🌌 Reshaped #33
Welfare reforms (part 2), Microsoft's gaming bet, social media and the US elections, Google's antitrust threat 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 sharing the second part of my excursus on welfare, with a special focus on the role of startups. This is a very relevant topic for all those who work in the innovation economy — as founders, employees, investors, regulators, academics, or journalists — since we sometimes tend to forget the many consequences of our activities on the future of society as a whole.
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New welfare for a new society (part 2)
This is the second and final part of my excursus on welfare reforms, started in a past issue. Here are the main takeaways of the first part:
Existing welfare systems are not suited to the big crises of our times and need a participated process of reform;
Modern welfare systems need to address the increasing inequality caused by the reinforcing loops of the asset economy;
Welfare systems vary depending on the commodification level of the economic activities and the direction of the intervention (bottom-up and top-down).
The goal of this second part is to further analyze the systemic nature of welfare and social justice reforms, with a particular focus on the role of the various actors of the innovation economy — mainly startups — in the desired system.
The systemic nature of welfare is extremely evident in its interconnectedness with the broader economic system. Take personal wealth as an example. Personal wealth is a stock that grows when inputs (income, gains, rents, or inheritances) are greater than outputs (expenditures, taxes, or losses). Governments use taxation to finance public services and regulate wealth levels across the population so that the rich do not grow disproportionately richer at the expense of the poor. In such a way, income taxes can be seen as balancing feedback loops that prevent wealth from growing exponentially in the hands of a few people — which is actually happening in the Western world, as perfectly explained by Thomas Piketty and other economists.
Balancing feedback loops are useful to prevent social disasters and redistribute wealth to make society more equal. However, they find it hard to balance a system where stocks grow not only because of direct inputs, but also thanks to reinforcing feedback loops. If a bank gives you a 10% interest rate on your investments, it makes a big difference if you have $10,000 or $100,000 to invest. If you have $100,000, the interest you receive allows you to grow your wealth exponentially at a much faster rate. This applies in almost every domain of our everyday lives. The rich family can allow paying higher tuition fees for the education of their children, who will have access to better jobs and more opportunities to grow their wealth.
This mechanism is brilliantly described by Donella H. Meadows in her Thinking in Systems: A Primer.
There are many reinforcing feedback loops in society that reward the winners of a competition with the resources to win even bigger next time—the “success to the successful” trap. Rich people collect interest; poor people pay it. Rich people pay accountants and lean on politicians to reduce their taxes; poor people can’t. Rich people give their kids inheritances and good educations. Antipoverty programs are weak balancing loops that try to counter these strong reinforcing ones. It would be much more effective to weaken the reinforcing loops. That’s what progressive income tax, inheritance tax, and universal high-quality public education programs are meant to do. If the wealthy can influence government to weaken, rather than strengthen, those measures, then the government itself shifts from a balancing structure to one that reinforces success to the successful!
This is why more and more economists are complaining about the limits of policies aimed at simply reinforcing redistributive systems. It is still possible to act to balance the system by reducing the impact of reinforcing feedback loops without armed revolts against the richest classes. For instance, in a recent article published by Pandora Rivista (in Italian), economists Fabrizio Barca and Patrizia Luongo claim that a new strategy for social justice should be built around two basic principles: access to knowledge and transfer of power. A welfare reform built on these principles could reduce the reinforcing feedback loops that increase the socio-economic power of those who already have power — revitalizing and democratizing a paralyzed social mobility.
But how does it translate to the innovation economy? In his Hedge: A Greater Safety Net for the Entrepreneurial Age, Nicolas Colin explains how the safety net that characterized the postwar Western world — built on the balance of social insurance, financial system, and collective bargaining — was destroyed by the neoliberal paradigm, too focused on financial performance. After reviewing the main features of what he calls “the Entrepreneurial Age”, Colin proposes a framework for a Safety Net 2.0 that has entrepreneurs as the main drivers of change. The problems of the new era cannot be addressed by simply improving the role of the state through social insurance programs like basic income or renewed unions.
Instead, he proposes a framework in which the major areas of interest of welfare policy (from housing to basic healthcare) are advanced through innovative ventures and entrepreneurial spirit, in close partnership with public institutions. According to Colin, startups can imagine the future and implement innovative solutions much more efficiently than the state, which would contribute to the scaling phase of the safety net later on in the process. The advantage of this framework is that it follows the natural flow of the digital economy, giving more power (and more responsibilities) to tech companies of all sizes. In addition, it relies on a broad bottom-up process of welfare reform based on the engagement of the citizen.
However, there are also disadvantages. The main thesis seems quite naive if we consider that some of the problems that modern welfare has to address stem from the role of startups themselves. Take as an example the mass layoffs during the recent lockdowns, or the privacy issues arising from our online presence. The startups Colin talks about are not social innovation ventures, but startups with three clear goals in mind: replicability, scalability, and profitability. They differ from Uber or Airbnb for their willingness to have a positive impact on society. Unfortunately, this is what almost all startups claim they aim to do with their offerings. And what about the financial speculation behind those startups? The majority of VCs follow the same logic of the private equity funds that have contributed to destroying the sustainable financial system of the Safety Net 1.0.
