The Economist - Starting Successful New Companies in the Downturn

Starting Successful New Companies In Recessions

Posted by: Michael Mandel on May 03

First, my apologies for disappearing for a bit. I was travelling, and then got otherwise distracted.

People have hypothesized that it’s easier to start companies during downturns, because labor, rent, and other resources are cheaper (in economic jargon, the ‘opportunity costs’ are lower). And there have been plenty of news articles talking about out-of-work professionals going into business for themselves.

But here’s a slightly different question—is it easier to start a successful company during a downturn? Not so obvious, is it? It might be easier to start a company, but harder to start a successful one if the economy is weak.

Take a look at the table below, which was put together by Gary Beach, publisher emeritus of CIO magazine. The table, based on the Fortune 500, shows what percentage of top companies were incorporated during a recession (Gary was using Wikipedia’s list of U.S. recessions, which goes back further than the NBER’s list of U.S. recessions).

	Based on Fortune 500				percentage that were incorporated into business
						during a recession year
	Top 10 companies						70%
	Top 25 companies						64%
	Top 50 companes						52%
	Top 100 companies						43%
	Top 500 companies						36%
	percentage of years that the U.S. has been in recession						39%
	Data: Gary Beach

By Gary’s count, the U.S. has been in recession for 39% of its years. Looking at the entire Fortune 500, 36% of them were incorporated into business during recession years, which is no great shakes.

But as we move up to the most successful companies—the ones at the top of the list—the situation changes. Among the top 10 companies, according to Gary, a full 70% were started during recession years.

More Bad News for the Trade Bubble

I like what this article says : Either governance becomes more globalised or finance less globalised.

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More Bad News for the Trade Bubble

from BusinessWeek Online -- Economics Unbound by Michael Mandel, 16 Apr 09

I was readily favorite bloggers, Brad Setser, and he had this to say:

The FT – more than most – has recognized the challenges created by a global banking system and national regulation. A recent leader argued: “The current mismatch of globalised finance and national governance is unsustainable. Either governance becomes more globalised or finance less globalised.“

My guess is that finance will necessarily become a bit more national. The current crisis has shown than highly leveraged intermediaries require a government backstop, and for now there is no global taxpayer willing to bailout global banks that go bad.

Now, I'd argue with Brad about the FT--I've written about the importance of having a global central bank multiple times over the years. For example, back in 2006 I had a cover story "Can Anyone Steer This Economy?" where I wrote:

No matter which party you belong to, or which Big Idea or school of economic policy you subscribe to, one thing is clear: Globalization has overwhelmed Washington's ability to control the economy. Whether you're a Republican supply-side tax-cutter, a Wall Street deficit hawk of either party, or a Silicon Valley techie type, your preferred levers of economic policy just don't work as well as they once did.

and

a Big Big Idea--probably too big to even consider right now--would be the creation of global institutions for governing the world economy. History tells us that market economies are prone to financial crises, to which the only solution is a strong central bank. During the Asian financial crisis of the 1990s, for example, the Fed played that role.

But with the explosive growth of China and India, that sort of role for the Fed is no longer feasible, and no new institution has arisen to take its place. As former Treasury Secretary Robert E. Rubin, now a top official at Citigroup, recently said: "There's no policy mechanism for bringing together the countries that really matter in the global economy." The best solution would be some sort of global central bank with real powers--but that's not going to happen until there's a big enough financial crisis to truly scare people.

This was written in 2006. Is this crisis big enough to scare countries into a global central bank?

No. No. No. The U.S., utilizing its privileged position as the world currency, has one get out jail free card, which it is playing now. This crisis is more like to end the way that Brad says above--a retreat from the globalization of the financial system, which will mean a retreat from unbalanced trade (which requires massive cross border capital flows).

It's worth repeating that. You need to have a global financial system to support the cross-border capital flows that come along with unbalanced global trade. So if we don't have a global financial system...which we won't...we will inevitably end up with more balanced trade, by one way or another. Poof. Wave a big part of the trade bubble good bye.

Black swans no more?

Ten principles for a Black Swan-proof world

By Nassim Nicholas Taleb
Published: April 7 2009 20:02 Last updated: April 7 2009 20:02

1. What is fragile should break early while it is still small. Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks – and hence the most fragile – become the biggest.

2. No socialisation of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and risk-bearing. We have managed to combine the worst of capitalism and socialism. In France in the 1980s, the socialists took over the banks. In the US in the 2000s, the banks took over the government. This is surreal.

3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus. The economics establishment (universities, regulators, central bankers, government officials, various organisations staffed with economists) lost its legitimacy with the failure of the system. It is irresponsible and foolish to put our trust in the ability of such experts to get us out of this mess. Instead, find the smart people whose hands are clean.

4. Do not let someone making an "incentive" bonus manage a nuclear plant – or your financial risks. Odds are he would cut every corner on safety to show "profits" while claiming to be "conservative". Bonuses do not accommodate the hidden risks of blow-ups. It is the asymmetry of the bonus system that got us here. No incentives without disincentives: capitalism is about rewards and punishments, not just rewards.

5. Counter-balance complexity with simplicity. Complexity from globalisation and highly networked economic life needs to be countered by simplicity in financial products. The complex economy is already a form of leverage: the leverage of efficiency. Such systems survive thanks to slack and redundancy; adding debt produces wild and dangerous gyrations and leaves no room for error. Capitalism cannot avoid fads and bubbles: equity bubbles (as in 2000) have proved to be mild; debt bubbles are vicious.

6. Do not give children sticks of dynamite, even if they come with a warning . Complex derivatives need to be banned because nobody understands them and few are rational enough to know it. Citizens must be protected from themselves, from bankers selling them "hedging" products, and from gullible regulators who listen to economic theorists.

7. Only Ponzi schemes should depend on confidence. Governments should never need to "restore confidence". Cascading rumours are a product of complex systems. Governments cannot stop the rumours. Simply, we need to be in a position to shrug off rumours, be robust in the face of them.

8. Do not give an addict more drugs if he has withdrawal pains. Using leverage to cure the problems of too much leverage is not homeopathy, it is denial. The debt crisis is not a temporary problem, it is a structural one. We need rehab.

9. Citizens should not depend on financial assets or fallible "expert" advice for their retirement. Economic life should be definancialised. We should learn not to use markets as storehouses of value: they do not harbour the certainties that normal citizens require. Citizens should experience anxiety about their own businesses (which they control), not their investments (which they do not control).

10. Make an omelette with the broken eggs. Finally, this crisis cannot be fixed with makeshift repairs, no more than a boat with a rotten hull can be fixed with ad-hoc patches. We need to rebuild the hull with new (stronger) materials; we will have to remake the system before it does so itself. Let us move voluntarily into Capitalism 2.0 by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, shutting down the "Nobel" in economics, banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here, and teaching people to navigate a world with fewer certainties.

Then we will see an economic life closer to our biological environment: smaller companies, richer ecology, no leverage. A world in which entrepreneurs, not bankers, take the risks and companies are born and die every day without making the news.

In other words, a place more resistant to black swans.