Pro Commerce

Small Business Drives GDP

President Trump became an historically important person of monumental importance when he said in Poland that the most important act of any government is to reduce the amount of regulation. I explained, here, that commerce would thrive at many times the level we now see and prosperity would explode, if government regulation is reduced.

Now he has done it again. Trump as said that small business is the driving force of the economy (press conference 3/21/2020). He was referencing the statistic that businesses with 500 or less employees employ 50% of the work force.

I would like to add my modification to this subject. I have been a consultant for over 40 years and consulted more than 2,000 businesses. By consulting I mean that I have looked at their books and given advice on any of the issues relevant to the company. Any issues that I see as relevant. Marketing, finance, management, personnel and everything else. I've also taught and written about these subjects.

Firms with under 10 employees are 70% of the firms under 500 employees. In other words, they are the core of the firms that Trump is talking about and they earn about 10% of the revenue of all firms; they provide jobs for about 10% of the total workforce.

Those are the small businesses I am thinking about. Of these firms under 10 employees, 70% are 4 or less employees. About 25% are retail and restaurants, another 60% are professionals, health-care and education. Think lawyers, insurance sales, medical practitioners, home-care, graphic designers, CPA's and yoga teachers.

Most new small businesses don't last four years (50%). Those I worked with, most stayed in business for well over 15 years because I encouraged them to be open and focus on their community of supporters.

It is one thing to say that small business is the driving force of the economy. The reality is that small businesses of the kind I am talking about, provide nearly all the services that individuals and families use to live. Dentists, therapists, cleaners and auto mechanics. Businesses that operate on a large and efficient scale provide the bulk of the supplies and services. Think phone, TV, groceries, utilities, transportation and household materials.

To be correct, the Trump analysis needs to say small business that involve great variation and have close interaction with an innovative community are the source of economic growth.

Much of what I have seen in small business innovation came out of the urban hippie community.

Several examples:

• Hippies living in communes with weird food tastes (think 'organic') started in the mid 1960's going to suppliers to get bulk volumes of special orders. They got cheeses, grains and nuts. Out of this grew the first 'organic' groceries, retail and membership. There were countless varieties of these stores with open bins and raw produce. The first well run variations that were neat and well organized were Real Foods in San Francisco on Polk St and on 24^th St. Started by young people with capital from parents and drug businesses. All these stores developed close relations with farmers and producers.

•  They evolved with great variation along with bread suppliers. The new food demands created long distance truckers who created a distribution system that slowly, in the earlier 1970's expanded 'organic' groceries to most of America. By 1980, Whole Foods was in business in hippie Austin Texas.

• The new tastes in foods generated the new cuisine in restaurants. The first I remember was in the early 1970's at College Ave and Ashby, Sunshine Bakery in Berkeley. It was at the same time as the Cheeseboard Collective on Shattuck Ave. A block from the original Peet's and on the block that became the home of Chez Panisse. An important development was Greens Restaurant in San Francisco, the first high-end zen vegetarian restaurant that was full from opening day in the late 1970's.

• California has liquor laws that make a distinction between wines and liquors. Getting a wine license is much easier than a liquor license. Especially where food is served. A small hip bar near the corner of Geary and 2^nd Ave. in San Francisco was able to serve shochu a Japanese drink that is 90 proof. The bartender, in the early 1990's, started creating mixed drinks with shochu. The inspiration caught on and allowed restaurants to create powerful mixed drinks. A national craze caught on changing the nature of bars and restaurants.

• A non-hippie example: An adventurous perfume wholesaler in Tokyo, in the late 1980's, pointed out to me that the Japanese never used one scent popular in the U.S.. He thought Japanese might like it. I encouraged him to bottle and sell it. He started at the Keio department store on the West side of the Shinjuku station where it sold well. The line expand geometrically and was finally adapted by all the major Japanese perfume companies.

Of course small businesses sometimes hit on a very popular idea and grow to large businesses. The Body Shop in San Francisco was copied, exactly, by a British woman and became the global retail giant.

