MONEY Economy

Would Hillary Clinton’s Profit-Sharing Plan Put More Money in Your Pocket?

Democratic presidential candidate Hillary Clinton speaks during a campaign town hall meeting in Dover, New Hampshire July 16, 2015.
Brian Snyder—Reuters Democratic presidential candidate Hillary Clinton speaks during a campaign town hall meeting in Dover, New Hampshire July 16, 2015.

It might. But it wouldn't address the bigger forces holding down wages.

Democratic presidential candidate Hillary Clinton on Thursday outlined a plan to encourage companies to share more of their earnings with workers. It’s a tax credit companies could get for two years if they set up a profit-sharing plan tilted toward the lower- and middle-income employees on the payroll. (The tax credit would phase out for higher-paid workers.) In an example used by the campaign, if an employee was paid $5,000 in a profit-sharing bonus, the company would get a tax break of up to $750.

At least at first, the plan has generally been interpreted as part of Clinton’s tilt toward the progressive side of the economic debate. “Veering left…” is how the insider political paper The Hill put it.

Clinton herself has fit profit sharing into her broader message about fixing economic inequality. Here’s a graphic from the campaign website that illustrates the story Clinton is telling about what’s driving inequality. Companies are doing great and getting more productive, but they haven’t haven’t been sharing those gains with workers:

SOURCE: hillaryclinton.com, based on data from the Economic Policy Institute

But even though profit sharing has the word “sharing” in it, it’s actually a pretty business-friendly approach. (The idea that the credit phases out for higher earners is the main way you can tell the proposal comes from a Democrat.) Lots of companies like the idea of paying their people more only when the business is doing well; the flip side is they can pay less in fallow years. In the jargon of human resources, other names for profit sharing are the much less warm and fuzzy sounding “pay-at-risk” and “variable pay.” Walmart, a company that’s famously tough about holding down its labor costs, used to be well-known for profit sharing.

At qz.com, writer Alison Shrager worries that more profit-sharing would just shift more pay out of steady wages and into up-and-down bonuses, adding another source of instability to the finacial lives of low-and middle-income workers. The Clinton campaign told Vox.com that companies would only be able to get the credit for profit sharing above regular wages—presumably meaning they couldn’t cut salaries and then get a credit for adding a profit-sharing plan. But over time, as companies gave out regular raises and made new hires, or as new firms started up, the mix of pay might still shift toward variable bonuses. Profit sharing eligible for the credit would be capped at 10% of salary.

If Clinton’s proposal became law, it would really be just one more of several tax policies that shape how companies structure their pay. If you get health insurance at work or a 401(k) match, that’s because the tax code makes it appealing for companies to pay you that way. You pay less tax on $1 of health insurance or $1 of a 401(k) match than you do on $1 of straight cash pay, so companies like to offer those benefits; similarly, it would be slightly cheaper for a company to give you $1 of profit sharing than to give you $1 of a raise. As an economist will tell you, the health insurance you get at work isn’t a free gift on top of your pay. It’s part of your overall compensation. If companies didn’t offer health coverage, they’d have to pay us more. (Of course, then we’d still have use that money to buy insurance.)

So perhaps Clinton’s plan would largely move money from one line in your pay stub to another. But it might be better than a zero-sum game. For one thing, it’s effectively a tax cut on pay, which the Clinton campaign says is worth $10 billion to $20 billion over ten years—not huge as these things go. Companies would get the credit directly, but to the extent that it encouraged companies to make more money available for profit-based bonuses, the tax break could flow through to workers. (Though the campaign says one purpose of the temporary credit is simply to offset the administrative costs of starting up a profit-sharing program.)

And there’s at least some evidence that companies with profit sharing actually do pay more overall. An influential think-tank policy paper on “inclusive prosperity,” which the Clinton campaign is reported to be be drawing from, points to a study of the effects of profit sharing by the economists Joseph Blasi, Richard Freeman, and Douglas Kruse. Based on surveys of workers, it found that pay was generally as high or higher among companies that gave workers some kind of stake in company performance. That includes not just profit-sharing bonuses but employee stock options and other programs.

Why? Partly it may be because you have to give people a shot at higher total pay to compensate for the risk that they might not do as well in some years. Or, the economists write, it could be that people are getting paid more because profit sharing spurs them to be more productive. That looks like a win-win, but its not exactly money for nothing. Maybe profit sharing works because it improve morale, reduces employee turnover and gives people an incentive to worker smarter and more creatively. Or perhaps anxiety over losing a bonus scares people into working harder and faster.

But the wage stagnation of the past several decades isn’t mainly a productivity problem—just look at the Clinton campaign’s own graphic above. People with jobs these days are already working smart and working hard.

Profit-sharing tax credits might nudge some companies to share more of the gains from that productivity with people outside the C-suites. But the story of the last several years is that it’s taken employment a long time to climb back from the hit it took in 2008. One thing that really helps people get more pay—whether it’s in cash, bonuses, stock option, pensions, or insurance—is full employment and a hot labor market, where companies have to do everything they can to get the workers they need. That’s something Washington has had a hard time delivering.

TIME 2016 Election

Bush Hails Uber, While Clinton Criticizes

Democratic presidential candidate Hillary Clinton speaks at The New School on July 13, 2015 in New York City.
Andrew Burton—Getty Images Democratic presidential candidate Hillary Clinton speaks at the New School in New York City on July 13, 2015

The tricky politics of the gig economy

Uber hitched an unexpected ride on the 2016 campaign trail this week.

During a rollout of her economic plan Monday, Democratic frontrunner Hillary Clinton took companies like Uber to task for not giving drivers benefits. On Friday morning, Republican presidential candidate Jeb Bush plans on hailing an Uber in San Francisco to show his support for the ride-sharing company and others like it.

