The Other Aging of America: The Increasing Dominance of Older Firms
brookings.edu
brookings.edu
http://www.moneyandbanking.com/commentary/2014/6/23/growth-a...
excerpt:
"Market economies are characterized by high turnover of both workers and firms. This “churning” is part of the process of “creative destruction” that shifts economic activity to more productive uses. The U.S. economy has typically stood out for its level of dynamism. But recent research has highlighted the long-term slowdown in the U.S. pace of gross job creation and job destruction (see top panel below), at least part of which has been associated with the decline in firm startups"
It's easy to get a rosy view of things, reading Hacker News, as Hacker News is attached to one of the few parts of the USA business community that remains dynamic. But it is important to take a wider view. The bulk of business activity in the USA has seen a decline in dynamic new formation. The decline started around 1980 and has gotten worse over the last 30 years.
Here is another one worth reading:
http://www.brookings.edu/research/papers/2014/05/declining-b...
That one looks at specific cities.
The news is troubling and grim. The trend is more than 30 years old, and appears to be accelerating.
Digging through the Forbes 500 list, there are 10 companies of the top 100 that I would consider "tech". They are (with year of founding): #5 Apple (1976), #17 HP (1939), #23 IBM (1911), #34 Microsoft (1975), #35 Amazon (1994), #46 Google (1998), #53 Intel (1968), #55 Cisco (1984), #69 Ingram Micro (1979), #82 Oracle (1977).
By decade that's: 2 from the '90s, 1 from the '80s, 4 from the '70s, 1 from the '60s, 2 pre-WW2. Looks like the '70s were a good time to do a tech startup. :)
Noah Smith wrote a good rebuttal: http://noahpinionblog.blogspot.com/2014/05/declining-us-dyna...
The flaw would be to assume that more dynamism, in and of itself, is better. For example it could come from many small players reinventing wheels (i.e. each Mom-and-Pop shop in my example above having their own supply chain).
Our economic top performers performer better, but any firm displaying merely good performance is regarded as a failure, so revenue flows become increasingly concentrated and markets uncompetitive, as incumbent advantages vastly outweigh competitive pressures. This is problematic in the round.
Income inequality seems one of those things that is "capitalistic" and beneficial, but it actually (a) provides an incentive for self-protection and corruption at the top, and (b) makes it far more likely that bad actors get away with it, because their superior resources allow them to move faster than they are discovered.
The problem is that capitalism requires inequality of results but the persistent, generational type of inequality that the world has now (and the US, post-1980s) is fundamentally anti-progressive.
Case in point: Wal-Mart. Wal-Mart used to be a great store -- until they won their commanding market position. In many areas, it's a gas station, CVS or Wal-Mart. Now they skinflint everything... they understaff, don't merchandise product, and have a shopping experience something like DMV.
And it isn't just the retail end that's a problem. Because of that dominant position, they've squeezed out the distributors that provided the supply chain to the retail economy.
Real competition is messy and inefficient on it's surface.
I lived in a town that had no Wal-Mart and then it did. Before, you had to drive to downtown or a retail area across town and the stores closed basically at dark.
If you went to Penney's, it had hardwood floors, the clerk sent your transaction up a pneumatic tube to the cashier and got your change out of the same pneumatic tube. Banks still use these at drive in lanes.
Only the precursor to Wal-Mart - Gibsons - was open past 6:00ish ( I don't remember the exact figure ). You had to conform to the store's schedule. Mom would send orders with Dad to fill on lunch, back before we had two cars ( this was late '60s, early '70s ).
People invoke competition, but competition really only works out when the new guy has twice to ten times the impact that the incumbent has. Something has to cover switching costs.
Before 1978, bankruptcy laws were set up so when a business could no longer pay its bills, it declared bankruptcy. The business was dissolved, and its assets sold off and the proceeds given to the creditors.
In 1978, this was fundamentally changed to the idea that a bankrupt company could continue to operate with a judge acting as CEO. It's hard to imagine a person less qualified to run a huge corporation than a judge with absolutely zero expertise in business, finance, or the field the company is in. The result was ineptness, and a general looting of the company's assets by the lawyers.
The process of creative destruction was severely blunted by this, and the economy has suffered the consequences ever since.
(The book is rather hysterical, and its conclusions silly, but it well documents what the change in bankruptcy laws did.)
