At the blog of the Atlanta Fed there’s a round-up of articles on the decline of dynamism in the American economy. I might take a look at them later but it seems pretty obvious to me that if you provide enough advantages to big companies, big companies are able to stomp down upstart competitors, large companies are slow to add employees, and you prop up large companies with government subsidies of various different sorts, it’s going to reduce the general dynamism in the economy. It’s also a pretty fair description of where we are now.
if you provide enough advantages to big companies…
But those companies deserve it. They are the mainsprings of all that’s right and good in our US of A, dammit. And the guys who run those big companies are right up there with Beatrice in the eyes of God. Who, when he thinks about it, could really disagree with Robert Benmosche, the current CEO of AIG, regarding the brouhaha over the post-bailout bonuses awarded to our CEO saviors and their lieutenants:
It’s a sorry state of affairs in this country when the cup of compassion runs dry for such as Mr. Benmosche.
Yes, smaller companies are competitively disadvantaged by bigger companies, if only by the pricing benefits they receive through the sheer volume of the business they do. However, I think what is even more daunting for starting a smaller business, than being in the shadow of a larger one, are big government regulations, which only grow in number and size with government expansion. Such regulations can literally capsize an upstart business before it’s even had a chance to open it’s doors, let alone thrive.
Basically, economical dynamism is more robust with a less obstructed ebb and flow of commerce in a free market society. Even in the case of leveraged buy-outs, the maligned business Romney was in, there is usually a renewal of economical activity by the reallocation of resources into other areas of industry, including new job creation, housing sales, adjunct business start-ups — collateral energy, if you will, created by the demise of one failing industry that is revitalized and moved successfully over to another. This is what has occurred in other recessions, but not so much in this one. Why not?
It’s well beyond economies of scale which is what you’re describing, jan. A better example would be predatory pricing, pricing things at or below cost to drive competitors out of the market.
Back when my little company did a small amount of retail sales we knew we were buying product for the same prices as our much larger competitors who could sell it for less. Some of that was due to their economies of scale but it was also due to their superior ability to weather periods of reduced sales to drive out the competition.
Additionally, there’s the ability of larger companies to lobby for tax benefits or outright subsidies. Nobody ever gave a subsidy to a scad of small companies for the benefits they’d bring but the incidents of pay-offs of various kinds to big companies, especially by state and local governments, are legion.
Dave, I was using the ‘economics of scale,’ for my example. And, your enlargement of issues, such as predatory pricing, are not to be dismissed.
However, perhaps it’s because of how we operate under a smaller business model ourselves, I am sensitive to the non-monetary advantages of such operations, if only these businesses are allowed to establish their footing, and develop a ‘loyal’ clientele.
It’s kind of a Mac versus PC comparison, in a way, where small can offer qualities, conditions, operational nuances that the more impersonal big companies can’t. Whether it’s a small, grocery, hardware or book store, rental company, financial, tech consultants, creative endeavors, cottage industry, etc., oftentimes it’s more about the personal service, quality relationships, unique product line, the smaller but more trustworthy aspects of dealing with hands-on business entities which can trump the financial benefits larger corporations have to lure customers with — enough at least to carve out and ‘make a living.’
We, for instance, more often than not, don’t do business with the lowest priced bid or item, but are attracted more to skilled, pride of workmanship qualities and products, as well as after-purchase support and service and so on. Consequently, we use contractors, services and purchase products that are derived from Main Street commerce, and might even be considered home-spun, rather than Wall Street or big box sources. In my rather anecdotal opinion I believe that these kinds of businesses would flourish more (not in off-the-grid black market venues), if there was less governmental discouragement via the layer upon layer of bureaucracy coming between one’s ability to even open a business.