For some Republicans, the contrast made Clinton an easy target.

Rep. Elise Stefanik of New York, the youngest woman ever elected to Congress, argued the former Secretary of State was out of touch with the younger generation. “If you look at millenials, we love those companies [like Uber], we love consumer choices,” she said. “It’s a big mistake, I think, that Secretary Clinton chose to go after those companies that are really disrupting those industries for the better.”

But the politics of Uber aren’t so clear cut for either side.

While Republicans love the idea of breaking taxi unions, GOP support for the sharing economy isn’t so clear-cut. Most of the sharing economy vanguard—companies like Uber, AirBnB and Lyft—were born in California, a big blue state, and their corporate blueprints assume the kind of large social safety net favored by Democrats.

As Uber CEO Travis Kalanick told reporters in Washington in November, the Affordable Care Act was “huge” for his company because the “democratization of those types of benefits allow people to have more flexible ways to make a living.” In other words, his company didn’t have to provide health insurance because drivers could buy it on their own through Obamacare. (That was eight months before a California court ruled that Uber drivers are, in fact, employees and thus were owed typical benefits, a decision the company is appealing.)

Democratic Sen. Mark Warner of Virginia, who built a fortune in cell phone technology, calls it “the gig economy.” Part-time or temporary workers already account for 40.4% of the workforce, up from 35.3% in 2006. Many of these workers have several jobs doing things like driving for Uber, renting out their couch through Airbnb or doing freelance journalism, software coding or videography. These jobs provide workers with flexibility and give them an alternative to unemployment, but the drawback is that they don’t come with the standard package of benefits most full-time workers have long enjoyed.

Underlining Clinton’s concerns about the gig economy, Jake Sullivan, one of her top policy advisors, told a group of Washington journalists at a breakfast Tuesday organized by the Christian Science Monitor that there’s no easy answer. “It’s a huge question and a very hard one,” he said.

While Clinton faces the risk of looking uncool by criticizing companies like Uber, Bush faces an even tougher question. After all, repealing Obamacare is at the top of every 2016 Republican candidates’ list. It’s one thing to ride in an Uber, but quite another to figure out how to fix its business model if the safety net shrinks.

But if the 2016 candidates are just skirting around the edges of the issue, Congress has barely touched it.

A self-described pro-business moderate, Warner is just about the only one on Capitol Hill thinking about these issues. He’s exploring legislation that would help freelancers, such as creating an Obamacare-type program for retirement benefits or building off the model that some trade unions have for contract workers to receive benefits. He also is looking to revamp the tax code to create a category for “dependent workers,” a hybrid between a contractor and a full-time employee that would end the debates, if not the legal challenges, on exactly what kind of an employee gig economy workers are.

But Warner is months, if not years, away from legislation and little is likely to pass before the election, regardless. Which leaves the issue open for debate among the 2016 field. Where should workers in the gig economy get benefits: from their employers or the government?

TIME Congress

13 Reasons the Government Could Shut Down Again This Fall

Congress Convenes On Columbus Day As Government Shutdown Continues
Mark Wilson—Getty Images The U.S. Capitol in Washington in 2013.

Democrats and Republicans don't see eye to eye on spending

Do you miss the government shutdown? Don’t worry, another one could be coming as soon as this fall.

You might have thought the threat of another shutdown was shelved last year when congressional Budget Committee Chairs Rep. Paul Ryan and Sen. Patty Murray came to a two-year bipartisan deal to fund the government.

But the new Republican Congress blew up that deal, and a shutdown could be part of the fallout.

Republicans are now attempting to undo controversial cuts to military spending in the 2013 sequester. Democrats are having none of that: if the Pentagon gets its money, they argue, so too should entitlements, as was part of the original deal. Unless Republicans relent on this point, Democrats have vowed to block all 13 appropriations bills from coming to the Senate floor.

But even if those bills were to get voted on, odds are they won’t pass since they have dozens of provisions that Democrats object to — and which President Obama has threatened to veto.

If some sort of funding isn’t passed by the end of September, the government will shut down. Senate Majority Leader Mitch McConnell swears that will not happen on his watch, but for now the two sides aren’t even talking.

So what could cause a shutdown? Here’s a look at the 13 most controversial provisions, any one of which could trigger a partial or total government shutdown if Democrats and Republicans can’t come to an agreement.

