In part 3 of this series I argued that the changes in employment are the main driver behind the massive rise in inequality in the US. That inevitably brings out a number of responses for how to address inequality, none of which I believe will actually work. At the end of that post I already showed a graph that debunks the notion that this can be solved through better education (at least of the traditional variety). Similarly we now have calls for better labor organizing and higher minimum wages. Unions played an important role during industrialization so why not now? As even Robert Reich concedes, if there are too many people without a job it becomes very hard to organize those who have one. And even though I am sympathetic to an increased minimum wage as a short term measure, in the long run it will only hasten the demise of jobs as machines do not qualify (ditto for healthcare).
What all of these old solutions have in common is that they are premised on the continued growth of traditional jobs. If we want to make progress we first have to abandon that notion and have to think about a world in which there are fewer and fewer traditional jobs. Here then are three proposed solutions aimed at such a world:
1. Encourage and support the creation of new marketplaces that support micro-entrepreneurship, such as Etsy, Airbnb, Taskrabbit, Kitchensurfing, Sidecar, Skillshare and Shapeways to name just a few (including several USV investments).
2. Stimulate demand in areas of the economy that are mispriced or underpriced and hold significant employment potential for instance by taxing carbon and problematic food ingredients and providing prizes for space exploration and medical innovation.
3. Take measures aimed directly at inequality and its consequences, such as unbundling healthcare from employment and changing the tax code to affect some level of redistribution.
Each of these will eventually get its own detailed treatment in a separate blog post. But for now I want to provide some more justification for each and more importantly point out how they work together given the changes in employment.
Micro-entrepreneurship is exciting because it allows people to earn an income often with minimal need for capital. Many (but not all) of these marketplaces are aimed at providing unique products or experiences or otherwise ad hoc tasks that will not easily be substituted by machines any time soon. So from a regulatory perspective we should be encouraging the growth of these marketplaces and the creation of new ones. Instead, we are seeing a fair bit of hasty action, such as the cease and desist orders against Lyft and Sidecar, that could harm the development of these marketplaces.
The second part of the approach is likely to be more controversial. But I firmly believe that it is the central role of government to deal with externalities. And we have a bunch that are not properly addressed today that could create significant net new employment. When people protest a carbon tax by pointing to jobs that would go away they fail to point to the new jobs that would get created. In fact, a carbon tax would mostly hit industries that are heavily substituting machines for humans whereas it would benefit efforts such as reforestation that are labor intensive. The same goes for processed foods compared to local farming and farm-to-table. I strongly favor approaches such as taxes and prizes where the government just sets the framework and lets private activity unfold over having this activity be part of the government itself. In fact, this is a strong complement to the micro-entrepreneurship. For instance, taxing highly processed foods while simultaneously fostering farm-to-table marketplaces (e.g. Farmigo and Good Eggs) will push economic activity from capital intensive to labor intensive which is what we need. Similarly, posting prizes for medical innovation and space exploration will help foster collaboration in emerging research networks such as Research Gate.
Some of the likely criticism of both of these recommendations is that people cannot earn enough money via micro-entrepreneurship and that taxing carbon and processed foods will make staples more expensive thus compounding the inequality problem. Which is exactly why we need to attack inequality and its consequences more directly. In fact all indirect approaches which make labor more expensive are the exact opposite of what we need in a world which is substituting away from labor. Direct approaches aimed at making healthcare accessible and affordable (one of the major issues with inequality) and redistribution through the tax code don’t have that problem.
The goal for today’s post was to get these three pillars of what I think of as the “new new deal” out there. I will provide more meat on each of these in subsequent posts. But I want to address one other immediate question as to how we can afford all of this. Leaving aside for a moment that we cannot afford the alternative, which ultimately heads towards massive social unrest, I am proposing new revenue sources for government. I also believe that by shifting more activity into new and emerging marketplaces we can actually reduce some costly government programs. In fact, re-inventing how we tax and allocate budgets to avoid the silliness that is the Washington’s fiscal cliff could and should be a fourth component.