The greatest innovation in small business came in the United States after 1960. It was not seen anywhere else at the time although retailing was endemic to the overseas Chinese, the Japanese and the French. The difference is that America didn't have a family tradition of retail business where the children took over the existing business. Americans starting businesses felt free to innovate and experiment. Their customers were tolerant of innovation, unlike most other nationalities.

It is innovation in small business that is the driving power of American business. A small but significant modification of President Trump's observation.

San Francisco during shutdown

At noon today, on a Friday, I drove around the city to see what the shutdown means. I think that many of the other cars I saw were people doing what I was doing; looking around.

The city was just like the same city on a Saturday morning in summer time at 8am, with five exceptions.

• People out exercising, but fewer than an ordinary Saturday morning.

• Fewer parked cars in downtown and business neighborhoods than any day of the week or on holidays.

• A few dozen businesses boarded up; that is not a regular occasion in the city.

• About half or less as many 'homeless', what I call 'street people', as would be normal for 2020 in San Francisco. We have about 7,000 regularly, at most today there were 3,000 city wide. But they have still created messes where they are and nobody is cleaning it up. Businesses would usually clean up the messes.

• The most significant change in this shutdown period is the total absence of tourists. Total absence regardless of the time of day. The photo of Chinatown at noon shows no one. No one. There would be hundreds of visible tourists any day any week of the year. The same was true for Union Square and Fisherman's Wharf. No one.

These last two points are significant based on earlier blogs that I have written.

The current scene is a perfect vindication for an earlier blog.

I wrote a blog, for city planners, on why cities have so many empty retail store fronts. Thousands of empty retail store fronts in San Francisco in the past two decades during a period of vast population growth and massive wealth expansion.

The two professional planners I showed the blog to, found it irrelevant to their worlds. The nature of business is something they don't know about.

Tourism is vital to San Francisco and is directly connected to the City's functioning. 

What the current situation in San Francisco shows is that tourism, which is today non- existent, is a vast San Francisco enterprise. We got 25.2 million tourists in 2016 spending $16 billion a year.

Based on this blog from 2006, there were 12 million tourists per year at $7.76 billion in spending. The number of tourists is right, since the airport count is accurate. The number of tourists grew from 2006 to 2016. That is astounding; 12 million per year to 25.2 in ten years. More than double.

That means, today, 500,000 people in the Bay Area are supported by the growth in tourism to San Francisco in the past decade. As with the earlier blog estimate a further doubling of tourism in the next four years would mean another 500,000 new jobs in the San Francisco Bay Area. Doubling within four years would occur if the visible street people were gone.

That doubling of tourism; that would occur without the street people, means, EACH visible San Francisco street person destroys jobs that would support 166 potential new people in the Bay Area. Worth roughly $2.6 million dollars per year for the potential new workers and their families arriving in the Bay Area.

Good lord, visible street people, are very expensive for a tourist oriented city like San Francisco.

 

Miscellaneous anecdotes

There are two sides to the issue of interaction with history.

I am particularly aware of this as the father and originator of MasterCard which is the first credit card designed to be a global currency.

Am I the father of the first global currency or not? The 'not' argument is that what I invented would have developed in any case because it was obvious.

The first thing that needs to be understood is the real history of the development of the bank credit card and my role in it. I went from being the most knowledgeable person at the first bank credit card, Bankamericard, to organizing a new bank credit card among my four friends at the other major banks in San Francisco.

At the time, Bankamericard was being copied in up-state New York (where they were already using the trademark 'Interbankcard'), in Kentucky (where we later had to buy the name Mastercard), and in Chicago where the unit banks were trying to create a mutual bank card that failed in two months. (Banks were not allowed to have multiple branches in Illinois.)

My organizing for a new bankcard, with shared bank ownership, was uniquely my idea which is why I demanded that the next meeting of the four banks be with executive vice presidents at our common lawyer's office. I proposed that the new card be modeled on the bank check clearing house which was an established legal, mutual, American bank joint operation. This was obvious to me, but not to any other bankers in the country.

