While the overall U.S. economy is picking up steam, it remains fragile. And one of the warning signs is that “economic dynamism” is in retreat, as shown by a sharp decline in startup companies across the country, especially in at-risk communities.
This disturbing trend is revealed in a new report, “Dynamism in Retreat,” by the Economic Innovation Group in Washington, D.C. It describes the scarcity of startup companies in the United States, particularly in 80 percent of the metro areas that were hardest hit by the Great Recession.
While a relatively few regions are doing well with startups (including some in Utah), most economic regions in the nation are losing more businesses than they are gaining. After the economic downturn in 2008, firm deaths have outpaced firm births, on average.
Utah entrepreneur, business leader and philanthropist James Lee Sorenson is working to reverse this trend. By championing innovative legislation in Congress, and through the work of the Sorenson Impact Center at the University of Utah’s David Eccles School of Business, Sorenson is seeking to accelerate investments in startups to help revitalize economically distressed communities.
Without frequent addition of successful new companies that provide vitality along with innovative products, services and jobs, many regional economies are in danger of stagnation with less innovation and entrepreneurship.
The Economic Innovation Group report noted that as dynamism fades, “the U.S. economy becomes more reliant on a rapidly narrowing geographic base to power its growth.” From 2010 to 2014, just five metro areas produced as big an increase in new firms as the rest of the nation combined.
Before 2008, at least 80 percent of metro areas saw more firms open than close in any given year. But in 2009, during the Great Recession, only 11 percent of metro regions added firms, and most metro regions have not recovered.
Utah metro areas are doing relatively well, with the Silicon Slopes region among the leaders in the nation. But many parts of rural Utah still struggle economically.
To help reverse these disturbing trends, Sorenson is supporting the Investing in Opportunity Act, which has been introduced in the U.S. House and Senate. This is ingenious legislation that deserves support by Utah’s congressional delegation.
It would tap an enormous resource for economic development — the $2.3 trillion in unrealized capital gains from stocks and mutual funds. The law would remove barriers to putting this capital to work in revitalizing distressed communities without endangering federal tax revenues and without public sector financing.
The proposal, which has more than 80 co-sponsors in the House and Senate, would allow investors to roll passive holdings of accumulated capital gains into investments in distressed communities by pooling their capital and risk with other like-minded investors in special “Opportunity Funds.” Each state would create opportunity zones in low-income census tracts where these funds could be invested.
This would allow investors to temporarily defer taxes on capital gains from the sale of an asset, but only if they reinvest the gains into a qualified opportunity zone. The rolled-over investment would appreciate tax free until the investor withdraws from the investment, at which time both the amount originally deferred and any additional gains would be taxed at the prevailing capital gains rate, with certain exceptions to encourage long-term investments.
The Sorenson Impact Center is studying the decline in dynamism in regions in Utah and is developing a set of recommendations to address the decline.
The initial research indicates that if the Investing in Opportunity Act were passed, millions of additional private dollars could begin flowing into underserved, at-risk opportunity zones in the state. However, these underserved communities would need investment infrastructure (funds, intermediaries, accelerators, incubators, etc.) to effectively absorb investment capital at that scale.
This is a creative and effective private-sector approach to improving the lives of individuals and families in distressed communities in Utah and across the country. I congratulate Jim Sorenson and the Impact Center for their excellent work, and hope Utah’s leaders will support the legislation and implement it.
A. Scott Anderson is CEO and president of Zions Bank.