If we take Gøsta Esping-Andersen’s definition of decommodification and the direction of intervention to classify welfare systems, we could end up with something similar to the figure below.
As you can see from the picture, the Startup Economy scenario has the benefit of being a bottom-up approach (as envisioned by Hilary Cottam), but the limit of being poorly decommodified. This is quite straightforward: startups look for even the smaller market opportunity, with a tendency (in the long term) to commodify the entire economic spectrum of activities. In an ideal world, such a liberal scenario would lead to a world where all people could address their needs and have access to equal opportunities. Fortunately, we are now aware of the limits of this form of laissez-faire capitalism to refuse such a simplistic vision of a fully commodified world.
In the scenario I called Social Democracy (a term which I broadly refer to political proposals like Bernie Sander’s), the state retains control over a vast amount of welfare key constituents, from healthcare to education. However, it does so while empowering local ventures (from startups to family businesses) to identify and address viable market opportunities in a sustainable way — this latter parameter is particularly relevant when public funding and public equity participation are considered.
It is not a case that we end up with a welfare framework that resembles the “Welfare 5.0” model proposed by Hilary Cottam. Leaving the floor to startups — even if the state participates in the process by identifying key welfare priorities and by supporting the new ventures — ultimately means losing control over welfare mechanics, leaving them to the dangerous fluctuations of capitalism. A stronger role of the state is fundamental, especially if we are to gradually remove those reinforcement feedback loops that harm social justice reforms. However, it requires courage, patience, and competent politicians and administrators.
The state
The antitrust case against Google is taking form. The US Department of Justice will narrow its scope to focus on Google’s search engine monopoly (The New York Times). The goal of the regulators is to show “how Google uses its dominant search engine to harm rivals and consumers”. The specific focus of this suit leaves behind other crucial investigation areas such as advertising and news, but a higher degree of specialization might be beneficial to provide more concrete results. Nonetheless, advertising is already part of a separate investigation that “is expected to result in a suit accusing Google of using tactics that have undermined competition in the market for online advertising”.
While the tech backlash is intensifying in the US, as the reaction to the launch of Amazon’s Ring Always Home Cam shows (The New York Times), the battle continues in Europe over the digital tax. Specifically, the European Commission appealed against the General Court ruling that annulled the order to Apple to pay €14.3 billion in back taxes (Financial Times). The relevance of this case is enormous, as it sets a precedent for the tax regime of the entire tech industry.
Talking about digital regulation, take a look at Blacklight, the new tool developed by The Markup that “emulates how a user might be surveilled while browsing the web”.
Blacklight works by visiting each website with a headless browser, running custom software built by The Markup. This software monitors which scripts on that website are potentially surveilling the user by performing seven different tests, each investigating a specific, known method of surveillance.
The types of surveillance that Blacklight seeks to identify are:
Third-party cookies
Ad trackers
Key logging
Session recording
Canvas fingerprinting
Facebook tracking
Google Analytics “Remarketing Audiences”
The markets
Social media
Social media platforms are taking measures to approach the upcoming US elections in order to prevent the massive spread of disinformation (Time). Due to the possibility of a prolonged time span with no clear results, tech companies are working on “what to do if a candidate prematurely declares victory before the results have been made official [or] how to stop videos calling into question the legitimacy of the election from going viral”.
Meanwhile, the situation of TikTok seems to be clearer. During the weekend, an agreement has been found to spin out TikTok from ByteDance, creating a US-based, brand new company called TikTok Global (Ars Technica). ByteDance would still retain 80% of its shares, while the remaining would be split between Oracle (12.5%) and Walmart (7.5%). However, about 40% of ByteDance is owned by US equity investors, which makes the deal closer to Donald Trump’s requirements. The valuation of TikTok is not clear yet, which raises concerns about the structure of the deal.
TikTok Global plans to go public within one year in the US, thus increasing the portion of equity under the direct control of American shareholders. It will also create 25,000 new jobs in the US and pay $5 billion to the US Treasury — even if this point is not totally clear, as the government expects this amount to be invested in an education fund, while TikTok seems to intend it as a standard tax payment. The lack of clarity and the marginal role of Oracle — more a supervisor than an owner — may end up prolonging the ban of the app in the US.
Whatever the future of the deal, it is already a big strategic move for Walmart, which “could become a leader in online video commerce — an area of retail that has been a hit in Asia, but is still nascent in the US” (Recode). The company wants to fill the digital gap with Amazon and be the leader in e-commerce, especially after the launch of the Walmart+ subscription service, aimed at competing with Amazon Prime.
Assuming the deal gets done, Walmart says it will “provide our ecommerce, fulfillment, payments and other omnichannel services to TikTok Global.” […] TikTok users could buy merchandise created or promoted by their favorite TikTok artists without leaving the app, and TikTok could potentially use Walmart’s existing warehouse and “fulfillment” services to deliver the merchandise. […] Walmart could provide incentives for TikTok or its most popular creators to link to Walmart.com in those instances, but a deeper integration into the app could be the longer-term vision.