And assets being lootedby lawyers doesn't sound much worse than assets being looted by auction
But isn't YC focused on proving some idea and then getting acquired? YC is thus primarily a pipeline for the enlargement of older, established companies, not a mechanism for creating new companies that will be viable in the long term.
So, if we consider the trend mentioned in these articles to be a problem (and clearly you do), then wouldn't YC -- and, by association, HN -- be more a part of the problem than part of a solution?
edit: The first company that is successful in a space will accumulate the money and the clout to keep competitors out of the industry and influence regulation to protect their position. The only worry such a company has is that a larger, more incumbent company in a related industry will undercut them by taking a loss, either through expensive lobbying or aggressive underpricing.
Since Reagan, the US has openly been reducing taxes and extending subsidies and bailouts to the largest companies, and finance/media rules have been gradually dismantled enabling politicians to take better advantage of indirect payments.
The reason incumbents have been more successful since 1980 is a direct result of government corruption, and is no different than similar patterns within other corrupt economies.
edit2: I forgot the incumbent option of buying the competition though the furious M&A that has also increased steadily during the same period, along with increasing weakness of antitrust legislation which encourages the behavior.
It's sad that we live in a time (due to computing and the internet) when starting or expanding a new or small business is less capital intensive than it has been in history, yet the incumbents have used regulation to make themselves more entrenched than they've been in nearly 100 years.
I strongly disagree.
What makes it hard to compete with Microsoft in the consumer PC/office suite space? What makes it hard to compete with Apple or Samsung in the phone/tablet space? What makes it hard to compete with Amazon in the retail space, or Oracle in the DB space? IBM in the IT consulting space? Intel in the desktop CPU space? Google in the search space? Are these companies protected by "government corruption?"
Large companies have certain disadvantages, but in general have overwhelming advantages. Take Apple or Intel, who can throw massive money at manufacturing R&D. An upstart competitor simply can't build a similar product at a similar price point. Take Microsoft, which can exploit massive network effects, or Amazon, which can exploit tremendous efficiencies of scale in logistics. Even in the purely online world, there are benefits to scale, either network effects like Facebook's, or being able to deliver better results because of the sheer volume of data a company like Google has access to.
Consolidation is the natural direction of a market economy, because at the end of the day the market favors efficiency and scale, and Wal-Mart is efficient in a way thousands of little mom & pops aren't. Indeed, if anything, technology accelerates the effect. It's much easier, in a world with internet, instant messaging, etc, to run a 100,000+ employee company efficiently than it was say 50 years ago. As technology gets better, the equilibrium point at which diseconomies of scaling bigger outweigh economies of scaling bigger gets pushed further out.
Patent lawsuits.
It's a two way street. Are the incumbents so sad to kill off smaller, dangerous competitors, by being bffe with the politicians?
In general, the problem is not big gov. The problem is not big biz. Its "BIG".
[1] http://www.intellectualtakeout.org/sites/www.intellectualtak...
[2] http://politicsandprosperity.com/2012/02/17/lay-my-regulator...
The increase in the number of federal register pages is a response to court cases in the 1970's that made it easier to challenge federal administrative agency actions on the basis that they were inadequately justified. The 1935 Administrative Procedure Act requires agencies to accompany regulations with a "concise general statement" in the Federal Register. From 1935 to the 1970's, that's precisely what they were, even when the substantive regulations had far-reaching scope.
In the 1970's there was a trend of increased judicial scrutiny of agency actions, centering on the agency's explanations and rationales for new regulations. Sometime in the 1960's, economic cost-benefit analysis also became a fixture of agency action. Thus, the page count of the federal register exploded, as the "concise general statement" became exhaustive rationales filled with the results of studies, cost-balancing analysis, etc.
The end result is that agencies like the NLRB have vastly less actual power than they did decades ago, but to exercise what little power they have, they must detail every bit of reasoning and evidence behind a rule in the Federal Register, to fortify the new rule against challenges in court. Modern agencies have to slavishly justify every little action, whereas agencies of the 1930's-1960's could impose sweeping regulations of industries without so much as a cost-benefit study.
The "greatly increased compliance costs" narrative is garbage. One would assume that if compliance costs were increasing, legal costs would increase too. Yet, the opposite is true: the legal sector's share of real GDP has shrunk from over 2% in the 1970's to 1.3% today: http://amlawdaily.typepad.com/.a/6a00e55044cbaf88340168e5077.... Indeed, that understates the decrease. Finance is a very legal-intensive industry, and makes up a much larger fraction of the economy than it did in the 1970's. Thus, the decrease in legal expenditures in the non-finance sectors must have been even larger.