  1. Obamacare: Of course, the bills cut funding for the implementation of Obamacare — the same law that caused the last shutdown.
  2. The environment: The bills would essentially defund or block the President’s climate change plan—including his recently issued controversial rule for coal fired power plants, a clean water rule and a bunch of endangered species listings. All told there are more than 30 riders that environmental groups are protesting.
  3. Cybersecurity: On the heels of a massive breach of personal information for tens of millions of government employees, the GOP budgets would delay installation of cybersecurity upgrades to federal agencies to protect against foreign attacks and cut funding to protect the nation’s electronic grid from cyber attacks and extreme weather by 40%.
  4. Education: The GOP bills would cut nearly $6 billion in education funding, eliminating six pre-K-12 programs, slashing Head Start by $1.5 billion, cutting 21st Century Community Learning Centers by 10% and School Improvement Grants by 11% and $300 million in Pell Grants.
  5. Labor: As the President negotiates two of the largest free trade pacts in the world, he has pledged to ensure that they will meet fair labor standards and not empower countries to abuse their workforces. But the enforcement of these provisions falls on a Labor Department office, the same office that Republicans are looking to cut by 67%. Also on the chopping block: 5% of the Occupational Safety and Health Administration’s budget and 8% of the budget of the office that protects workers from wage theft and abuse.
  6. Veterans: Despite the ongoing scandal plaguing the Veterans Affairs Administration, the budgets cut $255 million from veterans medical care and $105 million from maintenance for VA hospitals.
  7. Consumer protection: The GOP bills would cut $200 million in funds to implement Wall Street re-regulation, or the Dodd-Frank bill passed in the wake of the financial crisis to prevent something like that from happening again. And it attempts to defund Sen. Elizabeth Warren’s darling, the Consumer Financial Protection Bureau, which was set up in the wake of the crisis to better protect Main Street from the risks Wall Street is taking.
  8. Women’s health: The bills cut funding for Title X family planning service programs, eliminating access to birth control for the 4.7 million clients that the programs served in 2012, preventing an estimated 1.2 million unintended pregnancies. They also slash funding to prevent teen pregnancies by 81%.
  9. Infrastructure: In the wake of a fire in a Chicago radar facility that knee capped Midwest air traffic for weeks as air traffic controllers tracked planes with pen and paper, the Transportation Department asked for more money for air traffic control. Instead, Republicans are seeking to cut $255 million from the air traffic control system. Other targets include: $479 million in cuts to water infrastructure $400 million in cuts to innovation grants and $1.7 billion in cuts to transit projects across the country.
  10. Job training: The bills propose cutting $650 million from job training programs.
  11. Wildfires and disease: The GOP budgets envision cutting $1 billion from funding to fight wildfires. Also on the chopping block: $500 million for the Agriculture Department to research diseases like the avian flu.
  12. National parks and national service: The bills cut the National Park Services budget by $321 million, despite the fact that the agency has a massive $11 billion backlog. It also cuts $340 million, or 29%, from AmeriCorps, which translates into 32,000 fewer members serving their communities.
  13. Health: The GOP budgets propose cutting lead paint removal in low-income households, potentially putting more than 2,000 children at risk. And they cut funding for 9,000 scientists’ research at the National Science Foundation.

TIME Economy

Fed’s Yellen: Brace Yourselves, a Rate Hike Is Coming

US-POLITICS-FINANCE-YELLEN
Mandel Ngan—AFP/Getty Images Janet Yellen smiles after taking the oath of office as Chairman of the Board of Governors of the Federal Reserve System February 3, 2014 at the Eccles Building in Washington, D.C.

"The economy has made further progress"

You heard it from the Federal Reserve Chair herself: interest rates will soon go up.

In prepared testimony to the House Financial Services Committee on Wednesday, Federal Reserve Chair Janet Yellen will say that as the U.S. economy continues to improve, “conditions likely would make it appropriate at some point this year to raise the federal funds rate target.”

Appropriate or not, there is no guarantee rates will rise this year, and it may take until 2016 for it to happen. If and when rates go up, it will be their first rise in nearly 10 years.

The increases would be gradual, coming as a result of overall economic improvement and the falling unemployment rate.

“The economy has made further progress toward the Federal Reserve’s objective of maximum employment,” Yellen will say, adding that the unemployment rate of 5.3% is “slightly below its level at the end of last year.” And there’s more good news from Yellen: “Other measures of job market health are also trending in the right direction, with noticeable declines over the past year in the number of people suffering long-term unemployment and in the numbers working part time who would prefer full-time employment.”

Yellen’s outlook won’t be all roses. Separate from her prediction of a federal rate hike, Yellen will say there are still “uncertainties in the economic outlook. Foreign developments, in particular, pose some risks to U.S. growth.” She will call out the current situations in Greece and China as examples of such uncertainties.

TIME housing

San Francisco Revamps Airbnb Regulations

Investors love Airbnb, but the reaction in its own backyard has been mixed.

The hometown of accommodation-sharing website Airbnb has come to a tentative resolution in a long fight over how often people can rent out their houses and apartments online.

After multiple rounds of debate over 60-day, 75-day and even 120-day caps on rentals, the San Francisco Board of Supervisors voted Tuesday to keep the current 90-day cap in place when the host is not present and allow unlimited days when the host is present.

The fight is far from over, however, with one supervisor even calling the vote “somewhat moot.” Earlier this week, a measure qualified for the November ballot that would cap both hosted and unhosted rentals at 75 days per year. The initiative would also require platforms to list only hosts who have registered with the city, a tenet of the current law that has been largely ignored by local hosts. The measure has been labeled as “anti-Airbnb.”

The debate is not just a local skirmish. Airbnb has faced concerns from lawmakers in New York as well, while cities across the country have debated limitations and even bans on companies like Uber, a ride-sharing app, as local governments struggle to update long-standing regulations in light of new technology.

The new San Francisco ordinance, which passed in a 6-5 vote, will create what supporters call a “one-stop-shop” office to handle issues related to short-term rentals, whether that’s getting through the registration process or handling neighbor complaints.

While investors love Airbnb, the reaction in its own backyard has been mixed.

The city is in the midst of a housing crisis. While some locals have been evicted from their homes by landlords hoping to rent them out on Airbnb full-time, others have testified that they’ve only been able to stay in their homes because of the extra income home-sharing has afforded them. An extensive report on the issue by the San Francisco Chronicle found that more than 150 homes seemed to be rented full-time on the platform, suggesting that might be stock taken out of the strapped rental market.

During the meeting, supervisors debated when private companies should be asked to share data and when participation in new economic opportunities turns an activity like driving or sharing an apartment into a business. “I do believe that home-sharing is here to stay, and we should support appropriate and responsible home-sharing in San Francisco,” said Supervisor Mark Farrell, who sponsored the new ordinance with San Francisco Mayor Ed Lee. “But we must protect our city from turning into a city solely of short-term rentals.”

Farrell, and other city lawmakers, cautioned against deciding this issue by ballot, because after a law is put in place that way, officials must return to voters in order to make any changes to it. He said that the economy and business models are changing too rapidly to put such a high bar in place for updating related laws. “We’re in the top of the first inning here,” he said.

