
The Other Aging of America: The Increasing Dominance of Older Firms - luu
http://www.brookings.edu/research/papers/2014/07/aging-america-increasing-dominance-older-firms-litan
======
lkrubner
Related, and worth reading:

[http://www.moneyandbanking.com/commentary/2014/6/23/growth-a...](http://www.moneyandbanking.com/commentary/2014/6/23/growth-
and-dynamism-troubling-facts)

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...](http://www.brookings.edu/research/papers/2014/05/declining-
business-dynamism-litan)

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.

~~~
muzz
The second paper is somewhat of a canard. There are fewer "firms" than 30
years ago largely because of fewer small players in areas like retail and
construction (for example, fewer Mom-and-Pop shops and more market share to
WalMart, etc).

Noah Smith wrote a good rebuttal:
[http://noahpinionblog.blogspot.com/2014/05/declining-us-
dyna...](http://noahpinionblog.blogspot.com/2014/05/declining-us-dynamism-
story-or-non-story.html)

~~~
UweSchmidt
Dominance of large players could be a major reason for a less dynamic economy,
so your link is not really a rebuttal. Can you clarify?

~~~
muzz
Dominance of large players is indeed a reason for less "dynamism".

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).

~~~
anigbrowl
That's somewhat inefficient, but it also creates lots of jobs. Arguably, what
we are heading towards or perhaps already have now is an economy that's quite
efficient but has large structural problems; a significant number of people no
longer have meaningful jobs due to automation, Many more are underemployed to
facing stagnant wage growth due to a skills gap, and there just aren't enough
highly-skilled jobs to significantly increase employment.

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.

~~~
_delirium
In isolation I agree, but it's tricky with globalization. For example my read
of Greece is that it has too many mom-and-pop businesses which, even though
they work 60-hour weeks, cannot compete with an efficient, modern German or
Dutch company whose workers work a strict 40-hour week but in a well-managed
Enterprise. Of course there are other big differences as well, corruption
being one of them, but I think the cultural difference in company sizes is a
big one: Greeks mostly want to work for themselves or in family businesses,
whereas a typical German "small business" (as in the famous Mittelstand) has
more like 50 employees (often 100-200), not <10\. An economy built on tiny
family businesses can't compete with a more modern economy built on
Enterprises (in the sense of a corporation with division of labor, employees,
professional operations & business management, etc.). SMEs in the 50-200 range
are ok, but the tiny family businesses and one-person shops have trouble, and
an economy dominated by those has few jobs and a poor economic base.

~~~
judk
Also worth noting that big companies get unfair benefit of not paying VAT on
internally created and consumed value. Greeks solve this problem by just not
paying tax ;-)

------
pessimizer
The stability of incumbents is an inevitable result of government corruption.

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.

~~~
rayiner
> The stability of incumbents is an inevitable result of government
> corruption.

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.

~~~
nitrogen
_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?_

Patent lawsuits.

------
protonfish
This seems like another symptom of the widening income gap. You need money to
start a new venture and the average worker no longer has much to spare.
Meanwhile large corporations have increased power and influence acquire/stifle
competition.

~~~
mhb
Or it could be a symptom of an increasingly risk-averse society which
encourages its government to promulgate ever more regulations to keep us
"safe". Big/rich companies are favored by that, so the causality isn't
obvious.

~~~
rayiner
The U.S. is a lot less regulated, in practical terms, than it was 30-40 years
ago. Entire industries have been deregulated, like transportation,
communications, etc, and enforcement in areas like antitrust, etc, is less.
Agencies like EPA, OSHA, NLRB, etc, area shadow of what they were in the
1970's.

~~~
nickff
The regulations that have harmed new businesses and (non-software) start-ups
are not related to anti-trust enforcement. OSHA, EPA, healthcare, and IRS
regulations in the last 30-40 years have greatly increased compliance costs,
and severely complicated matters for small companies, this has crippled many,
either preventing them from growing, or killing them entirely. The agencies
may be taking more or less enforcement actions on various different subject
matters, but they have greatly increased the complexity of compliance and the
volume of documentation required to stay within the bounds of the law. If you
need proof of this, please take a glance at the federal register, and you will
see that the rate of regulation has greatly increased in over the past 30-40
years ( the FR more than tripled in length from 1970-2000), with few of the FR
entries being repeals.[1] Please also keep in mind that the FR does not
contain all the existing administrative rules, so the integral of all the FRs
is a more relevant (and horrifying) statistic (~3 million cumulative pages as
of 2010).[2]

[1]
[http://www.intellectualtakeout.org/sites/www.intellectualtak...](http://www.intellectualtakeout.org/sites/www.intellectualtakeout.org/files/chart-
graph/Federal%20Register%20Pages,%201940-2001.JPG)

[2] [http://politicsandprosperity.com/2012/02/17/lay-my-
regulator...](http://politicsandprosperity.com/2012/02/17/lay-my-regulatory-
burden-down/)

~~~
rayiner
Quoting "# of federal register pages" is like quoting "number of source lines
of code." It's not a good metric for understanding the scope of what a program
does.

