The Hidden Economic Funk

It’s complicated. The stock market is soaring. Real estate prices are at record levels. Unemployment is down, and Americans are actually getting higher wages than they have seen in recent years. America is great again, right? OK, rising prices have pretty much continued the slide in discretionary income and a much smaller percentage of Americans can afford to purchase a home if they don’t already own one. Car sales have plummeted so much that Ford Motors is shuttering five of its manufacturing plants for a few weeks to let the inventory sitting on car lots dissipate. And while US company healthcare plans have, according to the Kaiser Foundation, trickled upward by a record-low 3%, insurance companies are quivering in fear at the market disruption that would sent rates soaring for a huge horde of Americans should the GOP “repeal and replace” program become law.

We know that income inequality is definitely not moderating; the biggest corporations, the richest Americans, are bringing home cash by the wheelbarrow-load. But most of us have this nagging feeling that the economy remains unstable for all but those at the top of the economic ladder. There are tons of reasons beyond the massive destructive forces of hurricanes, the roiling political instability in the Middle East, and the threats from North Korea.

Private sector unions represent only 6.7% of their workforce, and automation (accelerated by artificial intelligence) has accounted for most of the reshoring of manufacturing in this country. Workers have not recovered the high-paying jobs that migrated off-shore only to return to those spanking new robots. I’ve drilled down on both mostly on the impact of automation – for an example, see my September 11^th Stitches blog – but today, I’d like to focus on another element that is tanking those “growth statistics for the rest of us” – the incredible slowdown in what most of us perceive as the backbone of American opportunity: the level of start-ups. This reality might even tell us part of the story behind the recent rise in American populism.

“A total of 414,000 businesses were formed in 2015, the latest year surveyed, the Census Bureau reported Wednesday. It was a slight increase from the previous year, but well below the 558,000 companies given birth in 2006, the year before the recession set in… ‘We’re still in a start-up funk,’ said Robert Litan, an economist and antitrust lawyer who has studied the issue. ‘Obviously the recession had a lot to do with it, but then you’re left with the conundrum: Why hasn’t there been any recovery?’

“Many economists say the answer could lie in the rising power of the biggest corporations, which they argue is stifling entrepreneurship by making it easier for incumbent businesses to swat away challengers — or else to swallow them before they become a serious threat… ‘You’ve got rising market power,’ said Marshall Steinbaum, an economist at the Roosevelt Institute, a liberal think tank. ‘In general, that makes it hard for new businesses to compete with incumbents. Market power is the story that explains everything.’…

“The start-up slump has far-reaching implications. Small businesses in general are often cited as an exemplar of economic dynamism. But it is start-ups — and particularly the small subset of companies that grow quickly — that are key drivers of job creation and innovation, and have historically been a ladder into the middle class for less-educated workers and immigrants.” New York Times, September 20^th.

Lending capacity has been sucked up by larger corporations, fueling mergers, acquisitions, stock buy-backs and even internal growth… with cheap debt. The old rule that banks only lend to companies who don’t need the cash, most definitely not going much to smaller, and hence riskier, firms… has never been more true. The incredible and mega-expensive costs of raising equity, in full compliance with the exception litany of securities rules and regulations, the unwillingness of brokers to represent the smaller capital needs of younger-stage companies, and the twisted maze of unaffordable patent litigation that allows big companies to outlast smaller businesses trying to assert patent infringement claims against those biggies in court… well, let’s just say it plays into the hands of America’s richest private institutions, for whom such costs are just drops in a bucket.

As Snap, Inc. (the owner of Snapchat that recently went public) recently learned, watching its stock plunge as competitor Instagram (Facebook) reverse-engineered some of that social media’s coolest photo-apps, and added it to the latter’s quiver of Instagram’s universally-available features, some patents can too easily be replicated with non-infringing versions. The biggest boyz have the money to pay those high re-development costs… and otherwise, when pushed, to buy out those little companies before they can grow to become real competitors. Whatever the reasons, it is not good for the United States… and definitely not a solution to the income inequality mess.

Can smaller entrepreneurs remotely complete? Amazon can ask cities for massive subsidies and tax abatements to lure new facilities construction. Apple has even been able to convince an entire nation, Ireland, to offer them an incredibly low corporate tax rate. What chance does a small company have against power like that? So, increasingly, smaller companies often just give up, selling out to the biggies, doing the best they can. But the bigger picture, the radical reduction in start-ups should be deeply troubling to us all.

“Since about 2000… the slowdown has spread to parts of the economy more often associated with high-growth entrepreneurship, including the technology sector. That decline has coincided with a period of weak productivity growth in the United States as a whole, a trend that has in turn been implicated in the patterns of fitful wage gains and sluggish economic growth since the recession. Recent research has suggested that the decline in entrepreneurship, and in other measures of business dynamism, is one cause of the prolonged stagnation in productivity…

“The evidence is largely circumstantial: The slump in entrepreneurship has coincided with a period of increasing concentration in nearly every major industry. Research from Mr. Haltiwanger and several co-authors has found that the most productive companies are growing more slowly than in the past, a hint that competitive pressures aren’t forcing companies to react as quickly to new innovations.

“A recent working paper from economists at Princeton and University College London found that American companies are increasingly able to demand prices well above their costs — which according to standard economic theory would lead new companies to enter the market. Yet that isn’t happening.

“‘If we’re in an era of excessive profits, in competitive markets we would see record firm entry, but we see the opposite,’ said Ian Hathaway, an economist who has studied the issue. That, Mr. Hathaway said, suggests that the market is not truly competitive — that existing companies have found ways to block competitors.” NY Times. Yup.

Trump rails against federal regulatory restrictions, like the Dodd-Frank bill that clamped down on a number of big boyz abuses. He’s dismantling consumer productions and OSHA safety rules, allowing rather blatant industrial pollution to resume. Has Wells Fargo opened an unwilling account on your behalf? You’d think “deregulation” would boost the little guy by reducing red tape and costly compliance options, but what it really does is further to remove government protection for smaller business as they face a litany of rather unholy, if not outright illegal, practices from America’s biggest companies… alone without federal watchdogs.

Oh, and Trump and the GOP Congress want to slash as much as $1.5 trillion from big corporate America’s tax bill. They call it tax reform. Yeah… and that’s going to create lots of new jobs and solve our growing income inequality problem! Riiight. Just the way the Reagan era corporate tax cuts on money held overseas brought fresh capital to the US… fomented a mass of mergers, acquisitions and stock buy-backs… which in turn resulted in the normal and customary “efficiency” layoffs… that boosted the unemployment rate accordingly.

I’m Peter Dekom, and Wal*Mart was a start-up in 1962, Microsoft in 1975, Apple in 1976, and Facebook in 2004.