Does the Internet Hamper Economic Growth?

The sharing economy--Uber, Airbnb, Zipcar, bike sharing and so on--makes more efficient use of resources.  Cars that might sit around are instead used more often.  Living space that might remain empty provides accommodation.  People don't have to buy a bike any more.  They can just rent the short term use of one. 

But does all this sharing hinder economic growth?  If people use cars, bikes, homes and other things more efficiently, fewer of these items need to be produced and sold.  Manufacturers may see decreased demand.  Jobs may be lost.  Growth could slacken.  The country's tax base might stagnate, just at a time when increased government funding is sought for everything from national defense and security to infrastructure repair and expansion to Social Security and Medicare.

Gig-based employment could have similar implications.  People who work short term gigs tend to earn less than full-time employees, reducing their ability to contribute to the consumer demand that comprises 70% of America's economy.  Employers have little or no incentive to improve the abilities and productivity of gig employees, so improvements in worker productivity could be hampered.  Without productivity growth, we won't have long term gains in employee compensation or national wealth.  Gig employees may be unable to save significantly for retirement, which would place more of the burden of their golden years on public funding.  These increased tax burdens could further impair growth.  As gig-based employment grows, so would these problems. 

The Internet greatly enhances globalization.  Customer support centers in Third World countries can inexpensively serve the needs of corporations in the industrialized world.  All manner of services, from manufacturing to radiology to routine legal work, can be cheaply coordinated and/or delivered from distant, low wage places over the Internet.  Workers in America who provided those services are out of luck.

The Internet provides the communications process that allows the sharing economy, gig-based employment, and globalization of services, to operate.  But greater micro-economic efficiencies such as these may have negative macro-economic implications.  One of the great mysteries of modern economics is why the economy is growing so slowly.  Increased efficiency creates losers as well as winners.  Those losses will have aggregate impact eventually, when they grow large enough. 

The Internet is an astonishingly effective conveyor of information.  But, as regards the sharing economy, gig-based employment, and globalization, owners of assets, holders of capital, and employers benefit more than employees--except employees willing to work for lower wages  The Internet may have enhanced total global economic growth.  But the distribution of that increased growth may well favor low wage countries, leaving industrialized nations with dimmer futures.   

It's impossible to stop the march of technological advance.  But the Internet is almost too effective in cutting costs and creating efficiencies.  When artificial intelligence and robots have driven millions of people out of the labor force, leaving them penniless, economic stagnation may be more likely than prosperity.  We had damn well better come up with a way to maintain social equilibrium in such a circumstance, or the political insurgencies of today will seem like gentle summer breezes.

Will America Ever Produce Another Steve Jobs?

It hardly needs to be said that Steve Jobs was a transformational figure, doing as much or more than anyone to create the personal computer, and decades later, the products that will gradually replace the personal computer. Jobs took the lead in adopting the mouse and graphical interfaces, critical features that made computers user friendly to non-geeks. He was a talented marketer, offering tech products that actually looked attractive and felt sleek. The massive personal computer market spawned by Jobs and a small group of like-minded geeks made possible the Internet as it exists today: a global forum for the largest informational and intellectual exchange in history. The creators of portals, search engines and social networks are singles hitters compared to Jobs' standing as the high tech world's Babe Ruth.

A rather scary question is whether America will ever again produce a figure such as Jobs. When Jobs went to high school and college, America was evolving from the rigidity and conformity of the 1940s and 1950s into a more open-minded place where being different was tolerated and, in Jobs' case, ultimately rewarded. Jobs briefly attended college. Then, he dropped out but hung out around campus, exploring what interested him, growing spiritually as well as technically. Steve Jobs was simply different, and that's why he achieved such far-ranging, innovative success. His varied interests in the arts, music, religion, and high tech were ultimately reflected in the products he created. It wouldn't have been obvious to 99% of personal computer makers that they should create a product that promotes music, like the iPod. But Steve Jobs by all indications saw the iPod, iPad, iPhone and other expansions of the digital world as just part of the same continuum.

His particular vision is gone. He leaves behind a company that employs about 50,000 people, with suppliers that probably employ tens of thousands more (and let's not forget Pixar, Jobs' other corporate creation that's now a Disney subsidiary). Entrepreneurial success like this is crucial to economic growth. Comparable figures from the past, like Edison and Ford, had similar impact on the economy. Today's contentiousness over economic, monetary and tax policies, social safety nets, and so on can't do much to solve our problems. That debate is about the allocation of costs and burdens, and does little or nothing to make the economy grow.

