Brad Feld Reviews The Lights in the Tunnel_6 potx

THE LIGHTS IN THE TUNNEL / 180 CopyrightedMaterial–Paperback/Kindle available @ Amazon meltdown.Oncethecurrentglobalcrisiseases,wecanbe surethatgovernmentswillturntothetaskofattempting tocontainthisriskinthefuturebyimposingregulationon themarkets.However,theimpactofadvancingtechnolo- gy willnotbeconfinedto justthefinancialmarkets. We will ultimatelyhave to address the issue of systemic risk throughouttheentireworldeconomy,andthiswilleven- tuallyinvolvetransitioningtoamorerobustmodel. The Market Economy of the Future The scheme that I have proposed above essentially in- volvesadoptingspecialtaxestorecapturetheincomefrom lost jobs and then having the government redirect that income according to individual incentives—without the requirement for traditional “work.” The conservative readerislikelytoviolentlyrecoilfromthisidea.Isthisnot theworstformofRobinHoodsocialism?AmInotpro- posingtostealfromthosewhohaveworkedhardtobuild abusinessandthensimplygivetheproceedstomassesof indolentpeopleinreturnfordoingnothing? IwillarguethatIamproposingnoneofthesethings. Putyourselfinthe placeof a smallbusiness owner. Re- memberthatwearestillthinkingintermsofourextreme future scenario with 75 percent unemployment. How wouldyourbusinesssurviveinsuchasituation? The special wage recapture taxes thatyou would be requiredtopayasabusinessownerwouldbeaninconve- nienceto you;youwould,ofcourse,preferthatyounot havetopaythem.(Thesamecouldbesaidofthewages youcurrentlypaytoyouremployees.)However,thewage Transition / 181 CopyrightedMaterial–Paperback/Kindle available @ Amazon recapture taxes paid by every other business will collectively powertheconsumersthatdriveyoursales(exactlyasthe wagespaidbyotherbusinessesdotoday). Wemustfindawaytoredirectincometolargenum- bersofconsumers,ormarketdemandwillnotbesustain- able. It is not necessaryto require workforthatincome becauseinanautomatedeconomysuchworkwillnotbe required.Therecipientsofthisincomewillnotdo“noth- ing;”theywill,infact,bemotivatedtobehaveinwaysthat benefitusall.ThenewtaxesthatIproposearesimplya replacementforthewagesthatwouldhavebeenpaidina lessautomatedeconomy. Without government intervention of this type, free market forces, together with increasing automation, will driveoursocietytowardanunsustainableconcentrationof income.Imagineamodern,industrializedsocietyinwhich 95percentofthepopulationisimpoverishedandleadsa subsistence level existence with little or no discretionary income,whiletheremaining 5percent receivesnearlyall theincome.Insuchascenario,themajorityofindustries now in existence would collapse. The businesses from which most wealthy people derive their incomes would fail. Whilethisisobviouslyanextremeexample,thereality isthateconomicdeclinewouldoccurlongbeforesuchan extreme concentration of income was achieved, and that declinewould be accompaniedbythedeflationofnearly allasset values. Thewealthywill notbeableto maintain their high incomes by selling things exclusively to each THE LIGHTS IN THE TUNNEL / 182 CopyrightedMaterial–Paperback/Kindle available @ Amazon other.Thedaysofthefeudaleconomyaregone.Wenow haveamassmarketeconomy. Aslongasanenormousmassmarketofviablecon- sumersispreserved,theprimaryincentivesthatdrivethe free market economy will remain intact. In the future, it willstillbepossibletobecomeextremelywealthybybuild- ing a new business or product. In fact, it may in some ways,beeasiertodosothantoday.Manybusinessstrateg- ists believe that future marketing will increasingly entail sellingcustomizedoruniqueproductstohugenumbersof small market niches. 52  Evolving online technologies will makeiteasiertoreachtheconsumersinthesetinyniches andofferthemhighlypersonalizedproductsandservices. This will likely create many opportunities for entrepre- neursandsmallbusinessestocreatenewproductsgeared towardspecific marketsegments.Itwill alsoenablelarge businessesandnewindustriestosellhugenumbersofdif- ferentproductsonahighlytargetedbasis. However,itshouldbeobviousthattheexistenceofa hugenumberofviablemarketnichesdependsonarobust and ever expanding universe of consumers. In order to provide future entrepreneurswith a richmarket for new ventures, we have to somehow ensure that the average consumers in our population have access to reliable in- comestreamsevenastraditionaljobsareincreasinglyau- tomatedaway. ConsiderthebusinessmodelofanInternetcompany likeGoogle.Googlereliesonrevenuefromonlineadver- tisementsthatarehighlytargeted.Theadvertiserswhouse Google’ssystemdosobecausetheyhaveconfidencethat Transition / 183 CopyrightedMaterial–Paperback/Kindle available @ Amazon their adswill attractviableconsumerswithadequate dis- cretionaryincome.Intoday’seconomy,nearlyallofthose consumersrelyonjobs.Ifatsomepointinthefuture,it becameobviousthattheuniverseofviableconsumerswas substantiallydiminished,advertiserswould befarlessin- terested and