
U.S. businesses are being destroyed faster than they’re being created - pesenti
http://www.washingtonpost.com/blogs/wonkblog/wp/2014/05/05/u-s-businesses-are-being-destroyed-faster-than-theyre-being-created/
======
iamthepieman
This is due to consolidation pressure brought about by long-term low interest
rates combined with inaccessible small consumer loans.

When the banking crisis happened in 2008, there was some talk and pressure
from consumer groups and governments (at least in the U.S.) to make capital
available to individual consumers. However, this was a short-lived sentiment,
or at least one that never had any teeth to it. Banks stopped lending to
consumers as readily as they had before the crisis while the Federal reserve
kept interest rates and especially interest rates they give to banks extremely
low.

This meant that if you already had capital(large businesses, wealthy
individuals) it was easy to get nearly free money. whereas if you didn't it
was nearly impossible. This led to consolidation as big businesses could buy
up many small ones .

I predict this will continue happening as long as the combination of low
interest rates and inaccessible consumer loans continues.

~~~
sitkack
That seems deeply wrong to me. Free money to grow your monopoly?

~~~
yourapostasy
This is an interesting emergent behavior of our current financial system.

Generally speaking, access to credit is treated more importantly than
possession of capital, due to the leverage credit provides. For individuals
however, it is treated negatively (the more credit you have registered with
the credit-reporting agencies the less future credit will be extended to you)
while for businesses, because they generate income, it can be treated
positively. This is generally because credit-granting institutions often do
not perform a deep enough analysis to determine if credit utilization in a
business is leading to organic or artificial growth; it's a difficult task to
perform, and the difficulty is compounded by the long time scales it can
sometimes take before the determination of organic-vs-artificial can be
pronounced. Simply possessing sufficient credit to take control of assets
until someone else pays more for the assets induces all sorts of "fake-it-til-
you-make-it" games.

Throw into this cauldron of unintended consequences the official and quasi-
governmental support (which boils down to more credit extended for these
activities) for real estate development, medical care, and education, and it
is small wonder we see the kinds of unbalanced stresses we observe in banking,
housing, medical and education sectors.

An especially egregious example of this in action in the US are the "limits"
on number of financed properties secured through government mortgage
assistance programs. The layperson could be excused for believing that the
mortgage assistance programs are meant for "the little guy", and the limit
would be one financed property per household, owner-occupied. The taxpayer
foots the bill, so it should only be for families and individuals who need the
government-stabilized mortgages for the house they live in, right? What
actually happens is there are a complex set of rules between Freddie Mac,
Fannie Mae, FHA and VA programs that delivers government support for taxpayers
to subsidize hundreds of thousands of "investors" to get taxpayers to supply
the mortgage assistance for up to about 10 properties, only one of which needs
to be owner-occupied, up to a $2M aggregate loan value.

In HN-terms, it is as if there was a taxpayer subsidy that let you put up 10%
of a $2M loan for your startup idea, dis-chargeable in bankruptcy, at credit
rates you could not touch in the private markets. The scrutiny hurdle to clear
to secure this financing is much lower than for YC; it's mostly taxpayer money
that's at risk and the agency problem runs rampant here. This is an outright
gift to the banks that originate the loans and service them for the
origination and servicing fees but don't underwrite the risk, as well. You
should have heard the cries of doom and gloom when the government agencies a
few years ago mulled dropping the number of investment properties that could
be carried. Most of these "professional investors" are oblivious to how real
businesses obtain credit, and the real cost of credit in the private markets.

