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  • Surowiecki: Americans Have 'Soft Spot' for Small Businesses, But Large Businesses Drive the Economy

    New Yorker writer James Surowiecki challenges the political rhetoric that small businesses drive America's prosperity. Sharing a history lesson from Marc Levinson 's The Great A. & P. and the Struggle for Small Business in America , Surowiecki points to past efforts to control large businesses on behalf of small stores through policing prices that suppliers charged chain retailers. From his Financial Page column: These days, government regulation to keep prices high is less popular. But the fetishization of small business continues apace. Some of the support derives from real virtues that small companies offer—diversity of choice, connection to local communities. But much of it derives from the idea that the nation’s economic well-being depends on such companies. Given that the overwhelming number of American businesses are small, and that, as we’ve all heard, small businesses create most new jobs, this seems reasonable enough. But the truth is that, from the perspective of the economy as a whole, small companies are not the real drivers of growth. One can see this by looking at the track record of the world’s economies. The developed countries with the highest percentage of workers employed by small businesses include Greece, Portugal, Spain, and Italy—that is, the four countries whose economic woes are wreaking such havoc on financial markets. Meanwhile, the countries with the lowest percentage of workers employed by small businesses are Germany, Sweden, Denmark, and the U.S.—some of the strongest economies in the world. This correlation is not a coincidence. It reflects a simple reality: small businesses are, on the whole, less productive than big businesses, and though they do create most jobs, they also destroy most jobs, since, while starting a business is easy, keeping it going is hard. This is true around the world. A recent study by the World Bank that looked at ninety-nine developing countries found that large firms had significantly higher productivity growth. And in the U.S. the connection between size and productivity is, as a 2009 study showed, especially close. In part, this is because big businesses are able to enjoy economies of scale and scope. Big businesses are also better able to make investments in productivity-enhancing technologies and systems; in the U.S., for instance, big companies account for the vast majority of R. & D. spending. Read Big is Beautiful here .

  • Surowiecki: Lessons on Economic Recovery from Past Natural Disasters

    As we've said before, the human tragedy remains the concern in Japan. As far as the economic disaster that rides in the wake of the earthquake and tsunami, we don't have clear agreement on how many billions of dollars of damage have been done to Japan's economy. But James Surowiecki cautions us not to come to any rash conclusions about the long term damage. In his latest Financial Page column for The New Yorker , Surowiecki writes that recent history reveals modern economies demonstrating remarkable recovery powers: The quintessential example comes from Japan itself: in 1995, an earthquake levelled the port city of Kobe, which at the time was a manufacturing hub and the world’s sixth-largest trading port. The quake killed sixty-four hundred people, left more than three hundred thousand homeless, and did more than a hundred billion dollars in damage (almost all of it uninsured). There were predictions that it would take years, if not decades, for Japan to recover. Yet twelve months after the disaster trade at the port had already returned almost to normal, and within fifteen months manufacturing was at ninety-eight per cent of where it would have been had the quake never happened. On the national level, Japan’s industrial production rose in the months after the quake, and its G.D.P. growth in the following two years was above expectations. Similarly, after the Northridge earthquake, in 1994, the Southern California economy grew faster than it had before the disaster. A recent FEMA study found that after Hurricane Hugo devastated Charleston, in 1989, the city outpaced growth predictions in seven of the following ten quarters. And the 2008 Sichuan earthquake, despite its enormous human toll, may have actually boosted the economy’s growth rate. These were all monumental catastrophes, and yet, a couple of years after the fact, domestic growth rates showed little sign that they had happened. The biggest reason for this, as the economist George Horwich argued, is that even though natural disasters destroy physical capital they don’t diminish the true engines of economic growth: human ingenuity and productivity. With enough resources, a damaged region can reconstruct itself with surprising speed. Although the Northridge quake demolished the Santa Monica Freeway, it reopened after just sixty-six days. Healthy economies are by definition adaptive: in the case of Kobe, other Japanese ports picked up the slack until it was back on line. And, because governments generally flood disaster areas with money, there’s no dearth of cash for new investments. Read the full article, Creative Destruction? , here .

  • Surowiecki Calls Groupon a 'Real Company'

    We are sure to see Groupon pop up on a series of best-of 2010 lists. It has been a good year for the coupon/daily deal site. Some wonder whether its growth is a temporary fad, or just the beginning for the next huge Internet company. The New Yorker 's James Surowiecki sees neither outcome in Groupon's future. He describes it as a "real company," unlike compared to the YouTubes, Facebooks, and Googles: Groupon, by contrast, is a much more old-school business. It doesn't have any obvious technological advantage. Its users don't really do anything other than hit the "buy" button. And its business requires lots of hands-on attention: thousands of salespeople to sell to and service local businesses, copywriters to come up with the right pitches for customers (Groupon's clever ad copy is one of its selling points). Groupon isn't just flinging piles of deals at users; the idea is that it's performing a "curatorial" role, and is relying on humans, instead of on Google-style algorithms. All these things are real assets-and a reason that Groupon is less vulnerable to competition than people think-but they're also very labor-intensive. Facebook, with five hundred million users, has fewer than two thousand employees, while Groupon, with some forty million subscribers, already has three thousand employees. Groupon can obviously add subscribers easily (all it has to do is send out more e-mails), but serving them enough deals to keep them happy is another matter: the more business it does, the more people it has to hire. Recently, Groupon has experimented with a self-service system, which would let it outsource some of the work to local merchants, who could set up virtual storefronts. But, unless it wants to abandon the approach that made it successful, scaling up will require more work and more workers than the Twitters and YouTubes of the world need. Read Groupon Clipping here .

