"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.
Even in tech I think it's easy to overstate the level of dynamism. A lot of the buzz is around startups, but a huge amount of the industry is owned by fairly old companies.
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. :)
I think when you see efficiency run amok and start to look like central planning, that's a sign that something is out of equilibrium.
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.
But that's natural. The innovator in retail is now Amazon. Wal-Mart was innovative when Sam hisownself ran it, and a little past that. The trope is that Sam had a daily report ( presumably on green fanfold paper ) on his desk every day. Very much a tech leader in the pre-Internet network sense.
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.
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).
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).
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.
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.
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 ;-)
Inefficient makework is a horrible form of welfare. The formerly employed should create new products/services to sell, or use their free time to organize and agitate for something like guaranteed basic income paid by the wealth concentrators.
Part of the problem is related to a change in the bankruptcy laws. This is documented in the 1992 book "America What Went Wrong".
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.)
> 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 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?
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.
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.
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.
> 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.
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?
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.
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.
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.
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]
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.... 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.
>"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.
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.... 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.
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.
> 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.
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.
Americans tend to be incredibly risk-averse when it comes to physical risks and terrorism, but they seem much less risk averse when it comes to money. Given the same personal financial risk, Americans seem more likely to start risky business.
>>> Meanwhile large corporations have increased power and influence acquire/stifle competition.
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.
Also the dropping of pensions, and increase in cost of healthcare. It used to be that some portion of people could get 20 yrs in a their first company then have the option of having a fairly secure foundation from which to take risks.
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.
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.
Globalization killed several of those, but that's not a recent change. 4 being steel or aluminum companies.
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.
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.
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.
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.
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.
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.
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.
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).
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.
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.
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.
VCs and the entrepreneurs who work with them have made themselves wealthy in large part through starting companies which ultimately get acquired. This includes many of their investments that IPO but get acquired later on.
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.
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.