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Below is a complimentary Demography Unplugged research note written on 11/30/20 by Hedgeye Demography analyst Neil Howe. Click here to learn more and subscribe.

The Inexorable Triumph of "Bigness" - 11 30 2020 12 44 41 PM

The title of a new NYT opinion piece says it all: “Big Companies Are Starting to Swallow the World.” UChicago economics professor Austan Goolsbee warns of the ever-widening divide between different types of companies: The corporate giants, which are riding high, and most small businesses, which are struggling to get by if they haven't failed already. (The New York Times)

NH: Austan Goolsbee, for those of you who may not recall, was a chief economic advisor to President Obama during his first term. A gifted storyteller who often appeared on news interviews or the Colbert show, Goolsbee now teaches at the U of Chicago's Booth School of Business.

While "Chicago" was once the school that famously argued for less antitrust enforcement, it is now yielding to a new generation of economists who are arguing for the opposite.

The regressive impact of the 2020 pandemic on U.S. personal income by household is well known, and we have covered it in some detail. (See "Lives Changed in a Major Way Due to Covid-19.") Those who have suffered the biggest job losses and earnings cuts have been younger, lower-income, less educated, and less white than the average American.

As Goolsbee points out, the pandemic has had the same regressive impact on businesses--by revenue, earnings, or market cap. The big have grown bigger, and the small smaller. As with household inequality, this new jump in business inequality marks an acceleration of a trend already in place over the last two or three decades. While both forms of inequality have typically surged during economic downturns, we've never seen it happen so quickly as it has over the past year.

At the top end, of course, the biggest winners are literally the biggest, period. The largest five firms in the S&P500 (AAPL, MSFT, AMZN, GOOGL, and FB) now comprise 22% of the index's entire market cap. The largest ten now comprise 30%. Both figures are records, exceeding the earlier high-water mark during the height of the dot-com bubble.

Looking at entire indexes year-to-date, the total S&P500 (+12.4%) easily beats the small-cap S&P500 (+3.8%). It also beats the equal-weighted S&P500 (+7.5%) by 5 percentage points. And the Wilshire large-company growth index (+33%) beats the Wilshire small-company growth index (+17%).

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What about all listed firms versus the entire universe of unlisted small businesses? (Let's restrict our definition of small businesses to the 5.1 million or so that are corporations, LLCs, or partnerships and that typically hire employees).

Well, here the chasm is vast. While their "market cap" is unknown and unknowable, total small business revenue is down an estimated 20% since January. And since (non-CARES) bank financing has now brutally tightened, that has to mean they're worth less. And maybe a lot less, considering that a record number have closed their doors.

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True, a number of large firms have also gone under--notably, JC Penny, Hertz, Chesapeake Energy, Nieman Marcus, and CEC Entertainment. But so far this number is running way below what happened after 2008 or 2000. This time, thanks to the Fed, big firms are buoyed by lofty market prices, narrow credit spreads, and abundant low-cost liquidity.

No such luck for small companies, which are dying at an unprecedented rate. No one knows exactly how many are going under. According to Brookings, 400.000 small businesses closed permanently from March to June, which is a larger number of failures than typically occurs in an entire year. Small-business transactions data collected by the software services firm Womply show that one in five firms operating in January has stopped transacting entirely. Most have likely stopped for good. A survey by another on-line business service firm reported that 42% of the respondents still in operation say they might have to close for good by the end of the year.

Yes, small business startups are also higher than normal. Applications for new employer IDs have hit 3.2 million this year, versus 2.7 million at the same time last year. And some of these no doubt represent the fruits of "creative destruction," in which entrepreneurs, taking advantage of low rents and piled-up friends-and-family cash, are meeting some new demand in today's altered marketplace.

But this churn doesn't change the overall picture. Most of the new applications are from new gig workers and independent contractors, whose ranks have swelled due to layoffs, bankruptcies, and the termination of benefits. And some are former small businesses reorganizing under a new name. When the final tally of businesses is computed for 2020, it will be way down from 2019, which in turn will probably be beneath its 2007 record of 5.3 million.

