YouTube, Instagram and WhatsApp: Exceptions, Not Rules, to Productivity Growth

The narrative is fantastic. A software entrepreneur launches a service, hires a few dozen staff to get it off the ground, then sells it to a big tech company for billions.

The backstories of YouTube and Instagram are legendary. It’s the stuff that Silicon Valley dreams are made of. As Edward Luce notes in his book The Retreat of Western Liberalism,

“In 2006, Google bought YouTube for $1.65 billion. It had sixty-five employees, so the price amounted to $25 million per employee. In 2012, Facebook bought Instagram, which had thirteen employees, for $1 billion. That came out to $77 million per employee. In 2014, it bought WhatsApp, with fifty-five employees, for $19 billion, at a staggering $345 million per employee.”

Productivity growth measures the output per hour of labor. If YouTube can create billions of dollars of value with a minimal amount of human input, that is an astronomic level of productivity, at the firm-level. But YouTube, Instagram and WhatsApp are more of the exception than the rule. If anything, it is getting harder to discover the game changing technologies that push business and the economy forward.
[su_box title=”Econ Book Reviews” title_color=”#ffffff”]Read our review of Edward Luce’s book, The Retreat of Western Liberalism[/su_box]
In a recent article “Wearied science,” the Economist columnist Ryan Avent writes that it is becoming harder, not easier, to discover new ideas. A team of economists at Stanford and MIT argue that new ideas are becoming more expensive to uncover. Avent says,

“As the authors acknowledge, squeezing oranges dry is not a problem if new oranges keep arriving: ie, if new lines of research appear even as others are exhausted. Yet they reckon that, across the economy as a whole, the notion that the cost of ideas is rising holds true. Since the 1930s, the effective number of researchers at work has increased by a factor of 23. But annual growth in productivity has declined.”

We have seen this slowing productivity growth across the world. In the United States, an estimate from the Bureau of Labor Statistics shows that productivity actually fell by 0.1 percent in 2016. That has risen to an average of +0.8 percent in the first two quarters of 2017. As a benchmark, productivity has risen 2.1 percent on average since 1947.

Data: BLS

In the U.K., the situation is worse. As Gavin Jackson of the Financial Times recently wrote, “The figures were released alongside the latest labour productivity numbers, which found that Britain’s productivity was growing at the slowest rate since the invention of the spinning jenny.”

Productivity: What makes your life better than it was before

Since productivity is ultimately what makes people better off, this is a big problem. As Paul Krugman once quipped, “Productivity isn’t everything, but, in the long run, it is almost everything.” If it takes more money and more manpower to come up with the next big technology,  those costs will have to be passed onto consumers. Some ideas might work in practice, but might not be economical. Without a way to justify the commercial viability of many productivity-enhancing technologies, some useful ideas might collect dust on research lab shelves.

It is beginning to look more like YouTube and Instagram were the low-hanging fruit of the digital world. Giant platforms like Google and Facebook were able to leverage them to become the indispensable, ubiquitous products they now are.

But the next game-changing app or technology could to require a lot more engineers, and a lot more money. The problem isn’t that robots are taking over the world, rather they might not be taking it over fast enough.

 

Cover photo: Maurizio Pesce (Flickr Commons)

 

5 Charts That Explain the State of American Manufacturing

It doesn’t take too deep of a dive into the archives of @realDonaldTrump to find some 140 character commentaries on the state of American manufacturing.

“@danlifting: @realDonaldTrump Get a life George Will. USA doesn’t make anything anymore. TRUMP will bring manufacturing Back to USA!”

— Donald J. Trump (@realDonaldTrump) October 18, 2015

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“@AMuller65: @realDonaldTrump Do you ever see the USA once again becoming a Manufacturing power?Only with new & capable leadership.

— Donald J. Trump (@realDonaldTrump) July 28, 2013

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But is this true? Does America not make anything anymore? Is the United States an industrial wasteland?

The answer is a resounding no. In fact, America is an industrial powerhouse compared to its global peers. But the story is a bit more nuanced than that.

Manufacturing is not declining, it’s evolving. Productivity in American manufacturing has been the key story of the past few decades. It simply takes fewer workers to produce more goods than it once did. And the goods that are produced are higher quality and of higher value than before.

What does that mean for manufacturing employment?

Simply put, it’s declining. In the postwar years, manufacturing made up about 30 percent of jobs in America. Today, that number is down to about 8 percent.

This causes a lot of friction in the economy and in society. One needs only to look at the voting patterns across the American Rust Belt to understand what kind of social dislocation declining manufacturing employment brings.

But looking at the chart above, it looks like share of manufacturing jobs has stabilized. That could mean that the American economy needs about 8 percent of all jobs to power the manufacturing sector. And because the economy itself has grown…

The number of manufacturing jobs is growing.

As of August 2017, there were about 12.5 million Americans employed in manufacturing. This well below the 1979 peak of about 20 million people employed in manufacturing, but we may have seen the bottom. Since the February 2010 low, the American economy has added about a million manufacturing jobs. If the 8 percent of all jobs in manufacturing number holds, the number of factory jobs should only continue to grow.