TIME JetBlue

This JetBlue Video Shows You How Not to Behave at the Airport

JetBlue
Preston Rescigno—Getty Images

Don't push and shove, please

We’ve all been there: waiting outside a departure gate at the airport, ready to storm the jetway like it’s the Bastille, hoping to avoid too many sharp elbows in the mosh pit of travelers that’s sure to form.

JetBlue, though, wants to change all of that.

The airline — which made waves recently when it became the latest carrier to completely do away with free checked bags — has posted a humorous video on its Twitter account showing how you shouldn’t behave when boarding a plane.

Things to avoid include blocking the entrance, trying to get on the plane before your row has been called, and getting in the way of someone in a wheel chair who is trying to board. It even features one woman who decorates a gourd as a child to try to get on the plane before everyone else.

Watch below if you need a quick refresher before you jet off on a summer vacation.

TIME world affairs

Greece Doesn’t Need a Bailout—It Needs Investors

The global financial system needs to look beyond loans if it wants to avoid future train wrecks when financing growing nations

Greek negotiators and their European counterparts have blinked, having tiptoed up to the cliff of European disunion, looked down, and decided not to take the plunge. Global markets have collectively exhaled in relief as a result of a deal arrived at over the weekend that buys Greece more time to turn things around and pay its debts.

What’s depressing is that we will likely see this drama play itself out again, as we have before, whether or not the actors on stage are Greece and the European Union, or some other over-indebted nation and its creditors. There may be elements to this story that are particular to the dynamics of the Eurozone, to be sure, but there is a more fundamental, less discussed, problem that needs resolving: the excessive reliance of nations on debt as a means of financing their development.

The Greek debt crisis is so similar to other debt crises of the past it’s haunting. Developing countries load up on loans from over-eager banks and other creditors based on rosy growth projections that do not materialize. Unable to meet their repayment obligations, they default or seek debt forgiveness. If the crisis is big and systemic, other governments and multilateral financial institutions (in this case, the European Central Bank and the International Monetary Fund) bail out banks trying to prevent a financial crisis that may cause large economic disruption. Pundits on both sides make loud noises. There is a usually a “moral hazard” camp arguing against any bailouts, opposed by an “extraordinary times require extraordinary measures” faction eager to do what it takes to avoid ruinous financial contagion. Rewind, pause, repeat. The pattern is all too familiar and a bit too frequent.

The fundamental problem is an excessive reliance on debt as the method to finance public spending. Such inflexible IOU’s shouldn’t be the only means available for sovereign nations to raise capital to invest in their growth and development. Like enterprises in the private sector, sovereign states should also be able to raise equity funding, which involves selling a stake in their future to investors eager to participate in, and benefit from, their success. This would give these states more room to maneuver when times get tough, and give their creditors a better return when things go well.

Consider the differences between Greece and Uber. If Uber wants to raise money to finance its expansion, it can go to a bank to seek a loan, or it can sell that equity stake to investors willing to share both the upside and downside risk, aligning their interests with those of the company. Short of selling shares in individual state-owned enterprises, there are surprisingly few avenues for sovereign nations and investors to partner up, and there is no good reason for Uber and other start-ups to have more financing options than an emerging sovereign nation does.

A traditional loan requires a fixed repayment, regardless of circumstances. Sure, different borrowers, including governments, pay different interest rates depending on their track record and prospects, but essentially once a debt is contracted, they do not repay more if outcomes exceed expectations, and their liabilities aren’t diminished if things sour. Lenders have generally looked to government debt as a relatively safe, conservative investment, which is why so many pension funds and individual investors in this country choose to invest in municipal bonds and Treasury bills.

That’s the theory, of course, but as the Greek case shows, the international financial system has gone too far in privileging debt over other financing options, with utterly predictable results. Once again, creditors and borrowers — not to mention the people of Greece and elsewhere in Europe who weren’t in on the decision to enter into these agreements — are entangled in a messy, time-consuming, and destabilizing drama emanating from a supposedly unimaginable default. Equity-like deals, where investors fully become invested in a country’s fate, are often made only after a costly default process, when some investors acquire “bad debt,” after a default. The value of the bad debt can rise and fall dramatically, depending on a nation’s performance. For instance, after defaults by Latin American countries, such as Argentina, in the 1980s, these countries’ old debt obligations were swapped for what were called “Brady Bonds,” which allowed investors to trade the debt for other financial instruments at deep discounts from their contractual values. The market values of Brady Bonds rose and fell with the economic performance of these countries, which means investors and sovereign debtors’ interests became somewhat aligned.

It would be far better to design an equity-like, risk-sharing arrangement between sovereign states and creditors from the outset, in which the required repayment were automatically lowered in bad times and scaled up in good times. For example, the repayments could be linked GDP growth, or to market prices of commodities that a country exports.

Finding new ways to package and sell risk-sharing equity stakes in a nation’s future would better align the interests of sovereign borrowers and its foreign or domestic creditors. The concern that countries receiving equity capital might be tempted to minimize their resources or performance to lighten their obligations, is likely not relevant for small, growing countries. The consequences for reporting bad outcomes frequently would cause investors to lower their expectations of countries’ potential for growth and thus lower the valuation of their assets when any future financing is being negotiated. The hit that a country’s reputation would take for inaccurate reporting would simply be too high.

We should think of small, growing countries such as Greece (whose performance was healthy prior to the financial crisis, recession, and austerity of recent years) the way we think of promising, but volatile, tech start-ups. They should be financed with less debt, and more equity, perhaps even with riskier options — like stock-call options that are worth zero when performance is poor, but deliver outsized returns when things go well. This more diversified approach to sovereign financing would provide growing nations with natural shock absorbers. Their creditors would profit handsomely in good years, but countries like Greece would conversely benefit from some relief in bad years, as opposed to forcing a crash of the international financial system on account of a debt straightjacket they have forced themselves into.

