Tech business economy crisis

Major economic downturn in US history, the ‘villains’ have been the ‘heroes’ during the preceding boom,” said the late, great management guru Peter Drucker. I cannot 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 has 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 is 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% stake in the company.) Goldman Sachs is launching a new credit card with the tech titan, which became the world’s first $1tn 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.

No matter what the Silicon Valley giants might argue, ultimately, size is a problem, just as it was for the banks. This is not because bigger is inherently bad, but because the complexity of these organisations makes them so difficult to police. Like the big banks, big tech uses its lobbying muscle to try to avoid regulation. And like the banks, it tries to sell us on the idea that it deserves to play by different rules.

Consider the financial engineering done by such firms. Like most of the largest and most profitable multinational companies, Apple has loads of cash – around $210bn at last count – as well as plenty of debt (close to $110bn). 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 10 years. This is part of a Kafkaesque financial shell game that has played out since the 2008 financial crisis. Back then, interest rates were lowered and central bankers flooded the economy with easy money to try to engineer a recovery. But the main beneficiaries were large companies, which issued lots of cheap debt, and used it to buy back their own shares and pay out dividends, which bolstered corporate share prices and investors, but not the real economy. The Trump corporate tax cuts added fuel to this fire. Apple, for example, was responsible for about a quarter of the $407bn in buy-backs announced in the six months or so after Trump’s tax law was passed in December 2017 – the biggest corporate tax cut in US history.

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Because of this, the wealth divide has been increased, 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 epitomised 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 their book 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 (in essence, they allow a handful of companies to grow quickly and eat everyone else’s lunch). 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.

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