World After Capital: Technological Deflation

NOTE: I have been posting excerpts from my book World After Capital. Today’s section is about technological deflation and how its interaction with UBI enhances economic freedom. 

If you are currently struggling to pay for your basic needs, the world will seem like an expensive place to you. Yet the data shows that a lot of things have become cheaper, and that this trend has been gathering steam for some time now. In the U.S., as the following chart shows, the prices for consumer durables have been falling since the mid 1990s. Not only can we see the decline in the prices for consumer durables; we can also see the rise in the cost of education and healthcare.

What has produced the decline in prices for consumer durables? Once again it is technological progress. We are getting better at making stuff and a big part of that is the ongoing automation of production and distribution. While this progress hurts you if you are losing your job or your salary is remaining stagnant, it helps you if you have money to buy things, and that money goes farther and farther over time. With Universal Basic Income, you will have the money, and over time, it will buy you more and more.

Thanks to the decline in prices for consumer durables, clothing has become easily affordable. Technology also has been driving down the cost of smartphones, which we will be essential to making education and healthcare much more affordable. The price decline in this area will only accelerate as we further increase automation and use technology such as additive manufacturing (also known as “3D Printing”) to manufacture products only when they are needed and close to where they are needed [67].

What about housing? Technology is definitely making it cheaper to put up a building. In early 2017, the first house printed using mobile 3D printing technology was built in Russia in just 24 hours! [69] Another factor making housing more affordable is the more effective sharing of existing housing assets through services such as Airbnb and Couchsurfing. Despite such progress, it still costs a fortune to live in certain places like Manhattan or San Francisco, where the demand for housing exceeds the available supply. Here UBI functions quite differently from other solutions that make housing more affordable, such as government subsidies. With UBI, people can live in parts of the country (or the world) where housing is much more affordable.

The city of Detroit is currently giving away houses as an alternative to tearing them down [70]. Or if you prefer a rural setting, you can buy or rent a home for as little as a couple hundred dollars per month [71]. Right now, many people can’t take advantage of these opportunities, since they can’t find a job in these locations and would be left with no income. By breaking the connection with a job, UBI provides geographic freedom. People would no longer be trapped in expensive locations just so they can meet their basic needs.

Already today, a large group of people is no longer constrained by the need for a job: Retirees. And sure enough, we observe that many retirees move away from expensive cities to places where real estate is much more affordable [72]. When considering the cost of shelter, it would be a mistake to analyze how much people need to live where they may be trapped today. Instead, we should look at the future cost in a world that has UBI. And that cost will be declining because of technology.

As for food, here too technology has massive gains in store for us. While some argue that GMOs hold the key to affordably feeding the planet, other near-term breakthroughs don’t carry some of the potential issues that GMOs pose. Indoor and vertical farming, for instance, allows for a precise delivery of nutrients and light to plants as well as huge increases in seeding and harvesting productivity. It also allows food to be grown much closer to its consumption, reducing the cost associated with transportation including spoilage. All this adds up to a dramatic reduction in the cost to feed a person.

Technology also promises to bring about a dramatic decline in the costs of education. At Union Square Ventures we became interested in education as an investment opportunity in 2009 when we held a one-day conference titled “Hacking Education.” Since then, the universe of online learning resources has grown rapidly, including many free or highly affordable ones, such as Duolingo for language learning (one of our portfolio companies). In addition to formal online courses such as edX or Khan Academy, millions of individual blog posts and even entire series of posts exist to explain a specific topic. And of course, YouTube is bursting with educational videos on subjects as broad as sailing and quantum computing.

Evidence exists that the exorbitant rises in tuition costs over the years in the U.S. are beginning to slow. When analyzing this data, we must remember that a huge amount of inertia exists in our educational system and job market. Many employers still believe they must hire from the best universities. This in turn drives up prices for higher education, with a ripple effect that extends all the way back to private nursery schools. It will be quite some time before most students will turn to free or extremely affordable online resources for all their learning needs. Still, the possibility now exists.

With healthcare, it’s a similar story. Healthcare spending in the United States per capita far exceeds that of other countries, having risen for many years much faster than the rate of inflation—but that hasn’t translated into better care. For instance, Cuba for years has had almost an identical life expectany to the U.S. despite spending less than a tenth on healthcare per capita [73].

Debates have been raging as to whether the Affordable Care Act or other legislative interventions will bring about lower healthcare costs or instead drive up insurance premiums further. Regardless of how this works out, progress with digital technology will push healthcare costs lower for a number of reasons.

First, technology makes prices on medical procedures more transparent, enabling more competitive pressures to exist that can push prices down. Second, to the extent that people better track their own health data through technologies associated with the “quantified self,” we will live healthier lives and require less care, especially over the long term (in the shorter term, folks who already enjoy above average health will most readily employ this technology). And third, technology will make possible faster and better diagnosis and treatment. If you want to feel inspired, just read some of the stories about how Crowdmed has helped people whose conditions went undiagnosed or misdiagnosed for many years. USV portfolio company Human Dx is also working on a system to help with diagnosis, and Figure 1 lets doctors exchange images and other observations. Flatiron Health is pulling together data on oncology patients to enable more targeted treatment. This says nothing of a whole group of companies that is bringing telemedicine into the app era, such as HealthTap, Doctor on Demand, Teladoc, and Nurx (another USV portfolio company). All promise to dramatically reduce the cost of delivering care.

One might object that so much of healthcare cost doesn’t result from doctors’ visits, but from pharmaceuticals. In fact, pharmaceuticals account for only about 10% of total spending [74]. Here too, we will likely see technology drive costs down. One successful pharma entrepreneur I spoke with described the potential for personalized treatment to dramatically improve the effectiveness for a wide range of conditions, including many cancers and even diseases such as ALS and Alzheimers. And on the horizon technologies such as CRISPR will give us unprecedented abilities to fix genetic defects [75] that today result in large ongoing expenses.

Now, you may find it confusing to hear me describe technological deflation as a good thing. Economists, after all, have painted deflation as an evil to be avoided at all cost. Economists are primarily concerned about growth as measured by GDP, which they argue makes us all better off. Their logic about deflation goes like this: If people anticipate that prices will drop thanks to deflation, they will be less likely to spend money today, which means that output will be lower than it could be. This in turn leads owners of capital to make fewer investments, which results in less innovation and lower employment. That in turn makes people spend even less, thus causing the economy to contract further in a vicious cycle. Economists point to Japan as a country that has been experiencing both deflation and contracting output. To avoid this scenario, they argue for policies designed to achieve some amount of inflation, including the Fed’s so-called quantitative easing (cheap money), which is intended to expand the supply of money.

In a world of technological deflation driven by digital technology this reasoning is flawed though. GDP is increasingly not a good measure of progress because it ignores positive and negative externalities. For instance, everything I’ve said about making education and healthcare dramatically cheaper through free resources would serve to lower GDP while clearly making people much better off. We can also identify a second flaw in economists’ reasoning: It assumes that technological progress is tied to growth in production. But it is possible to achieve technological progress even as economic activity, as measured by GDP, appears stagnant. Increases in economic, informational and psychological freedom allow us to accelerate the Knowledge Loop which is the foundation of all progress. A great example here is open source software, which has driven a lot of technological progress outside of the traditional economic model.

Once we break out of the job loop with the help of UBI, then in fact technological deflation becomes desirable. For individuals it means that they can afford more with the payments they are receiving and for society as a whole it means that UBI is affordable.