VCs On Inequality, Unemployment, And Our Uncertain Future

The Great Bifurcation is underway. The American economy is polarizing between the minority rich and the majority poor; technology is a major cause of this; and the rest of the world will soon follow, if it hasn’t already. I’ve been writing about this for years, and by now you’re probably sick of my perspective — so I went to tech VCs Steve Jurvetson and John Frankel for theirs.

Let me just set the table first. Not so long ago, the Great Bifurcation thesis was a minority view. Now it’s nearly the consensus. The New York Times recently announced: “The middle class is steadily eroding. Just ask the business world.” The Wall Street Journal concedes: “Last year, the richest 10% received more than half of all income, the largest share since such record-keeping began in 1917.”

Forbes argues that “around 70% of American families are receiving more from the government than they are paying in.” (Which is exactly what you’d expect from a progressive tax system in a time of drastic inequality.) In Silicon Valley, “those making $100,000 and up, a group that constitutes 45 percent of the region’s population, saw their incomes rise” last year … but incomes fell for those making less than that.

Is tech to blame? Is technology destroying jobs faster than it creates them? A couple of years ago, that view was often dismissed offhand with a little contemptuous muttering about buggy whips; nowadays it is taken extremely seriously by The Economist, The New York Times, The Financial Post, and others, courtesy of Erik Brynjolfsson and Andrew McAfee’s book The Second Machine Age.

OK then. Brace yourself. There’s a lot to chew on down below.

So. Steve Jurvetson. He sits on the boards of Tesla and SpaceX, among others; he’s a managing director of Draper Fisher Jurvetson, who just raised $325 million for their eleventh early-stage fund; and he’s been pondering the accelerating divide between the rich and the poor for some time, as per his Solve for X talk from last year.

John Frankel, based in NYC, is the founding partner of ffVC — who recently raised $52 million across two funds — and sits on the board of Klout and Interaxon, among others. He followed up on our wide-ranging conversation two months ago by writing:

Technological disruption seems to be accelerating and we think it is due to a secular confluence of advances in technology and development of platforms, which leads to more unemployment in the short term. The problem is that the Federal Reserve’s response was to cut interest rates to zero making capital even cheaper vs. labor. This pulls forward investment in technology that displaces labor and accelerates disruption, causing more unemployment, into a vicious loop. The Fed seems to have created half the problem here but cannot see that raising interest rates would slow down the rate at which jobs are being replaced. I am concerned that if robotic technology gets cheap enough we reach a tipping point where too many industries are disrupted at the same time, leading to massive unemployment and too long to retrain people.

Theoretically, by extrapolating the trend, we might hit 60% unemployment. But, that is impossible, and the impossible does not happen. Something will break before then. But this is like a new Industrial Revolution, and though we know the outcome of that, which most would say was good, it was rough getting there. There are many dystopian outcomes you can see here, but I want to be hopeful.

…which sets the tone nicely. You cannot accuse either Frankel or Jurvetson of trying to hide their heads in the sand and/or minimize the situation. They’re both extremely accomplished and intelligent men who have thought deeply about the subject from a variety of angles; in the long term, they’re both optimists (as am I); but the medium term seems uncertain, at best, to us all.

Feedback, Religion, and Social Media

Both of them talked about sociopolitical feedback loops a lot. Consider social media. On the one hand, Frankel argues that “social media empowers the people — Twitter in Turkey, Facebook in Brazil — and forms a tighter feedback loop among people and between those who govern and the governed in a way that takes power from those who govern.” On the other, Jurvetson suggests that since increasing inequality can obviously foster resentment, an important open question is: do social networks subtly aggravate that resentment, since envy is often their default emotion, as everyone tries to show off and paint the best possible portrait of themselves? Will Facebook and Twitter become subtle but potent equalizers of power, or will they breed a vicious cycle of jealousy and anger between the rich and the poor? Or both?

In a similar vein, Jurvetson has said: “One tech-related concern with religion is that it appears to be a positive feedback loop to the accelerating rich-poor gap, as the disenfranchised opt out of modernity.” He cites Sam Harris:

While most developed societies have grown predominantly secular, with the curious exception of the United States, orthodox religion is in florid bloom throughout the developing world. Religiosity is strongly coupled to perceptions of societal insecurity. In addition to being the most religious of developed nations, the United States also has the greatest economic inequality. The poor tend to be more religious than the rich, both within and between nations. And on almost every measure of societal health, the least religious countries are better off than the most religious.