What I am most hoping for with this post is to move the debate past the old solutions and past the old divisions towards a different set of approaches that do not fall along existing party lines. All of the proposals above really are aimed at moving us away from the hierarchical organization of production which is dominated by a substitution of capital for labor towards a peer economy and society.
This is the third post in my mini series on employment. Part 1 illustrated how agriculture and manufacturing, the two historically large areas of employment, have collapsed over time. Part 2 drilled into the services sector which today accounts for the bulk of employment to show that many categories there have stopped to grow and are under pressure from the twin forces of automation and globalization. Why does all of this matter? My overriding argument is that we have not found a new source of jobs. The result is an unprecedented pressure on wages that is the primary driver of the astounding growth in inequality in the United States.
Much has been written recently about inequality but still the numbers are so extraordinary that it is worth calling some of them out. Maybe the most radical summary came in the form of a tweet by Senator Bernie Sanders in which he claimed that the Walton family owns more wealth than the bottom 30% of Americans. Subsequent fact checking showed that he was off with the real number being above 40%. For some more similar examples see this post. How is such an extreme situation possible? Of course on one end it is the exceptional fortunes at the top of the pyramid. But these wouldn’t be so much a problem in isolation.
The real issue, as fas as I am concerned, is just how tough things have gotten for a large and growing part of the population. A recent report by the Census Bureau showed a further decline in median household income (image taken from the full PDF report which is worth studying)
When looking at this chart it is critical to keep in mind that these are median household incomes. That means half of all households make *less* than that and in some cases by a lot, with almost 10 million households living in poverty.
To see how inequality is driven by what is happening in the labor market consider first the following chart from a terrific blog post titled “Is Decoupling Real?” that investigates the relationship between GDP and income growth:
The chart shows average household income tracking GDP growth but median and Q3 (middle quintile) income detaching around 1980 and slowing down substantially. The only way for the average to grow faster than the median (for any measure) is for the high end of the distribution to grow faster. Translation: incomes at the top have been rising while incomes at and below the media have been stagnant or declining.
But what is behind that decoupling? The next chart shows what has happened to labor’s share of national income. It is from a great post from two researchers at the Federal Reserve in Cleveland titled “Labor’s Declining Share of Income and Rising Inequality”
The two obvious questions are: why is labor’s share declining and what is growing in its stead? Let’s start with the second question as it is covered by the same set of statistics: income from capital has been rising rapidly. The answer to the first question are the forces I have described in part 1 and part 2 of this series: globalization and automation. Both of these will make capital more important than labor. And that is exactly what the statistics show!
The rising importance of capital is a double whammy for inequality. First, wealth is already highly unevenly distributed which means that the returns to capital are highly concentrated among a small part of the population. Second, the shift is responsible for the decoupling between average and media wages shown above. For those with jobs that are complementary with capital (eg, investors, CEOs) incomes have been rising with the increased importance of capital. The latter effect is made even more pronounced as automation is driving increasing returns to scale with winner-take-all (or nearly all) effects in many markets.
And to tie all of this back to the basic premise of my series of posts: traditional remedies simply won’t do. We are experiencing a fundamental restructuring of economic activity on par with the shift from agrarian to industrial society. Pressure on labor will only rise from here on out. We need to think beyond fiscal stimulus and even beyond a simplistic and unreflected mantra of “more education” as the following chart shows (taken from a post title “It’s the distribution, stupid”):
The red and blue lines indicate that a growing percentage of the population has at least completed high school (blue) and even more gains have been achieved in the percentage of the population with a college degree (red). Over that time period productivity (yellow, measured here in change in GDP per capita) has also grown substantially due to automation. All the while median wages (green) have stagnated as we have already seen.
