Preserving big companies drags an economy down

Lecture 4 within “Modern Economic Issues”, by Robert Whaples, is about productivity, increases in which are what drive improved per-capita living conditions. One of the big questions that occupied economists is why Europe has lagged in labor productivity (output per worker-hour) compared to the U.S. The consensus seems to be that formation of new companies is important but that the destruction of big inefficient companies is equally important. The Europeans have been comparatively reluctant to let their dinosaurs go extinct, which means that a lot of resources (capable people, production facilities, capital) are tied up by inefficient management and structures. Aside from direct subsidies to the big and struggling, the Europeans have kept dinosaurs alive by making regulations so complex that small companies can’t afford the time and effort to get required permits, etc.

The lecture made me wonder if the sluggish U.S. recovery since the 2008 collapse might be partly due to the fact that the American government has done so much to favor the big. The biggest banks got the most cash. Chrysler and GM were preserved in the form that had led them to insolvency, rather than being allowed to have their parts folded into new enterprises. States handed out all kinds of subsidies for establishing or maintaining facilities but these subsidies were available only to big and established companies. Regulations have become more complex to the point that competition from small or new companies is further discouraged.

11 thoughts on “Preserving big companies drags an economy down

  1. In interesting idea. If it’s true what would be best course of action (in the case of the giant US banks and car companies); prevent companies from getting “too big to fail” in the first place; or allow them to fail and society accepts the cost of failure?

  2. Phil,
    “the Europeans have kept dinosaurs alive by making regulations so complex that small companies can’t afford the time and effort to get required permits,”

    Though Europe has its faults, the US is where the whole “compliance” industry came into being initially, where companies have “compliance officers”, etc.
    Reminds of the NYT story about the San Francisco ice cream shop that never was:


  3. Certainly this is part of the problem in the US. I think it has to do with fear of the unknown. If you’re in a crisis, you have two options: preserve the behemoths, and muddle through — which is a moderately painful process, but it has the advantage that you can see the mechanism of how it works, and you can be reasonably certain of your ability to pull it off (provided you have enough cash). Consider the alternative: let the behemoths die, and usher in a period of creative destruction. Economics teaches that this provides better outcomes in the long run, but many of the involved decision makers aren’t necessarily incented to look at the long term. Not only that, but there is MASSIVE UNCERTAINTY down this path, and massive uncertainty that it will even provide good outcomes in a given short-term window, say, a presidential term.

    Is it any wonder we preserve the behemoths? Sure, pointy-headed economists can validly point out that this does not optimize for long-term outcomes…but who said that’s what we were optimizing for?

  4. has research showing that *all* net new jobs come from new companies (small and big) less than 5 years old.

  5. Phil,

    what about Japan? That country seems to fit the model at least as much as Europe. Renesas, Hitachi, Sony, to name a few dinosaurs.

  6. You don’t get electoral brownie points for claiming that you let Chrylser fail and thus released capital that was locked up. You become a hero for claiming to save thousands of jobs by bailing out the auto industry. Rinse and repeat for banks, Fannie/Freddie, USPS.

  7. I wonder if the pensions of GM and other big companies with defined benefit pensions haven’t been propping up these old companies. If you’re deferring compensation for 20 or 30 years with a pension plan and making unrealistic assumptions about pension returns, then the employees are in effect making 7-8% loans to the company, and may not get paid back. Of course, that depends on whether the pension gets bailed out.

  8. Another sad facet of this is that the companies we’ve bailed out in the USA have been slow to share the wealth. They’ve forced people to do the work that 2 or even 3 people have done before…and they pay less for it.

    This also seems to be the case with many corporations. Corporations in general need to start hiring and to stop hording all the profits for their CEOs.

  9. I know that my company, Cisco Systems, rarely hires. It grows mainly by buying other companies. These are Dg’s new companies that took on all the risk of creating jobs.

  10. Re John Rynne’s citation of the article about the San Francisco ice cream shop, Starbucks and Dunkin’ Donuts have entire teams that specialize in getting the permits and clearing the way for their shops to open.

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