The Souljourner said:
Small characters do the *exact* same damage they did before
No, they don't. A halfling that wanted to finesse a weapon could use a dagger to do 1d4/19-20, range increment 10 ft. That's handy, 'cause he gets a +1 racial bonus to attacks when he throws the weapon; using a dagger gives him flexibility. Combine that with favored class: rogue, and you can deal some damage.
Now, a halfling that wants to finesse a weapon that he can also throw must use a Small dagger that does 1d3/19-20, range increment 10 ft. If he wants that dangerous 1d4 damage, he has to use a non-throwable (barring magical enhancement) Small shortsword.
Also, a halfling rogue used to be able to do 1d6 with his shortbow; now he's got to use a 1d4 Small shortbow.
Similarly, a 3.0 halfling or gnome could plink away at 1d8 damage with a light crossbow, or 1d4 with a sling; now, they're down to 1d6 and 1d3, respectively (poor gnome druids).
Heck, those gnome druids -- they could wield a 1d6/18-20 scimitar two-handed before. Now? Well, they can wield a 1d4/18-20 Small scimitar in one hand, but there is no curvy bladed 1d6/18-20 two-handed option for them at all, unless they multiclass or burn a feat.
Perhaps more importantly, the halfling and gnome have to hope they fight a lot of goblins and kobolds with magic items; it's not likely that your average orc, hobgoblin, etc. is going to be carrying around Small magic weapons. Of course, given that kobolds and goblins are classically not as dangerous as larger foes, they tend to have less extensive collections of lootable items. Thus, generally speaking, the small PCs aren't going to see many magic weapons or armor* as loot, while their more Medium-sized colleagues will continue to collect magic daggers, shortswords, and other items previously usable by all characters, but now unusable by the short adventurers.
*(or other items? Does it say that magic cloaks, boots, hats, rings, wands, etc., resize or are otherwise usable by a range of different-sized characters?)