Is the future we’re building the one we want?
How a shift in perspective could make us all rich someday.
If you do not change direction, you may end up where you are heading. — Lao Tzu
We’re getting more productive as a society at an increasing rate. On one hand there’s a lot of benefit to go around for the effort, but our technology comes with responsibilities that rest on everyone. If we don’t guide our technology with care, we run the risk of a future decided by short-sited decisions.
To get a better picture of the future we’re on a path for, we should look at what we produce right now and where that income goes.
Since we pay taxes when we make money, let’s look at the US tax base (in a general sense) as how we make money right now. Granted, not everything gets reported, but for the most part taxes can give some useful insights.
Here’s the breakdown of Federal tax revenue from 2016. First, we’ve got income tax, which is from wages and salaries and investment income on an individual level. Then there’s payroll tax from employees and their employers. Corporate income tax is from the profits corporations earn. Then the remaining 9% of tax revenue is a split of other miscellaneous taxes.
Most of the money at the federal level comes from individuals and their labor. Only 9% of the entire federal tax revenue is coming from tax on corporate profit.
What happens to the chart in the future when we get (a LOT) more productive? Its breakdown is going to shift, and this shift could be a problem if we aren’t ready for it.
Artificial intelligence, robotics, machine learning, and countless other innovations will continue to create value and disrupt existing industries and make everything more productive. The benefits this productivity creates can accrue for all of us, but only if we plan ahead.
With all these crazy new productivity gains, everyone’s going to make more money, right?
That might not be the way things play out.
For example, computers started becoming common in offices in the late 60s and 70s. By the 80’s, computer usage was widespread, and at the same time a strange trend between productivity growth and hourly compensation began appearing.
The gap between productivity and hourly compensation opened up a lot since the 1980s. Since then, GDP and corporate profits have grown, but household income hasn’t.
It’s a worrisome trend that more and more income is going to employers and shareholders over employees in recent decades. But more of the pie going to companies and the rich shouldn’t come as much of a shock. What’s less talked about is that the pie itself could start shrinking soon for a lot of industries.
Companies creating technological advancement and disruption create conditions that create AND destroy value. The more you disrupt and take market share away from your competitors with technology, the more current value you destroy industry-wide.
Let’s say you’ve led the charge in disrupting a 10B industry, and your company has captured 3B of the market for itself in a few years. If you’re the one company disrupting and changing that industry, you’ve got a lot to celebrate. You brought prices down for the consumer and gave them a better experience. You don’t care that along with those lower prices, that 10B industry might only be worth 5B now. A bigger share of a smaller pie worked out great for you. Your employees are happy at your thriving company and your shareholders are too. All the other companies your startup displaced won’t fare as well for themselves or their shareholders. Your competitors who can’t compete will either downsize, reinvent themselves, or fail.
Isolated and contained disruption is much easier for a system to adjust to. Competition keeps companies from growing stagnant and feeds a cycle of innovation. However, we’ve never experienced technological disruption on a systemic scale like we may soon. Are we ready if it happens?
Huge spoils will go to fewer and fewer victors. If those victors rise privately without most investors able to participate, what will become of their many (likely public) competitors? Let’s say a stock index has 100 stocks across multiple industries, and 3 new companies evolve in the next few years to disrupt all of those industries. As those 3 new companies grow and lower prices within all the disrupted industries wiping out half the old industry revenue, how do you think that index is going to do over the next decade after adjusting for inflation?
What about all the wealth generated from entirely new industries?
There will be a lot of wealth created from technology we don’t even know about yet and aren’t giving credit to. This new wealth is going to make a lot of people rich. It might also make autonomous organizations managed by AI and smart contracts rich too, depending on how things play out.
Whether we’re talking about people or code creating and running new industries, the wealth that both generate in the future is likely going to come from companies and feed into government coffers through corporate income tax. Those tax dollars won’t come from salaries or wages if technology replaces most jobs. Those tax dollars also won’t be coming from companies paying payroll taxes. (If a job no longer exists, the company or employee obligation to pay that payroll tax goes away too) All that money will get rolled back up into corporate profit. If income flows to corporations with fewer employees, tax revenue from corporations should be what goes up, at least in theory. In practice, businesses become more fluid and their income harder to pin down as they grow.
Once a business gets large enough, it’s easier to acquire and absorb competitors rather than compete with them. Over time, fewer challengers can compete because of the massive scale and advantage of the leaders. Amazon, for example, is eating entire industries alive at this point, and anti-trust law isn’t equipped to keep pace with it. The greatest advantage of corporate scale is all the creative tax options that start to open up for you.