Employment in manufacturing might be down 40 percent over the last generation, but does that mean the U.S. is less globally competitive? No.

Of G7 countries, America has been the manufacturing leader. And it’s not particularly close.

Since 1980, American manufacturing output has doubled. The next closest peer is Germany, which has increased output by 67 percent over the same period.

And this is where the competitiveness argument goes awry. Comparing the U.S. to countries that have been developing for the past few decades isn’t accurate. The United States got rich by being the low-price workshop to the world a few generations ago. Today, American manufacturers are producing high-end goods, which are the result of decades of investment in both machines and people. Developing countries have taken on the role that America used to play – which is why U.S.’s share of manufacturing is declining.

But manufacturing is hardly dead. America is producing more than ever. Which comes back to productivity.

American manufacturers are more productive than the rest of the economy

Throughout the 1990s, American manufacturers were less productive than the rest of the private sector. But that has changed in recent years – since 2010, manufacturers are producing 20 percent more per hour of human input. This is directly related to global competitiveness – the U.S. can’t win on wages, but it does produce more valuable goods. Manufacturing Boeing jets creates more wealth and produces better manufacturing jobs than what existed 100 years ago.

If companies are producing more, why are manufacturing employees poorer?

Again, this harks back to the #MAGA narrative of the 2016 election. Workers, especially those in the manufacturing sector, are seeing slower wage growth than the overall economy. Those factory jobs are fewer and farther between, as well.

But why? If output per hour is increasing so much for manufacturing workers, why aren’t they seeing wage gains?

It’s not because there’s a giant glut of manufacturing workers – the unemployment rate for those in the manufacturing sector is below the national average. Instead, it could be the changing dynamic between capital and labor.

A recent report from Brookings suggests that declining rates of union membership could have to do with stagnant wage growth. Across the economy, the share of income to capital has been increasing. Shareholders and the owners of companies have taken a larger share of profits, while less has trickled down to the actual workers. Manufacturing, in particular, has a long history of organized labor. Union membership has declined across the entire economy, but it could be hurting most in industries like manufacturing.

What does this all mean for American manufacturing?

The irony is that solutions like tariffs and breaking up trade pacts could make American manufacturing less productive and will reduce global competitiveness. Just like any company or industry, productivity is at the core of long-term success. Enacting price controls or boxing in the American manufacturing industry from global competition will decrease productivity and reduce competitiveness.

As some might argue, we could force the American economy to produce more of the goods that we currently import. That would indeed create manufacturing jobs. But that would also make us all poorer. Financing for valuable companies and projects would be shifted to lower-return manufacturing. That decreases returns on capital.

And it’s not even a guarantee that many jobs would be created. American manufacturers have done a lot more with fewer human hands in the process. Why would that stop?

Free-marketer types would argue that the invisible hand should find the right balance of financial and human capital allocated to manufacturing in America. Messing with that balance would not only make American manufacturing less competitive, it would make the entire economy less dynamic.

 

Cover photo: Thomas, Flickr Commons

Loftium Won’t Cause Another Housing Crash, But It Stirs Bad Memories

Loftium is the Seattle-based startup that has a unique proposition for potential homeowners. If the borrower lists a room on AirBNB for three years, Loftium will provide a $50,000 down payment.

Currently, the company only operates in Seattle, with plans to expand to Chicago and Washington D.C. These are all cities with expensive markets, where millennials could get locked out of homeownership problem. In that case, $50,000 isn’t anything to sneeze at, but it’s only a start.

The traditional mortgage calls for a 20 percent down payment. If you rent out your home, the $50,000 is only a down payment for a $250,000 home. In Seattle proper, the median home costs $606,200, according to the Census Bureau’s 2016 American Community Survey. The borrower will have to come up with an additional $71,000 to buy that median home. Even in high-earning Seattle, that’s a tall order for young professionals.

The second problem is who this deal could appeal to. In economic terms, there’s probably a bit of adverse selection happening. You know how the sickest people are more likely to buy health insurance than healthy people? The same effect could apply here.

Seattle is one of the most expensive housing markets in the country, and prices have jumped significantly since the Financial Crisis. Now, there’s a way for more people to get into the housing market – people who might otherwise be unqualified to buy. If an underqualified borrower – let’s call him or her a subprime borrower, for fun – defaults and triggers a foreclosure, then Loftium is the second claimant on the property, behind the lender. If the price of the house has jumped since the initial purchase, the lenders could come out ahead.

But this brings back dark memories of 2007 and 2008. If this scenario is true, it sounds an awful lot like the “prices never go down” attitude we saw in Las Vegas and Phoenix circa 2006. That time period was as valuable for the lenders as it was for the borrowers. Until it wasn’t. This should be a cautionary tale for all parties involved in these transactions.

Of course, this one company will never cause a meltdown of the entire nation’s housing market and economy. But it should still be considered from a micro level. If memory serves correct, things didn’t seem to work out too well for either the borrowers or the lenders in Vegas and Phoenix.

And I say all of this as a supporter of affordable homeownership and presenting new, creative ways to make that happen. But the risks have to be considered, along with the rewards.