I know this is not a graduate-degree analysis of market conditions, which probably puts me at odds with many here. But, ironically this country’s strength and desirability, it’s fulcrum where success has been evident, is lodged in it’s free market philosophies and tenets. Such an unfettered environment is a catalyst for creating real possibilities of economic mobility for all people to experiment with their creativity and dreams — succeeding or failing because of circumstances generated out of personal good/bad luck, chance, or within themselves, than by too many tedious, extraneous governmental controls and conditions becoming road blocks from even trying…..
@sam
The bankers can thank Secretary Timothy Geithner for their bonuses.
So? Does that make his less of an asshole?
Does that make Benmosche less of a moral cretin?
The US has had fewer small businesses and a concentration of workers in large businesses for quite a while compared with much of the OECD. Since financing for most new small businesses comes from friends and family, our concentration of capital into the hands of relatively few people makes it difficult to start new small businesses here.
Steve
Hello from New York. Small business guy here. And Dave’s point is spot on. And why is large business favored? It starts with a G and ends with a t. Also, campaign contributions.
Steve – if you mean raw start ups of retailers like dress shops, knick nacks or flower shops, repair shops, or plumbers……you are correct. If you are talking about a yogurt chain that starts small but grows to ginormous you are talking about the venture arm of private equity. If you are talking about $30MM to $250MM revenue widget makers, well, you are talking to me. That’s who finances their growth. And you want to slap us down through regulation and taxation why?
Speaking of large business subsidy and government malinvestment…..
I don’t read but rarely what was once a great paper and now just a shill for leftists – they call it The New York Times. But I’m here and was bored so I picked up a copy. I often mock the financial acumen of commenters here, and with good reason. There is a page 1 bus section article that serves as a test case. This is wrong on so many levels. I invite anyone here to comment on why. If I get no responses I’ll know I’m vindicated. You don’t know what you are talking about. Title: Union Push for IPO Forces Filing at Chrysler. read the whole article, but here are enough snippets for people to get the issues.
1) Chrysler files for IPO under pressure from second largest shareholder (the Union Medical Benefits Trust)
2) Negotiations with largest shareholder – Fiat – to purchase Trust stake failing over valuation
3) Federal government “shepherded” Chrysler through bankruptcy………..including A PUT OPTION ON BENEFITS TRUST FOR ITS EQUITY STAKE” brokered by Obama Administration.
4) Fiat majority owner has alternative plans for cash; GAP IN VALUATION EXPECTATIONS
5) Cal-Berkeley Professor: “high stakes battle; UNION TOOK ON HIGH RISK IN ACCEPTING SHARES IN BANKRUPT COMPANY IN RETURN FOR BENEFITS – NOW WANTS TO SHARE IN UPSIDE”
6) Union stance a negotiating tactic (ya think??)
7) FIAT NATURAL BUYER; POTENTIAL VOLATILITY AND VALUATION DIMINISHMENT ; CANNOT COMPLETE STRATEGIC PLAN AT CURRENT VALUATION
I put the cap letters in to lead anyone with even rudimentary corporate finance acumen right down the path to what is wrong with the whole article and Trust stance. I wonder who will understand it, and respond.
No corporate finance experience here, Drew, but it seems that this will be an investment that will be sold on the cheap. But, maybe I’m missing the whole puzzle point.
Since I’m on a roll….
We were recently treated to the wisdom of a noted economic expert, and part time author, on what was wrong in the Rust Belt (after being informed that iron ore no longer was transported from MN to the mills on the southern tip of Lake Michigan…….which must have caused a certain amount of distress to ore boat captains who said to themselves “Holy Shit!! Where am I going to dump this hull full of rocks! – But I digress.) with the notion that we needed a Cal-Tech and the illustrious Silicon valley here.
Well, on page 1 from the illustrious NYTimes. “Struggling, San Jose Tests a Way to Cut Benefits”
San Jose. Let me look at a map. Oh! The heart of Silicon Valley. Aye carumba!! So some snippets from this article:
1) San Jose spends 20% and increasing of its general fund on public employee benefits
2) To free up money they are closing all kinds of traditional govt services
3) “We are Silicon Valley, not Detroit” says a Dem city counselman
4) The Dem mayor says we have to cut benefits (Heh…when do we hear he is a cruel and heartless stealth Republican who want to starve children and the elderly?) The plan is, ahem, “opposed by the unions.”
