per capita (48th) while its neighbor Arkansas spends $9,200 (10th). Florida is the lowest spending state at just $4,000 per person, an amazing 42% less than the national average.

Another way to look at these differences is to compare the spending of 5 states. Rhode Island $10,400 (6th), Kentucky $8,500 (16th), Washington $7,000 (26th), Colorado $6,200 (36th) and New Hampshire $5,000 (46th). Rhode Island spends twice as much on state government than New Hampshire, a few miles away. This is the range in the US, reflecting vastly different local priorities.

Summary

In our federal system, state and local governments are called upon to manage one-half of total government spending. They routinely deliver budget surpluses and adapt during recessions, even the pandemic driven recession. They have accumulated significant real and financial assets to buffer difficult times. They have managed pension liabilities appropriately and improved their bond ratings and ability to borrow. They have taxed and spent to match local preferences. In aggregate, their spending has remained at the same percentage of GDP for many years.

New College of Florida: A Matter of Perspective

https://www.foxnews.com/media/ron-desantis-shakes-liberal-university-appoints-six-new-members-new-college-florida

Florida governor and presidential aspirant Ron DeSantis decided that my alma mater, 700 student New College in Sarasota, Florida needs a makeover. He appointed 6 new trustees and expressed his desire for the publicly funded liberal arts college to be overhauled to better provide for the public good and to eliminate “woke” policies, practices and culture.

New College was founded in 1964 as an alternative private college with an innovative program of study emphasizing personal responsibility for learning using all available resources without the usual bureaucratic constraints. Private New College was folded into the University of South Florida in 1975 and eventually set up as New College of Florida, branded as “the honors college” of the Florida state university system. New College’s very low student faculty ratio (7-1 to 10-1) has made it an inherently costly investment. In 2021 Florida politicians introduced bills to fold it into some other state university. A new president was hired in 2021 to help the small college re-evaluate its academic, financial and political strategies in order to re-establish its long-term viability.

The college has continued to attract very high potential students, its graduates have a truly enviable record of graduate and professional study and fellowships, but its 5-year graduation rate is low versus comparable schools and its graduates disproportionately pursue academic, not-for-profit, small business and other non-traditional career paths so that the average measured financial success of graduates is not competitive with schools which produce students who pursue more conventional professional careers.

I hope that the 6 new trustees will invest some time to analyze the “current state” before seeking to overhaul, makeover or revolutionize the curriculum, culture, faculty and leadership. I believe that there is a large overlap between what really matters at New College historically and today and what conservative leaning Florida politicians, citizens and voters value.

The Individual Matters

New College curriculum and culture emphasize the central role of the individual in making life choices.

Personal responsibility for the student’s program of study is at the heart of the curriculum.

Freedom of thought is honored. Left, Right or Center. Various shades of left.

Freedom of expression. Academic freedom. Free discussion. Free beliefs. Changes. Exploration.

Humility. Great thinkers among classmates, professors and writers. Chances are good that your views are not “simply the best”. In a post-Freudian world we only “know” so much. Many have a “piece of the truth”. Pride is risky.

Authenticity. Consistency. Self-awareness. Embracing feedback and interaction.

Ideals Matter

Ideals matter. The unexamined life is not worth living. Politics, community, philosophy, religion and spirituality matter. Dead serious. It’s important to proactively explore options and make choices. Evaluate choices versus experience, data and new frameworks, paradigms and world views. Individuals are responsible for developing personal philosophies.

Growth and Learning Matter

College provides an opportunity for tremendous learning in many dimensions. So much to learn. Consider all possibilities. Personal quest. No limits to growth. The journey matters. There is no end to growth and learning, so develop those skills. “Still there’s more”. Embrace feedback and interaction, even when it hurts.

Community Matters

Community of learners and seekers of knowledge, wisdom, truth, beauty and meaning. Small scale community where “everybody knows your name”. Forced to interact and be authentic. Academic discipline and profession matter. Generation matters. Groups matter. Politics matters. Service matters.

Character Matters

Classical philosophy focused on “living a good life”. Authenticity. Humility. Respect for others. Openness. Personal responsibility. Tolerance/acceptance of differences. Dead serious. Excellence. Merit.

Competency Matters

Demonstrated learning. The Western Canon. Mastery. Results. Achievement. Research. Critical thinking. Written expression. Debate. Progress. Examination.