It was also obvious to Bank of America, when they saw it. Bank of America immediately copied the MasterCard organization upon seeing it. Bankamericard changed its name to accommodate this new structure, calling itself Visa.

Yes this was obvious. Would it have happened without my insight?

I merely point out that suitcases with wheels was an obvious technology as airplane travel became common after 1950, but suitcases with wheels didn't hit the market until 40 years later, patented by Bob Plath a Northwest Airlines pilot.

Being obvious doesn't make something real.

The other thing about 'obvious' and historic outcomes is that we don't know the direction of influence. Here are three historic anecdotes to consider.

In the early 1970s two friends of mine and I put on three concerts. One, the prime mover, Ed Stadum, was a lawyer who had taught me how to ride a motorcycle on mountain paths. His idea was to put on country and western concerts in the center of the great Hard Rock movement of San Francisco. We had the Carter Family in San Francisco at Ghirardelli Square. Then followed with Charlie Pride and Merle Haggard at the Oakland Coliseum.

As one of the producers I was backstage at the Carter Family production. One of the family, June, the energetic bouncy singer and tambourine player, came up to me and wanted to go have sex afterwards. To this day I regret saying 'no' because I had a girl friend with me in the audience at the time.

Now this is not meaningful except that June Carter had been married to Johnny Cash several years earlier. They became known as a famous and tight couple over the next several decades.

What would have happened if I had taken up with June? Who knows? What might have happened to me is an important part of the question, too.

Another anecdote is that I went to San Francisco State College in 1960 for a year because the graduate school of economics at U.C. Berkeley wouldn't admit me until I had a bachelor's degree. S.F. State only required that I spend one year there. Which I did.

In my second week on campus, the school student board of directors asked me to be president of the student body. Which I accepted. I had a big budget and used it to duplicate two things that were important to me in my earlier year at the U. of Chicago: the pool hall and the classic film program (called 'Old Doc').

The classic film program was weekly and very popular. When I left, the administration asked a faculty member to take it over. He turned the weekly program into the film department. Years later, with interest and money from Francis Ford Coppola, it became a well known film department.

This was not just a fluke of my behavior. About seven years later, as a banker, I was frustrated with the absence of classic films in movie theaters in San Francisco. So I organized a weekly film showing of classic films at an old unused Chinese theater in North Beach.(The Pagoda theater) I never actually went. I was too busy with other things. One night in the early 1970's I drove by the theater after midnight and saw on the marquee the film Betty Boop. I thought that was a little weird for my classic film series and I was also curious about the film.

I stopped and went in. No film. Just a raucous full house. There was an all male chorus line on stage, The Cockettes, with a large black singer named Sylvester. Did I start that? Did it shape my later life and long involvement with the gay community?

In 1974, I started the Briarpatch Network at an office I opened on Wednesdays at Pier 40. Soon after, word got out that hippies could come by and get business advice. One Wednesday someone came to my office and said that there was a guy outside, in front of the Pier entrance, who had a model, in his car, to show me.

The model took up the full trunk of his older Buick. You've seen it. It was the original of the future Galactic Starships of Star Wars I. It was a brand new model but it was painted to look old and used. The fellow wanted to know what to do with it. He wanted to make a business of it.

My advice was to keep driving South to Hollywood. Park on the street with the trunk open and let the world come to him.

Not too different from the advice I gave my next door neighbor Linda X. She made a living sizing dresses for a local San Francisco dress maker. It was her idea to make jackets out of new fabrics that were waterproof and light. She had ten models she had sewn. What should she do with them?

I told her that a fashion industry fair was going to be in San Francisco in a week. I'd pay for her to set up a rack and for her to put her ten jackets on it and deal with the world that came by.

She was offered the head design job by two companies: Climb Any Mountain and North Face. She took them both and created the modern sportswear core design of lightweight waterproof fabric. What would have happened if Linda never went to that fair?

Back to the original question. What did I start? Would it have happened otherwise?