Is the Aging of Firms Good News?

Amidst all the discussion of the trend toward fewer young firms in the economy, this question occurred to me.

I think of entrepreneurship as a trial-and-error learning process. If we had perfect knowledge in the economy, we would not need new firms. Is it possible that information about business prospects is getting better, so that we do not need as many new firms?

The analogy might be with inventories. In the 20th century, a major factor in recessions was that auto and steel manufacturers often were caught with large excess inventories, resulting in layoffs as the companies reduced production to work off the unwanted inventories. Over the last 25 years, computer and communication technology has caused the inventory cycle to be much more subdued.

What if “big data” in the economic and business environment has a similar effect on starting new ventures? Instead of having to spend years to determine whether a new business idea is viable, suppose it takes months, or can be predicted with reasonable accuracy even before it is launched?

In that kind of environment, I think that some of the advantage shifts away from entrepreneurs and toward existing businesses. As Amar Bhide pointed out, ambiguity deters large established businesses but attracts entrepreneurs. We think of rapid technological change as adding ambiguity to the environment, because change creates uncertainty. But if one of the effects of change is to make the business environment easier to read, maybe the ambiguity is lower today than it was 20 years ago.

Put this post in the “ideas I put out there but to which I am not committed” category.

UPDATE: That didn’t take long. from the comments:

I think if this were the case we would expect to see fewer of the types of entrepreneurs that don’t grow/fail quickly, but the types of entrepreneurs who grow rapidly and create a lot of jobs would not be affected (because predictions of success are becoming more accurate). This may have been the case prior to 2000, but we show that since 2000 the top of the growth rate distribution for entrepreneurs has fallen. Entrepreneurs aren’t growing as fast, and/or the high-growth types aren’t entering the market, which I think reduces the plausibility of the “lower ambiguity” theory. See

The Courage to Desist

Robert Shiller writes,

I wrote with some concern about the high ratio in this space a little over a year ago, when it stood at around 23, far above its 20th-century average of 15.21. (CAPE stands for cyclically adjusted price-earnings.) Now it is above 25, a level that has been surpassed since 1881 in only three previous periods: the years clustered around 1929, 1999 and 2007. Major market drops followed those peaks.

Pointer from Mark Thoma. Here is my take:

1. I think investors look at the zero interest rate on short-term money-market instruments and say, “I can’t possibly settle for that.” As they reach for yield, long-term interest rates fall.

2. At low interest rates, long-term bonds become very speculative investments. A small decline in market interest rates, and the market value of your bonds shoots up. Conversely, it takes only a small increase in market interest rates to create a negative return on a bond mutual fund (holding the actual bond rather than a bond fund avoids marking your losses to market, but on an opportunity-cost basis, an actual bond still gives you a negative return in a rising-rate environment.)

3. If Shiller is right and stocks are over-priced, your best strategy may be to sit on those low-yielding short-term instruments and wait for prices to come down. This is hard to do. It is my strategy in fantasy baseball auctions–watch the first 50 players get chosen at prices that I think are too high, and then wait for prices to come down. If prices are too high early, this has to work, because the fixed budgets given to owners mean that prices have to come down eventually. I am not saying you win a fantasy league that way, because luck tends to dominate any advantage you might appear to gain in the auction. But if you wait, you can get good value cheap. I think that we are in that type of stock market.

4. Having said that, we know that for every credible theory that stocks are over-priced there must be an equal and opposite theory that they are under-priced. (See Brad DeLong’s response to Shiller. See also this comment that Tyler Cowen found on his blog) Otherwise, prices would not be as high as they are. The thing is, most of the movement in stock returns is due to changes in the taste/toleranace for risk, and there is no guarantee that this parameter will head toward one particular value.

Related: James Hamilton on the San Diego public employee pension fund reaching for yield.

The Problem of Monopoly

Tim Harford writes,

No policy can guarantee innovation, financial stability, sharper focus on social problems, healthier democracies, higher quality and lower prices. But assertive competition policy would improve our odds, whether through helping consumers to make empowered choices, splitting up large corporations or blocking megamergers. Such structural approaches are more effective than looking over the shoulders of giant corporations and nagging them; they should be a trusted tool of government rather than a last resort.

Pointer from Mark Thoma.

Unfortunately, I can imagine “assertive competition policy” creating more monopoly power. The problem is that government is by far the most secure monopolist. The more “assertive” is government, the more assertive is this monopolist. One can hope that this monopoly power will be exercised wisely. I, for example, hope that the government could break up big banks wisely.

But the public choice of the matter, as Harford points out, is not reliable.

Steven Braun vs. Brad DeLong

Braun as a co-author writes,

the US has enjoyed a sustained economic recovery that has exceeded most contemporaneous and historical financial crisis benchmarks. Up until a year ago, the unemployment rate was falling by an average of 0.7 percentage points per year, roughly tracking the more successful historical experiences, and well exceeding the norm following a financial crisis. In the past year, the pace of the decline in the unemployment rate has doubled. As a result, the official unemployment rate is 83% of the way back to its pre-Global Crisis average. A variety of other indicators–such as broader measures of labour market underutilisation that include discouraged workers or marginally attached workers as well as unemployment rates for different demographic groups–show similar magnitudes of recovery

DeLong writes,

But I look at 25-54 [year-olds]. The employment rate is down from 79.9% in 2007 to 76.6% in July 2014–3.3%-points less, compared to 4.0%-point a fall from 63% to 59% over the entire population. The participation rate is down from 80.8% in July 2014 compared to 83.1% for 2007–2.3%-points, compared to the 3.1%-point fall from 66.0% to 62.9% over the entire population.

Pointer from Mark Thoma.