What is the answer then? I don’t know either but in the next post I will take some stabs in what I think is the right direction. It should come as no surprise to regular readers of this blog that much of it will involve the peer progressive agenda.
Last weekend I wrote a post about what is happening with employment. The gist was that employment in the US in agriculture and manufacturing has collapsed as a percentage of total employment and declined even in absolute terms mostly as a result of increased productivity and globalization. All employment growth has been concentrated in services. Today I want to take a deeper dive on services, but before doing so I should point out that I am optimistic about technology in the long run. My point is not at all that we can’t get to a better place eventually — it is that we are being naive about the degree of the dislocation that’s ahead of us and what it will take to get to a better place.
In the previous post my primary goal was to show that entire sectors of the economy can decline in employment. There I treated all of services as one big bucket labeled “other.” Now here is a breakdown of service employment over the last 10 years based on data from the Bureau of Labor Statistics:
The chart shows that the total number of employees has been flat or has even declined somewhat in most categories other than Education & Health, Professional & Business Services and Leisure & Hospitality. Again, keep in mind that over the same time period the US population grew by almost 10%!
One way to gauge how robust the increased demand for labor is in these three areas is to look at what has happened to wages in these three sub sectors (data also from the BLS):
Leisure and hospitality has been relatively flat and isn’t much above minimum wage to begin with. Wage growth in professional and business services started to level of in 2009 and even in education and health services which had the strongest employment growth wages started to level off last year. The pressure on wages even in these areas of growing employment comes from the high supply of labor (as people cannot find jobs elsewhere) but also because even here technology is becoming an even strong substitute for labor.
So what exactly are the mechanics by which increased productivity operates in these services sectors? Here are five different scenarios
Elimination of jobs: these are not being done by a machine, instead the task has disappeared entirely, such as filing papers (when there are no more papers to be filed).
- Complete replacement: examples here are wide ranging from the bank teller being replaced by an ATM machine to the dental technician replaced by a 3D printer.
- Increased human effectiveness: a car mechanic using computer diagnostics can determine in minutes what’s wrong with a car or an executive assistant with email and and Internet can schedule meetings faster.
- Distribution of work to the consumer: for instance with online travel booking the task of picking a flight is shifted to individual end users, reducing the number of travel agents that are required.
- Shifting overseas: many information based jobs from low end data validation to high end engineering can now be carried out anywhere in the world.
- Insufficient seller rents: this last one is a bit tricky but the idea here is that especially with digitally delivered goods the price is dropping to zero so that fewer people can earn a living (at least for now, more on how that might change in the future in a subsequent post) — eg regional newspapers would each employ a sports writer but on the Internet one sports writer can reach the entire nation.
For many of these mechanisms we are just at the beginning of what technology can do. For instance, in legal services computer programs are rapidly replacing humans during the discovery phase in scanning and summarizing documents. We now have driverless cars and in some big open pit mines the trucks are self driving already. Each of these are currently available only at the high end but as the cost of the technology declines will become more pervasive. Education is another example where we have just started a potentially massive transformation. Previously a single teacher could at best teach a few hundred students in a large lecture course. Now someone like Sal Khan has millions of students and large MOOCs have hundreds of thousands of students.
The bottom line here is that it would be foolish to count on continued growth in the services economy to fill the widening employment gap. Already today many of the components of services have either stopped to grow or even started to shrink and the remaining areas of growth are under pressure. And we are only in the early stages of what technology can do in these areas.
In the next post in this little mini series I will talk about how these changes are the leading cause of the massive growth in income and wealth inequality in the United States. I will also come back to the point that we have been using government and consumer debt as a way to try to counteract these changes. That is unsustainable and will set the stage for a subsequent post about the emerging “peer economy” (think Etsy, Uber, airbnb and more) together with thoughts on a more radical view of the future.