There are no easy answers here, unfortunately. Credit is a legitimate feature
of the modern economic landscape, and a _bona fide_ tool in an honest
business' toolbox.

~~~
sitkack
Thanks for this. Also crazy. Everywhere I look, more crazy.

------
candybar
Original sources:

[http://www.census.gov/ces/dataproducts/datasets/lbd.html](http://www.census.gov/ces/dataproducts/datasets/lbd.html)

[http://www.census.gov/ces/dataproducts/bds/overview.html](http://www.census.gov/ces/dataproducts/bds/overview.html)

Methodology:

[http://www.census.gov/ces/pdf/CES-
WP-02-17.pdf](http://www.census.gov/ces/pdf/CES-WP-02-17.pdf)

Looking more carefully, I think the numbers tell a completely different story
- this is not about the decline in entrepreneurship, but more about the rise
of contingent workers and one-person businesses. Their definition of firm is a
business that has paid employees and not all contingent workers count under
that definition because they are often independent contractors or employees of
a third party agency. The broader availability of all kinds of services from
legal to insurance to accounting to technology to logistics to HR/staffing
also allows 1-person businesses to handle more than they ever have, while
potential legal and regulatory concerns have raised the cost of hiring the
first employee. This is not about consolidation but bifurcation.

~~~
digitalengineer
>more about the rise of contingent workers and one-person businesses.

This is exactly what's happening in the Netherlands as well. Lot's of one-man
companies. Our government is looking to stop the growth because of some tax
dedications they can claim.

~~~
stevesearer
I see the same thing in the circles of people I spend time with. Almost nobody
is starting a business in the sense of having other employees. What people are
starting are businesses that bring in some side revenue to help augment their
regular incomes.

What I find interesting about this is that because these are run on a
shoestring budget, they end up being a testing ground for ideas that are
actually profitable.

------
rayiner
Businesses shutting down faster than they are created could be a measure of an
un-dynamic economy, but I think that given the relevant time scale, it's
mostly a measure of consolidation. And the fact that businesses are
consolidating isn't news or even surprising, or necessarily even bad.

In the Valley, technology has had the effect of making it easier to create new
businesses (startups), so I can see why the HN crowd would assume that
consolidation represents a negative trend. But the fact is that in the rest of
the economy, technology has enabled consolidation and driven small businesses
either into closing down or being acquired. Technology pushes out the boundary
at which diseconomies of scale overtake economies of scale, enabling larger
businesses to be more efficient.

Take a company like Amazon or Wal-Mart. Technology enables those companies to
operate at massive scales, and using technology, they can replace thousands of
smaller businesses while operating much more efficiently.

I suppose the other relevant trend has been what has happened in the financial
markets. 1978-present was a period of massive M&A activity. Those with more
capital spent it buying out those with less capital, and as a result
industries that used to have dozens of competitors now have a handful.

------
jusben1369
A few quick thoughts:

1) That's a particularly horrendous timeframe to try and draw long term
conclusions from. 2) Small business people are more conservative than ever
right now (ie not starting businesses). Large enterprises have also suffered
from this same conservative approach (sitting on massive piles of cash vs
investing) It's a very conservative business climate across the spectrum. 3)
Some have argued that larger companies have gotten more nimble at competing in
the last decade and so the opportunities aren't always there for small
businesses to move into gaps 4) Healthcare costs have skyrocketed in the last
10 years and have been risky (losing coverage) which has a very real dampening
effect on individuals quitting corporate jobs to start businesses. There's a
pocket of people who believe the ACA will have one of it's biggest impacts in
this area (workforce mobility has also declined in last 10 years)

This is good stuff and worth watching but I would want to wait until the end
of 2016 for some of the above to play out before drawing long terms
conclusions around the US economy.

~~~
brudgers
I'd agree that long term conclusions might be suspect, but then again "It's
tough to make predictions, especially about the future." However the US
demographic shift toward a greying population suggests that the pool of people
likely to start businesses is shrinking.

In the short term, people start businesses when they are optimistic or at
least naive about the economy. And the sort of people who historically have
started small businesses as a means to achieve economic mobility are exactly
the people who are likely to be least optimistic these days.

~~~
jusben1369
You raise a good point I forgot to address. The proportion of new businesses
that are started by first generation immigrants. It's much higher in that
population than with people born stateside. When you add together the
unattractiveness of the economy (dampening interest to migrate) along with an
uptick in anti-immigration sentiments it's not hard to see this being a big
part of any short term reduction in new businesses.

------
arel
I'm not sure that this is a bad thing in the short term. Unhealthy businesses
closing are better for the economy in the long run as it redistributes
capitol, talent, resources to those that are productive. Japan can tell you
all about their "zombie economy"