Google’s business model would clearly be threatened. Historyhasshownthatonlyaselectminorityofthe populationhasthecombinationofskill,entrepreneurship, accesstocapital,andluckthatisrequiredtostartandrun a successful business. This reality will not change: most people aredestined to bebuyers rather thansellers.The individualswho do succeed inbuilding businesses inthe future will likely find that wages paid to employees ac- countforafarsmallerfractionoftheirexpenses.Howev- er, they will have to pay higher taxes to compensate for this;otherwise,theywillnotenjoyvibrantmarketdemand fortheproductsandservicestheycreate. An International View Manypeoplemightobjecttotheideaspresentedhereon the grounds that if acountry, such asthe United States, weretoraisebusinesstaxessubstantiallyitwouldbecome less competitive relative to other countries and would thereforeattract less investment. Ifyou look backat the table on page 165, which showed how a wage recapture taxmightaffecttheunitcostofahypotheticalproductor service,theunitcostisclearlyhigheraftertaxestorecap- turelostwagesareimplemented.Forproductsorservices thatfaceinternationalcompetition,thiswouldconstitutea THE LIGHTS IN THE TUNNEL / 184 CopyrightedMaterial–Paperback/Kindle available @ Amazon problem.One solution might be to relymore on acon- sumptiontaxratherthatadirectbusinesstax.Incountries such as the United States, of course, the manufacturing sector has already largelymigrated overseas and employ- ment has become increasingly service oriented. In the U.S.,thegreatestdangerisgoingoccurwhenthe service sectorautomates,anddirectforeigncompetitionislessof anissueinthatarena. In the long run, job automation will clearly be a worldwide phenomenon. No country will escape its im- pact,andthisincludesdevelopingnationswithlowwages. AsIpointedoutinthepreviouschapter,wearelikelyto seeashiftintheincentivesthatdrivebusinessestochoose wheretheyinvest.Politicalstability,minimizedtransporta- tion and energy costs, and proximity to sustained con- sumptionmarketswillbeprimaryissuesinthefuture. Inthebroader sense,wecanspeculate thatanauto- matedeconomywould,inmanyways,redefinethenature ofglobaltrade.Sometradebetweencountriesoccursbe- causeoftheavailabilityofnaturaloragriculturalresources (oilorFrenchwine,forexample),butmuchtradeoccurs becauseoflabordynamics.Ifaparticularcountryhaslow wagesand/oraparticularlyskilledworkforce,itcurrently enjoys an advantage that will lead to trade. In an auto- matedeconomy,whereworkersplayafarlesssignificant role,thistradedynamicwouldobviouslybelessimportant. There are really only two primary reasons that the government ofa country would want to attract factories andbusinessinvestment:jobsandtaxation.Asautomation reducesthenumberofjobs,taxationwillbecomeincrea- Transition / 185 CopyrightedMaterial–Paperback/Kindle available @ Amazon singly important. It seems likely that once this issue be- comesapparent,somedegreeofcooperationbetweenna- tions will develop. Perhaps international entities such as the World Trade Organization will address this issue by settingstandardsfortaxation.Wecannotexpectthatthe transitiontoanewmodelwouldbeentirelysmooth,and perhapsinsomecases,protectionistmeasureswillbene- cessary.Whilefreetrademaybedesirable,itshouldclearly bealowerprioritythanthepreservationofourentireeco- nomicmodel. Transitioning to the New Model Now that we have seen how the government might be abletosupporttheconsumersofthefuturebyredirecting incentive-based income streams captured through taxa- tion, we can begin to thinkabout howto transition into thisnewmodel.Theprimaryproblemwefaceisthatthe currenteconomyisstillhighlyreliantonhumanlabor.We needtodevelopasystemthatavoidscreatingadisincen- tivetoperformnecessarywork.Inotherwords,wedon’t wanttocreateinequitiesbyrequiringsomepeopletowork andnotothers,andwedon’twanta“moralhazard”that pushes people to avoid work and seek government sup- portinstead. The answer must be sometype ofjob sharing solu- tion.Theexactmechanicsofthissolutionwouldneedto vary depending of the nature of the job. For many job types,itmightbepossibleto simplymovetowardapart time work schedule so that more people are employed doingthesameamountofwork.Forjobsthatdonotlend THE LIGHTS IN THE TUNNEL / 186 CopyrightedMaterial–Paperback/Kindle available @ Amazon themselvestoparttimework,arotationschemecouldbe used. A worker might rotateinto a job on a monthly or evenayearlybasis.Jobscouldbesharedbygivingworkers asabbaticalatdifferenttimesoftheyear. Ineachcase,workerswouldbesupportedbysupple- mentary incentive-based income streams from the gov- ernment. As automation progresses and more jobs are eliminated,thissupplementaryincomestreamwillbecome anincreasinglyimportantcomponentoftotal income. In largecorporationsandorganizations,itmightbepossible tohandlejobrotationsinternally.Insmallerbusinesses,it would probably be necessary to set up external mechan- ismssothatworkerscouldrotatebetweenemployers.Ob- viously, regulationsand/or incentives * wouldberequired toimplementthesejobsharingschemes. Needless tosay, the businesscommunityis likelyto initially opposethis idea and dismiss it as expensive and unworkable.AsI’vepointedouthowever,businesseswill ultimatelyhave to choose betweengovernment interven- tion and taxation and the existence of a robust market. Oncethistradeoffbecomesclear,oppositionwillbeless vigorous.Weseeasimilarphenomenoninthehealthcare arena, where many industries that opposed efforts at reform in the 1990s nowat least recognize the problem andhavelinedupbehindthegeneralconceptofreform— althoughnoconsensushasyetbeenreachedonasolution.   * Thetaxcodecouldbeusedtoprovideanincentiveforparticipation inajobsharingscheme.InthepreviouschapterIsuggestedtheidea of“progressive”deductionsforwagespaid.Inasimilarfashion,high- erdeductionscouldbeprovidedtobusinessesthatagreedtoincorpo- ratejobsharingintotheirbusinessmodels. Transition / 187 CopyrightedMaterial–Paperback/Kindle available @ Amazon Onethingthatisabundantlyclearisthat,inaworld where traditional jobs are disappearing, access to health careinsurancecannotbecoupledtoemployment.Oneof theprimaryneartermgoalsfortheUnitedStatesshould be to establish auniversal healthcare system thatisnot tied to jobs. Additionally, as I pointed out in Chapter 3, payrolltaxes will become increasinglyunsustainable. The firststepsintransitioningtoanewmodelwillhavetobe toshifttheburdenformaintainingsocialprogramsaway fromtaxesonindividualjobsandtowardabroader,more sustainablemodelwhichfallsmorefairlyoncapitalinten- siveindustriesthatemployrelativelyfewpeople.Thebur- den that falls on a business should depend not on how many workers it employs, but on how successful that businessisatderivingwealthfromthemarket. Onceasystemisputinplacethatallowsworktobe shared on an equitable basis, it should be possible to achieve a relatively smooth transition into an automated economy.Overtime,theincentive-basedincomestreams provided by the government would increase, and the amountoftraditionalworkperformedwoulddecrease.As jobautomationincreasesandthewagespaidbybusinesses fall, the special taxes that have been put in place would needtobegraduallyincreasedtorecapturetheincome. Inadditiontotheprimaryeconomicobjectiveofsus- taining consumer demand, this would of course, have manypositiveimpactsonsociety.Individualswouldhave moretime forfamily,leisure,personalhealth andeduca- tion. Better educated consumers with more leisure time andmoreconfidenceintheirfutureincomeswouldresult THE LIGHTS IN THE TUNNEL / 188 CopyrightedMaterial–Paperback/Kindle available @ Amazon insustainedconsumerspending,vibrantdemandfornew products and services, and long-term economic growth. As incentive-based income became more important rela- tivetotraditionalwages,individualswouldseeincreasingly potent incentives to act in environmentally conscious ways,andthatwouldpotentiallyhaveasignificant,favora- ble impact on climate change and other environmental challengesinthecomingdecades.   Transitional Economy Average Income              Time Machines Becoming Autonomous Consumers and Workers Decoupled Machines Getting Better Value Transition / 189 CopyrightedMaterial–Paperback/Kindle available @ Amazon Keynesian Grandchildren While few contemporary economists seem particularly concernedabouttheseeminglyinevitabletransitiontoan automated economy, one legendary economist did have remarkableinsight into the future.In1930, as the world plungedintotheGreatDepression,JohnMaynardKeynes wrote an essay entitled “Economic Possibilities for our Grandchildren.” 53  In his essay, Keynes coined the term “technologicalunemployment,”writing:  Wearebeinginflictedwith anewdiseaseofwhichsome readersmanynotyethaveheard thename,butofwhich theywillhearagreatdealintheyearstocome—namely, technologicalunemployment.Thismeansunemploymentdueto ourdiscoveryofmeansofeconomisingtheuseoflabour outrunningthepaceatwhichwecanfindnewusesforla- bour. *   Keynesrecognizedthat,in1930,technologicalunem- ploymentwouldbeatemporaryphenomenonandthatthe economywouldeventuallyabsorbtheexcessworkers.The mainthrustofhisessaywastoattempttolookmuchfur-   * Today,wheneconomistsdiscussthecausesoftheGreatDepression, they tend tofocusalmostexclusively on themonetary policyofthe FederalReserve.Whilethereislittledoublethattheoverlyrestrictive policies of the Fed prolonged the Depression and perhaps turned a runofthemillrecessionintoadisaster,itshouldnotbeforgottenthat therewasawidespreadbeliefatthetimethatthetechnologicalunem- ployment(andtheresultingplungeinconsumerdemand)thatKeynes spoke of played an important role. Even Albert Einstein expressed thisopinionwhenaskedforhistakeonthecausesoftheDepression duringavisittotheUnitedStatesin1933. [...]