Ordinarily, I would side with Braun, for two reasons. First, he is a gentle, soft-spoken guy. Second, he knows labor market data better than anybody I know.

In fact, right now I find DeLong’s take more compelling. But if Braun were to convince me that I am wrong, it would not be the first time he has done so.

UPDATE: DeLong strengthens his case.

Callie Gable on Avikcare

She writes,

Roy’s plan changes the structure of Obamacare’s subsidies by benchmarking them to a high-deductible plan with a health-savings account — providing a powerful incentive for people to move into consumer-driven health plans. The HSA would be funded in part (depending on income level) by federal subsidies, which would roll over from year to year, giving consumers incentives to stay healthy and to make cost effective health-care decisions when they do need care.

The difference between subsidizing Singapore-style health insurance and mandating Obama-style health insurance is significant.

This is even more significant:

Medicare eligibility age would increase by four months every year until the program is totally phased out, to be replaced by putting seniors on the reformed exchanges.

Actually, with longevity increasing by 3 months per year, I am not sure that Medicare would phase out as rapidly as they think. And any step-up in anti-aging innovation could mean that longevity increases faster than 4 months per year. Still, better to be raising the age of eligibility gradually than not at all.

Of Interest to Libertarians

1. From George Leef.

Since 2003, the [North Carolina Board of Dental Examiners] has been issuing cease and desist orders to beauty shops or any other business that offered teeth whitening services. The legal basis for such orders is that the “practice of dentistry” is restricted to licensed dentists and the Board decided that teeth whitening falls within that practice. Unless you’re a licensed dentist, you must stop.

2. From Graeme Wood.

Minerva is built to make money, but Nelson insists that its motives will align with student interests. As evidence, Nelson points to the fact that the school will eschew all federal funding, to which he attributes much of the runaway cost of universities. The compliance cost of taking federal financial aid is about $1,000 per student—a tenth of Minerva’s tuition—and the aid wouldn’t be of any use to the majority of Minerva’s students, who will likely come from overseas.

The Pew Quiz on Political Typology

I found it repetitive and unsatisfying. Thanks to Mark Perry for the pointer. I thought that the responses that were supposed to be conservative were left-wing stereotypes of conservative views. Not so much the other way. I thought that sometimes small wording nuances that they probably did not notice affected my answers. The difference between “most” and “every” was significant to me, but my guess is they chose those words more casually.

It called me a Business Conservative.

Business Conservatives generally are traditional small-government Republicans. Overwhelming percentages think that government is almost always wasteful and it does too much better left to businesses and individuals. Business Conservatives differ from Steadfast Conservatives in their positive attitudes toward business and in their strong support for Wall Street in particular. Most think that immigrants strengthen the country and take a positive view of U.S. global involvement. As a group, they are less socially conservative than Steadfast Conservatives.

I wonder if they have a libertarian category and I failed to make it there. Otherwise, what they call business conservative may be the closest thing you can get to libertarian within the confines of the survey.

I think that the three-axis model is better. Some people did not care for the quiz in The Three Languages of Politics, but I think it was actually a better quiz than what the Pew people came up with.

Arthur Brooks on Coercion vs. Charity

He writes,

Consider the present total that Americans give annually to human-service organizations that assist the vulnerable. It comes to about $40 billion, according to Giving USA. Now suppose that we could spread that sum across the 48 million Americans receiving food assistance, with zero overhead and complete effectiveness. It would come to just $847 per person per year.

Or take the incredible donation levels that followed Hurricane Katrina in 2011. The outpouring of contributions exceeded $3 billion, a record-setting figure that topped even the response to the attacks of September 11, 2001. But even this historic episode raised enough to offset only 3 percent of the costs the storm imposed on the devastated areas of Louisiana and Mississippi. Voluntary charity simply cannot get the job done on its own.

This is not fully persuasive. It may be misleading to describe what a charity-only safety net would work like using an extrapolation based on current social arrangements.

1. If we took away today’s safety net and left that income in private hands, people would have more to donate to charity.

2. If we took away today’s safety net, then affluent people who now assume that government is taking care of those in need would instead take the view that donations are needed.

Nick Rowe on Monetary Theory

He writes,

2.1 Home production increases in a recession. People grow their own veggies, cook their own meals, fix their own cars, and go back to school. Because investment in human capital is a form of investment that requires mostly one’s own time, on top of inputs bought for money. Home production of investment goods rises, even as all other forms of investment fall.

2.2 If trade were harder in a recession, we would expect to see trade in all goods falling, and not just trade in newly-produced goods. And, as far as I can tell, that is what we do see. It gets harder to sell old houses, as well as newly-produced houses.

2.3 Barter increases in a recession, as far as I can tell. Barter is usually very difficult, but some barter exchanges are more difficult than others. If recessions were caused by something that made monetary exchange more difficult than normal, we would expect to see abnormally high levels of barter in a recession. I think we do.

2.4 Some goods are easy to sell for money even in a recession. Which goods are those? It is those that are traded in organised central markets, where problems due to asymmetric information are small, and where prices are very flexible. It is precisely those goods that are more like money, where if all goods were like that we wouldn’t need money as much to help economic coordination. It is those goods that are traded in markets that approximate the market of the Walrasian auctioneer. If all goods were like that, and if all markets were like that, we wouldn’t observe recessions. And we wouldn’t need money.

But we don’t see increased use of foreign currency in a recession. We don’t see increased use of buying on credit–we see the opposite. And as for point 2.3, as far as I can tell, the use of barter in the 2008-present episode has been minimal.

Later, he writes,

Lots of things can cause coordination failures. Not all coordination failures are monetary coordination failures. There are many coordination failures that monetary policy cannot cure.

I don’t think that the last six years represents an example of the latter.