At the 2024 Women for Women Summit, Charleston, South Carolina
By Governor Lisa D. Cook
… [Today], I would like to talk with you about the important role startups, new businesses, and entrepreneurship play in our economy from the perspective of a Federal Reserve policymaker. I also want to share a bit of my story. Just like many of you – including those who have started a business or those who dream of doing that someday – I have faced and overcome hurdles along a winding path.
My story
I was born and raised in Milledgeville, where my mother, Professor Mary Murray Cook, was a faculty member in the Nursing Department of Georgia College and State University. She was the first tenured African American faculty member at that university. My father, Rev. Payton B. Cook, was a chaplain and then in senior leadership at the hospital there. My family lived through the events that brought Milledgeville out of a deeply segregated South. My sisters and I were among the first African American students to desegregate the schools we attended. I drew strength from the example set by my family, others in the Civil Rights Movement, and the village that raised me and from their conviction in the hope and promise of a world that could and would continually improve.
While I had an interest in economics even before I entered high school, that was not the initial field of study I pursued. I entered Spelman College in Atlanta as a physics and philosophy major. After graduation, I had the honour of studying at the University of Oxford as a Marshall Scholar.
After Oxford, I continued my education at the University of Dakar in Senegal in West Africa. However, at the end of my year in Africa, it was the chance to climb Mount Kilimanjaro in Tanzania in East Africa where I discovered my love of economics. I hiked alongside a British economist, and, by the end of the trek, he convinced me that studying economics would provide me with the tools to address some big and important questions I had pondered for a long time.
I went on to earn my Ph.D. in economics from the University of California, Berkeley. Entering the economics profession came with its usual challenges, and, for women, a few more challenges existed. To this day, women are still underrepresented in economics. Women earned just 34 percent of bachelor’s degrees in economics and 36 percent of Ph.D.’s in economics in 2022, the most recent available data from the US department of education. The share of women earning those degrees rose only modestly from 1999, when women earned about 32 percent of economics bachelor’s degrees and 27 percent of Ph.D.’s. The data stand in sharp contrast to all science and engineering degrees, including in social science fields, where women earned roughly half of degrees granted in 2022.3
Education was paramount in my family and was construed as a means of realizing the promise of the Civil Rights Movement and continual improvement of our society and economy. Of course, economics, like physics, is a field where math skills are vitally important. Between my mother, my aunts, and my extended family, I had essentially understood STEM (science, technology, engineering, and mathematics)-related jobs to be women’s work. I was grateful to have these role models in my orbit to give me the confidence to undertake study in a STEM field.
Access and encouragement for girls to pursue study in math and science are a significant concern. Economist Dania V. Francis’s research shows that Black girls are disproportionately under-recommended for Advanced Placement calculus. The course is often a gateway for economics, for STEM classes, and for college preparation, in general.
My mentors and role models encouraged careful study, teaching, and scholarship and helped me block out the voices saying I did not belong at each juncture. They encouraged my work and have been champions for me. As a result, I have been committed to serving as a mentor, as well. For several years, I was the director of and taught in the American Economic Association’s Summer Program, an important training ground for disadvantaged students considering economics careers.
Each year, the share of students who are women oscillated between 41 percent and 67 percent, much higher than the enrollment in undergraduate economics courses nationally. I told those students – and continue to tell them as they make their way through graduate programs in economics and through the economics profession – “You belong here. Your insights are unique, and the profession will benefit from them.”
In my career as an economist, I studied, researched, and taught in roles at universities and worked in the private sector and in government before I was nominated by the president and confirmed by the senate to become a member of the board of governors of the Federal Reserve System in 2022. I am honored and humbled to serve in this role and proud to be the first African American woman and first woman of color to serve on the board of governors. As Fed policymakers, we make decisions affecting the entire economy and the well-being of every American by focusing on the dual mandate given to us by Congress: maximum employment and stable prices.
Entrepreneurs’ vital role in the economy
In my years of conducting research and while at the board, I have met many inventors, innovators, and entrepreneurs who made important contributions to the economy. Many of them happened to be women who were very knowledgeable, creative, and inspiring. So I want to discuss the vital role entrepreneurship and new business creation play in our economy.
You might ask what interest I have in this subject, as a monetary policymaker focused closely on the dual mandate of maximum employment and stable prices. Well, this topic has interested me for a long time, and I conducted a fair amount of research on entrepreneurship and innovation before joining the board. But the topic is also important precisely because of our dual mandate. To convince you of this, I will explain a few of the ways in which economists think about entrepreneurship, and how they relate to the dual mandate.
The first is the most basic. For many people – many millions, in fact – entrepreneurship or self-employment is a career choice.7 It is their preferred way of participating in the labor market and obtaining income for themselves and their families. They prefer to be their own bosses, with all the benefits and risks that entails. But whether they end up hiring others or not, self-employed individuals support the labor market by providing a job for themselves.
A second way economists think about entrepreneurship is a little broader: New business creation is a large contributor to overall job growth. In fact, new businesses punch above their weight. For example, during the handful of years before the pandemic, in a typical year only about 8 percent of all employer firms were new entrants, but these new entrants accounted for about 15 percent of annual gross job creation. And research has found that this job creation effect is long-lasting. Even though many new firms do not survive, those that do survive tend to grow rapidly over 5 to 10 years, largely offsetting the job losses from those firms that shut down.
