small business is the backbone of our economy Or at least that's the story Entrepreneurs taking a chance on themselves to start a business have provided employment to millions of people created innovative products and services that you enjoy every day and in return they can achieve levels of financial success that would be impossible with almost any regular old day job You would be silly not to give it a go at least once in your life right well that message has been heard loud and clear by millions of people because if you look at the numbers it would seem we are living through a golden age of new entrepreneurs There are now twice as many new business applications being processed every month than there were before the pandemic Politicians on both sides of the aisle have been quick to take credit for this trend as the personification of the American dream Unfortunately this record- setting business creation has made a lot of people very angry because those new businesses are being started by poor people So instead of being an indication of a thriving business environment it's instead a sign of everything wrong with our economy If you believe the numbers according to the Census Bureau last year a record 5 1.5 million people applied for a small business application Over the last few years the number of applications filed to start a new business that's absolutely surged So small businesses are not only job generators they're also at the heart of the American dream In the last month we've increased the share of funding for small businesses with fewer than 10 employees by nearly 60% I decided I'm going to tackle this problem by myself and start my own business So new businesses being formed is normally a really good sign that the economy is doing well People normally only start a new business when they feel confident about their future and the future of the market they want to operate in If you thought a recession was all but guaranteed and you weren't sure how you were going to pay your bills next month you probably wouldn't be starting a business Lots of new business creation is also a sign that people have achieved a certain level of financial security Starting a new business often means making some significant upfront investments into renting some commercial space buying equipment purchasing inventory and for a lot of businesses hiring some staff Most new business owners should also expect to go for some time without taking any income while their business builds up sustainable cash flows This means if lots of people are starting businesses lots of people are in a comfortable enough financial position to bear these costs Lots of new businesses is also more than a sign that things are going well They actually make things go well New businesses create employment for people who just want a job and they improve productivity in a few ways Business owners especially new business owners on average will put in more time and effort working for themselves than they would in a regular day job This means they're making more output than they would be if they were just working a 9 to5 New businesses can also become successful businesses that bring valuable products or services to market If you start a business-to- business company that develops a new type of software that streamlines AI generated LinkedIn appreciation posts then you could save millions of wasted man-hour across the country which means workers could actually do something better and more productive with their time Likewise if you start a business selling a consumer product it could add competition to the market for similar products Or if you develop a new product altogether it could make people happier healthier smarter or just keep them entertained Of course most new businesses fail But for society at large the few that succeed are usually a good thing So then why is this record level of business creation in America not exactly great news well there are actually three reasons The first is simply why these businesses are being started A 2023 paper by Ryan Decker of the Federal Reserve Board and John Halawinger of the University of Maryland found some interesting patterns with these new businesses The first was that these new businesses were largely being formed in states and counties with lower average incomes Now most counties saw an increase overall but the outskirts of cities particularly hard-hit states outpaced the rest by a significant margin The authors of this paper suggested that a lot of this business formation was just existing businesses closing in city centers that didn't see much foot traffic and reopening in suburbs where the rent is lower and they can cater to a market of people working remotely This wouldn't actually really increase business activity because it's just moving it around from one place to another but closed businesses can stay registered for a long time after they physically shut down Now this move to the BBS might not actually be doing any good but it's not doing any harm either Unfortunately it doesn't account for the entirety of this trend And a lot of the other people starting a new business aren't doing it to follow their dreams They are doing it because they have no other option And it's probably making things much worse than we realize So it's time to learn how money works to find out how a record number of businesses might be quietly breaking the economy This week's video is sponsored by Morning Brew Morning Brew is a free daily email newsletter that keeps you up to date on the must know news affecting your work and life through a business lens It's designed so that you can skim topics you don't care about dive deeper into what you do and still grasp the day's business news in under 5 minutes I've been reading Morning Brew every day and it's a game changer For example I learned that Florida is now considering scrapping property tax and Wall Street bonuses set records last year and this year might not be as good to say the least I can see why over 4 million people are hooked on Morning Bro and the newsletter is 100% free So worst case scenario you unsubscribe and go back to dry long-winded and boring business news It takes less than 15 minutes to sign up So try Morning Brew today by clicking the link in the description or by going to morningbrewdaily.com/hmw So actually figuring out how our economy is going is something that our governments really struggle with Collecting data on hundreds of millions of people millions of businesses and billions of transactions is actually really