He also suggests that a similar feedback loop — the famous network effect, aka the winner-take-all nature of much of the tech industry — may perpetuate America’s pre-eminence. Even as and when China grows wealthier than America, America’s tech giants are likely to remain dominant for the foreseeable future. (At the same time, of course, technology will be an enormous boon to people throughout the developing world, and Steve is eager to invest in companies that can help capture/maintain/provide health information around the world; to paraphrase him, health is very low on Maslow’s hierarchy of needs, and at the same time, so much of healthcare is simple information transfers. What’s more, another significant piece is pharmaceuticals, which, in a slightly more distant and misty-eyed future, can be delivered by drone.)

But for a more stark and pessimistic view of the future of the developing world, see John Robb:

There's a race to see if 2.5 billion people in the BRICs can reach the middle class before tech eats the economic system. I bet tech.—
John Robb (@johnrobb) January 29, 2014

Basic Incomes and Reputation Economies

I was a little surprised by how open both Jurvetson and Frankel were to a drastic revision of our social / political / economic status quo, in order to accomodate a new normal. Frankel spoke approvingly of some form of a sizable basic income replacing all of America’s existing welfare/entitlements/tax credits/etcetera. Jurvetson was more cautious with his enthusiasm, but was certainly willing to take the idea seriously, along with notions like Milton Friedman’s negative income tax, or the intriguing notion from one Shwan Jo:

I wonder what would happen if we had a tax system that organically responded to the wealth distribution in the country. Not meaning there is simply higher rate as you go up, but which is responsive to the rate of change of the shape of the distribution. Thus, the calculation is adaptive to a shape that changes too quickly.

Both also agreed that reputation economies will continue to grow in importance. As Jurvetson pointed out, in an unofficial, unquantified way, a lot of us already spend a lot of time maintaining our reputation. (Indeed, if you ask me, all marketing is a kind of reputation-economy investment.) And Frankel, of course, is a director of Klout.

The Bitcoin Dilemma

One subject on which they do not agree: Bitcoin. Frankel speaks and tweets of it dismissively:

ha! so simple and, well, true #bitcoin #ponzi ponzi.io—
john frankel (@john_frankel) February 08, 2014

Bitcoin is doing a very good impression of being a momentum driven asset that has no underlying value. #Tulip—
john frankel (@john_frankel) December 08, 2013

whereas Jurvetson is a (long-term) believer in e-cash in general — he wrote an article about e-cash and its sociopolitical side effects for the Stanford newspaper twenty years ago, in fact — and, technically, at least, admires Bitcoin’s blockchain solution of the Byzantine Generals’ Problem. (Also, his precocious son insisted more than a year ago that his allowance be paid entirely in Bitcoin, which has worked out well for him.)

He is, however, a little concerned that semi-anonymous cryptocash like Bitcoin, if/when it becomes widespread, may be a double-edged sword; enormously useful to the developing world, where it could give financial tools to the unbanked and cut transfer fees/difficulties immensely … but, in theory, cryptocash could also be used for tax avoidance/evasion among the wealthy, which could undercut any basic income those taxes are meant pay for. (All in some indefinite future, obviously.) A solution which isn’t worryingly surveillance-state might be anonymous e-cash for small amounts but identified/tracked e-cash for large amounts / taxes etc … if that can be technically enforced.

Our Clouded Road To Utopia

In the long term, both agreed, everything is going to be great: innovation and new technologies will make lives colossally better around the world. The question is how we get to that destination. As Steve put it: “The problem isn’t that jobs are going away, it’s that people need jobs.” After a difficult medium-term period of disruptive transition, this new revolution should benefit every human being on the planet…but the exact mechanism, the means by which we as a society morph from the difficult period just ahead into that quasi-utopian low-scarcity future, remains stubbornly unclear. “And then a miracle occurs!” Steve joked, describing that transition.

Frankel agrees that we’re in uncharted territory:

We are not the only people that see now as something similar to the Industrial Revolution with regard to job and social disruption, secular unemployment and rapid adoption of new technologies. What is new this time is that it is happening in every country, every imaginable political regime, every place at the same time. The Industrial Revolution burned through countries slowly: Great Britain first, then Europe, then the US, etc. Here it is all playing out everywhere at the same time. If software is eating the world, it is eating it at the pace of a World War Z Zombie! […] I don’t know what’s going to happen. Nobody does. We need to just keep innovating for a better outcome.

Food for thought.

Image credit: James Vaughan, Flickr.