The way to solve our problems is to foster more rapid economic growth. As history shows, a small number of original thinking entrepreneurs can have a disproportionate impact on growth. They envision and then foster disruptive change, sweeping aside conventional assumptions and recreating the world as they see it. They produce products almost no one else could have imagined, and convince millions of other people to like and buy those products. They are strong-willed and singularly determined. Blessed with exceptional intelligence, they tend to be impatient with those less capable, whom they may micromanage and over-supervise. Highly sensitive to criticism and any imperfection in their worlds, they often don't play well with others. They're difficult to be around and their employees have to be well-compensated to put up with them. When they succeed, they become exceedingly wealthy, as do their employees and the nations that host their companies.

There is reason to doubt America's ability to produce another Steve Jobs. Our educational system posits that all holes are round--as in well-rounded--and tries to peg all kids into them. To be regarded as highly successful, kids need to get A's in all subjects, excel at taking standardized tests, and be superb athletes, musically gifted, charitably and community minded, well-traveled, immersed in at least two foreign languages, pleasant, mannerly, well-groomed, well-spoken and generally pleasing to adults. A kid who is brilliant in one or two areas, such as high tech or math, but is otherwise diffident, reticent, indifferently groomed, and unexceptional in other ways, is viewed as weird, strange, unbalanced, geeky, nerdy and not competitive for most of the best colleges. A 17-year old Steve Jobs today would probably have a tougher row to hoe than Steve Jobs had in the 1970s. There was once a time, decades ago, when America's educators understood that it was more important to cultivate a student's strengths than to turn all kids into carbon copies of the student body president. That allowed many gifted, but not well-rounded kids to grow into great successes in their individual fields.

America's obsession with well-rounded students who excel at taking standardized tests means that we are turning out legions of future administrators, bureaucrats, consultants, corporate lawyers, and mid-level executives. Those in this group who earn MBAs may accumulate small fortunes in business or finance. Very few or none will have any macro impact on the economy.

Those poorly rounded, but disproportionately talented kids who have the potential to change the world must struggle against stereotyping, unfavorable social expectations and schools that don't value them. It's important to remember that advanced economies require people who are highly specialized and that innovation comes from those that don't fit in and aren't readily accepted. America today has reverted to a troubling conformism that may hinder the full development of our children's potential. This nation remains a haven for tinkerers, inventors and garage-based business start-ups. Our best chance for future prosperity rests in their hands, not in the hands of the idiots on Capitol Hill who can barely agree on a continuing resolution. Let's try to give the nerds a better chance at the brass ring.

Are the Social Networking Companies Approaching a Peak?

The frenzy over LinkedIn's IPO a couple of days ago, in which its stock more than doubled in price during its first day of trading, is reminiscient of the tech stock mania of the late 1990s. In those halcyon times, companies with no profits, scant revenue and highly optimistic business plans were going public with enthusiastically received IPOs. The stock market was pushed up to levels that it hasn't, on an inflation adjusted basis, since regained. Of course, we all know the tech stock craze went the way of leisure suits, although the financial consequences from stocks were much more painful.

Leisure suits have made a comeback of sorts in the past year or so. And so have tech stocks. The craze du jour is social networking, which proponents claim to be the grand future architecture of the Internet. Maybe. Something similar was said two decades ago about Microsoft, whose MS-DOS operating system was virtually ubiquitous among personal computers. But Gates & Co. didn't get the Internet, which was then struggling to organize itself around a concept called the World Wide Web. Then, a decade ago, portals were seen as the behemoths of the 21st Century. Today, only Yahoo is left as a major albeit struggling portal. A half dozen years ago, Google was expected to be heir to the Internet throne. Today, it is a growing and prosperous company whose vision thing is flagging. Google once was going to become the library to humanity. Legal squabbling over copyright ownership of large numbers of books has bogged down that initiative. Google is a leader in cloud computing, but Amazon will offer formidable competition. Goggle had to play catch up in the browser battles against a nonprofit that puts out Firefox. Google's failed attempt last year to buy Groupon was a signal that its ascendency to the throne of the Internet is no longer seen as inevitable. If Google is a sure fire winner, why wouldn't the Groupon folks want to associate themselves with Google?

But no matter that previous innovators have matured and shrunken to mere mortal companies. Social networking is hot, and investors pant for shares. Logical analysis fell by the wayside with LinkedIn. It had $15.4 million of earnings last year yet has a current market cap of around $8.8 billion. Its 95 million shares outstanding are worth $93 or so each at current market prices. Earnings per share are about $0.16, resulting in a price-earnings ratio of 581 to 1. Considering that the p/e ratio for the S&P 500 index based on trailing earnings is around 17, it's fair to say that investors are, at a minimum, extremely optimistic about LinkedIn.

Facebook, the big prize among anticipated IPOs, has dallied in the not very private private placement market, where transactions reportedly imply a valuation of as much as $70 billion. While the absence of solid public information makes Facebook's valuations somewhat amorphous, it's clear that public investors are getting whipped into a frenzy by all the press coverage of Facebook's private offerings. Facebook has indicated it might go public in the next year or so. When it does, that's likely to be a major signal of a peak in social networking stocks. A lot of really savvy Wall Street insiders huddle around the corporate insiders at Facebook. Those folks surely won't sell until they believe they can maximize the price they get, which by definition minimizes the bargain public investors will get. It's possible for public investors to make money from an IPO (Google is one example). But the IPO is a moment when the odds may well be stacked against the little guy. Invest carefully.