To explain the extraordinary gains of large businesses over small in 2020, we need to point out the unique advantages that the pandemic has conferred to the scalable and impersonal giants--most obviously, in digital tech and communications, but also in pharma, consumer credit, discount retail, and fast-food chains. This stands in contrast to everything small, local, informal, and personal--which has gotten hammered. Yet we also need to acknowledge how the response to the pandemic has practically guaranteed that the big would get still bigger, by providing market support and near-bottomless liquidity to the giants who already possessed the most cash-in-hand.

In his NYT op-ed, Goolsbee begins with the observation that what we're seeing in 2020 is not a new trend, but rather a dramatic one-year acceleration of a trend toward larger business size that has been underway since the 1980s.

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He then argues, IMO correctly, that ever-larger scale inevitably creates monopoly pricing power for the incumbent giants and suppresses start-ups, job churn, mobility, and innovation among the smaller players. (For a comprehensive look at the evidence, see "Declining Business Dynamism: A Visual Guide.")

In time, he suggests, this cycle can become self-perpetuating. In product markets, monopoly rents enable the bigger players to underprice or buy out (in "killer acquisitions") smaller competitors. In financial markets, the herding of passive investors into massive ETFs furnishes the giants with the lowest cost of capital and leveraging. And in politics, the bigger players can make sure the rules favor them and that antitrust enforcement remains ponderous and underfunded. Goolsbee points out that, while merger activity has roughly doubled over the past decade, federal spending on antitrust enforcement (through the Justice Department and the FTC) has fallen sharply along with the number of enforcement actions.

Just last week, BTW, Penguin Random House (owned by the German conglomerate Bertelsmann) announced its intention to buy Simon & Schuster (owned by ViacomCBS), which would shrink the global "big five" book publishers down to just the big four. News Corp CEO Robert Thompson, slamming the move, announced, "There is clearly no market logic to a bid of that size--only anti-market logic... This literary leviathan would have 70% of the U.S. literary and general fiction market.” He then archly added: “There will certainly be legal books written about this deal, though I wonder if Bertelsmann would publish them.”

Favoring the odds of more vigorous antitrust enforcement in the years ahead is the fact that the Republicans, as they transform into a more populist party, increasingly agree with Democrats on the need to restrain monopoly power. (See "The Politics of Policing Social Media" and "Antitrust Threats Against Apple Heating Up."). On the other hand, as Goolsbee points out, antitrust enforcement typically declines in the wake of market crashes and economic downturns--when policymakers are more concerned with business survival than with competition.

Goolsbee's final observations are worth quoting here in full. "As Congress and the president consider additional relief measures for small businesses, they should remember that there’s much more at stake than the number of jobs next month. The largest downturn in 90 years threatens to fundamentally change the competitive balance in scores of industries for decades to come."

He then concludes: "That might garner a hearty cheer from investors (because who doesn’t love a good, profitable monopoly?). But riches for shareholders would come because the government didn’t stop big companies, which would no longer fear competition, from squeezing more out of millions of consumers."

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ABOUT NEIL HOWE

Neil Howe is a renowned authority on generations and social change in America. An acclaimed bestselling author and speaker, he is the nation's leading thinker on today's generations—who they are, what motivates them, and how they will shape America's future.

A historian, economist, and demographer, Howe is also a recognized authority on global aging, long-term fiscal policy, and migration. He is a senior associate to the Center for Strategic and International Studies (CSIS) in Washington, D.C., where he helps direct the CSIS Global Aging Initiative.

Howe has written over a dozen books on generations, demographic change, and fiscal policy, many of them with William Strauss. Howe and Strauss' first book, Generations is a history of America told as a sequence of generational biographies. Vice President Al Gore called it "the most stimulating book on American history that I have ever read" and sent a copy to every member of Congress. Newt Gingrich called it "an intellectual tour de force." Of their book, The Fourth Turning, The Boston Globe wrote, "If Howe and Strauss are right, they will take their place among the great American prophets."

Howe and Strauss originally coined the term "Millennial Generation" in 1991, and wrote the pioneering book on this generation, Millennials Rising. His work has been featured frequently in the media, including USA Today, CNN, the New York Times, and CBS' 60 Minutes.

Previously, with Peter G. Peterson, Howe co-authored On Borrowed Time, a pioneering call for budgetary reform and The Graying of the Great Powers with Richard Jackson.

Howe received his B.A. at U.C. Berkeley and later earned graduate degrees in economics and history from Yale University.