Takeaway: There’s no shame in renting. In fact, it’s a pretty good deal in a lot of housing markets. If their target audience has no money for a down payment, they won’t get much for $50,000. In that case, why not rent? Then you don’t have to share your home with strangers for three years.

 

Cover photo: Ian Sane (Flickr Commons)

Weekly Wrap: Why is entrepreneurship falling in the U.S.?

This was first published on Facebook. To get the Weekly Wrap hot off the press, please like us on Facebook.

Welcome to the 8th edition of the Weekly Wrap, where we aren’t registered as a company, and are thus pulling down the rates of entrepreneurship in the U.S.

Americans aren’t starting companies. Why?

Ben Casselman wrote in his inaugural piece for the New York Times about the declining rates of business creation in the United States. According to Census Bureau data, only 8.1% of companies in the U.S. are less than a year old. That’s down from about 15% in 1980.

So why are Americans scared of entrepreneurship?

Casselman notes a few reasons: rising power of existing corporations, fewer baby boomers in the labor force, fewer community banks, and more regulation.

There is also another potential factor at play – slower growth in the U.S. economy.

The trend of business creation parallels the trend in real GDP growth since 1980. This would almost certainly hurt business creation. Think of it from the perspective of a bank lender. If you are looking to lend to a new business, you’ll have to take into account different factors to make sure that business owner can pay you back. If broad economic growth is slowing, then the risk of default for borrowers goes up.

That leaves funding for business creation or expansion available to fewer companies. Only established, healthy corporations will receive capital, shutting out many would-be small businesses. That makes the economy less dynamic and less productive over time.

Good ol’ Causation <> Correlation

I asked Casselman about this, and he said it was unclear about the direction of causality here. Are there fewer new businesses because of slow economic growth, or is slow economic growth leading to fewer new businesses? He also pointed me in the direction of some research on the topic:

• Changing business dynamism and productivity: Shocks vs. responsiveness; Ryan Decker, John Haltiwanger, Ron S. Jarmin, and Javier Miranda

• Older and Slower: The Startup Deficit’s Lasting Effects on Aggregate Productivity Growth; David Berger, Titan Alon, Rob Dent, and Ben Pugsley

No matter what, this is a huge issue for the American economy, and one that I hope Casselman continues to explore. And there are other questions that I hope to consider, as well:

• If there are fewer young companies, are we really in a tech bubble?

• What is the breakdown by state? If market power is really hurting rates of entrepreneurship, should we see lower rates of business creation in places like California and Washington – home of Facebook, Amazon, and other companies criticized for being “too dominant?”

What we wrote this week

Amazon and Antitrust: Be careful what you wish for (September 15): “In an ideal world, the platform rivalries between Amazon, Microsoft, Facebook and Google provide a sort of Goldilocks consolidation: not too much, not too little. The tech-lash crowd should just be careful to not outright shatter the proverbial bowls of porridge.”

This Week’s Federal Reserve Meeting: Nightmares of the taper tantrum redux (September 18): “This is uncharted territory. The big four central banks – the Federal Reserve, the European Central Bank, the Bank of England, and the Bank of Japan – all amassed giant balance sheets post-Crisis. The U.S. is the first to dip its toe into unwinding those assets, so nobody is sure what exactly will happen.”

A Weak Currency Alone Won’t Save Your Export Industries (September 20): “But exchange rates are only a small part of the story. Global competitiveness stems from hard investments in capital and soft investments in education and training. Exchange rates can become a red herring: they can be weaponized and used to start a trade war. That’s far more damaging to an economy’s balance of trade than the currency exchange level.”

Other links and notes

Janet Yellen doesn’t know what’s up with inflation. Investors shouldn’t pretend to know, either. “The markets want to believe the economy will stay in the sweet spot, growing just enough to avoid deflation concerns while avoiding pushing up inflation. But wanting something to be true don’t make it so.” (Three Dangerous Words for an Investor to Buy Into: Inflation Is Dead; James Mackintosh, Wall Street Journal)

The gold standard may have actually created fewer busts (and booms) than critics realize. But is that enough of an argument for the barbarous relic? “None of this is to say that the gold standard is necessarily better — stability can be overrated and growth is worth having — but the data suggest the standard arguments against gold, and the standard arguments in favour of the flexible and “counter-cyclical” state we have today, need serious revision.” (Going off gold did the opposite of what many people think; Matthew Klein, FT Alphaville)

Social media has been at the center of Silicon Valley techo-libertarianism. But it is a big enough part of our cultural and political zeitgeist to be scrutinized by regulators. “But Facebook’s power and influence seem likely to grow beyond the “self-regulation” phase. That’s why markets are willing to give the company a valuation of $500 billion when its 2017 profits will be in the neighborhood of only $15 billion. (Bloomberg data shows analysts expect Facebook’s revenue to grow to $76 billion in 2020, almost doubling projections for 2017.) The question remains how long self-regulation will be acceptable to the public and Congress.” (Facebook Marks the End of Social Media’s Wild West; Conor Sen, Bloomberg View)

Cover photo: Flickr Commons