5) Stanford U prof: “…these workers did nothing wrong….politicians promised them these benefits…” (They did nothing wrong except make a deal with the devil, “my vote for your promise of unsustainable candy”)
6) A cop: “they are encouraging us to leave.” (I guess they can’t “just write a few more pages in a book” and move on….)
7) A cop: “I’m leaving after my 25 years (retirement at 50, eh??) and I’d rather lose my house than work overtime (does anything say government worker more clearly than cushy job?)
I could go on. This is a microcosm of everything the left advocates, and a fiscal conservative, like me, tells you cannot go on forever. At the local, state and national level government has gone berserk and its all coming home to roost. There is no free lunch.
But hey, maybe a steel mill or two should be built in Tiburon and at least the ore boats would have somewhere to go…….
jan
No, but I’ll see how many respond and say no to wrong answers to narrow the answer options.
I assume you mean the Union Trust investment. They are angling for a premium, not a discount or even privately negotiated price. The IPO threat is simply a “let’s let the market decide” posture. It brings with it “complications.”
But just ponder this: given the history of the reorganization and the intent and how the Trust got their securities ownership, the prior securities holder’s result, and the current ask…………is this an equitable result. If so, why? If not, why?
Its all in that question.
Just to rough in some of RB’s comments whether a company is small, medium, or large depends on what it does. Manufacturing takes a lot more capital investment than retailing which takes more capital investment than software development. Although over the last 15 or 20 years the lines have gotten blurred a bit.
A $100 million company is small in manufacturing but medium sized for a retailer and large for a software development company. A company like Microsoft with $77 billion in revenue is absolutely enormous.
1) You need a new bogeyman. Only about 7% of workers in the private sector belong to a union.
2) I think there are at least two models for the development of smaller businesses that grow into bigger ones. You can have the model where a small business is founded by a person or a few people that then grows, perhaps with franchises (MacDonald’s, Apple, Microsoft). Those people start out using their own money and that of family or friends. You also have a Staples type model where people successful in one business start another, often with capital from outside investors. I think it is the former model which I suspect is disappearing, IOW, to use Drew’s example, the first yogurt shop never opens. Perhaps that is inevitable in a mature economy. I dont know.
” And you want to slap us down through regulation and taxation why?”
I dont. I just see why we need to give you a tax rate of 15% on what you make while the rest of us pay at higher rates (for roughly equivalent income levels).
Steve
@steve, The different tax treatment comes from having your stake at risk. If you want people to take risks with their money, with the hopes of selling their business some day, you need to account for the differences between employers and business owners. Otherwise, everybody will just line up to work at big government or big corporations.
If our economic success rests on developing a rational tax system then we are probably doomed.
“You need a new bogeyman. Only about 7% of workers in the private sector belong to a union.”
And yet public sector unions are bankrupting cities and states. You should find that instructive.
steve
On your point two, I think you suffer from a “singularity” bias. Any one business may only grow to a large extent through a franchise model, or taking off like a Google. But there are literally hundreds of thousands, if not millions, of small and boring “widget makers” who have not reached full potential and each can grow employment only modestly, but in aggregate tremendously. It is, in fact, what I do for a living. Our public policies should not retard this effort. Joe’s Pizza may only add 1-2 people over its lifetime, but there are a million Joe’s Pizza’s. The ACME widget company may only add 20 people to the employment rolls after our ownership, but if there are 100,000 ACME’s…………….
I just see why we need to give you a tax rate of 15% on what you make while the rest of us pay at higher rates (for roughly equivalent income levels).
Then, steve, you must make the case for taxing capital gains at ordinary income rates. The only philosophical element of tax rate to income level is progressivity. Ordinary income vs capital gain is a longstanding and different in kind concept. Have at it.