Creativity Matters

“Both/and” perspective. Multiple intelligences. Multiple perspectives. Interdisciplinary views. Paradigms. Two cultures. Theory and practice. Local and global.

Founded in 1964

The post-war economic expansion was followed by a culturally conservative 1950’s and then concerns about the role of the individual in a world where big business and big government dominated. World War I and World War II shattered simplistic modern expectations of “progress”. Romanticism and utopian socialism were in decline. Cultural critics worried about the sameness of suburbia, the organization man, the man in the grey flannel suit and “the lonely crowd”. Existentialist philosophy was very influential at the time. I think that New College’s curriculum and culture were shaped by this founding period. Existentialism focused on the individual in a different way than Ayn Rand, but clearly on the individual. The key insight was that “in spite of” the challenges provided by modern knowledge and society, an individual could move forward (maybe).

The relation between the individual and various communities was a clear focus. The contrast between existential “existence” and the historical emphasis on “essence” by philosophers and religions alike was unavoidable. The “solution” was to study, learn and grow, while accepting that final, deterministic answers were very unlikely. The best a person could do was to work through life considering the conflicting viewpoints and holding on to whatever he or she thought was best. This is a fundamentally “liberal” view, even if many/most of the implications greatly support historical conservative views that aim to preserve individual character and institutions.

Unavoidable Conflicts Between New College and Modern Conservatism (The Rub)

Rejection of civil and religious authorities. Belief that the individual must choose (and live with the consequences).

Inherently a “relativistic” perspective. There are many ways to frame situations, decisions, politics, religion, etc. No one view, perspective or paradigm is clearly correct. Individuals may embrace fixed perspectives but should accept that others might make different choices.

The classic western canon of received literature and science continues to evolve. There is value in having “everyone” share in the study of “the classics” but diverse perspectives also have an important role to play.

Individuals belong to many “communities of limited liability”. The nation or church does not automatically take dominant priority.

The global community and priorities may be as important as the national and commercial perspectives.

No one deterministic religious perspective is fully adequate.

Individual “rights” compete with the community’s rights and interests.

There is an intolerance of “intolerance” by left-leaning institutions like New College and its students, faculty and leadership.

Summary

New College was founded in the early 1960’s within a culture that raised up the individual in contrast to the conformist social norms of the state, community and businesses. Yet, it was a child of the US which embraced individualism even as it promoted patriotism. The New College curriculum and culture which I experienced in the 1970’s and which largely continues today supports this individual centered model of learning and personal growth. Most of the curriculum and culture is compatible with classic conservative views. Some of the beliefs are incompatible with more fundamentalist conservative views. New College has recently become a pawn in the national “culture wars”. I hope that the trustees will see the very positive role which New College can play in helping a small share of students to wrestle with the difficult questions posed today and contribute mightily to society.

Firms and Jobs 3: It’s Complicated

The relationships between firm size, age, growth, survival, death, locations and job creation and retention are many, complex and politicized. However, the core relationships expressed in my 2 recent posts are well supported by data and theory. I’d like to share more background information.

The 10-year job survival rate for startups is roughly 80% and has improved in the last 10 years. However, the FIRM survival rate is much lower. The surviving firms, through economic natural selection, grow rapidly from a low (4 average employees) initial base.

This study of 2011-14 highlights the initial start-up job surge, followed by 10 years of net job attrition and then modest net job growth by mature firms when low firm death rates (5%) are exceeded by decent levels of net jobs added.

The Small Business Administration (SBA) reports the average firm survival rates for 1994-2019 as roughly two-thirds for 2 years, one-half for 5 years, one-third for 10 years and one-fourth for 15 years.

My review of the 10-year data confirmed the 33% rate for most of the period, with an increase to 36% for firms that began after the Great Recession in 2010-12.

https://www.chicagobooth.edu/review/surprising-numbers-behind-start-survival-rates

This post-recession improvement was widespread, across most industries.

In 2010, Kauffman Foundation researchers summarized the detailed Business Dynamics Statistics (BDS) data, showing the relatively slow decline in net added employment from 100% initially to 80% at 5 years to 70% at 15 years and the rapid decline in the surviving firms rate to one-half at 5 years, 40% at 10 years and just 20% at 25 years.

Another Kauffman report from 2010 shared similar results. The universe of firms is dominated by young firms because the cumulative attrition makes “mature” firms quite rare.