One of the truly depressing things about listening to the presidential debates was that both sides seem to be disregarding a fundamental factor in the economy: the displacement of humans by “machines” (in quotes because these days the machines in question are computers). Because politicians are largely ignoring the importance of this trend, the proposed policy solutions all belong to the same tired arsenal of either supply side or demand side economics. It’s a bit as if you were on the Titanic *after* hitting the iceberg and arguing about turning to port versus starboard instead of getting everybody into the life boats.
For context, here is an interesting little chart that I pulled together mostly from US Census data. It shows the composition of employment over the last 200 years.
As you can see the percentage of people employed in the US in agriculture collapsed from a high of over 80% of all people employed in 1810 to below 3% in 2010. Manufacturing (tightly defined) peaked in the 1950s and 1960s, accounting for about 1 in 4 jobs, but has been declining since 1970 and by 2010 was down to only 10% of employment. The rest of employment has gradually shifted into “other” which includes services, transportation, government and more and now accounts for over 85% of all employment in the US.
Now of course over the same time period total employment has grown in absolute numbers and as the following chart shows even as a percentage of the population (again mostly based on Census data)
This growth over time from about one third to almost one half of the population being employed has been driven in no small part by the increased participation of women in the workforce. As far as total job creation goes this is an even bigger accomplishment given the tremendous population growth over this time period. In 1810 the US had barely over 7 million people in it and in 2010 there were over 300 million Americans for a growth of more than 40x!
Against this backdrop of a growing population and growing workforce participation, the collapse of agriculture and manufacturing is even more dramatic. Both of these sectors are in fact down in *absolute* numbers of people employed off their highs. Agriculture peaked in the early 20th century at around 12 million people and is now down to 3 million. Manufacturing peaked in the 1980s at around 22 million and is now down to below 15 million employees.
What is behind the shrinking of agriculture and manufacturing? Innovation and globalization. Innovation has allowed us to be vastly more productive in agriculture and manufacturing (meaning fewer people can achieve the same output) and globalization has allowed us to import food and products from other parts of the world. Innovation is at work everywhere though and so if you assembled similar charts for say China or India you would find the percentage of the population working in agriculture there declining as well. I am not sure whether manufacturing is already declining there, but the announcement that Foxconn is planning to deploy 1 million robots suggests the eventually inevitable direction.
Now the obvious argument here is that surely there must be parts of the “other” category for which employment is growing. That’s something I will dig into more in a second post. But at a high level there is no reason why the growing parts of “other” *have* to add employees faster than the contracting parts are shedding them. Put differently: we are already using fewer people to feed ourselves and fewer people to make stuff so it is entirely conceivable that we will need fewer people for everything else! Essentially all it takes for employment to drop is for productivity growth in “other” to outstrip the growth in demand.
To be continued!
In my Tech Tuesday posts I have covered main memory and storage (by the way, coming up tomorrow: HTTP). If you have read those or otherwise follow hardware, then you will find this short piece from BBC Technology News on a new technology known as ReRAM quite interesting. Essentially, ReRAM holds the promise of providing non-volatile storage at the speed of memory.
That would provide a major breakthrough for database applications. Not only is ReRAM even faster than the Flash memory used in the SSDs (which are currently replacing traditional disk drives for high end database applications) but it obviates the need for going to disk in the first place. That means the whole intermediate software layer that controls disk access falls away as well.
What is amazing is not just that this is possible at all, but also the history of this technology. ReRAM is based on something called a Memristor which was invented as a theoretical possibility in 1971 (much after the Transistor which was invented in 1947). Then it took until 2008 to build a Memristor. From that breakthrough by HP it seems that commercial products may be available as early as next year!
The patent wars have really been heating up. For some time now Apple has been going around trying to get various Android devices off the market based on patent claims. Now the shoe is on the other foot as a court in Germany has found in favor of Motorola Mobility against Apple based on a patent. Of course Motorola Mobility is in the process of being acquired by Google so that its trove of patents can be used in the fight against Apple and others. Apple is reaping what it has sowed. And in the last few days it has become clear that Apple has been punching both above and below the belt. Not only has Apple has sold or licensed several of its patents to a newly established troll but Apple has also been using patents to undermine open standards.
