Small business is not the answer. By Matthew Yglesias.

Small business is not the answer. By Matthew Yglesias. 

January 12, 2021. 

Slow Boring.com

Josh Hawley is wrong, and Walmart deserves a defense

These days everyone is mad at Josh Hawley for his role in fueling the insurrection at the Capitol that destabilized the government and got a bunch of people killed. But it’s also worth paying some attention to Hawley as a policy thinker because he’s been hailed in this regard in a variety of quarters. Most of what I’ve seen of his ideas is really bad. For example, he’s taken to posturing as a champion of small businesses against big chain stores — a bad left-wing idea from the 1990s that will perhaps find a new home among right-wing populists.

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Specifically, right before New Year’s, a social media manager at Walmart made fun of Josh Hawley for being a sore loser, which inevitably ended as it should — with the company apologizing for the inappropriate use of the company twitter account.

But Hawley, rather than graciously accept the apology, fired back by pretending to object to Walmart’s low pay and alleged habit of “driv[ing] mom and pop stores out of business.”

Now Hawley, to be clear, is just a phony. Asking employers to apologize for low wages isn’t a policy. An actual policy remedy for low wages is to raise the minimum wage, which Missouri voters did over Hawley’s objection. And when not too busy with his day job posting, Hawley is also a United States Senator with influence over federal law. In that capacity he has never acted to prevent the spread of chain stores or otherwise protect mom and pop businesses. So there’s no reason to believe that “populist” conservatives like Hawley pose any kind of actual threat to America’s big box store sector.

The problem, to me, is that chain-bashing is a kind of socialism of fools — a shiny object that taps into economic discontent while channeling it into a blind alley and away from useful remedies.

Anti-bigness isn’t antitrust policy

I want to draw a distinction here between anti-bigness and antitrust policy because there’s a set of influential figures who’ve been working to muddy the waters here and it’s confusing.

Antitrust is about competition. If Nike tried to buy Reebok there would be a serious antitrust question about monopolization of the sneaker market. The issue isn’t that the combined Nike/Reebok entity would be “too big” (there are lots of bigger companies than the two of them combined); it’s a specific concern that we want companies to compete with each other rather than merge and raise prices. In theory you could have an anti-competitive cartel between three very mid-sized companies, if they happened to jointly control a market in something obscure like a particular kind of gasket or what have you.

By contrast, although McDonald’s is a company that’s about as big as Nike in market cap, there’s really no conceivable McDonald’s merger that would raise major antitrust concerns. If McDonald’s merged with Starbucks, the combined entity would be much bigger than NikeReebok, but “restaurants” or even “fast food” would continue to be an extremely competitive market.

Walmart, in this sense, is both a very big company and a company that exists in a very competitive marketplace. Over the weekend, I went to Walmart in Ellsworth, ME and mostly bought groceries there. But there’s a Shaw’s and a Hannaford and a Circle K all in town selling groceries, and I do most of my Maine grocery shopping at either the Blue Hill Co-op or the Tradewinds Supermarket. I also got some hardware store type stuff there (there’s a Home Depot across the parking lot, plus independent building supply stores are everywhere in Maine) and a couple of pharmacy items (there’s Walgreenses everywhere, but also supermarkets sell a lot of this).

Obviously, Walmart also competes everywhere with the option of ordering stuff online, most notably from Amazon. But although I didn’t buy any on this particular trip, Walmart also sells a lot of apparel, which is a market where there’s a very deep set of online retailers. There’s no Target or Costco in Ellsworth, but in lots of local communities, you have those retail alternatives.

The main demand from anti-bigness advocates is actually for less competition, not more. They’re upset that chain stores drive mom & pop out of business. And now perhaps they’re concerned that Amazon is driving chain stores out of business. But that’s competition — mom & pop are asking for protection so they can maintain their geographically segmented local monopolies.

Beyond consumer prices

For a long time, antitrust policy in the United States looked at everything through a pretty narrow frame of consumer prices. Walmart’s growth had to be good for competition because it brought prices down. Then along came Amazon and it also brought prices down. Lately there’s been an interest in looking at a broader set of considerations. Cory Booker, for example, has been trying to get regulators to commit to looking at the whole playing field of labor market impacts.

This is correct as a policy matter — you ought to consider the full range of impacts.

But retail chains pay higher wages than independent stores. You can see in a kind of crude way that pay is correlated with firm size.

That could be for all kinds of reasons. Law firms have higher average wages than restaurants because they employ lots of lawyers. But a rigorous look from Brianna Cardiff-Hicks, Francine Lafontaine, and Kathryn Shaw shows that the chain premium isn’t just about selection effect — the exact same person earns more at a big box store.