In the meantime, regardless of what happens in Greece, a continued overreliance on debt to finance the expansion of developing economies will only mean that the next time—and there will be a next time—will be no different.

Bhagwan Chowdhry is a professor of finance at the UCLA Anderson School of Management and co-founder of the Financial Access at Birth initiative. His website is http://bit.ly/bhagwan

TIME Economy

What Happens to a Country That Defaults on Its Loans?

Argentina and Iceland provide examples

In 1945, Britain borrowed $4.3 billion from the U.S. That money prevented Britain from going bankrupt after World War II.

In 2006, Britain finally paid off the last of that loan.

But when a country can’t pay off its debts, what happens? TIME explains in the above video.

TIME China

Volatile Chinese Markets Climb on Thursday Afternoon

State media was quick to celebrate the day's gains

Chinese stock markets surged on Thursday after state regulators enacted further drastic measures to offset an economic crisis.

When the markets closed at 3 p.m. local time, the Shanghai Composite Index sat at 3,709.33 points, up from 3,432 at market open. The lion’s share of the 5.76% jump came in the afternoon, following the announcement that the state would ban major shareholders — those with shares of more than 5% — from selling their stocks for the next six months.

State media was quick to celebrate the day’s gains. Xinhua News Agency tweeted that the jump was “long awaited” following “repeated supportive measures,” likely referring to Beijing’s recent efforts to stymie the massive sell-off in the markets of Shanghai and Shenzhen.

The recent volatility, however, suggests that Thursday’s triumphs could be temporary — one oscillation in a rapidly fluctuating system.

“Short and powerful rallies during bear markets are normal,” Tom Elliott, an international investment analyst at the financial consultancy deVere Group, tells TIME. “It was possibly triggered by government-encouraged buying by state controlled companies, but in the absence of dramatic and substantial intervention by the authorities I wouldn’t read too much into it.”

Elliott says that state interventions might eventually stabilize the market, but in the meantime, the current situation “absolutely” qualifies as a crisis. In spite of Thursday’s jumps, confidence in the market appears to remain sparse. The South China Morning Post reports that 128 additional companies suspended the trading of their shares in China’s two stock markets, bringing the total number of suspended companies to 1,400 — half of all companies listed on these markets.

Read next: Why China’s Stock-Market Meltdown Could Hurt Us All

TIME society

A Letter to Millennials: Don’t Sleep Through the Revolution

people-meeting-office
Getty Images

The Aspen Institute is an educational and policy studies organization based in Washington, D.C.

It is time to wake up and begin to think about a digital renaissance

In my last letter, I told you there was a time in the late ’60s when the most critically acclaimed movies and music were also the best selling. The Beatles’s Sgt. Pepper album or Francis Coppola’s Godfather film were just two examples. I said that that is not happening anymore, and I wanted to explore with you why this change occurred. Because I spent the first 30 years of my life producing music, movies, and TV, this question matters to me, and I think it should matter to you. So I want to explore the idea that the last 20 years of technological progress — the digital revolution — have devalued the role of the creative artist in our society.

I undertake this question with both optimism and humility. Optimism because I believe in the power of rock and roll or movies to change lives. Certainly witnessing Bob Dylan go electric at the Newport Folk Festival in 1965 changed this Princeton freshman who was intent on being a lawyer into a passionate follower of the Rock and Roll Circus who managed to make a good living from the entertainment business for the rest of his life. My optimism also showed itself in 1996 when I helped found the first streaming video on demand service, Intertainer. Anyone crazy enough to found a service that needed broadband in 1996 had to be an optimist. That led to humility, because the diffusion of broadband was much slower than I thought, so I know that predicting the future is a humble man’s game.

In the last few years I have run the Annenberg Innovation Lab at the University of Southern California. At the risk of biting the hand that feeds me, I confess that I often feel like a cork tossed into a rushing technology stream. While I have no doubt of the wonders of the Internet revolution, I think it’s time to take stock of where this stream is carrying us.

We have become convinced that only machines and corporations make the future, but I don’t think that is true. In thinking about the role of the humanist in our technology-driven future, I was drawn to a sermon Martin Luther King preached at the National Cathedral in Washington two weeks before he was killed. At the outset he told the story of how Rip Van Winkle had passed a sign with a picture of King George III of England on the way up the mountain where he fell into a long sleep. When he came down the mountain, the same sign bore a picture of George Washington.

This reveals that the most striking thing about the story of Rip Van Winkle is not merely that Rip slept 20 years, but that he slept through a revolution. While he was peacefully snoring up in the mountain, a revolution was taking place that would change the course of history — and Rip knew nothing about it. He was asleep. Yes, he slept through a revolution.

I doubt that anyone would quarrel with the notion that the last 20 years of technological disruption have constituted a revolution, but I want to understand just who has been sleeping through this revolution and who has been awake, creating the moral, political, and technical architecture of the world our children will inhabit.

The beginnings of the “cyber revolution” that King referenced in his sermon were already moving forward in 1968 as he was speaking. The origins of that technology revolution were clearly located in the counter-culture, as Fred Turner and John Markoff have shown, and the idea (in Nicholas Negroponte’s words) was to “decentralize control and harmonize people.” That the earliest of networks, like the Whole Earth Lectronic Link (WELL) organized by Stewart Brand, grew directly out of the hippie culture was a natural progression from both the political and cultural growth of ’60s counter-culture.

