🌌 Reshaped #30
The conflict between the US and China, equity taxation, MBA struggles, SPACs boom, Palantir and its industry and much more
Welcome to a new issue of Reshaped, a newsletter on the social and economic factors that are driving the huge transformations of our time. Every Saturday, you will receive my best picks on global markets, Big Tech, finance, startups, government regulation, and economic policy.
This week I am concentrating on the relationships between China and the US, a topic that is going to be more and more crucial as we approach the American elections.
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The State
Last week, I somewhat missed the news that the Chinese government has restricted the export of some key technologies, which now require explicit approval to be sold abroad (The Guardian). Exports in 23 technological fields will be scrutinized by national authorities — a process that could last up to 30 days. For China, this is the first major restriction in technology exports since 2008 and a new act of the trade war with the US. Restrictions could place at risk the sale of TikTok to a US-based corporation, since “TikTok’s recommendation algorithm relies on domestic technology that might need to be transferred to a new overseas owner”.
But what is the future of the trade war between China and the US (see The big picture for more on that)? The Democratic candidate Joe Biden is facing pressures to differentiate its trade strategy from Trump’s in the electoral campaign (South China Morning Post). According to recent research, “a record 73 per cent of Americans now hold an unfavourable view on China, yet 51 per cent want to broker a strong economic relationship with America’s greatest modern-day rival”. Managing this contradiction means, above all, setting a clear space of cooperation on key areas like climate change and data governance regulation, leaving the harsher competition to growing economic areas like space and consumer technologies.
On the relationship between China and the US, I was surprised to read that “the share of the country’s income held by the top 10% of China’s population rose from 27% in the late 1970s to 41% by 2015”, which means that inequalities within the country are increasing over time (Quartz). Until 2001, the trend is absolutely comparable to that of the US; after 2001, the gap starts to close, which is to say that both countries produce almost the same amount of income inequality (see chart below).
To invert this trend, the typical recipe endorsed by left parties includes higher income and wealth taxes — with a growing focus on inheritance. However, according to Sam Lessin, there is a third way: equity taxation (The Information). This applies, in particular, to areas with high startup density like San Francisco, where a 5% equity tax on new companies could finance a sovereign wealth fund capable of realigning the private interests of founders with those of the public sphere. This makes sense from a solutionist point of view: we have plenty of startups that have a major impact on the socio-economic structure of the region, so we take a small percentage of their equity to have more control.
This might sound like an entrepreneurial state kind of measure, except that it acts on the results of a pure laissez-faire economic ground. Instead of proposing such a remedy, bold policies would realign public and private interests at the roots of the problem: the disproportionate rewards that financial speculators and venture founders get from accessing public markets — which produces inequalities — and the competitive advantage that venture-backed startups have with respect to incumbents to access and disrupt industries — which builds on inequalities. An equity tax would be reasonable, but only if it is paired by ambitious wealth taxation to act on the pre-distributive side of the game.
The markets
Critics of the innovation economy often point the finger at the diffused inconsistency between a startup’s values and its actual behavior. This applies at both the external and the internal level — which goes from labor management to production processes. Among the latest startups to be accused of such an inconsistency there is Carta, which defines itself as a disruptor of the financial sector on a mission to “change how equity works, how founders raise money, how companies offer liquidity to their employees, how investors interact with their LPs, and how assets are managed”. However, the reported experiences of current and former employees reveal the real distance between these commitments and the daily practices of the company in managing the relationship with its workforce (The New York Times).
This is not surprising for practitioners of the innovation economy: the Silicon Valley model is built around flexibility, which, in turn, can easily take the form of distorted organizational structures. If not managed appropriately, these can result in diffused employee dissatisfaction and high turnover rates, when the vision is not considered anymore reliable or achievable. An eventual loss of appeal of startups at the aggregate level is still possible. However, this seems to have little effect on the tech industry as a whole, which is going to surpass traditional employers of MBA graduates like consulting and financial services companies because of the negative effects of the pandemic on non-tech industries (The Wall Street Journal).
But, if networking is almost impossible and job opportunities languish, what is the benefit of an MBA in 2020 if students “pay $200,000 or more to attend some of the most elite programs” and are not rewarded proportionately? As for many other contexts, Big Tech companies are saving the MBA industry, eventually narrowing the spectrum of career opportunities of graduates. Voluntarily or not, tech corporations are filling all the gaps the pandemic left behind, with systemic effects that are hard to forecast.
And now, a quick overview of the top news of the week you cannot miss.
Palantir is preparing to go public, but the majority of us know nothing about it. A recent article on The Economist explores in depth its business model and compares it with other companies in the sector that are cloud-native.
Successful corporate-software firms develop programs and services that can be offered without much customisation to many clients. This is trickier in the data business, where every company has a unique digital footprint. When Palantir got going, it was in effect a professional-services firm, chiefly creating bespoke data-analysis systems for the likes of the CIA and the Department of Defence. In recent years it has developed more generic products for corporate clients. But its scepticism of standardisation means it continues to deploy plenty of engineers to tweak them.