~~~
notacoward
This isn't about healthy vs. unhealthy businesses. If that were the case, the
businesses that closed would be balanced by new ones (of the same size) that
opened. This is about _consolidation_ from a larger number of smaller
companies to a smaller number of larger ones. It would be a bit surprising to
hear - on HN of all places - that big companies are inherently healthier or
better to have than small ones.

~~~
humanrebar
I don't know. We used to have a bunch of owner-run video rental shops around.
That has been replaced with streaming and RedBox. Does that mean we're
unhealthy?

Maybe some of the consolidation is due to the increasing importance of supply-
chain at the expense of location in low-margin businesses.

------
wil421
I think this may be a good thing. Kind of like a house cleaning for
businesses. I can count on both hands how many companies I find out about each
week and ask myself how are these people still in business.

~~~
notacoward
_Replacement_ of bad companies with fresh new ones might be a good thing, but
a consistent pattern of companies failing with nothing to replace them is a
horse of an entirely different color. That means more people are deciding to
work for an established company instead of starting their own, and it's hard
to see the good in that.

~~~
wil421
>That means more people are deciding to work for an established company
instead of starting their own.

Maybe established companies are seeing more growth. Not everyone wants to work
for a new/struggling company, a lot or people want job security (if there is
such a thing).

I think part of this could be the decline or brick and mortar stores.

Nowadays I probably wouldnt want to open a Hardware store vs the 70s. We have
companies like Home Depot who drive the smaller guys out but they also create
a lot more jobs and have better benefits than a Mom and Pop hardware store can
provide.

So is it a good thing, yes and no depending on how you look at it. I really
need more info on the factors that are causing the decline.

~~~
notacoward
"Maybe established companies are seeing more growth."

When has that ever been the case? Small companies have always been the growth
engine of the US economy, and others as well. A small company can grow 100x in
a couple of years and it doesn't seem weird, whereas a large company growing
even 2x would be remarkable. Even if 95% of those small companies totally
fail, they're still likely to generate more growth than big companies. It's
not likely to be a coincidence that declining entrepreneurship and stagnant
wages (everywhere but Silicon Valley) have gone hand in hand for a while now.
Yes, people seek security. That's fine, perhaps even wise, but when everyone's
running for their lives there's not going to be much growth or innovation.

~~~
mikeyouse
> _Small companies have always been the growth engine of the US economy_

That's not as clear as people claim.

The common definition of 'small business' when people say that 'Small business
create the most jobs' is a company with fewer than 500 employees. That's over
99.5% of companies in the US, so of course they create the most jobs.

If you change the definition of a small business to fewer than 50 employees,
then only 1/3 of workers are working for 'small businesses'. These companies
are also the first to lay off employees and the last to hire in recessions due
to their smaller balance sheets.

The whole thing is worth a read, but the gist;

    
    
       It makes for a less popular stump speech, but large firms
       are a vital player when it comes to job creation. Over the
       past two decades, for example, small and mid-sized businesses
       have held a larger share of the country’s overall employment
       (29 percent and 27 percent, respectively) than they have of 
       total jobs added (16 percent and 19 percent). During the same 
       period, companies with more than 500 workers employed about 
       45 percent of the workforce yet contributed 65 percent of the 
       jobs created since 1990.
    
       Those jobs may be more valuable, too, considering large firms 
       have historically paid significantly higher salaries than 
       their smaller counterparts. On average, small business 
       employees currently earn about 50 percent lower wages than 
       those paid to workers at large companies.
    
    

[http://www.washingtonpost.com/business/on-small-
business/who...](http://www.washingtonpost.com/business/on-small-business/who-
actually-creates-jobs-start-ups-small-businesses-or-big-
corporations/2013/04/24/d373ef08-ac2b-11e2-a8b9-2a63d75b5459_story.html)

~~~
Futurebot
The SBA's guidelines for defining "small businesses" is definitely not what
many think:

[http://www.sba.gov/content/what-sbas-definition-small-
busine...](http://www.sba.gov/content/what-sbas-definition-small-business-
concern)

Examples:

\- Manufacturing: Maximum number of employees may range from 500 to 1500,
depending on the type of product manufactured;

\- Wholesaling: Maximum number of employees may range from 100 to 500
depending on the particular product being provided;

\- Services: Annual receipts may not exceed $2.5 to $21.5 million, depending
on the particular service being provided

------
jotm
Could it also be because the EU, China, HK and other countries have become
more attractive for small business?