But within 20 years, starting with Peter Thiel’s cohort at Stanford University, the organizing philosophy of Silicon Valley was far more based on the radical libertarian ideology of Ayn Rand than the commune-based notions of Ken Kesey and Stewart Brand. Thiel, the founder of PayPal, an early investor in Facebook, and the godfather of the PayPal mafia that currently rules Silicon Valley, has been clear about his philosophy.

He stated, “I no longer believe that freedom and democracy are compatible,” his reasoning being: “Since 1920, the vast increase in welfare beneficiaries and the extension of the franchise to women — two constituencies that are notoriously tough for libertarians — have rendered the notion of ‘capitalist democracy’ into an oxymoron.”

This is a pretty extraordinary statement, and I have reread the interview he gave to the Cato Institute several times. It appears that most women, in Thiel’s judgment, fall into Ayn Rand’s notion of “takers” as opposed to Thiel’s vaunted male “makers.” So for Thiel, in a true “capitalist democracy” only the makers should get to vote, and the women and the welfare recipients will take what the makers chose to give them.

Whew! It gets worse. Thiel has made it clear that his preference (along with Google CEO Larry Page) for a “free cities” model — in which polities are privately owned and unregulated by states — would be an ideal way for capitalists to avoid the “mob mentality” of democracy. He has even suggested that companies could set themselves up off shore (out of the reach of government) on platforms that would give them true freedom to operate.

Like Amazon’s Jeff Bezos, he has built his fortune on enterprises that were not taxed or regulated. He also does not believe in competition, havingstated in the Wall Street Journal that “competition is for losers. If you want to create and capture lasting value, look to build a monopoly.”

Peter Thiel, Larry Page, Jeff Bezos, and Mark Zuckerberg have not been asleep at the revolution, as their inclusion near the top of the Forbes 400 list of America’s billionaires will attest.

Since the introduction of Napster in 2000, global recorded music revenues have fallen from $21 billion to $7 billion per year. Newspaper ad revenue has fallen from $65 billion in 2000 to $18 billion in 2011. Book publisher operating profits have fallen by 40 percent, and the revenue from DVD sales of movies and TV (of the top 100 titles) has fallen from $7 billion to $2.3 billion.

The astonishing fact of the precipitous declines in revenue has nothing to do with the idea that people are listening to less music or watching fewer movies and TV shows. In fact, all surveys point to the opposite. Consumption of all forms of media is rising. So where did the money go? Two places: into the pockets of Digital Monopolists and Digital Thieves.

While the revenues of movie, music and news purveyors were falling rapidly, the revenues of the “internet platform” providers were exploding. Google’s revenue went from $1.2 billion in 2001 to $66 billion in 2014. Amazon went from $4.8 billion in 2002 to $89 billion in 2014. Apple went from $7 billion in2002 to $199 billion in 2014. One could argue that a massive reallocation in the order of $50 billion a year from creators and owners of content to platform owners has taken place since 2000. Make no mistake, while the movie studios, record companies, newspapers and magazines operate in a very competitive environment, the platform providers are monopolists or, at least, oligopolists. Competition is for suckers, and by now Negroponte’s notion of decentralization and harmony has been replaced by Thiel’s beneficent monopoly.

But this does not account for the role of the Digital Bandits. There is a wonderful picture of Kim Dotcom, who made $200 million in two years off of the stolen music and video of countless artists on his Megaupload pirate site. In the picture, the fat German thief stands on a picturesque beach with his “Playmate of the Year” girlfriend sprawled on the sand in the foreground and his 200-foot mega yacht in the background. Kim, in an attempt to fight the lawsuits against him, has appropriated the message of Martin Luther King, assuming the stance of the man who freed everyone from the slavery of having to pay for creative works. Exactly how the hard work of artists got exempted from the notions of the market economy escapes me, but for Kim to pose as some new sort of freedom rider brings us back to the whole fallacy of the libertarian economy. Ayn Rand’s most famous quote is “the question isn’t who is going to let me, it’s who is going to stop me.” This is how Kim Dotcom has functioned from day one.

The larger question then becomes, who enables the Kim Dotcoms of the world? Type into your Google search box the words “watch (your favorite movie) online free” and you will have the answer.

Whether it is illicit drugs, stolen music, or jihadist lessons on how to blow up an airplane, Google, with a 70 percent market share of all global searches, is the beginning point of a great deal of online criminal activity.

Of course, for most of your generation, the idea of getting your music or movies for free from pirates like Kim Dotcom doesn’t seem like a big deal. But you are studying at USC to (hopefully) become the next generation of journalists, filmmakers, and musicians, so the future of the business is in your hands. Somehow you have to let go of the idea that this is a victimless crime. As I said to you in my last letter, I’m not worried about Jay Z or Beyoncé. I’m worried about the middle class musician, the journeyman that used to be able to ply his trade and make a living selling 25,000 CDs. That does not exist anymore.

But perhaps this tolerance for criminals like Kim Dotcom is part of a larger problem. As the Associate Chancellor of UC Berkeley, Nil Gilman, has written, we are plagued by a twin insurgency: “From below comes a series of interconnected criminal insurgencies that route around states and seek ways to empower and enrich themselves in the shadow of the global economy. From above comes the plutocratic insurgency, in which globalized elites seek to disengage from traditional national obligations and responsibilities.”

Just how we distinguish between the criminal, the warlord, and the rogue state actor will become harder, as Robert Kaplan pointed out many years ago in his prescient book, The Coming Anarchy. What was the nature of the massive hack on Sony this fall? Will we ever know if it was a state-sponsored act or that of an angry laid-off employee? The on-rush of the much-heralded “Internet of Things” will make the possibilities of cyber crime even more profitable. Imagine the now-prevalent cyber blackmail (“pay me $1000 to unlock your data”) played out on a larger scale: “Pay me $200 million to bring the Los Angles Department of Water and Power back on line.” Forbeshas reported a software program being sold on the Dark Web that can ostensibly hack into the “connected car” and take over the acceleration and braking functions.