A third way economists think about entrepreneurship, which I have explored in my own research, is that a small but critical subset of new firms are innovators – they introduce new products or business processes that change how we consume or produce. As such, they make large contributions to overall productivity growth over time. That is, innovative entrepreneurs help enable us to do more with less – and even more so if access to innovation participation is equitable. It is important that everyone, including women, historically underrepresented groups, people from certain geographic regions, and other diverse representative groups, can participate in the entrepreneurship and innovation economy.
In my research, I have found that investors underrate the prospects of Black-founded, or simply outsider-founded, startups in early funding stages. Better assessment of the early stages of invention and innovation could broaden the range of new entrants and the ideas they contribute to their local communities and the broader economy.
Consider the dual mandate
So let’s return to the dual mandate. You can now understand that self-employment and entrepreneurial job creation are relevant for our employment mandate. Indeed, one could argue that entrepreneurs are critical to Fed policymakers’ efforts to promote maximum employment. And the productivity gains we reap from entrepreneurship are like productivity growth from any other source. When the pace of productivity growth increases, it allows for economic activity and wage growth to be robust while also being consistent with price stability.
The importance of business startups to our dual mandate objectives is why I have watched closely as various measures of new business formation have surged since the onset of the COVID-19 pandemic.
Applications for new businesses jumped to a record pace shortly after the pandemic struck the US. The pace of applications has remained elevated above pre-pandemic norms all the way from the summer of 2020 to the most recent data, even though the pace appears to be cooling some this year. At first, it might have seemed like these business applications were mainly being submitted by people who lost their jobs, or perhaps by an increase in “gig economy” work. There was doubtless some of that going on, but research and data since then have painted a more optimistic picture.
When researchers look across areas of the country, the pandemic business applications had only a weak connection with layoffs. The surge in applications persisted long after overall layoffs fell to the subdued pace we have seen since early 2021. The applications did have a strong relationship with workers voluntarily leaving their jobs. Some quitting workers may have chosen to join these new businesses as founders or early employees. And surging business applications were soon followed by new businesses hiring workers and expanding. Over the last two years of available data, new firms created 1.9 million jobs per year, a pace not seen since the eve of the Global Financial Crisis.
The industry patterns of this surge reflect shifts in consumer and business needs resulting from the pandemic and its aftermath. For example, in large metro areas, new business creation shifted from city centers to the suburbs, perhaps because of the increase in remote work. Suddenly, people wanted to eat lunch or go to the gym closer to their home, rather than close to their downtown office. Likewise, consumer and business tastes for more online purchases, with the shipping requirements that entails, are evident in the surge of business entry in the online retail and transportation sectors. But this is not only about moving restaurants closer to workers or changing patterns of goods consumption.
There was also a particularly strong entry into high-tech industries, such as data processing and hosting, as well as research and development services. That may have more to do with developments like artificial intelligence than with the pandemic specifically, as I discussed in a speech in Atlanta last week.
Economists will spend years debating the various causes of the surge in business creation during and soon after the pandemic. Perhaps strong monetary and fiscal policy backstopping aggregate demand played some role, or pandemic social safety net policies, or simply the accommodative financial conditions of 2020 and 2021. Indeed, more research is needed and will be the subject of many dissertations in the near future.
I do think a large part of the story is ultimately a case of resourceful and determined American entrepreneurs, perhaps including some of you, responding to the tumultuous shocks of the pandemic. They, like some of you, stepped in to meet the rapidly changing needs of households and businesses. This points to a fourth way economists like to think about entrepreneurship, which is that entrepreneurship plays a big role in helping the economy adapt to change.
Research suggests that entrepreneurs and the businesses they create are highly responsive to big economic shocks, and the COVID-19 pandemic was certainly a seismic shock. To be sure, the future is uncertain. It is unclear what the productivity effects of the pandemic surge of new businesses, particularly in high-tech, will be. And whether that surge will continue is an open question; after all, the pre-pandemic period was a period of declining rates of new business creation, and the pandemic surge itself does appear to be cooling off recently.
Conclusion
For now, let me say that I am grateful that entrepreneurs continue to give us a hand in meeting our employment mandate, and whatever productivity gains we may reap in coming years as a result may help ease tradeoffs with inflation as well.
Finally, I will share one last story about why South Carolina will always hold a special place in my and my sisters’ hearts. Every summer and at Thanksgiving, we would travel through the Palmetto State to our grandparents’ house in Winston-Salem. Sitting in the back seat of the station wagon, we were entranced by the many colorful signs along Interstate 95 advertising what I, as a child, viewed as South Carolina’s number one attraction: the South of the Border roadside amusement park.
We begged our parents to stop every time. It was an epic struggle that went on for more than a decade. Once or twice they did relent, a sweet childhood victory! And here is the funny thing about travels – paths can cross. The timing is such that my sisters and I may have even been helped by a waiter named Ben, a young man from Dillon, South Carolina, who would go on to be Federal Reserve chairman Ben Bernanke! Perhaps it was the world’s way of foreshadowing.
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