High-tech companies are hijacking our data, our livelihoods, our social fabric and our minds, according to Financial Times columnist Rana Foroohar. She’s with us.
Rana Foroohar, global business columnist and an associate editor at the Financial Times. Global economic analyst for CNN. Author of “Don’t Be Evil: How Big Tech Betrayed Its Founding Principles — and All of Us” and “Makers and Takers: How Wall Street Destroyed Main Street.” (@RanaForoohar)
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Excerpt from “Don’t Be Evil” by Rana Foroohar
Too Fast to Fail
The late, great management guru Peter Drucker once said, “In every major economic downturn in U.S. history the ‘villains’ have been the ‘heroes’ during the preceding boom.” I can’t help but wonder if that might be the case over the next few years, as the United States (and possibly the world) heads toward its next big slowdown. Downturns historically come about once every decade, and it’s been more than that since the 2008 financial crisis. Back then, banks were the “too-big-to-fail” institutions responsible for our falling stock portfolios, home prices, and salaries. Technology companies, by contrast, have led the market upswing over the past decade. But this time around, it’s the Big Tech firms that could play the spoiler role.
You wouldn’t think it could be so when you look at the biggest and richest tech firms today. Take Apple. Warren Buffett says he wished he owned even more Apple stock. (His Berkshire Hathaway has a 5 percent stake in the company.) Goldman Sachs is launching a new credit card with the tech titan, which became the world’s first
$1 trillion market cap company in 2018. But hidden within these bullish headlines are a number of disturbing economic trends of which Apple is already an exemplar. Study this one company, and you begin to understand how Big Tech companies—the new too-big-to-fail institutions—could indeed sow the seeds of the next crisis.
The first thing to consider is the financial engineering done by such firms. Like most of the largest and most profitable multi- national companies, Apple has loads of cash—$285 billion—as well as plenty of debt (close to $122 billion). That is because—like nearly every other large, rich company—it has parked most of its spare cash in offshore bond portfolios over the past ten years. At the same time, since the 2008 financial crisis it has issued debt at cheap rates to do record amounts of share buybacks and dividend payments. Apple is responsible for about a quarter of the $407 billion in buy- backs announced since the Trump tax bill was passed in December 2017.
But buybacks have bolstered mainly the top 10 percent of the U.S. population that owns 84 percent of all stock. The fact that share buybacks have become the single largest use of corporate cash for over a decade now has buoyed markets. But it has also increased the wealth divide, which many economists believe is not only the biggest factor in slower-than-historic trend growth, but is also driving the political populism that threatens the market system itself.
That phenomenon has been put on steroids by yet another trend epitomized by Apple: the rise of intangibles such as intellectual property and brands (both of which the company has in spades) relative to tangible goods as a share of the global economy. As Jonathan Haskel and Stian Westlake show in Capitalism Without Capital, this shift became noticeable around 2000, but really took off after the introduction of the iPhone in 2007. The digital economy has a tendency to create superstars, since software and Internet services are so scalable and enjoy network effects. But according to Haskel and Westlake, it also seems to reduce investment across the economy as a whole. This is not only because banks are reluctant to lend to businesses whose intangible assets may simply disappear if they go belly-up, but also because of the winner-takes-all effect that a handful of companies, including Apple (and Amazon and Google), enjoy.
As we read in the last chapter, that’s likely a key reason for the dearth of start-ups, declining job creation, falling demand, and other disturbing trends in our bifurcated economy. Concentration of power of the sort that Apple and Amazon enjoy is a key reason for record levels of mergers and acquisitions. In telecoms and media especially, many companies have taken on significant amounts of debt in order to bulk up and compete in this new environment of streaming video and digital media.
Some of that high yield debt is now looking shaky, which under- scores that the next big crisis probably won’t emanate from banks, but from the corporate sector. Rapid growth in debt levels is historically the best predictor of a crisis. And for the past several years, the corporate bond market has been on a tear, with companies in advanced economies issuing a record amount of debt; the market grew 70 percent over the last decade, to reach $10.17 trillion in 2018. Even mediocre companies have benefited from easy money. But as the interest rate environment changes, perhaps more quickly than was anticipated, many could be vulnerable. The Bank for Inter- national Settlements—the international body that monitors the global financial system—has warned that the long period of low rates has cooked up a larger than usual number of “zombie” companies, which will not have enough profits to make their debt payments if interest rates rise. When rates eventually do rise, losses and ripple effects may be more severe than usual, warns the BIS.
Of course, if and when the next crisis is upon us, the deflationary power of technology exemplified by companies like Apple could make it more difficult to manage. That is the final trend worth considering. Technology firms drive down the prices of lots of things, and tech-related deflation is a big part of what has kept interest rates so low for so long; it has not only constrained prices, but wages, too. The fact that interest rates are so low, in part thanks to that tech-driven deflation, means that central bankers will have much less room to navigate through any upcoming crisis. Apple and the other purveyors of intangibles have benefited more than other companies from this environment of low rates, cheap debt, and high stock prices over the past ten years. But their power has also sowed the seeds of what could be the next big swing in the markets.
Excerpted from DON’T BE EVIL by Rana Foroohar. Copyright © 2019 by Rana Foroohar. Excerpted by permission of Currency, an imprint of Penguin Random House LLC. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Financial Times: “Opinion: Fact-checking Facebook’s fantasies” — “Criticising Big Tech can feel redundant at a time when many chief executives in Silicon Valley are doing such a good job of making the public sceptical about their business models and their executive competence all by themselves.
“Even so, Mark Zuckerberg’s speech at Georgetown University and his testimony on Capitol Hill last week are worthy of note. Facebook insists it does not want to be responsible for false political advertising. So I’d like to help Mr Zuckerberg out by fact checking a few of the points of disinformation in his own communications.
“Let’s put aside the total non-starters — like the fact that a man who has become a billionaire via surveillance capital — the industrial-scale monetisation of personal data — invokes the civil rights leaders Frederick Douglass and Martin Luther King in his efforts to avoid appropriate regulation. Instead let’s start with Mr Zuckerberg’s assertion that Facebook is part of the ‘fifth estate’.
“The 1960s term, which refers to a counterculture of journalists and intellectual outsiders who are critical of mainstream society, is associated with a Detroit-based anarchist magazine of the same name, which was struggling against, among other things, capitalism. Facebook, on the other hand, is one of the flagships of surveillance capitalism. The fact that Mr Zuckerberg (or his minders) chose that phrase reveals a shocking lack of historical perspective.”
This article was originally published on WBUR.org.