hard So they often make some calculated guesses based on historic patterns As impractical as it would be for the Bureau of Labor Statistics to scrape every job posting off Indeed and look through every classified section to find new jobs being created it wouldn't even be that accurate The rise of ghost job listings means that there are almost twice as many job postings as there were 5 years ago But as anybody who has tried to get a job in the last 24 months will tell you businesses aren't exactly in a rush to hire That's a problem because government agencies use job creation data to make very important budget and interest rate decisions So we really shouldn't be making [ __ ] up One of the other historical assumptions has been more business creation equals more job creation Businesses need employees So this makes sense Except the data has actually started saying the opposite In the report on the rise in new business applications Decker and Halterawinger found that counties with a higher rate of business creation were actually correlated with a higher rate of job destruction This data really just confirmed what a lot of people already suspected People weren't starting businesses to take advantage of some amazing opportunity They were starting them because they had no other choice According to a broad market survey 36% of the American workforce is now engaged in the gig economy Some of these people are doing this in conjunction with the regular day job as a way to earn extra money But whatever the exact details that is still a significant increase from just 5 years ago Gig workers are encouraged to register a business and keep track of their revenue and expenses just like any other business But unlike other business none of these people are going to be hiring employees or investing a lot of money into the broader economy In the past people starting a new business usually had a bit of experience in their field and a bit of cash in their pocket to get their business set up At the very least they had some investors that were willing to trust them with upfront capital to get their idea off the ground Most of these new gig economy businesses today are started by people without enough experience to land a job and without any cash at all Now it's not all bad For a lot of people being able to sign up instantly to perform work in the gig economy instead of going through the outdated hurdles of job interviews is a big reason why these platforms have become so popular But these jobs also shouldn't be sugarcoated They are insecure don't pay well and are quite dangerous This technology is truly unprecedented And in the short term it has existed it's already reshaped what we think of as work It's really up to you if it's been for better or worse though So you might think this is just another example of a slow government struggling to keep up with changes in technology that have redefined the labor force But there are two reasons why government agencies have tried really hard to intentionally ignore this trend The first reason is that headlines about job creation and business development are great for reelection Nobody wants to be in charge when the data collectors change their methodology and reveal that millions of jobs we thought exist actually don't The second reason is that it makes it look like big programs are actually working Late last year the Small Business Administration made a press release bragging about the success of a business loan program made to minorities In it they highlighted how previously underrepresented groups had been starting a record number of businesses Now before a whole big thing starts in the comments yes these loans probably should have been made based on socioeconomic need but statistically they show the same thing Anyway the Small Business Administration thought they had successfully empowered a new group of business owners What they had actually done was just record these groups registering for Uber Eats Even highly skilled workers with a lot of experience have not been immune from this trend either The number of people working as independent contractors jumped significantly as businesses moved away from full-time hires and the worker protections that came with it Typically independent contractors should have the freedom to work when and where they want as long as they deliver the agreed upon product or service within the agreed upon time frame But a lot of businesses have not so subtly mandated that their contractors be in office just like any normal employee just without the security or benefits A study by the National Employment Law Project found that a lot of these independent contractors were forced to sign non-compete agreements as part of their contract This meant they had all the independence of an employee combined with all the safety of someone in business for themselves Now for certain people especially those at the top of their field being an independent contractor is a great opportunity to provide services to multiple different companies and charge a much higher hourly rate than 9 to5 employees ever could These kinds of private contractors didn't suddenly become twice as common though Most of this growth is simply explained by people working full-time jobs with contractor conditions It also means that job opportunities aren't as plentiful as the numbers would suggest because even if lots of new jobs have actually been created they are likely being worked by someone who already had a job and just needed a second or third source of income to keep up with living expenses Now I know for a lot of you watching you already know this but ignoring this issue will probably end up making it worse These charts aren't just here for me to make depressing videos every week They should inform policy If we can't even acknowledge a problem it makes it much harder to fix Now if we want to encourage genuine business activity that's great And there's a lot we can do Actually banning non-competes making it easier for business owners to save for retirement and making access for healthcare easier for people who don't get it through their employers But these things are hard There is one other group that would really like everybody to keep on looking the other way and those are the platform businesses that have made this all possible We might not actually be living in the golden age of entrepreneurship but watch this video next to find out why we are living in the golden age of middlemen And don't forget to like and subscribe to keep on learning how money works