In the end all this patent litigation will accomplish absolutely nothing for the companies in question. Yes, maybe it will delay a competitor here or there for a short period of time. But in the end there are too many patents around already so it all becomes the equivalent of a slow moving trench war with all sides digging in. In the process countless lawyers will become incredibly rich and innovation will suffer as collateral damage. We are experiencing the tragedy of the anti-commons: instead of ideas combining freely to move us forward as a species we are fighting in court over their ownership. Here too Apple has played a rather sad role by patenting a variety of things that had clearly been out there already thus effectively removing ideas from the commons where they can be combined freely with other ideas!
Given all that it is especially galling to see the Supreme court on its way to extending the reach of patents into yet another realm: medical diagnosis. Apparently it could soon be a patent violation for a doctor to adjust the dosage of a drug based on measuring the level of a chemical in the patient’s blood. Leaving aside that this seems like a fairly obvious idea, it is frightening to consider the consequences of patents extending beyond pharmaceuticals to simply applying medical knowledge.
Tomorrow I will be attending an “Innovation Summit” hosted by the Darden School of Business. I just finished reading Peter Thiel’s “The End of the Future” in the National Review. Thiel’s argument is that underlying our economic difficulties is a more profound problem: a dramatic slow-down in innovation. His examples include the fact that we now find ourselves with travel slowing down not speeding up (Concord decommissioned and no successor in sight) and the apparent lack of progress on treating cancer (Thiel’s piece was published just before Steve Jobs’ death which provided a poignant reminder of just that).
Thiel’s diagnosis appears to be that we have lost the will to progress (there is a distinctly Nietzschean bent to Thiel’s writing) when the “hippies” took over in the 1960s. I don’t share the deep vein of pessimism that runs through all of this. Without a doubt our current institutions are failing us by focusing on protecting the status quo and being mired in incrementalism. That’s true for government, universities, large corporations. But we are beginning to see new networks emerge on the edge that are the likely sources of future innovation.
As just one example, there is a lively and growing culture of makers. Interestingly, many makers are both technologically sophisticated and environmentally conscious. They are possibly the vanguard in a redirection of the thrust of innovation from purely “faster” as a metric to “sustainable.” This is not a rejection of technology (as we did see in the 60s) but rather an appropriation of technology for a different set of goals. If that attitude becomes more widespread — as I believe it will — that will become the new social consensus. Once it does we will unlock an amazing new innovation arc.
If you want a terrific historical perspective on this , please go and look at Carlota Perez’s presentation on “The direction of innovation after the financial collapse” (PDF). Perez lays out the previous cycles of “installation” versus “deployment” for various technologies including canals and railroads. Her perspective suggests that the financial crisis we are finding ourselves in now, may wind up being the catalyst for a transition (which would be much preferable over the previous big transition, which was World War II). Perez’s optimistic view provides the perfect antidote to Thiel’s.
Much as I admire the well rounded user experience on an iPhone (leaving notifications aside), there are some kinds of innovation that simply aren’t possible on the iPhone today, as it doesn’t let developers hook in deeply enough. One example is the games discovery app recently released by our portfolio company Heyzap. Once you install the Heyzap app, it notices when you launch game apps and gives you an opportunity to “check in.” Checking in broadcasts your gameplay to the Heyzap network and optionally lets you post to Twitter and Facebook as well.
If you are on Android, you should definitely try out the Heyzap app even if you don’t play games on your phone (yet). You may see friends playing games that wind up intriguing you. For instance, by following Jude, one of Heyzap’s co-founders, I discovered the XConstruction game, which challenges you to build bridges using metal girders. It’s very geeky which is probably why it appeals to me. What’s great about the openness of the Android platform is that Heyzap was able to deliver the check in popup as a user choice. Heyzap also offers an SDK that game developers can integrate, but if people like the check in experience, they don’t need to wait for developer adoption.
