Guest Post: Creative Destruction After the Pandemic
Aziz Sunderji on how new companies are being born—and existing firms are dying—at a faster rate.
This is a guest piece from Aziz Sunderji. Aziz was a strategist and director with Barclays Investment Bank’s research departments in London and New York for 14 years. He covered several areas for Barclays, including European investment grade credit, emerging market credit, and global macro. Aziz retrained at the Wall Street Journal in 2022. He now writes a graphics and data-driven newsletter about the economy and financial markets at sunderji.substack.com.
More companies are being born in the U.S.–and more companies are dying—than ever before. Whether that leads to faster productivity gains as newer, better businesses replace older, worse ones—or faster inflation, as higher rates of churn raise costs and limit the benefits of learning-by-doing—is still an open question. What follows is an overview of what we know so far, based on data from the Census and the Bureau of Labor Statistics (BLS).
The Pandemic Disruption
In theory, business closures that result from downturns come with a silver lining: less productive companies exit, making way for new, more productive upstarts. As Joseph Schumpeter argued, the “creative destruction” catalyzed by economic volatility “revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”
More than 320,000 American business establishments1 permanently shut down in the second quarter of 2020. Unfortunately, the companies that closed in 2020 were not particularly unproductive. They were just wrongly positioned for a pandemic: service companies in a world without face-to-face interaction. The destruction of firms came with all the costs—for employers, employees, and the economic fabric of communities—without the typical gains of a good cleansing.
Still, if the “destruction” part of this cycle wasn’t particularly beneficial, at least the “creative” part has been. After peaking mid-way through 2020, “establishment deaths” rapidly dropped back to normal levels and new establishments were launched. In the third quarter of 2020, a record-breaking 287,000 establishments were “born”. This rate continued to rise, peaking at 379,000 new establishments in the last quarter of 2021. The pace has cooled since then, but remains far higher than anything on record before 2020.