... time, the most striking realization is that nothing else has changed in the tunnel As we watch, we see that the lights continue to softly impact the panels on the walls of the tunnel as consumers purchase products and services The businesses in the tunnel make no distinctions based on the color of the lights Over time, the process of creative destruction continues just as it always has Inefficient businesses... take their place Among the multitude of lights in the tunnel, we can see that there are still a significant minority which shine with intense white light The wealthiest people in the tunnel may be subject to somewhat higher tax rates, but the businesses and assets they own are retaining their value as the mass market continues to thrive Overall, we sense that stability has returned to the tunnel As the. .. for their own benefit—and, in particular, in ways that preserve their positions and power—rather than for the benefit of their country as a whole In the final analysis, it comes down to individual incentives People are primarily motivated to do things that they are paid to do Making an arms length investment in a country and somehow insuring that that investment creates appropriate and sustainable incentives... shift their color much more slowly The green light, of course, represents the purchasing power of consumers who are supported by incentivebased income streams rather than traditional jobs The lights rotate in color as jobs are shared among the workers first affected by automation The green lights initially represent a small minority of the lights within the tunnel Most people continue to be employed in. .. their income from incentive-based income streams Based on their particular interests and abilities, people pursue higher education, work in the community and make choices that benefit the environment with the understanding that doing these things will lead to a higher income and a better stanCopyrighted Material – Paperback/Kindle available @ Amazon THE LIGHTS IN THE TUNNEL / 196 dard of living Average... revenue), these taxes would be gradually increased to recapture at least a portion of this income The overall objective is to recapture just the optimal amount of income and then get it into the hands of consumers so that there will be sufficient consumer demand to continue driving the economy Once the income has been collected, I then argued that it should be directed to individual consumers based on incentives... among the population In this chapter, we are going to use some imagination and push forward even further into the future Let’s suppose that our transition has been underway for some time in the major industrialized and emerging economies Things have progressed to the point where the majority of people in the developed world no longer work full time Most consumers now receive a substantial portion of their... who begin to utilize energy and other resources at levels typical for the major industrialized economies Copyrighted Material – Paperback/Kindle available @ Amazon THE LIGHTS IN THE TUNNEL / 198 In this chapter, I am going to argue that, in a largely automated economy, it should be possible to attack poverty simply by gradually extending incentive-based incomes to people in developing countries The payments... absolute limiter of production in the free market economy We are, of course, speaking here of demand in the economic sense, which means desire for a product or service combined with the ability and willingness to pay for it No business will invest in production unless there is either existing market demand or the reasonable expectation of such demand in the foreseeable future The idea that production responds... one of the defining characteristics of capitalism Removing the Constraints Now that we’ve listed the four basic constraints on production let’s perform a thought experiment and imagine how those constraints might conceivably fall in the distant future if technology continues to relentlessly advance The point is simply to imagine which constraints could poten- Copyrighted Material – Paperback/Kindle . on theirparticularinterestsandabilities,peoplepursuehigher education,work in the communityandmakechoicesthat benefit the environmentwith the understandingthatdoing thesethingswillleadtoahigherincomeandabetterstan- THE LIGHTS IN THE TUNNEL / 1 96 CopyrightedMaterial–Paperback/Kindle. captures ourinterestforatime, the moststrikingrealizationisthat nothingelsehaschanged in the tunnel. Aswewatch,we seethat the lights continuetosoftlyimpact the panelson the walls of the tunnel as consumers purchase products and services. The businesses in the tunnel make no dis- tinctionsbasedon the colorof the lights. Overtime, the processofcreativedestructioncontinuesjustasit. role. Even Albert Einstein expressed thisopinionwhenaskedforhistakeon the causesof the Depression duringavisitto the UnitedStates in 1933. THE LIGHTS IN THE TUNNEL / 190 CopyrightedMaterial–Paperback/Kindle