You can read more about about Heyzap’s release of the app on their blog. Now please excuse me while I go off to get lunch and build the level 8 bridge on XConstruction while waiting in line.
My blog post for today is on “Innovation in Education” and you can find it over at the Union Square Ventures blog. Having three kids in school this is a topic that I care about personally not just from an investment perspective. Also think that education is an area in which the disconnect between what the Internet can help us accomplish and how (most) policy makers think about it could hardly be larger.
I am glad to see the net neutrality debate raging. As Union Square Ventures and on our personal blogs (AVC, Continuations) we have long been proponents of net neutrality (the USV link is from 2006!). Our own bias here is clear: we are pro-startup and pro-innovation. Both are of course essential to the venture capital business, but we believe they are also the lifeblood of the economy. Surprisingly, a lot of people who argue against net neutrality don’t seem to make the connection to innovation and startups at all. That is even more surprising when the criticism comes from someone like Henry Blodget who is clearly the beneficiary of the level playing field provided by net neutrality.
As for the Google-Verizon proposal, my partner Brad has done a terrific job pointing out two of the key problems. I want to go a step further though. Much as I am glad that Google has been a proponent of some aspects of net neutrality, Google is no longer a startup itself! Google’s ability to cross-subsidize new markets from its amazing core business poses a potential threat to innovation that I have written about before. This access to nearly limitless funds is especially important to keep in mind when looking at net neutrality.
Because there are a lot of subtleties once one drills down, it is easy to lose sight of the most basic principle that net neutrality is trying to achieve: the ability for innovative startups to deliver their content and services on a level playing field with incumbents. It is easy to forget this because we have actually de facto had net neutrality, which is what has allowed the creation and rise of services and companies such as Google in the first place. It is hard to argue that the Internet has not unleashed a torrent of innovation that has hugely benefited endusers (at the cost of disrupting some existing businesses). Net neutrality is all about codifying this existing state of the Internet and preventing a distorted playing field that favors incumbents.
Imagine for a moment an Internet in which Google can pay Verizon and others to deliver Youtube videos faster than video content from other sites, including that of your favorite startup. Given Youtube’s existing scale and Google’s ability to cross subsidize, this would forever cement Youtube as the source of Internet video. I fail to see how this could be in anybody’s interest other than Youtube’s and Verizon’s (Business Insider included). That is exactly what the current Google-Verizon proposal would allow for the wireless Internet. Now ask yourself what will be more important in the near future — wireline or wireless delivery of the Internet?
The argument that competition among wireless carriers will take care of this seems disingenuous at best when we have all of four carriers left of which two control the bulk of the market. This is an oligopoly in which (even without any talk among carriers), the natural game theoretic equilibrium is one where none of the carriers provides net neutrality and all accept payments from incumbents.
So what could actual net neutrality look like when codified? It could be as simple as saying: carriers can charge people only for their bandwidth (up and down) and cannot accept other payments. In this scheme endusers still pay for bandwidth (as they do today) and bandwidth caps are possible. Youtube still pays for its bandwidth. But Youtube cannot pay for faster delivery, cannot pay for being excluded from consumers’ bandwidth caps etc. As it turns out — and this is again critical to emphasize — that is the status quo! A status quo that has brought us tremendous innovation and sufficient investment by carriers in bandwidth despite their griping.
Finally, to all those who would say that the government doesn’t regulate what people can pay and cannot pay for in other areas, that is of course wrong. You can pay a taxi for taking you from A to B, but paying the taxi to go above the speed limit is not legal. You can pay to get a liver transplant, but you can’t pay to get one faster than others. We full well realize that safety and ethical concerns matter. So does innovation. Net neutrality is all about protecting innovation while still providing the funds for carriers to invest in network growth.