Think about some of the other players at Amazon’s scale, like Google, Apple and Facebook. What tax rate do they pay? Is it the same rate we pay on our income when it comes from wages? Companies use all sorts of methods to pay the lowest tax rates possible just like everyone wants to. If you made a million dollars next year, would you want to give half to the government or would you get creative and try to keep as much as possible? You worked hard for that money and you want to choose what use it’s put to. This is more an aspect of human nature than finance, and one we shouldn’t assume will change as society evolves with technology.
What about a Universal Basic Income? Couldn’t that be a solution?
There’s been a lot of articles discussing the concept of a universal basic income lately. It’s a concept where everyone gets an unconditional amount of money to use for basic needs however they see fit. It’s talked about as one way to offset the financial disruption caused by technological unemployment. It’s a noble ideal with interesting trials ongoing and some positive results, but where does the capital come from and how does it flow?
To rely on a universal basic income, capital would need to get from the producers (corporations) to the government, and then from the government to the citizen. At the corporate level, income statistics are misleading because most companies do everything they can to shield their income from taxes. If you have multinational operations, you configure them so your profit looks like it came from the country with the lowest tax rate, and your losses came from the country with the highest tax rate. Should we expect corporations to change their nature in the future out of a sense of moral obligation to support a tax system based on a universal basic income?
As an aside, let’s say we do live in a world where corporations become altruistic global citizens, and every company decides to pay their actual tax rate on their actual income instead of trying to hide it with a Double Irish, or a Dutch Sandwich, or another of the myriad tax loopholes available at that level. Even if all that money still gets taxed, any kind of universal basic income is still going to have to pass through the filter of government before it gets to people. How efficient is the government, as a pass-through? How many cents of a given dollar typically make it from government to an intended use after overhead and everything else?
The changes in technology that are going to disrupt (and are disrupting) every economy, and job are coming no matter what. We aren’t going to stop this train. Our current, outmoded system needs some innovation to evolve with technology. We should all be asking ourselves whether we want a future where everyone can take care of themselves and live a life of abundance, or a future where the government takes care of most of us and we take what we’re given.
We don’t need to reinvent the wheel or change human nature to get to a workable solution, we just have to be proactive. There’s a pretty good case to be made for an enormous amount of new wealth to be created out of new technologies in the coming years. This wealth that can benefit all of us as long as there’s a way we can be a part of companies that create it.
Can we offset disruption by owning part of the disruptors?
What if we create ways for everyone to participate in the corporate wealth creation of the future. While we’ve been enjoying a great time to be involved in public stocks recently, fundamentals and long-term growth prospects in the public markets aren’t what they used to be. If you bought 100 shares of Apple during its IPO in 1980 for $2200 that investment would have been worth over $632k in 2015. You could have bought that Apple stock in 1980 and you didn’t have to be a hedge fund manager or a VC to do it.
Uber, as a modern Silicon Valley archetype, has gone from a 5.4M valuation in 2010, to a 68B valuation in 2016. That’s over a 12,000% return in 6 years for shareholders. Do you own shares of Uber? If you don’t, you’re not alone. Most people don’t own shares of Uber because most people can’t own shares of Uber. If you aren’t an accredited investor (basically a regulatory term for rich), you generally aren’t allowed to buy shares of a private company. If you aren’t an accredited investor, you have to wait until the company goes public, like Apple, before you can buy it. Apple wasn’t a huge company in 1980 when it became public, and as time has shown, it had a lot more growth left in it. Apple was not a global powerhouse in 1980. Uber (still private) right now is in 83 countries, and over 674 major cities worldwide. How much bigger is Uber going to get? How much growth potential is realistically left in a company already valued privately at 68B? Will $2200 invested in an Uber IPO be worth $632k in 35 years? That return would require Uber to have a 19 trillion dollar market cap, or basically the same as the GDP of the entire United States right now. Maybe Uber does get that big, but how confident do you feel about that bet? Incidentally, if you invested in Uber privately at that 68B valuation, you already lost 25% based on its most recent funding round, and it still isn’t a public company listed on an exchange.
Although we’ve clearly cherry-picked examples here, the point is that a lot of new wealth creation happens through private companies. The people who benefit most from that wealth are the shareholders. The companies driving the biggest changes are private and staying private longer, just like Uber. These private companies have been, and continue to make a handful of people like executives, board members, venture capitalists, angel investors, and private fund managers very rich. Most of us haven’t seen the same results. Most of us don’t have access to the same opportunities. Without ways to democratize the access to opportunity in this wealth creation process, the lopsidedness it causes in distribution is going to get worse. The sooner we start innovating our way out of these imbalances, the better the future will be for all of us.
Finding ways to give the public greater access to the same opportunities available to private investors could be a good place to start. If the future truly belongs to all of us, we should all have the access and opportunity to invest accordingly.