Another Kauffman report in 2009 summarizes this competition between dying firms killing jobs and surviving firms adding jobs. In the first 5 years, the firm failure rate is so high that it overwhelms the high job growth rate of those successful startups. In years 6-10, the death rate is still winning, but the total net job destruction is much smaller. For this 18-year data set, firm deaths exceed added jobs at every age, although 29+ year-old firms basically break-even. This is a critical insight when thinking about the claim that all or nearly jobs are added by startups. It is “true” due to the firm survival and jobs added rates at different ages. It is possible to have quite different results, with existing firms accounting for relatively more jobs, but that would require either the firm/establishment death rates to fall or the job creation rates of surviving firms to increase significantly. It looks like there has been some of that change after the Great Recession. This chart also helps to show that the “net, net” addition of jobs from start-ups, when considered as the sum of their first 5 years is in the 75-80% range, because the net jobs lost in those early years is only 5% per year, despite the more rapid loss of firms.

My summary of the last 30 years of data shows that startup firms do account for “all” new job growth. As others note, in a way this is almost “by definition”, because this is the only age group that only has “adds”, but no “losses”. It always must be positive. As we’ve seen in the details on job departures/hires, jobs created/lost, firms created/lost and establishments created/lost the positive and negative flows tend to be “roughly equal”. Hence, even a single year which is not burdened with an offset will stand out as the “big winner”. So, on the one hand we can discount the critical, essential, vital role of startup job creation, but we can’t ignore it. It is a necessary part of the life cycle of firms that delivers a growing economy.

The 2010 Kauffman study combined the initial jobs created with the jobs lost in the next years to emphasize the vital role of startups, using 2007 data. Mature firms also made a small contribution to jobs added.

Click to access size_age_paper_R&R_Aug_16_2011.pdf

A follow-up report in 2011 by Dr. Haltiwanger summarized the data slightly differently but tells the same story. New firms, nearly all “small”, account for almost all job growth. Other small firms destroy jobs in their first 10 years at a high rate and as mature firms at a modestly high rate. Middle-aged firms lose jobs while successful firms grow to more than 500 employees and become large firms! Young large firms add a few net jobs. Old large firms lose a small percentage of jobs for this time period (1992-2005).

The same author updated the calculation with more recent data and found the same basic results.

https://www.census.gov/library/stories/2022/02/united-states-startups-create-jobs-at-higher-rates-older-large-firms-employ-most-workers.html

The central takeaway remains valid with more recent data across industries. The initial growth of jobs is not offset by the net losses in the next 5 years. Firms more than 6 years old do not add jobs overall.

https://www.bls.gov/opub/ted/2018/over-the-last-decade-large-firms-responsible-for-48-percent-of-net-job-growth.htm

A different set of data indicates that about one-half of net jobs added come from firms with 250 or more employees.

Another analysis indicated that nearly all added jobs were at “middle market” firms rather than startups.

https://www.bizjournals.com/bizjournals/washingtonbureau/2015/04/middle-market-companies-create-most-net-new-jobs.html

I don’t know how to reconcile these competing claims but expect that the time periods chosen, and firm sizes chosen, are keys to understanding the significantly different claims.

https://www.bls.gov/spotlight/2022/business-employment-dynamics-by-age-and-size/home.htm

The most recent BLS report shows that startups and large mature firms add jobs.

In the early papers the Kauffman Foundation explains that it is new firms that drive new jobs. There is an overlap between new firms and small size that makes an analysis based on size alone appear to say that “small firms create most new jobs”; but the “newness” logically comes first. Existing small employment firms tend to shed jobs through firm death or internal job reduction.

Click to access size_age_paper_R&R_Aug_16_2011.pdf

A simple model focuses on just the first 5 years of a firm’s life after the initial startup year and defines four buckets of job growth and loss due to adding new establishments or experiencing deaths versus internal job growth (up or down) at the survivors. All four buckets matter. New establishments are infrequent for startup firms. Deaths are a major job killer. Job creating firms outweigh job losing firms. But the net gains from internal job growth is less than the drag from firm deaths.

