A few data points, brought together in an Financial Times article this last weekend (see At a record high, the US market is still shrinking), suggests our political and economic leaders are looking in the wrong direction for the real challenges undermining our economy. Let me summarize them for you:
- The US stock market is at an all-time high
- The US stock market is experiencing its longest bull run
- The tally of listed companies in the US stock market has halved since 1996, from 8,090 to 4,336 last year
- M&A, funded more by cheap money (via Quantitate Easing) rather than underplaying competitive weakness, has been rampant
- Industry concentration is widely up leading to mega-firms more able to snap up smaller firms sooner in their life cycle
- IPOs are happening at half their average rate compared to 1980 and 1990
- The number of start-ups overall continues to be running at near historic lows
In essence, creative destruction, that natural process whereby death is the catalyst or preparatory step leading to new birth, has been put in hold and worse, twisted into an abomination. What is the cause? How did we get to a place where natural, independent, entrepreneurial spirit has near extinguished? A range of disconnected public policies and actions have conflated to nudge us to this place.
- Increased regulation, followed up by yet more regulation, ever driven by powerful lobbies and ever more splintered interest groups
- Reduced public funding of primary R&D
- Poor alignment of vocational and educational services
- Social policies that promoted the false idea that everyone should go to university (everyone should have the opportunity) and the resulting demise of things like professional apprenticeships
More insidiously is that money, more specifically the capital markets, are now so distorted that the behavior that acted as the foundations of creative destruction are not holding it back. With the volume of cheap money that flooded the market in recent years, so much money has been chasing ever more riskier bets. The M&A mentioned above was one result. Another is the funding models for how capital investment is prioritized. This has led to a huge growth in private equity and so many more private companies. Thus the cycle of creative destruction has been undermined from several fronts over a long period of time.
The current situation is that the economy is being managed by fewer and fewer public giants and larger and larger private investment and sovereign investment funds. What is left to the retail market, once thought of as a natural part of the cycle, is being shrunk and may soon count for little. The economic cycle firms used to follow, that operated naturally and yielded up profits and growth, is now a managed system by politicians and a small number of the very rich.
What do we do? The FT article suggests yet more regulation to try to rebalance some of the results. No one of note is willing to suggest we roll back the policies and actions that caused the problems in the first place. Shame.