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THE US ECONOMY IS SUFFERING FROM LOW DEMAND

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We have concluded that demand matters for productivity growth and that increasing demand is key to restarting growth across advanced economies, write James Manyika, Jaana Remes, and Jan Mischke in Harvard Business Review.

A little over a century ago, Henry Ford doubled the minimum pay of his workers to $5 a day. When other employers followed suit, it became clear that Ford had sparked a chain reaction. Higher pay throughout the industry helped lead to more sales, creating a virtuous cycle of growth and prosperity. Could we be at another Henry Ford moment?

Some major companies have announced plans to boost employee pay. Target raised its minimum wage to $11 this past fall and committed to $15 by 2020. More recently, Walmart announced plans to match that increase to $11. In banking, Wells Fargo and Fifth Third Bancorp also announced pay increases for minimum wage employees.

These pay increases have occurred against a backdrop of weak economic growth and rising income inequality. Economic growth has been stuck in low gear for almost a decade now, averaging around 2% a year since 2010 while productivity growth, the key to increasing living standards, has been languishing near historic lows since the financial crisis. But more recently there has been a glimmer of hope. After stagnating for years, wages have begun picking up slightly, as has productivity growth, while corporate profits remain near record highs.

Are these recent wage increases merely necessary in light of a tightening labor market, or could they start a broader trend that may change our economic growth trajectory?

After a year-long analysis of seven developed countries and six sectors, we have concluded that demand matters for productivity growth and that increasing demand is key to restarting growth across advanced economies.

The impact of demand on productivity growth is often underappreciated. Looking closer at the period following the financial crisis, 2010 to 2014, we find that weak demand played a key role in the recent productivity growth decline to historic lows. In fact, about half of the slowdown in productivity growth — from an average of 2.4% in the United States and Western Europe in 2000 to 2004 to 0.5% a decade later — was due to weak demand and uncertainty.

For example, in the mid-1990s to the mid-2000s, rising consumer purchasing power boosted productivity growth in both the retail and the auto sector, by encouraging a shift to higher-value goods that can be supplied at higher productivity levels. In the auto sector, as customers in the early 2000s purchased higher value-added SUVs and premium vehicles in both the United States and Germany, they spurred incremental productivity growth of 0.4 to 0.5 percentage points. Today, that trend has slowed slightly in both countries, contributing only 0.3 percentage points to productivity growth in the period 2010 to 2014.

Similarly, in retail, we estimate that consumers shifting to higher-value goods, for example higher-value wines or premium yogurts, contributed 45% to the 1995-2000 retail productivity acceleration in the United States. This subsequently waned, dragging down productivity growth.

To put it simply, when consumers have more to spend, they buy more sophisticated things. That’s good not just for consumers and producers, but for the overall economy, because making more sophisticated, higher-value things makes everyone involve more productive, and therefore helps increase overall standards of living.

In addition, we found two other ways weak demand hurt productivity growth in the aftermath of the financial crisis: a reduction in economies of scale and weak investment.

First, the economies of scale effect. In finance, productivity growth declined particularly in the United States, United Kingdom, and Spain due to contractions in lending volumes that banks were unable to fully offset with staff cuts due to the need for fixed labor (for example to support branch networks and IT infrastructure or to deal with existing loans and bad debt). The utilities sector, which has seen flattening demand growth due to both energy efficiency policies as well as a decline in economic activity during the crisis, was similarly not able to downsize labor due to the need for labor to support electricity distribution and the grid infrastructure, and here, too, productivity growth fell.

Second, the effect of weak investment. We have found from our global surveys of businesses that almost half of companies that are increasing their investment budgets are doing so because of an increase in demand. Demand is the single most important factor driving corporate investment decisions. Investment, in turn, is critical for productivity growth, as it equips workers with more – and with more recent and innovative – equipment, software, and structures. But we have seen capital intensity growth fall to the lowest levels in post-WWII history. Weaker demand leads to weaker investment and creates a vicious cycle for productivity and income growth.

Of course, the financial crisis is long since over, and the economy has recovered, at least by some measures. So what’s to worry about? Won’t demand return to pre-recession levels, and thereby increase productivity?

Unfortunately, there is reason to believe that some of the drags on demand for goods and services may be more structural than crises-related. Slowing population growth means less rapid expansion of the pool of consumers. And rising income inequality is shifting purchasing power from those most likely to spend to those more likely to save. This is reflected in slowing growth expectations in many markets. For example, across our sectors and countries studied, in the decade from 1995 to 2004, growth in demand for goods and services averaged 4.6%, slowed to 2.3% in 2010 to 2014, and is forecast to slightly increase to 2.8% in 2014 to 2020.

