ARE WE FINALLY LEARNING THAT BIG IS BAD…?
For most of my life, the primary economic mantra for growth and the creation of wealth has been economies of scale. Company A buys Company B and lays off redundant employees and churns the no-longer-paid wages, salaries and benefits into profits.
That sounds great if you’re a consumer (you initially get marginally lower prices and the same quality), an investor (you get higher profits which equate to higher stock prices and possibly dividends) or one of the-people involved in the big deal (you get bonuses, higher salaries if you’re the buyer or a buy-out to recoup your investment if you’re the seller).
But one of the economic realities we’re learning in the 21st centuries that big can only get so big before die-off occurs (it’s an environmental science concept for populations so large that the ecosystem can no longer sustain growth).
And so big companies have to resort to cheating, lies and straight out stealing to create their illusion that they’re actually growing. We’ve gotten a face full of this in the past six months in the financial sector, but we’ve seen it for decades in in the automotive (think Pinto), tobacco (think eight out of ten doctors recommend Camels), meat packing (think The Meatrix) and retail (think, you knew this one had to be here, Save Money, Live Better) industries, just to name a few.
Earlier this week I posted about the stupidity of H.B. 875, the Food Safety Modernization Act of 2009 which is stupid not because of what it wants to do, but rather because it solves nothing as regards the way our system of putting food in our bodies via Big Food is killing us.
For years one of the slogans from Libertarians on regulation has been that if they (the government) regulate X (select your particular jones) then eventually they’ll create the food police and take away our steaks.
And I’m sure some will point to The Perils of Ignoring History: Big Tobacco Played Dirty and Millions Died. How Similar Is Big Food? by Kelly Brownell and Kenneth Warner and claim we told you so.
And maybe they’ll be right.
It is possible to read Brownell and Warner’s paper and conclude that government needs to step in and regulate the beast. That would be wrong.
You don’t save the life of a morbidly obese person by taking away their processed cheese food in an aerosol can while ignoring all other forms of caloric intake and their sedimentary lifestyle. No. You address the root physical and mental causes of their illness, get them up and moving and drastically reduce how much they eat while at the same time ensuring that what they do eat is healthy.
It’s time that government stopped taking away the Cheez Whiz and take steps to get the patient — the bloat-making food industry (now there’s two words that should never be used together) — back in shape the way Republican President Theodore Roosevelt did for the gross monopolies of a century ago.
How do you do this? How do you place a limit on growth? How do you decided how big is too big?
I’m not sure. But I am sure that we need to have the conversation on a national level.
One of the problems with getting too large is that it makes a high rate of growth harder. A 10% growth rate for a million dollar company means they only have to sell $100K more, for a billion dollar company the have to sell $100 million more.
That’s why companies over a certain size tend to “grow” by acquisition. We see that Walmart is trying to take this path as well, but the markets they are moving into just aren’t as large as the US so each new acquisition doesn’t give them the growth that Wall Street demands.
Studies have shown that most large-scale mergers have turned out to be detrimental to the firms involved. Usually the survivor firm does the deal by borrowing money and then uses the capital reserves of the acquired firm to pay off the loans.
This leaves the newly acquired firm with huge debt and poor prospects. Look at Time-Warner-AOL, or Chrysler-Daimler or Viacom-CBS as examples.
It’s not so much fraud as it is hiding the debit side of the balance sheet through various accounting tricks like “goodwill”.
A big firm like GE treats subsidiaries like chess pieces taking them and selling them off whenever they feel like it. Subsidiaries like this can’t do any long-range planning, have no governance independence and are left with debt. NBC is limping and Genworth Financial is a disaster, to cite only two.
Yes, bigger is not better. Obama has made one appointment so far to deal with anti-trust. Better than Bush, but not by much.
Shalom Robert,
Until the United States, and the rest of the industrial world, comes to grips with the concept that financial growth is just so much smoke and mirrors we will continue to be fooled.
We are indeed a foolish people.
B’shalom,
Jeff
the differences between size and rate-of-growth are interesting. it is how all those dot.coms and IT companies inflated their stock (growth) in the 90s.
Earl Butz, former secretary of agriculture, introduced the “get big or get out” paradigm to agriculture in the 1970s. I don’t think America was hurting for food, but fast food and processed food needed to grow. the commodities traders had more leeway if there were fewer producers they had to ultimately buy from.
the initial and final justification for less restrictive industrial regulation was that it kept employment up. Our problems are not producing enough for everybody, but how to come up with enough work to keep them busy enough to develop productive habits and skills.
I lived in an apartment complex in columbus for about a year. it is difficult to go anywhere in columbus without a car. the kids there were almost all very fat. I had kind of a relic childhood. I lived in Cleveland and Lakewood for about half of it. even at the age of five me and the neighborhood kids were free to run around the blocks and to the parks on our own. My parents would even send me to the corner store for milk, cigarettes, and the newspaper on sunday. that kind of freedom and activeness is obsolete these days.
Shalom Ryan,
I’m reminded of a scene I witnesses last year.
I was down in Euclid and I saw an obese parent waddling behind an obese child driving one of those battery-powered four-wheelers down the sidewalk.
Good for the parent, horrible for the child.
B’shalom,
Jeff