Big Tech
Microsoft rapidly went from losing the race to acquire TikTok to closing one of the most interesting tech M&As of the year. On Monday, Microsoft announced the acquisition of ZeniMax Media for $7.5 billion in cash. ZeniMax is the parent company of Bethesda Softworks, one of the major players in the game development industry and the creator of famous franchises like The Elder Scrolls, Fallout, and Dishonored. According to Microsoft, “Bethesda brings an impressive portfolio of games, technology, talent, as well as a track record of blockbuster commercial success, to Xbox”.
And this is the crucial point: the Seattle-based tech giant wants to enter the gaming industry as a first-class player, strengthening its Xbox business through new offerings and a renewed subscription-based business model. Microsoft joins a battlefield that includes primarily Google Stadia and Amazon Luna as the major competitors in the cloud gaming sector (CNBC). Like Apple, Microsoft is entering the quest for recurring revenues beyond its cloud computing business. It is also very interesting to read that Microsoft has agreed on a licensing deal with OpenAI to use the GPT-3 in its products and services.
Electric cars
During the Tesla Battery Day, Elon Musk announced some of the main goals for Tesla (The Verge). The most relevant of these goals is the future production of “tabless” batteries that could potentially last for the entire lifetime of an electric car. Being produced internally and with no cobalt, these batteries will strongly reduce the final price of EVs, making them comparable to traditional cars. Musk also announced the production of a new vehicle that will cost about $25,000.
The stock fell by 10% after the Battery Day, but Tesla remains the most valuable car manufacturer in the world. However, many raise concerns about the true impact of these cars in the reduction of global emissions. On The Guardian, George Monbiot argues that EVs do not eliminate the pollution generated by urban mobility and that a more ambitious effort should be done to reimagine our transportation habits.
A switch to electric cars will reduce pollution. It won’t eliminate it, as a high proportion of the microscopic particles thrown into the air by cars, which are highly damaging to our health, arise from tyres grating on the surface of the road. Tyre wear is also by far the biggest source of microplastics pouring into our rivers and the sea. And when tyres, regardless of the engine that moves them, come to the end of their lives, we still have no means of properly recycling them. […] Switching power sources does nothing to address the vast amount of space the car demands, which could otherwise be used for greens, parks, playgrounds and homes. It doesn’t stop cars from carving up community and turning streets into thoroughfares and outdoor life into a mortal hazard. Electric vehicles don’t solve congestion, or the extreme lack of physical activity that contributes to our poor health.
The speculators
This week, some relevant private fintech fundraising deals took place. Chime, a startup that provides banking services, raised a Series F round worth $485 million at a valuation of $14.5 billion (CNBC). It strongly benefited from the forced switch to digital caused by the pandemic, and it is now the most valuable US consumer fintech startup. This means it has surpassed Robinhood, which has raised an additional $460 million in its Series G round started in August, for a cumulative $660 million. The company is now valued at $11.2 billion.
Now, a closer look at public markets. GoodRx, a company that provides telemedicine services and tracks prescription drug prices in the US, went public on Wednesday raising $1.14 billion (Reuters). This is a slightly different tech IPO with respect to those described in the last issue, but the logic is the same: huge revenue growth and unstructured market, plus a great chance to control information flows. And, while we are waiting for the IPO of Airbnb, take a look at this recent analysis of the home-sharing startup by The New York Times.
A final remark about European ventures. Spotify founder Daniel Ek announced that he is ready to invest €1bn of his personal fortune in European tech startups in sectors like machine learning, biotechnology, materials sciences, and energy to overcome the funding gap that pushes entrepreneurs out of the European entrepreneurial ecosystem (TechCrunch).
The big picture
As many of you will not have the possibility to read the abovementioned article by Fabrizio Barca and Patrizia Luongo, I am providing some more details about their proposals. In the article, they outline five main goals for post-COVID welfare systems:
Improving access to knowledge through a more diffused role of higher education institutions, a mission-oriented strategy for state-owned companies, and a new effort at the European level to apply open science to address strategic issues such as digital transformation, energy transition, or healthcare and aging;
Freeing local knowledge by improving public services in non-urban areas and promoting local ventures to create jobs;
Promoting a new social agreement between citizens, companies, and unions to rebalance the structure of power in the jobs market;
Improving the chances of young people to build a future according to their aspirations regardless of their original wealth, for instance by providing them with a universal inheritance when entering their adulthood;
Improving the quality and the working methods of Public Administrations.
And now, a couple of reading recommendations for the weekend. On the Interner Policy Review, Madison Cartwright explains how the US managed to exploit the dominance of its tech companies on global markets to “internationalise state power through surveillance programmes conducted by national security and law enforcement agencies”. Now, thanks to Huawei and Tencent, China can do the same, challenging the status quo. The paper is an interesting addition to the various sources I have mentioned in the last issues on the US-China conflict. Finally, a new working paper by Hanna Szymborska contributes to a better understanding of the role of finance in the rise of inequalities in financialized economies since the 1970s.
Interested in the UBI debate? Take a look at this recent article by Visual Capitalist, which lists the most relevant basic income experiments worldwide.
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