Today, there is concern about where the next wave of growth will come from. Some prominent economists worry that we may be stuck in a vicious cycle of economic underperformance for some time. Our analyses strongly suggest that supporting sustained demand growth needs to be part of the answer. Demand may deserve attention to help boost productivity growth not only during the recovery from the financial crisis but also in terms of longer-term structural leakages and their impact on productivity. Suitable tools for this longer-term situation include: focusing on productive investment as a fiscal priority, growing the purchasing power of low-income consumers with the highest propensity to consume, unlocking private business and residential investment, and supporting worker training and transition programs to ensure that periods of transition do not disrupt incomes.

Companies play a key role in promoting growth through investment and innovation as well as supporting their workforce through training programs. Yet companies may also want to consider the words of Ford when he said: “The owner, the employees, and the buying public are all one and the same, and unless an industry can so manage itself as to keep wages high and prices low it destroys itself, for otherwise it limits the number of its customers. One’s own employees ought to be one’s own best customers.” While this is certainly not true for individual companies, it is true for the broader economy, and we might be at a rare point where the representatives of employees and employers alike share a common interest in healthy wage growth.

 

 

 

 

Source:  Harvard Business Review.

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MICROSOFT HAS KILLED MINECRAFT FOR APPLE TV

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Microsoft is no longer supporting the Apple TV version of Minecraft. The app has has been pulled from the App Store, and an in-game message notes that it won’t receive any further updates, though it’ll continue to be playable. Refunds will be issued for any purchases made up to 90 days before the announcement comes into effect. And it actually went into effect on September 24th, so it’s even more of an indictment of the state of Apple TV gaming that no-one really seemed to notice until this week.

Minecraft is one of the biggest games in history and has managed to find an audience on virtually every console, phone, and computer out there — including the iPhone, from which the Apple TV version was derived. But the Apple TV has been hampered as a games platform ever since Apple bungled the launch by unexpectedly requiring developers to support the Siri Remote. The company backtracked the following year, but the damage was done.

Apple hasn’t entirely given up on Apple TV gaming. Last year’s iPhone keynote saw Sky, the next game from Journey and Flower studio Thatgamecompany, shown off for the first time on the Apple TV 4K. But even that game is yet to see release, and it’s clear that Apple’s focus is elsewhere.

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UBER’S NEXT CONQUEST: YOUR DATA

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After replacing Travis Kalanick in August 2017, Uber CEO Dara Khosrowshahi is shifting the company’s focus. Though the company has always sought to become a world-class transportation platform, it has recently begun to describe itself as “Amazon for transportation” — an ambition which indicates the company is making a monopolistic data play.

Amazon has always been an inspiration for Uber’s leadership, but the form of that inspiration has shifted over the course of the company’s growth. Kalanick wanted to emulate Amazon’s strategy of pursuing market share and growth at the expense of profits — or, more accurately, with massive losses before using scale to reduce the marginal cost of expansion to turn a profit. Unfortunately for Kalanick, that strategy didn’t translate to Uber’s ride-hailing business.

Scale economies work for companies like Google, Facebook, and Amazon because the digital nature of their operations allows growth at little marginal cost in many aspects of their businesses. This is why many of these digital companies have so few employees compared to traditional auto companies. However, as transportation expert Hubert Horan explained: “Drivers, vehicles and fuel account for 85% of urban car service costs,” making scale economies very difficult for Uber’s ride-hailing service to achieve even as it outsources the ownership and maintenance of vehicles to its drivers.

Uber’s leadership is inspired by Amazon’s platform and the power and dominance that has come with it.

Uber’s margin improvements have typically come from cutting driver pay, not scale economies, and Kalanick’s plan to reach profitability relied on further reducing the share of revenue going to drivers. In the last few years that Kalanick served as CEO, the company became focused not just on developing autonomous vehicles, but on winning the self-driving race. We now know that autonomous vehicles will not be able to replace drivers nearly to the degree Kalanick had hoped, nor on the accelerated timeline he was relying on. This necessitates a new plan for the company’s future.

We don’t know whether Kalanick was in the process of formulating a new strategy, but over the past few months Khosrowshahi’s vision has become increasingly clear. He wants to make Uber into the “Amazon for transportation.” This time, instead of taking the wrong lessons from Amazon on scale economies, Uber’s leadership is inspired by Amazon’s platform and the power and dominance that has come with it.

From Ride-Hailing to Transportation Platform

Though Uber’s ride-hailing service has always been the center of its business, Khosrowshahi’s plan shifts the focus to its app — or, rather, its platform. He’s no longer just talking about the ride-hailing business, but about existing food delivery and freight services along with it, new scooters and bike offerings from Lime, car rentals from Getaround, public transit ticketing through Masabi, and the prospect of flying cars. Basically, the more services available, the more people the platform can serve.