Here we run into the tricky area of free speech. Google says it can filter out child porn from YouTube but not the Jihadist videos from Anwar al-Awlaki that were the entrance point of the Charlie Hebdo terrorists into the al-Awlaki network.

Just where Google draws the line seems important. Should they block al-Awlaki’s Inspire online magazine, which last month published detailed instructions on how to build a bomb that could pass through airport screening undetected? I don’t really have the answers, but I hope we can begin to have a dialogue around this issue.

Abraham Lincoln supposedly was the first to say, “The Constitution is not a suicide pact.” Certainly the fact that there are 3000 ISIS videos on YouTube and 10,000 ISIS accounts on Twitter should give you pause. Clearly this is a tricky area, and I don’t believe this is necessarily a matter for government regulation.

The use of their automated content identification technology could be employed to filter content being uploaded to their servers before it is ever displayed on YouTube. But then they couldn’t be selling paper towels in front of ISIS videos.

At this point you might be asking why the loss of billions in the media and entertainment sectors is worth worrying about in the face of the benefits ubiquitous Internet technology has brought you. My feeling is that media is just the canary in the coal mine, and that in the next 20 years, millions of the jobs you are training for might be automated. The Economist recently ran an article in which they projected the probability of your job being taken by a robot in that time period. Citing work from two Oxford University economists, they wrote that “jobs are at a high risk of being automated in 47 percent of the occupational categories into which work is customarily sorted.”

Larry Summers recently said that those who think that the answer to the jobs crisis is just higher education are “whistling past the graveyard.”

What a life awaits you. You can loan your car out on Relay Rides or become an Uber driver. If you can afford a house, you can rent your extra room out on Airbnb and find extra work on TaskRabbit.

We are only a few years into the sharing economy, but one thing is clear: As with Google, most of the economic gains will flow to those who own the platform rather than to those who do the work. Uber is currently valued at $41.2 billion, making it one of the 150 largest corporations in the world. That’s a capitalization larger that Delta Airlines or FedEx, all built on Ayn Rand’s motto: “The question isn’t who is going to let me, it’s who is going to stop me.”

With such economic power comes political power. Uber recently hired Obama campaign svengali David Plouffe to help it navigate the political lobbying waters of Washington, taking a page from Google’s bible. Google outspends all but a few financial and military firms in its lobbying efforts. The main financial backers of the Libertarian movement, the Koch brothers, have vowed to spend $900 million in the 2016 election cycle to ensure that the “no regulation, no taxes” principles of the movement are sacrosanct in the corridors of power.

The digital monopolists are not above using the rhetoric of libertarianism to spread the message that they alone are the guardians of freedom in the world. When the media companies tried (in an admittedly ham-handed fashion) to pass a law (Stop Online Piracy Act) that would require Google to block sites that were making millions off of stolen content, Google unleashed an online campaign stating this would amount to censorship. The uproar from the crowd quickly killed the bill.

Perhaps it is time to ask the question of who benefits from this technological revolution. Who is awake and steering the boat, and who is asleep below decks? As The Economist pointed out, the ability to substitute capital for labor has profound implications for the future of our society. In early 1929, before the stock market crash that set off the Great Depression, the top 1 percent earned 23.9 percent of national income. By 1976, because of 30 years of changes in tax policy as well as regulation, the 1 precent earned 8.9 percent of national income. But the Reagan era reversed both the tax and regulatory policies that had brought on more income equality, and today the top 1 percent earn 24.2 percent of national income.

What is clearly visible is that the great productivity gains brought on by technology, which used to benefit the ordinary workers’ paycheck, now only flow to the owners of capital. The work of Thomas Pinketty, the French economist, shows that this growing income inequality will only get worse in the coming years. The irony is the John Maynard Keynes envisioned this substitution of capital for labor in the ’30s but thought that the result would be an average work week of 15 hours, with a great deal of paid leisure for the common man.

Some have suggested a guaranteed income, but without some discussion, we risk a kind of social unrest that we have not experienced since the ’60s.

If the technology revolution has failed to bring the average worker increased prosperity, it has also created a vast new set of industries built on mining that worker’s most private data, with questionable return benefits. By the end of 2016 there will be 5 billion smartphones in the world, every one of them a vast treasure trove of personal data that can be mined by both the surveillance state and the corporate data brokers who sell your digital life for immense profits. This is where Martin Luther King’s “asleep at the revolution” metaphor seems most telling. Clearly the current corporate narrative about privacy is that it is a sort of currency to be traded to corporations in return for innovation. But Georgetown University Professor Julie Cohen argues that privacy has meaning in and of itself. Jonathan Sadowski describes her argument in The Atlantic:

What Cohen means is that since life and contexts are always changing, privacy cannot be reductively conceived as one specific type of thing. It is better understood as an important buffer that gives us space to develop an identity that is somewhat separate from the surveillance, judgment, and values of our society and culture. Privacy is crucial for helping us manage all of these pressures — pressures that shape the type of person we are — and for “creating spaces for play and the work of self-[development].” Cohen argues that this self-development allows us to discover what type of society we want and what we should do to get there, both factors that are key to living a fulfilled life.

Do you think your shrinking zone of privacy is altering your behavior? Are the pressures of social media keeping us from finding this fulfilled, authentic life? What keeps us asleep at the revolution? Could it be that drinking from the firehose of big data is a sort of deep distraction that prevents us from even asking the humanistic questions of what makes for an examined, authentic life? In the ’30s Aldous Huxley imagined a future in his Brave New World — a future in which the average citizen would take his dose of Soma (a kind of hybrid Prozac/Viagra) and go out to the Feelies, a form of entertainment so all-engrossing that the “prole” never had any sense that he was not a free human. Chris Sullentrop of the New York Times recently reported that several experts told him the virtual reality porn was going to be the killer app. Huxley would smile.