Related:[http://flipchartfairytales.wordpress.com/2014/02/26/america-...](http://flipchartfairytales.wordpress.com/2014/02/26/america-
not-a-small-business-country/)

------
er35826
I'm not sure his evidence given supports his statement of "no correlation"
between a state's Business Tax Climate index. He says the most business-
unfriendly state is showing the smallest decline, while the business-
friendliest state is showing the smallest decline.

While the full data may actually show no correlation, his highlights show the
correlation "business friendliness -> lower business creation."

------
michaelochurch
Before this discussion heads that way, this one can't really be blamed on the
venture capitalists directly, because VCs are involved in less than 1% of new
small businesses, most of which are local concerns like restaurants, parking
garages, and bookstores. The VCs aren't at fault for what happened to them.
What's happened to the Valley is just one campaign in a larger war on the
middle class (and, yes, there is such a thing going on... and the middle class
is losing).

The main problem is general economic disenfranchisement. When truck drivers
had powerful unions (today, many unions are corrupt and weak, with union
leadership buddied up to management) and made what would be six-figure
salaries today, while living in houses where the land was effectively free
(i.e. the cost of the house was the construction cost alone), it was possible
for people in the middle class to accrue real savings. College tuitions were
reasonable, because you could get a good job from a (well-funded, cheap) state
school and so there wasn't an arms race to get into elite colleges.

The idea that a working-class family could bankroll a business seems insane
now, but it wasn't, 30 years ago. The Satanic Trinity of housing, healthcare,
and tuition hadn't been re-summoned yet, so average people had money to do
things like start companies after a couple decades of working.

The Boomers pulled up the ladder, and made life for the rest of us a race to
the bottom. Now, college is expensive, healthcare is a long-tail risk for
pretty much anyone (even the "good" insurance policies have exclusions) and
housing is obnoxiously expensive anywhere that there are jobs. Add to this the
advent of consumer debt (which breaks the Fordist correlation between worker
prosperity and the health of the economy) and you have a world in which almost
no individuals have capital, and people are stuck relying on a few wealthy
individuals and large (usually corrupt) institutions.

When most people don't have any money, fewer small businesses will be formed.
It's that simple. These businesses aren't being created because people don't
have the means.

~~~
fredgrott
ahem, son of trucker.. truckers never made six figure salaries and my father
was a union trucker during unoin's heyday ie the teasmsters

~~~
turnip1979
I don't want to contradict you but I've heard different things. I had a
student in a CS program who told me that he was getting a truck after
graduating. His brothers were in the business and making 6 figures. This was
in the days that a new grad would make 50K as a starting salary in tech if
they were awesome. This is a data point from Canada btw.

Edit - might there be a difference if you own the truck vs. just being a
driver? I don't know the details of the industry.

~~~
at-fates-hands
>> Edit - might there be a difference if you own the truck vs. just being a
driver? I don't know the details of the industry.

I have an uncle who's a repo man. 80% of his business is collecting big rigs
when the owner falls behind in payments.

Trucking is an incredibly tough industry to be in. If you don't own the truck,
you have a monthly payment that's almost equal to your house payment. Throw in
gas prices going through the roof, and you're lucky to make a decent salary,

------
snorkel
The bar chart at the end of PDF is tells the same story we already know, that
most of the decline in business entries is in manufacturing and construction:
[http://www.brookings.edu/~/media/research/files/papers/2014/...](http://www.brookings.edu/~/media/research/files/papers/2014/05/declining%20business%20dynamism%20litan/declining_business_dynamism_hathaway_litan.pdf)

We don't build stuff no more.

~~~
kasey_junk
There is no way to read this data to indicate that we aren't building stuff
any more. Rather, fewer and fewer companies are in the business of building
things. This is almost certainly due more to consolidation than to output.

~~~
mikeyouse
Also, automation!

[http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=z...](http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=zTD)