Now, legal expenditures are not necessarily the same as regulatory compliance costs, but one would imagine the two are highly correlated. And the trend is totally in the opposite direction from the "greatly increased compliance costs" narrative.
If you are right, the Small Business Administration (a government agency itself,) must be very wrong, as it found "[t]he annual cost of federal regulations in the United States increased to more than $1.75 trillion in 2008." [1] The United States' GDP was $14.22 trillion in 2008, meaning that 12.3% of GDP was being used to comply with federal regulations, if you were to add state regulations, the result would only become more staggering.
[1] http://www.sba.gov/sites/default/files/The%20Impact%20of%20R...
$1.3 trillion of the number comes from estimating the difference between theoretical GDP and actual GDP given "economic regulations," ranging from quotas and tariffs to the Americans with Disabilities Act. They use a regression analysis based on a "Regulatory Quality Index" published by the World Bank. I don't know what to call this methodology other than "garbage." Fundamentally, many of these things are legitimate trade-offs, and it makes no sense to conflate those trade-offs with "compliance costs." A world in which the disabled are excluded from society is almost certainly going to be one with a higher GDP. A world in which we import all our food from South America is almost certainly going to be one with higher GDP than one in which we subsidize farming in the U.S. The fact that we choose not to live in that world doesn't make the difference between that theoretical GDP and the actual GDP a "compliance cost." Now, the cost of ADA litigation, or the cost of agricultural subsidies, etc, might fairly be considered a "compliance cost" but the SBA analysis goes far beyond that.
It also analyzes things like the increased cost of electricity resulting from environmental regulation, without accounting for the cost of environmental damage. A Harvard study found that coal use alone causes $350 to 500 billion in externalized health costs: http://www.fastcompany.com/1727949/coal-costs-us-500-billion.... Under the methodology of the SBA study, a $100 billion increase in electricity costs from banning coal would be counted as a "compliance cost" but the $300-500 billion saving from reduced health damage wouldn't be accounted for.
This is a very important methodological flaw, because most environmental regulations are fundamentally about dealing with negative externalities, by forcing them to be internalized. The SBA's methodology will account for the internalized costs, but not for the net economic benefit that arises from eliminating the externality. It's fundamentally flawed from a purely economic theory standpoint.
NB: I'm actually supportive of the general trend of deregulation, although I think gutting environmental and antitrust enforcement is a bad idea. But the trend is indeed one of deregulation, not increasing regulation.
This isn't true. GDP measures price, not value. For a given pound of beans, slave labor and a lower sticker price has lower GDP, whereas a well paid laborer and a higher sticker price for the same product is higher GDP .
(Ignoring the complication that foreign labor might not meet the D in GDP) GDP is dumb, in that producing more value at lower cost looks like lower GDP.
Actually most large corporations tend to shrink in poor economic times. They also tend to lay more people off, reduce spending and hiring and hunker down to weather to storm. I could post a dozen stories about company layoffs over the past 5 years. Many small and medium sized companies who have smaller workforces, will simply go under.
Target laid of 1,100 employees in January Cargill laid off 900 employees in March of this year Microsoft just announced it would lay off 14% of its employees in July Intel laid off 1,500 employees in April of this year
When the economy is poor, people don't get poor and corporations get rich. It simply doesn't work like that.
Here are the 30 companies that were in the Dow Jones Industrial Average, 30 years ago [1], with an asterisk indicating the companies that are still in the DJIA:
Allied-Signal Incorporated
Aluminum Company of America
American Can
* American Express Company
* American Telephone and Telegraph Company
Bethlehem Steel
* Chevron Corporation (formerly Standard Oil of California)
E. I. du Pont de Nemours and Company
Eastman Kodak Company
* Exxon Corporation
* General Electric Company
General Motors Corporation
Goodyear
Inco
* International Business Machines
International Harvester
International Paper Company
* McDonald’s Corporation
* Merck & Co., Inc.
* Minnesota Mining & Manufacturing
Owens-Illinois Glass
Philip Morris Companies Inc.
* Procter & Gamble Company
Sears Roebuck & Company
Texaco Incorporated
Union Carbide
United Technologies Corporation
U.S. Steel
Westinghouse Electric
Woolworth
This is not to say that income inequality is not a big problem, but I believe that it's premature to say that the U.S. economy has lost its dynamism and competitiveness.