Kauffman also created a complete theoretical model of job changes through time based on the key parameters and demonstrated that the model was a good match with the observed relative consistency of the parameters and the net output of jobs created. In a prior life, we called this the “layer cake” graph, using it to explain the composition of revenues or profits in a business based upon the year of customer contracts signed or new products introduced. At any point in time, there is a history of additions of various ages. Employment tends to decline over time based upon the combination of firm deaths, establishment gains/losses and internal job growth. Each year a new group of firms is added, all with job gains in the first year. This group too follows the pattern of job erosion in the first 5 years, smaller erosion in the next 5 years, close to break-even by age 20 and small net job creation for the mature surviving firms. Again, the parameters could be different, and the results would be different. But this framework provides economists and statisticians with the tools to analyze the components.

Another author created a dynamic model which illustrates how this process works through time.

https://www.cbpp.org/blog/startups-fuel-job-growth-animated

The Small Business Administration promotes the view that small businesses (less than 500 employees) are essential to the US economy and create a majority of all jobs. As noted above, startups are the key. Size is a byproduct.

https://bipartisanpolicy.org/blog/trends-in-new-business-creation/

In my earlier post I discounted the importance of the decline in the share of new to total firmsbecause the corresponding decline in failure rates and improved job creation by mature firms was still delivering solid annual job creation. However, this warning signal is worth monitoring together with the other measures. The Brookings Institution provides some other “warning signals” about the health of the new firm/job creating capacity of the economy in light of reduced measurable competition in many industries (a topic for another day).

Startup rates are down in most industries.

New firms account for a smaller share of total employment.

Business formation takes longer. Recent Kauffman reports shows that this trend has continued.

The entrepreneurship rate of college educated Americans has fallen most significantly.

One professor analyzed this and concluded that it was the result of American firms taking advantage of the low cost of capital and paying the higher salaries and incentives needed to attract and retain high potential employees. He says that job creation is happening more in existing firms and less in startups with no negative overall effect. He says that “marginal” (low return) entrepreneurs have been removed with little negative impact on the economy as a whole.

The slowdown in the new firm/job creation rate after the Great Recession attracted much attention from the media and politicians. Two representative articles are listed below, mostly bemoaning the decline of startups/small firms and the relative growth of large firms.

https://www.inc.com/magazine/201505/leigh-buchanan/the-vanishing-startups-in-decline.html

With the renewed emphasis on small firms and public policy to support them, others have responded by emphasizing the benefits of large firm growth and questioning the need to support/subsidize small firm growth.

https://thereader.mitpress.mit.edu/small-business-job-creation-myth/

https://hbr.org/2016/06/do-startups-really-create-lots-of-good-jobs

https://www.washingtonpost.com/business/on-small-business/who-actually-creates-jobs-start-ups-small-businesses-or-big-corporations/2013/04/24/d373ef08-ac2b-11e2-a8b9-2a63d75b5459_story.html

Using less than 250 employees to define “small business”, this article shows a 4% decline in small business share and 4% increase in large business share.

https://www.wsj.com/graphics/big-companies-get-bigger/

The Wall Street Journal reports that there are now more employees at very large (2,500+) versus small (<100) firms.

Professor Haltiwanger reports that large, mature firms have increased their share of total employees from 50% to 60% between 1992 and 2018. Both large and small young firms have lost offsetting market share.

https://www.census.gov/library/stories/2022/02/united-states-startups-create-jobs-at-higher-rates-older-large-firms-employ-most-workers.html

A recent Census Bureau article documents the increased employment share of older firms (6 years+) in many key industries.

It also highlights the increased concentration of workers in large firms in the retail, health care, accommodation and food services sectors.

The WSJ articles itemizes the increased concentration of employment in large firms in the retail, services and finance sectors and documents that these are the growing segments of the economy.

Summary (It’s Complicated)

The Business Dynamics Statistics database provides researchers with the consistently defined and reported data since 1977 to document the key role of startup firms in adding net new jobs to the US economy. Startup firms are one part of an ecosystem of firm, establishment and job creation and destruction that plays out through time in relatively predictable ways. The death rates of young, middle age and mature firms play a similarly important role. The growth and decline of new establishments in existing firms matters. The internal job growth rates of young, middle age and mature firms matter. The relatively small size of startups compared to mature firms has an impact on job growth. Historical parameters are generally similar and change slowly, causing the layers of employment by firm age to be similar in this 50-year period. The model and framework for measuring firms, establishments and jobs is solid. Startup firms are essential, but they are not the only driver of success.