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...](http://amlawdaily.typepad.com/.a/6a00e55044cbaf88340168e507757b970c-pi).
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.

~~~
nickff
> _" The "greatly increased compliance costs" narrative is garbage."_

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...](http://www.sba.gov/sites/default/files/The%20Impact%20of%20Regulatory%20Costs%20on%20Small%20Firms%20\(Full\).pdf)

~~~
rayiner
For context, the $1.75 trillion figure is about an order of magnitude larger
than the entire U.S. legal sector. Clearly, the study must be measuring
something other than the direct compliance costs: lawyers, accountants,
environmental analysts, etc.

$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...](http://www.fastcompany.com/1727949/coal-costs-
us-500-billion-annually-health-economic-environmental-impacts). 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.

~~~
nickff
My point with the SBA study was not that it estimated compliance costs (as it
clearly estimates cost of regulations), but simply to demonstrate that the
scope and breadth of federal (and likely state) regulations have grown
dramatically, and have a real impact on the economy. The SBA study also
supports the notion that regulatory costs disproportionately impact small
business, which is relevant to the basic discussion being had on this page. As
table one from the SBA study shows, federal tax regulations cost three times
as much (per employee) for firms with less than 20 employees than they do for
firms with more than 500. There are many other studies with similar findings,
and I will not bore you with a list of them, but they almost invariably find
that regulations have increased in the last 40 years, that compliance costs
have increased, and that small businesses have been disproportionately
impacted.

------
triangleman
I have not had a chance to read the paper, but I would be surprised if the
findings really tell us about some new trend in the U.S. economy.

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
    

Only 10 of the 30 companies are still in the Down Jones. Some of these
companies may be represented in merged companies under new names, but you can
still see the huge change in the makeup of the U.S. economy compared to 30
years ago.

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...](http://en.wikipedia.org/wiki/Historical_components_of_the_Dow_Jones_Industrial_Average)

~~~
mikeyouse
That list is entirely misleading, of your non-asterixed list:

\- 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.

------
zwieback
Wow - didn't expect the numbers to be so high in the high-tech sector. I'd
love to see the data of the last two years. It feels like the majority of
activity in tech is in startups but economically that's totally untrue.

~~~
seabee
To me it feels like the majority of progress and innovation in tech is in
startups, but the majority of activity is uninnovative. For example, a lot
gets done in the enterprise software market, though most of it is very boring
and uncreative from a technical perspective.

------
juliangamble
Firms spend much more of their time on survival. Arguably they have
incorporated the market-based cycles of creation and destruction inwardly. ie
they have absorbed this cycle.

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/Business_process_outsourcing_to_India)
[http://en.wikipedia.org/wiki/Information_technology_outsourc...](http://en.wikipedia.org/wiki/Information_technology_outsourcing)
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](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.

------
bjones53
I was disappointed that the article didn't acknowledge the impact
globalization has likely had on the increasing number of 'Older Firms'. Global
markets bring massive opportunities, but large corporations are better
positioned to succeed in a global marketplace. Global markets also means
global competition - for jobs and for entrepreneurs.

------
PaulHoule
One thing I've noticed is that vc backed companies in my field don't last more
than 5yrs. Maybe 2/3 get acquired, 1/3 get shut down, but I see so few
survivors I won't offer a probability estimate.

~~~
Iftheshoefits
The goal of VC backed companies today is to cash out as much "value" (ROI) as
possible, as soon as possible. VC firms aren't meant to last; they're meant to
enrich (a very select few).

~~~
PaulHoule
It is funny to compare today to the old days, say the 1980s, when public
investors made fortunes investing in companies like AAPL and MSFT. These were
startups that became "old companies".

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.

------
thomasmarriott
Scale is underrated. Cumulative advantage.

------
michaelochurch
This is damning data, proving that the "startup revolution" of the past 20
years and of the Valley is a fraud. Of course, many of us already knew this,
but it's nice to see data that proves our point.

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. 
    

Also, the power of the VC oligarchy is enhanced by the fact that bank loans
(the traditional way of starting a business) are completely broken at this
point. Getting a bank loan requires personal liability, which makes it a non-
starter for anything that might actually fail.

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.

~~~
scarmig
I love that I can tell the author of a comment by the end of the first
sentence =)

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.