The Point Missed in the Budget Debate

It's become all the rage in Washington to froth over the federal deficit and produce sound bite-driven proposals on how to reduce it. In the relentless quest for media coverage, everyone involved in the budget debate has something accusatory to say about someone else. As in sports, trash talking and cheap shots get more attention than real accomplishments.

The lack of attention to real accomplishments allows an important point about the budget deficit to go unnoticed. When we talk about splitting up a pie, the size of the pie is crucial. A large, fast growing pie is much easier to divide than a smaller, slowly growing pie. A stagnant or shrinking pie can be poisonous to the debate. Right now, we have a slowly growing pie that may go stagnant or shrink soon given the rising costs of energy and food. And the debate is indeed poisonous.

We need to focus more on expanding the pie, not in the Federal Reserve short term-next quarter, money printing, inflation-risky way, but for the long term. We also can't look to the federal government to solve all our problems. At the risk of asking Americans to behave like adults, it would be better if we looked for some non-federal ways to boost long term economic growth. There is a limit to the effectiveness of federal policies, which are mostly subsidies and handouts, and we pretty much surpassed that limit a while ago. What should be done?

Embrace Innovation. Innovation was the key to America's spectacular growth in the past two centuries. Railroads, the telegraph, the telephone, the airplane, automation of farming, new energy technologies, electronics and computers were essential factors in making America an economic powerhouse. We celebrate the concept of innovation today, but don't encourage it enough. Immigration rules for the highly educated should be relaxed--we'll never recapture manufacturing from Asia, but we can try to bring more of their brainpower to America. Many of Asia's smartest people want to live here, at least for a while and maybe for the rest of their lives. Brains produce innovation; tariffs don't. America's economic future will be in the production of high value added goods and services. (And not, contrary to what the Fed thinks, a revival of housing, which can't be revived by the government because it remains buried under a crushing load of bad debt, and only politically unacceptable levels of taxpayer subsidies will revive housing.) Innovation was the key to America's past prosperity and will be the key to its future.

Hug nerds. America's educational system is roundly criticized for failing to teach many students the basics. That's a valid point, but we're too focused on making America's schools training facilities for corporate employers. Schools should also be a place for exploration and creative thinking. They're not. Today's elite universities' admissions standards place enormous emphasis on being well-rounded, having not only fantastic grades, but athletic achievement, public service, experience in the arts, internships left and right, and international travel. The people admitted will make good corporate executives, management consultants, corporate lawyers, accountants, and doctors. Those with good math skills may become Wall Streeters. Most likely, none will create innovative technologies or establish major businesses. It's not an accident that Bill Gates, Steve Jobs, and Larry Ellison were all college dropouts. (So was Mark Zuckerberg, although it's not yet clear if Facebook is a transformational company or a fad-and-fade like Yahoo.) America's leading universities don't embrace original thinkers; they favor compliant kids who know how to manipulate and please their elders. Today's elite schools don't encourage or even tolerate the wacked out thinking that transformational economic change requires. Gates, Jobs and Ellison had to swim upstream to accomplish what they did. One can only wonder how many dozens, hundreds and maybe thousands of other free thinking, but slightly less determined kids have been discouraged from fostering innovative change. We need to think outside the box to make America grow again, and one way would be to encourage, and indeed embrace, kids who think outside the box.

Improve transportation and communications. America is a big country. Look on a globe, and you'll find very few other countries as large. We need really good transportation systems, because ultimately goods and many services need to be physically delivered. One can't live off Internet access alone. State and federal governments in the 19th Century did a much better job in this respect than their counterparts today. The Erie Canal was sponsored by New York state. The railroads were subsidized by the federal government. In the 20th Century, air transportation and the interstate highway system were creations of federal policy, and local governments took on much of the burden of building suburban infrastructure. America became wealthy from the massive markets permitted by these government supported transportation systems. Today, highways need to be maintained, bridges repaired, and subway systems renovated and expanded. Suburban roads need maintenance and improvement--remember that most economic growth is in suburban areas, in spite of renewal in a few urban areas. Roads and other transportation systems don't have powerful lobbyists, so they are easily ignored. That is a serious mistake.

Fostering high-speed Internet access for all should be a priority. This would include hard wired access and wireless access. The easier it is to communicate, the more innovation we'll have. And, let's face it, the more consumption we'll have since we're approaching the point where you can buy almost anything over the Internet. Way too many people share way too much about themselves in the Internet. But speed of communication speeds up economic activity. Even if some people are tacky and tasteless, others will increase their productivity--and, along with it, our prosperity.