“Jobs created by firm size” is similarly shaped by all of these factors which describe the typical firm life cycle. Small firms are not superior job creators. New firms are job creators, and they happen to have small individual employment levels (4 on average), so small firms have higher measured rates of job creation.

In the last 10-20 years there has been a significant decline in the rate of new firm creation as a share of total firms. New firms created have not lost as many jobs due to firm deaths in their first 5-10 years. Mature firms continued to shed a disproportionate number of jobs during recessions, but after the Great Recession began to add more net jobs due to internal growth than they had in the prior 40 years. The overall number of jobs created has remained in the 2-4 million per year range across the 50 years.

The conservative SBA, Kauffman Foundation, WSJ and Republicans promote policies to ensure a thriving entrepreneurial environment for new and small businesses. The more liberal Brookings Institute, college professors and Democrats have an instinctive distrust of big business and concentrated economic power, so also lend support to some pro-small business policies. If job creation falters during periods of economic prosperity, this may be a rare place where bipartisan agreements could be reached to promote new firm and job creation.

Good News: Firms and Jobs

Many people complain that the US economy does not create enough new jobs or soon won’t create enough jobs or won’t create enough good jobs or … People worry about employment. Writers and politicians cater to that worry. Fortunately for us, the US economy creates jobs year after year after year, only briefly interrupted by increasingly less frequent and brief periods of economic recession. I’ll share the core numbers on healthy firms and new jobs and provide some context and history which indicates that this is inherent in the modern US economy. The economy is not relying upon any major political change or special insight to continue adding jobs. It just happens.

For 9 straight years, from 2011-2020, across 3 presidential terms and 5 congresses, the US economy added 2 million new jobs each year. In the 1980’s, it added 2-4M per year. In the 1990’s it added 3M per year. In the “oughts”, it added 2M per year. 30 years of expansion, 7 lesser years that averaged more than zero. 4 strong years for every 1 weak year..

The recovery since the pandemic has been even stronger, starting at 8M new jobs per year in 2021 before sliding to 6M per year and most recently 4.5M per year.

My post earlier this week focused on the role of start-ups in driving job growth. I’d like to build upon that post.

The total number of firms in the US grew slowly in the last 40 years, from 3.5 million to 5 million. The growth rate was much faster prior to the Great Recession (2007-9). Much of this growth was accounted for by single employee firms. Despite this tame 1% growth per year, the economy was able to add more than 2 million jobs per year.

The number of establishments (locations) grew almost twice as fast, just under 2% per year.

The US economy requires some growth in the number of firms or establishments each year to drive job growth. Fortunately, it does not require heroic growth rates.

The number of new establishments added per year is remarkably consistent, averaging about 700,000 per year on a base of 5-7M. Of course, this means that the RATE of new establishments is shrinking, from 14% to less than 10%.

Establishment exits have increased from 500K to 600K to 700K before returning back to 600K per year. Big picture, 700K new establishments and 600K lost establishments each year across 4 decades.

Firm deaths have also been consistent at 450,000 per year.

Data calculated from BDS data. Direct graph not available.

Firm births have also averaged about 450,000 per year but present a different pattern. Firm births were much lower in the troubled time around 1980. Births ranged from 450-500,000 per year in the next 25 years. The Great Depression destroyed businesses, access to capital, personal net worth and aggregate demand. Hence, new firm creation dropped back to the 400,000 level. It recovered back to the 450,000 per year rate by 2015. As with firm deaths, the rate has fallen from 14%+ to less than 10%. Most importantly, the birth and death rates have been relatively consistent and have both been relatively flat, leading to a slow increase in the number of US firms.

https://www.bls.gov/spotlight/2022/business-employment-dynamics-by-age-and-size/home.htm

The BDS database shows that job gains and job losses generally move together, but that in a recession job gains fall and job losses increase. This is a very important result. Without active government or policy intervention, the economy creates 12-14M jobs each year and destroys 11-13M jobs each year. There is no guarantee that net jobs will be created in any given year, but overall that is the normal result.

https://bipartisanpolicy.org/blog/trends-in-new-business-creation/

Writers who wish to emphasize the decline of entrepreneurship focus on firms instead of establishments because of the slower growth rate. They emphasize the growth rate rather than the growth numbers because this is less positive. They don’t compare the growth and death rates or numbers, which move together. They focus on the aftermath of the Great Recession which did greatly slow firm creation, resulting in slower than historical numbers and rates of job creation from new firms. Nevertheless, the economy created 2M new jobs per year for 9 years. During that period, existing firms captured a larger than usual share of the job growth required to provide demanded goods and services.