After I gave a speech on this topic, I got a note from Jimmy Bartz, the minister at the small Episcopal Church, Thad’s, that I attend. He, too, agrees that we are asleep at a revolution:

However, I don’t believe enough people can be inspired to endure what it will take to change things if they are “asleep.” You mention the uptick in opiate addiction. There are also soooo many more people on mood altering medication (some need it, but not as many as take it), then, we have food, credit, media, devices. Our ability to endure what we’d have to endure to create the change you espouse (and I espouse) has atrophied to the point that we don’t even have consciousness around it. There’s a level of “insobriety” we’ve never experienced before — data, food, pharma, credit — we’re so doped up on that stuff that we’ll never have the will to legislate the change, and Washington’s too doped up on cash to have the will to do the right thing.

This sense that we are too doped up to care is distressing, but what’s more worrying is that we are building whole sectors of the digital economy on the concept of addiction. I recently picked up a book called Hooked: How to Build Habit Forming Products, in which the author shows how you too can build the latest Snapchat. The schematic of a “trigger, action, reward, investment” sequence is curiously close to that of the Skinner box we all studied in Psych 101.

Like the poor lab rat in pursuit of happiness clicking on the bar for a reward pellet, we spend hours looking for the “like” reward on our social networks. Those with the most likes can turn it into currency, as was demonstrated at the myriad “gifting suites” at the Sundance Film Festival, where popular YouTubers like iJustine collected thousands of dollars worth of free merchandise in exchange for posting about the swag on their social networks. iJustine, whose fames stems from having posted a video on YouTube about her 300-page iPhone bill, noted to the New York Times, “I love products, and I love sharing if I love something. Like, you can probably guarantee that it’s going to be posted, especially if I love it.”

It would be easy to diss iJustine’s blurring of the line between her own opinion and what she is getting paid to like if it weren’t the basic currency of the Internet age. What is any hip hop star but a walking product placement opportunity? How would the TV and movie business survive without “brand integration” dollars to top up the budget? And how would Vox, BuzzFeed or even the vaunted Atlantic survive without the “native advertising” that totally blurs the line between editorial content and paid advertising? If indeed the author of Hooked is on to something, and we really are building powerful addictions to social network apps, then is Peter Thiel’s almost-spiritual commitment to “liberty” really the same as Thomas Jefferson’s “life, liberty and the pursuit of happiness”? I don’t think so.

Here I am just a guilty as you. I surrender all of my personal data to Facebook in return for the ability to post my vacation photos to my friends.

I have no doubt that innovative developers can continue to build addictive products. Just try to walk down any sidewalk in this university while you constantly dodge people staring at their smartphones. I’ve told you that the Innovation Lab has studied Twitter and politics, and what we found was pretty disturbing. The anonymity that Twitter provides a shield that brings out the worst in humans. Plato told a tale of the Ring of Gyges that when put on would render you invisible. He asked the question: If we were shielded from the consequences of our actions, how would that change the way we act? We know the answer. As David Brooks says, we have created a “coliseum culture” in which some new celebrity gets thrown to the lions on a weekly basis. Of course, I know that writing you to resist the instant riches that might flow to you if you invent the newest addictive app, like Yik Yak, which allows students to shame each other anonymously, is probably a fool’s errand.

My deeper question comes from my position as a professor here for the last 12 years, where I have watched the lure of Silicon Valley grow stronger. If the best and the brightest of you are drawn to building addictive apps rather than making great journalism, important films, or literature that survives the test of time, will we as a society be ultimately impoverished? I was lucky enough to be involved with some artists like Bob Dylan, The Band, George Harrison, and Martin Scorsese, whose work will surely stand the test of time. I’m not sure I know what the implications are of the role-model shift from rebel filmmaker to software coder.

This brings me back to the question of what the tech plutocrats mean by freedom. Martin Luther King led the March on Washington for “jobs and Freedom.” It’s obvious now that the new freedom brought to us by the libertarian elite will not come with jobs. The fact that Facebook generates revenues of $8 billion with less than 9000 employees speaks volumes. Is Peter Thiel’s idea of corporations, free to reap monopoly profits free from government regulation, what we want for our country? Thiel’s icon Ayn Rand defines freedom as “to ask nothing. To expect nothing. To depend on nothing.” How far is this from Jefferson’s great inspiration, the Greek philosopher Epicurus, who defines the good life in these terms?

  • The company of good friends.
  • The freedom and autonomy to enjoy meaningful work.
  • The willingness to live an examined life with a core faith or philosophy.

I worry that our universities are being turned into trade schools in the pursuit of the almighty tech dollar. Are we forsaking the humanities and a basic liberal arts education all in promise to prepare students for the shark tank that awaits them in Silicon Valley or on Wall Street? As I said at the outset, I have no answers, but another phrase from Dr. King’s sermon calls out to me: “Our scientific power has outrun our spiritual power. We have guided missiles and unguided men.”

Let us not assume that this technological revolution we are living through has but one inevitable outcome. History is made by man, not by corporations or machines. It is time to wake up and begin to think about a digital renaissance. As my colleague Ethan Zuckerman said, “It’s obvious now what we did was a fiasco, so let me remind you that what we wanted to do was something brave and noble.” Your generation does not need to surrender to some sort of techno-determinist future. Let’s try and “rewire” (Ethan’s term) the Internet.

This article was originally published by The Aspen Institute on Medium

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