But the best piece I have found on Palantir was posted some days ago by Byrne Hobart on The Diff: even if you are not interested in the company, this is a must-read.
After the unexpected surge in subscriptions due to COVID-19 (now totaling 193 million worldwide), Netflix is planning to offer part of its streaming services for free in order to attract larger portions of users (Business Insider). While most tech companies are focusing on the reinforcement of their revenue model, Netflix continues to bet aggressively on customer acquisition, which means safeguarding customer experience while sacrificing advertising revenues (The Drum). This makes sense, as rival platforms like Amazon and Disney+ have the potential to challenge Netflix in the short term. However, the transition to a freemium business model might have huge implications for the company and reduce its control of revenue generation. Meantime, Prince Harry and his wife Meghan Markle just signed a $150 million contract with Netflix for content production (The New York Times).
Experiments on pigs will reveal more about the potential of Elon Musk’s Neuralink (The Verge). The futuristic brain implant has changed a lot since the last presentation (see picture below) and the first clinical trials on people affected by spinal cord issues are already scheduled for this year.
The speculators
Thursday brought the first sign of a drop in the financial bonanza of tech-driven financial markets, which is normal if you consider that “corporate profits for S&P 500 companies are expected to be down nearly 20 percent this year” (The New York Times). We can expect a period of fluctuations, to reach some kind of balance between Wall Street and Main Street in the medium term. For sure, financial speculation will continue to exploit this peculiar window between a global pandemic and the evident display of its permanent effects on the global economy. And the most impressive example of that is the boom in SPACs over the last couple of months (for a review of the implications of SPACs for the innovation economy, see this past issue).
According to Bloomberg, Airbnb has recently refused an approach by Bill Ackman to merge with his SPAC company. This makes sense: despite the pandemic and the risk of collapse of tourism companies, Airbnb — which suffered a drop in valuation from $31 to $18 billion — feels comfortable about going public alone by riding the wave of investors’ faith in tech. The resilience showed by Airbnb could also generate a higher IPO valuation than initially expected.
But what about individual investments? This week the business model of Robinhood was hit by the SEC probe regarding “its early failure to fully disclose its practice of selling clients’ orders to high-speed trading firms” (The Wall Street Journal). This could result in a $10 million fine, but, most of all, in a more advanced debate about the regulation of the successful fintech platform.
The big picture
The trade war between the US and China is the common line that connects the four books reviewed by Adam Tooze on the London Review of Books. The author provides a brilliant analysis of how the US managed to include China in the WTO and from then to a leadership position in the world economy. This happened primarily because of the intense lobbying activities of domestic corporations, which profited from Chinese mercantilistic economic policies to the detriment of the US blue collars.
The crude Trumpian take, which is perhaps also the kindest, is that the US negotiators of the 1990s and early 2000s were chumps, suckered by the Chinese. The more sophisticated version is that Bill Clinton’s team were too committed to the kind of modernisation theory Frances Fukuyama spun in his ‘end of history’ essay in 1989. They believed the liberal story that as China’s economy matured it would inevitably develop a need for the rule of law and representative democracy. If the Communist regime refused this logic and clung to its old ways, the laws of social science would condemn it to economic stagnation. Either way America had nothing to fear.
The crucial point of the current conflict, however, has long roots and is not fully related to trade. The sense of the evolution of US politics until Trump can be better understood by looking at the separation between national security and economic growth. The impossibility of clearly telling the former from the latter — an illusion brought by the failed dream of a US-led unipolar world — has reshaped modern geopolitical dynamics.
One of the effects of America’s unipolar dominance in the wake of the Cold War was that it permitted a clean line to be drawn between economic and security policy. Economic growth powered by globalisation was geopolitically innocent. In the best case, as liberals hoped, economic development would produce political and legal convergence. China would become a partner in a system shaped by the US. And if it didn’t, it couldn’t cause any real harm because America’s military and economic predominance were so overwhelming that no economic event, be it a historic crisis or a dramatic burst of growth, could seriously challenge it. […] The scale of China’s growth, combined with the determination of its political leadership, has undone the notional separation of economics and security policy entirely.
This explains why pro-Trump, radical conservatives are pressing to stop reinforcing Chinese economic growth, first of all by rejecting the convergence policy that characterized the previous decades. In a world that struggles to find new ways to grow — but, most of all, in a world that struggles to reinvent itself in the post-capitalist economy — growth becomes a key factor in the international balance of power. This is not new if you look back at modern history up until 1945. However, this is a severe and definitive coup de grace for the American illusion that its dominance formula (free-market economy paired with Western democracy) could provide a stable position to exploit for decades to come.
I am curious to know your opinion on the topic, which is strictly related to the recent article by Branko Milanovic I reported in the last issue on globalization and inequality: will the trade war translate into a class war?
Thanks for reading.
As always, I am waiting for your opinion on the topics covered in this issue. If you enjoyed reading it, please leave a like (heart button above) and share Reshaped with potentially interested people.
Have a nice weekend!
Federico