New establishments have driven 5-6M new jobs each year. The late nineties to early “oughts” reported the higher 6M per year figure.

Existing (continuing) establishments have added 10-12M gross new jobs each year.

Establishment deaths (including firm deaths) resulted in 4-5M jobs lost each year.

Continuing establishments trimmed 8-9M jobs each year, and many more during recessionary times. Although there are many moving parts, continuing firms eliminate more jobs than they create, especially during recessionary periods when they are adapting to lower demand. Firms die and they close locations, removing 4M jobs each year. New firms and new establishments add the new jobs required to fill the 2M net new jobs each year. This does not happen automatically or precisely, but overall, through time, the pattern is clear.

The US job market has grown from 90-150M positions during the last 40 years.

Firms hire 75M people each year. The typical job tenure is just 2 years.

Separations and hires generally move together. The net 2M jobs added annually is a small fraction of employment, hires, separations, gross job adds and gross job losses.

Establishment births exceed establishment deaths except during deep recessions.

New firms have high failure rates. Fortunately, firms that survive their first year have high percentage rates of new hires. They start with a small number of employees (4) and grow rapidly. The survival rate improves with the age of the firm and the employment growth rate of surviving firms tends to decline as they grow. The combined effect is that 80% of the new employees added by startup firms remain after 10 years. This employment survival rate has been improving in the last 15 years, partially offsetting the reduced number of start-up businesses.

https://www.bls.gov/spotlight/2022/business-employment-dynamics-by-age-and-size/home.htm

The first-year survival rate has remained roughly the same at 80% for 25 years.

The percent of non-business owning adults who start a business each month has shown a small upward trend before jumping up in 2020 and 2021.

The ratio of new employer businesses to population dropped significantly after the Great Recession, but has recovered in the last 4 years.

The share of “new employer businesses” dropped after the Great Recession and has not fully recovered.

The number of application for new business tax ids increased significantly after the Great Recession and jumped by 50% after the pandemic.

The Census Bureau also tracks a subset of the total new business applications based upon industry classification that is a better predictor of actual businesses eventually started. This measure shows modest growth after the Great Recession and a 30% spike after the pandemic.

About 10% of new business applications become new businesses. Hence, the rate of new business formation to be reported for 2022 is expected to be very high.

https://www.silive.com/business/2022/08/new-business-applications-are-on-the-rise-heres-what-led-to-a-record-setting-year.html

https://www.nber.org/digest/202109/business-formation-surged-during-pandemic-and-remains-strong

https://www.oberlo.com/statistics/how-many-new-businesses-start-each-year

https://bipartisanpolicy.org/blog/trends-in-new-business-creation/

https://bipartisanpolicy.org/blog/trends-in-new-business-creation/

About 80% of new businesses are formed based on opportunity and 20% based on necessity. Kauffman estimates that 2020 business formation was 30% based on necessity.

Summary

The US economy continues to generate 2 million new jobs in each non-recession year, even more in boom periods like the last 2 years. Firms and establishments are born, grow and die. The net employment growth rate for established firms is less than zero in their first 5-10 years and then slightly positive. The annual death rate of existing firms and establishments is relatively low, but on a 150M employee base it is 4M per year. The new jobs added by startup firms and new establishments allow the total number of employees to grow in normal years.

There is no “iron law of employment” that requires new firms or establishments to be created in numbers greater than the job losses. There is no law that requires surviving young firms to nearly offset job losses by young firms that die at a high rate. There is no law that requires mature firms (10 years old+) to add new employees or to die at slow rates. But these results have been consistent or improving for the last 40 years. I look forward to continued success.

Good News: US Startups Still Create Many Jobs (!!!)

I’ve always been a sceptic about the many claims that entrepreneurs, startup firms and venture capital are the “most” important drivers of improved quality of life in the US in my lifetime. I remain a sceptic. I believe that large firms deliver even more added value (driven by self-interest). I believe that the government and not-for-profit sectors play an equally important role. I believe that the government’s definition of the “rules of the game” and our culture’s influence on how people live their everyday lives are also very important. I’ll come back to the role of small firms in a separate blog post. I’ll try to tie together all of the strands of our amazing US labor market in another blog post.