They also show that one advantage of working at a chain is that the higher-ability workers tend to get promoted into management positions, whereas Mom & Pop employ themselves or other family members as managers. That upward mobility is good for you as a worker, but it’s also probably good for everyone. Shaw did a separate paper with Ed Lazear, and Christopher Stanton which quantifies the commonsense notion that workers are much more productive (and also less likely to quit) when they work for a good boss rather than a bad boss.

As a reader, I link these two findings. Big chains sort across a huge and diverse pool of retail workers to identify and promote effective front-line managers. This generates higher-quality management than when Mom & Pop put Cousin Jimmy in charge, which makes the stores more productive and raises pay.

Matt Bruenig points out that big employers also offer better benefits and, crucially, that Mom & Pop benefit from all kinds of regulatory exemptions.

You can make a case for or against this stuff, but on either side of the argument is an acknowledgment that Mom & Pop are relatively unproductive and will struggle to comply with regulatory mandates. If we feel sentimental about Mom & Pop we grant them an exemption. If we want to apply the rules across the board, we are essentially counting on a reallocation of labor—Mom & Pop will be driven out of business and replaced by a chain store that can afford to comply. For example, big minimum wage increases probably advantage larger and more productive employers over smaller ones. Amazon supports a $15/hour federal minimum wage because it already pays everyone at least $15/hour and thinks higher pay will hurt its rivals.

Successful social democracies have big companies

For idiosyncratic historical reasons, the face of “democratic socialism” in the United States became an old guy from Vermont. And Vermont has a very unusual political economy in that there are zero Fortune 500 companies headquartered there. Both Ben & Jerry’s and Bruegger’s Bagels are based in Burlington, but they are now subsidiaries of JAB Holding (from Luxembourg) and Unilever, respectively.

That’s a good vantage point from which to launch a politics based around anti-bigness. When Bernie Sanders fights for favors for local business interests, he’s going to bat for artisanal cheese makers seeking relief from FDA health measures.

But if you look to the oft-admired Nordic states, they do not operate on this basis. Denmark (Maersk), Finland (Nokia), Sweden (Volvo), and Norway (Equinor) are all headquarters of companies on the Fortune Global 500 list. Ikea, H&M, Lego, and Spotify don’t make the list but they’re all “big business” in an obvious way.

What makes these countries social democratic success stories is that they have strong labor unions with sectoral bargaining, and high taxes to finance a generous welfare state. And I think that if you want to understand why these countries are economic success stories and not the kind of basket cases that conservatives warn about, it’s precisely because they are home to big global companies that compete on international markets. Unions fight for good pay and working conditions, but they also want the companies to grow and thrive and keep employing people. The welfare state is meant to encourage high levels of education and labor force participation so that Sweden continues to be a good place to employ people despite the high taxes.

At the end of the day, part of what makes the Nordic Model a model is that the Nordic countries have unusually high GDP per capita for Europe. Vermont is well-below the US average in part because everyone’s working for Mom & Pop. Something like Massachusetts, where they have a progressive electorate and lots of big companies, is closer to Sweden. It’s hard to be an economic leader without innovation, and it’s hard to innovate without bigness.

Scale and innovation

While researching and reporting for One Billion Americans, I learned some random stuff about returns to scale that ended up not being relevant to the book. One of them, which I think is intuitive when you think about it, but doesn’t get much discussion, is that big entities have the incentive to explore small efficiencies. Google, for example, spends a ton of time and money on researching ways to marginally reduce the energy consumption of its data centers. That only makes sense because Google runs a ton of data centers.

UPS figured out that if they created routes for all their trucks traveling across the country that avoid left turns at all costs, it saves them a lot of gasoline.

This, again, probably helps explain the chain store productivity advantage. When you’re operating at the scale of a Target or McDonald’s, it’s worth your while to undertake expensive and time-consuming research projects about how to optimize this or that and wring out small improvements in performance.

Now what’s true is we should also worry somewhat about bigness in this regard and especially about mergers. When Mark Zuckerberg paid $1 billion for the no-revenue photo sharing app Instagram, it was widely seen as a sign of a dangerous bubble in tech stock valuations. At the time, I Slatepitched that Zuckerberg’s bid was actually smart because “the risk to Facebook is that it might be subject to some form of low-end disruption” and buying Instagram was a good way to forestall that. Today my conjecture about what was going on there is the conventional wisdom about that acquisition. There’s reason to believe that this kind of consideration is motivating a fair amount of recent tech M&A activity and as Giulio Federico,  Fiona Scott Morton & Carl Shapiro argue, it ought to be a focus of antitrust scrutiny:

The goal of antitrust policy is to protect and promote a vigorous competitive process. Effective rivalry spurs firms to introduce new and innovative products, as they seek to capture profitable sales from their competitors and to protect their existing sales from future challengers. In this fundamental way, competition promotes innovation. We apply this basic insight to the antitrust treatment of horizontal mergers and of exclusionary conduct by dominant firms. A merger between rivals internalizes business-stealing effects arising from their parallel innovation efforts and thus tends to depress innovation incentives. Merger-specific synergies, such as the internalization of involuntary spillovers or an increase in the productivity of R&D, may offset the adverse effect of a merger on innovation. We describe the possible effects of a merger on innovation by developing a taxonomy of cases, with reference to recent U.S. and E.U. examples. A dominant firm may engage in exclusionary conduct to eliminate the threat from disruptive firms. This suppresses innovation by foreclosing disruptive rivals and by reducing the pressure to innovative on the incumbent. We apply this broad principle to possible exclusionary strategies by dominant firms.