  • James Surowiecki: Investors Have Too Much 'Information' To Make Good Decisions

    James Surowiecki says investing is a bit like buying a television set--except instead of having just one salesperson talking up a particular model, you have many, many "experts" in your head yelling and telling you to buy or sell. And Surowiecki, author of the 2004 book The Wisdom of Crowds , argues that investing actually requires limiting the amount of so-called information that follows the daily activity of the market. "The media," he says in an interview with Big Think , tends to "exaggerate the importance of any one piece of news." So investors are better off if they aren't cluttering their minds with a constantly moving day-to-day analysis. Here is an excerpt of the interview: You can watch the full interview here .

  • James Surowiecki on China's 'Consumption Problem'

    In the latest Financial Page column at The New Yorker , James Surowiecki takes a look at consumption in China. The worlds's most populous nation has developed a reputation for thrift to the extreme. He estimates that Chinese households and institutions sock away $2.5 trillion a year. And consumption is just 35% of GDP--"significantly lower than for most Asian countries and only half the rate in the United States," Surowiecki writes. But it hasn't always been this way in China: One common explanation for this thrift is that it’s the product of “Confucian values.” Yet China has not always been so thrifty—in the eighties, consumption was more than fifty per cent of G.D.P.—and today other “Confucian” countries consume far more than China does. The real source of China’s underconsumption is the way it manages its economy. Credit isn’t always that easy to come by. China’s policy of holding down the value of its currency means that consumer prices are higher than they would otherwise be, which obviously discourages spending. And, as a recent McKinsey Global Institute study points out, once you move beyond China’s biggest cities, there’s often a dearth of retail outlets and products for sale. Potential spenders are also held back by systemic issues. Paradoxically, in this still putatively Communist society, families for the most part have to fend for themselves. Health insurance is limited in what it covers and far from universal, so getting sick can be a costly proposition. Only a fraction of the workforce receives unemployment benefits, while pensions are underfunded and haphazardly administered. A scarcity of student loans and subsidies for higher education, meanwhile, means that paying for college requires hefty savings. The inadequacy of the social safety net forces the Chinese to engage in “precautionary savings,” buffering themselves against disaster. A recent Brookings Institution study attributes much of the increase in household savings to the rising cost of health care, together with that of housing and education. Read The Frugal Republic here .

  • Surowiecki: Price Wars are 'the retail version of the doomsday machine'

    James Surowiecki 's Financial Page column in this week's New Yorker is a keen look at price wars as a high stakes game of chicken. He goes back to the airline industry's destructive price wars of the early 90s to shed light on the current Amazon-WalMart showdown . Surowiecki writes that there is only one way to win a price war: don't play. Instead, you can compete in other areas: customer service or quality. Or you can collude with your putative competitors: that’s why cartels like OPEC exist. Or—since overt collusion is usually illegal—you can employ subtler tactics (which economists call “signalling”), like making public statements about the importance of “stable pricing.” The idea is to let your competitors know that you’re not eager to slash prices—but that, if a price war does start, you’ll fight to the bitter end. One way to establish that peace-preserving threat of mutual assured destruction is to commit yourself beforehand, which helps explain why so many retailers promise to match any competitor’s advertised price. Consumers view these guarantees as conducive to lower prices. But in fact offering a price-matching guarantee should make it less likely that competitors will slash prices, since they know that any cuts they make will immediately be matched. It’s the retail version of the doomsday machine. Read Priced to Go here .

  • Joseph Stiglitz on the State of the Economy, and the Progress of Recovery

    Joseph Stiglitz says the federal government needs to spend more money (on infrastructure, schools, and elsewhere). And if he were president, he would work to restructure "large parts of the economy," and bring them up-to-date with the economics of the Twenty-First Century, rather than allowing them to keep following "Nineteenth Century economic principles." Those are among the ideas he shares with The New Yorker's James Surowiecki in this interview:

  • The Case for More Direct Action to Reduce Foreclosures

    James Surowiecki of The New Yorker 's The Financial Page , writes that the Obama Administration "has managed the effects of the housing crisis reasonably well." But, he goes on, it has not been able to resolve the crisis itself quite as well, "with nearly two million foreclosure filings already this year." One major stumbling block has been a general ineffectiveness of programs designed to help homeowners who are in danger of defaulting. He points to this paper from the Federal Reserve Bank of Boston , which shows that banks can often make more money by foreclosing than by renegotiating. Surowiecki: First, about thirty per cent of delinquent borrowers “self-cure”—after missing a payment or two, they get back on track without any help from the bank. Second, between thirty and forty-five per cent of people who do have their mortgages modified end up defaulting eventually anyway. In both cases, modification leaves the bank worse off. Reluctance to modify mortgages isn’t always a matter of obstinacy or ineptitude. It’s a matter of profit: banks are doing what makes sense for their bottom line. The answer then, according to Surowiecki, might be to stop trying to create incentives for lenders and borrowers to negotiate a way to avoid foreclosure, and to take a more aggressive route: If we really want to keep people in their homes, then, nudges and renegotiations probably aren’t going to do it. We need more direct action. One option, which the banking lobby killed earlier this year, would be to allow “cramdowns”: let bankruptcy judges reduce the principal on homeowners’ mortgages. Another, even more direct option is simply to give aid to homeowners: one proposal would have the government make low-interest loans, or even grants, to people who have suffered a steep decline in income and have negative equity in their homes. That would target the aid at the people who need it most: as another Boston Fed paper shows, defaults are most likely to happen not just because interest payments are set too high but because of income shocks (usually after the loss of a job) and plummeting house prices. Read Not Home Yet here .