[1]: http://en.wikipedia.org/wiki/Historical_components_of_the_Do...
Walmart seems to be the only real disruption on that list.
AT&T was split up and now occupies 2 spaces (AT&T, Verizon). Texico is part of Cheveron which is still on the DOW. So one split and one merge.
Several like Philip Morris are on the S&P 500. (allied-signal incorperated = Honneywell, E I du Point = DoPont, Goodyear, GM, union carbide is part of DOW, Owens-Illinois)
PS: If anything the average age significantly increased.
- Allied Signal purchased Honeywell (but adopted their name) and is currently a $72B company.
- Alcoa is still a $20B company.
- American Can became Primerica, which was the foundation of Citigroup which is a $150B company.
- Bethlehem Steel was mostly shuttered but is still operating under foreign ownership.
- Dupont is still a $60B company.
- Kodak we all know, but still a $1B company.
- GM had its issues but still employs over 200,000 people directly and is a $55B company.
- Goodyear is still a $7B company.
- Vale Inco is still a $75B company.
- International Harvester was merged into Navistar which is still a $4B company.
- International Paper still employs over 60,000 people and is a $21B company.
- OI is still a $5B company.
- Phillip Morris rebranded / merged to form Altria group which is an $80B company.
- We all know Sears' issues, but they're still a $4B company.
- Texaco's production operations were merged into Chevron ($250B company) and their retail operations were merged into Shell ($150B company).
- Dow Chemical bought Union Carbide for almost $10B and the combined company is today worth $60B.
- United Technologies is still a $100B company.
- US Steel is still a $5B company.
- Westinghouse bought CBS and rebranded to CBS Corp. ($35B company) and sold off its power business overseas and the rest of its electrics business to Toshiba.
- Woolworth rebranded to Foot Locker and is still worth $7B.
So maybe two on the list no longer exist, but the vast majority are still massive companies collectively employing millions of people with hundreds of billions (trillions?) in revenue. Their inclusion on or exclusion from the DJIA doesn't mean much about their competitiveness or their success.
In technology we see this in two areas:
1. In Outsourcing and the rise of contractors http://en.wikipedia.org/wiki/Business_process_outsourcing_to... http://en.wikipedia.org/wiki/Information_technology_outsourc... This enables the business to spend money on product maintenance and product development. Then the business can shut this off when cashflow stops. (But the firm keeps going!)
2. We see the rise of Product Management http://en.wikipedia.org/wiki/Product_management This is a kind of 'management science' devoted to starting, maintaining and stopping products. (But the firm keeps going!)
The point I'm making is that firms are getting older because they can incorporate the cycles of creation and destruction internally. You might argue this is good for the shareholder in the medium term.
Compare that to FB, we have to wait another 20-30 years to really know, but it's hard to see FB growing the way AAPL and MSFT did.
The main role of the VCs, at this point, is not to empower companies but to fund the competition (an extortion dynamic: "take our terms or we throw 'rocket fuel' to your competitors, who might crash and burn but will take you down before they do"). Subtle distinction. Management-wise, VCs take away far more than they add. The money (ahem, other peoples' money) that they infuse should be a commodity, but they're going to fight as hard as they can to make it not so. Thus, they've created a "startup" economy in which they:
* Build crappy "throwaway" companies not built to last, with the hope
that one will latch on to a genuine new technical idea and go 100x.
* Increase the entrepreneurial activity of one sector, slightly,
in one location while draining the rest of the country and society.
Business is becoming a generational aristocracy at this point. You don't need to look any further than the absurd propping-up of boy kings Lucas Duplan and Evan Speigel. (They even look like Joffrey Baratheon!) I don't have any prima facie dislike for capitalism. In fact, it's a necessary core component of any advanced society. But corporate capitalism is a dinosaur and it's time to go Yucatan on its ass.
Spot on, though. I would take a bit issue with your last point: imagining a good capitalism and a bad capitalism, and saying the issue is just we just got dealt a bad capitalism, is strikingly similar to socialists who say the same about the USSR--"but that wasn't real socialism!" Especially since many people approve of capitalism as it exists today and would argue that this is how it's supposed to be.
I'd also question terming it a dinosaur. The distinguishing characteristic of corporate capitalism is an amazing ability to adapt, survive, co-opt possible threats, and shift costs onto individuals outside the system. It's the most robust creature on the planet right now.
This situation does not seem to me to be incompatible with the dominance of older firms discussed in the article - the ones doing most of the acquiring.