But today, I want to tip my hat to the truly amazing role that startup firms play in driving the US economy and labor market.

https://www.bls.gov/bdm/us_age_naics_00_table1.txt

The US Bureau of Labor Statistics (BLS) tracks new jobs added (gains) and jobs lost (losses) each year in detail by firm and establishment (branch), including links to the year the firm was first created. At the total country level, we see that job creation and destruction follows the business cycle. The Great Recession, subsequent expansion and pandemic periods are obvious above. In the Clinton years, job gains averaged a great 15 million per year. The Bush, Jr. years showed still solid 13-14 million annual new jobs added. The Obama recovery increased new jobs from 10 to 13 million per year and Trump maintained this positive level at the end of a very long period of economic growth.

Job losses generally followed the pattern of job growth. Job losses are even more volatile. They peaked in the recessions of 2002, 2009 and 2021.

In the last 3 decades, the US economy added 2 million new jobs each year during periods of expansion.

Many economists, journalists and politicians claim that startups account for ALL new job growth. This is an “amazing” claim that deserves deeper analysis, investigation and description. I’ll chase this separately. The claim is “largely true”.

Startup firms delivered 4-5 million new jobs each year in the 1990’s. This declined to 2.5 million jobs during the “oughts”. It increased back to 3 million new jobs per year in the teens. In non-recessionary periods during the nineties and “oughts”, existing firms destroyed 2 million jobs each year. In the teens, the job destruction rates were much lower, roughly 1 million jobs per year. The startup jobs minus existing firm jobs number was typically 2 million net new jobs per year in positive economic years.

The BLS separates job gains from job losses and categorizes them by the firm’s first year of existence. Job gains at existing firms were roughly flat at 10 million per year. Startup firm new jobs declined from 4.5M in the nineties to 2.5 M in the “oughts”, recovering to 3M per year afterwards. Startup job creation declined from 45% to 31% of existing firm job creation, a one-third reduction.

The BLS provides data on the subtotal of all firms founded before 1993. These “mature” firms display a similar pattern. Annual job gains fell a bit from 4.5M in the “oughts” to 3M in the teens. Annual job losses fell even faster, from 6M in the “oughts” to 3.5M in the teens. Net job losses averaged 1.5M annually in the “oughts”, but just 0.5M in the teens.

The number of new jobs created by startups declined by one-third during this period, from 4.5 to 3 million per year.

The BLS data allows us to track the gains, losses and net jobs added by first year of existence for firms. First year startup jobs declined from 4.5M to 2.5M. The cumulative jobs created measured 10 years after startup is more positive. Cumulative new jobs, measured 10 years after startup, increased from 3M to 3.5M then dropped back to 3M in 2001. The startup classes of 2009-12, despite the Great Recession, report 2.5M net jobs added each year, as measured after 10 years.

Job losses have fallen much faster than job gains in the last 20 years, measured by a full decade of performance. The ratio of job gains to job losses has improved markedly. This ratio averaged 83% in the nineties, indicating that 1/6 new jobs was destroyed within a decade. This ratio has greatly recovered to the mid-90’s. indicating that new startups, in total, essentially maintain their initial jobs count a decade later. Other data shows that one-third of startups don’t exist after 10 years. Hence, this means that the successful remaining one-third have roughly tripled their employment in their first decade.

Firms die much faster than employment. There are many studies that claim that one-half, three-quarters, fourth-fifths or nine-tenths of employees at startup firms are eliminated in 10-20-30 years. These are mostly exaggerations.

Ten years after their founding, startups still employ 80-90-95% of their initial year hires. Job losses fell during the teens. Job gains grew rapidly after the Great Recession.

For the 18-year period where we have ten years of data on startup firms, we have a clear pattern of net employment decline at the end of the decade, on average. The ten-year retained employment level at almost 80% of the initial level is far higher than the 50% claimed by some commentators.

The years since 2009 show a clear pattern of startups maintaining 90-95% of their initial employment levels after 10 years.

Summary

The US economy typically added 2M net new jobs each year during periods of economic expansion. Historically, startups added 4M jobs annually to offset the 2M jobs eliminated by existing firms. The job destruction rate of existing firms has slowed. The jobs retention rate of startups has improved. Net, net, the US economy still generates 3M+ new jobs each year which essentially still remain a decade later. One-third of the firms are gone, but the winners employ 3 times as many as when they started.