But do note the flipside here. The worry that dominant firms are snatching up potential competitors is not an argument that small companies are important for innovation, it’s an argument that startups are important. What distinguishes a small company from a startup is that a startup aspires to become enormous. So anti-scale policies are actually harmful to the most innovative and valuable form of small business, which is of course a minority of them.

Small business is great … for business owners

I’ve been a small business owner myself for the past few months, so I’ve gotta say it’s actually really nice to be your own boss and have total control of your own schedule. Small business, in that sense, is great. On a whole number of levels, digital technology has made it easier for small companies to operate, and for personal life satisfaction reasons, I think perhaps more people should consider it.

This is what Erik Hurst and Benjamin Wild Pugsley found when they researched the actual characteristics of small business owners, who turn out to be mostly running lifestyle businesses with no huge aspirations:

In this paper, we show that most small business owners are very different from the entrepreneurs that economic models and policy makers often have in mind. Using new data that samples early stage entrepreneurs just prior to business start up, we show that few small businesses intend to bring a new idea to market. Instead, most intend to provide an existing service to an existing market. Further, we find that most small businesses have little desire to grow big or to innovate in any observable way. We show that such behavior is consistent with the industry characteristics of the majority of small businesses, which are concentrated among skilled craftsmen, lawyers, real estate agents, doctors, small shopkeepers, and restaurateurs. Lastly, we show non pecuniary benefits (being one’s own boss, having flexibility of hours, etc.) play a first-order role in the business formation decision.

This is all good stuff (and, as I say, it mostly applies to me) but it suggests that in general, protecting Mom & Pop is a bad idea. Mom & Pop are not only running a low-productivity business (this I don’t think applies to me but you be the judge); they are doing so largely because it delivers non-pecuniary benefits to them personally. So while regulatory protections for Mom & Pop are bad for workers and bad for consumers (at least monetarily), they are good for Mom & Pop personally.

Thus, in effect, you’re talking about a targeted bailout of a select class of relatively rich, relatively privileged people.

Are small businesses just doomed in a world without regulatory protections? I don’t think so. A big survey sponsored by Zendesk says superior customer service is the main advantage people see in working with small businesses. That makes sense. Larger firms can improve performance in many areas, but you necessarily have much more separation between frontline customer service people and actual decision-makers. I like to think that I am more responsive to Slow Boring readers than Dean Baquet or Marty Baron are, but small businesses should need to actually fight it out on this terrain.

The perils of the local notables

When I was a kid, anti-chain sentiment was a big thing among basically snobby city-dwellers. Now we’ve got Starbucks and Target in every big city and even a whole category of “fast casual” chain restaurants that are actually more prevalent in traditional urban neighborhoods than in suburban strip malls.

So anti-chain sentiment might become more of a Hawley-type thing going forward.

If you think about a typical deep-red House district, it’s probably very rural/exurban and doesn’t contain the headquarters of any big businesses. The richest people who live in the district are likely to be doctors and dentists who own their own practices, and then people who own a car dealership or a construction company. These are mostly lines of work where the prevailing regulatory framework discourages consolidation, rationalization, and franchising, and where the business owners will be naturally sympathetic to the view that fragmented ownership, local control, and protection from competition are good. The owners of actual mom and pop stores and independent restaurants are going to be a bit more all over the map in terms of their income, but certainly richer than average.

These kind of local elites are often the bulwark of conservative politics, and recasting the idea of championing their interests as a form of “populism” fits well with the New Model GOP that is emerging from the Trump years.

But who is this politics actually for? It’s no more responsive to the real needs of the majority of people in rural or small town areas than the older style of Adbusters politics was to those of the majority of people in big cities. Rural Americans need help with the very limited levels of competition among health care and broadband internet providers. They need a more robust Unemployment Insurance system since they’re dealing with thinner local labor markets and potentially longer spells of joblessness. They need a strong welfare state like the rest of us. And they benefit from redistributive taxation, rather than from a style of politics that leverages sentimentality about family farm owners into huge tax cuts for billionaires’ heirs.

The anti-bigness stuff is at best a distraction, and at worst an actively harmful way of entrenching the privileges of the relatively privileged, while giving most people less money and worse options.