Uber’s approach to autonomous vehicles has also shifted. Rather than trying to win the race to develop self-driving tech, Khosrowshahi has said his ultimate goal is to have “access” to the technology. He opened the door for Google’s Waymo and GM’s Cruise to offer their autonomous vehicle services on Uber’s platform, and Ford AV CEO Sherif Marakby recently told the Vergecast that they’d be open to offering their autonomous service on the platform as well.

Khosrowshahi predicts the traditional ride-hailing service to be only 50 percent of its future business, as scooters and bikes cannibalize the short trips currently made in vehicles. It’s hard to imagine Kalanick making a similar statement, but that doesn’t mean Khosrowshahi’s ultimate goal is any less inspired by monopolistic ideals.

Uber Wants to Control Urban Transportation Data

Uber is a private company with plans to go public in 2019. It has yet to turn a profit. Khosrowshahi has encouraged investors to commit for the long haul, as his plans to diversifying the company’s transportation options will not deliver short-term profits. At the same time, his value proposition to investors has changed: Now, they have access to Amazon-like power exerted on urban transportation networks.

In his book on these new digital monopolies, Platform Capitalism, Nick Srnicek identifies the importance of network effects in increasing a platform’s value. For platforms, data is raw material that can “be extracted, refined, and used in a variety of ways. The more data one has, the more uses one can make of them.”

Uber will not only use data on its own services, but data from every third-party service offered through its platform.

Uber already has a large, global user base (and dataset). The expansion of transportation options on its platform — both its own and those of other companies — adds value for existing users while attracting new ones interested in getting around by anything other than a car. New modes of transport and a growing user base will produce more data, showing the company where more people are going and how additional transport modes are used. Uber will not only use data on its own services, but data from every third-party service offered through its platform. All of this data feeds a flywheel that will improve Uber’s service exponentially over time.

In a recent interview with TechCrunch, Khosrowshahi was asked why he was allowing other services onto Uber’s platform. He likened it to Amazon offering branded products while letting other businesses sell their products through the Amazon marketplace. He left out how Amazon uses its sales data to see which third-party products are selling well and make cheaper versions of its own, undercutting the original product and leaving its seller with no means of challenging Amazon. Will Uber eventually do the same to Lime’s scooters or Getaround’s car rentals? It’s not impossible to imagine.

Cities Need to Act Now

City governments around the globe have struggled to effectively regulate ride-hailing apps, but there’s been some recent progress. In August, New York City passed new regulations limiting the number of ride-hailing vehicles, at least for a 12-month period as it further studies the issue. It will also ensure that drivers are paid the minimum wage of $15 per hour with a bit extra to cover vehicle costs.

Another regulatory bright spot: bikes and scooters. Having learned their lesson from letting ride-hailing companies evade regulation, city governments were quick to develop policies for new micromobility services. Mayors make it known that they, not tech companies, had ultimate authority over what happened on city streets.

As Uber sets out to capture a significant chunk of urban transportation data with its new Amazon-inspired platform model, city governments need to make clear that data from activities occurring on the street is not proprietary information. This data belongs to the people as represented by their government. Uber should not have a better idea of how different transportation data modes are operating than governments themselves.

Under Khosrowshahi’s leadership, Uber’s tone has undoubtedly changed — probably for the better. Bikes and scooters will likely capture a significant portion of the ride-hailing service’s current users. However, Uber’s push to become the world’s dominant transportation platform is cause for concern. City officials must establish their right to transportation data. At the very least, they should build publicly owned alternatives that serve the interests of residents — not multinational companies.

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JEFF BEZOS UNSEATS BILL GATES ON FORBES LIST OF RICHEST AMERICANS

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For the first time in 24 years, Bill Gates is no longer the richest American on the Forbes 400 list.

Gates lost his standing this year to Amazon CEO Jeff Bezos, whose net worth is $160 billion, compared with Gates’ $97 billion. That makes the Microsoft founder the second richest American.

Watch this: Amazon boosts its minimum wage to $15 an hour
1:06 

The shakeup isn’t an overnight surprise. In July 2017, Bezos became the richest person in the world, briefly, when his net worth hit just north of $90 billion. It happened again in October 2017 when his net worth clocked in at $93.8 billion compared with Gates’ $88.7 billion. In July 2018, Bloomberg reported that Bezos overtook Gates on its Bloomberg Billionaires Index, which pinned his net worth at $150 billion.

Bezos didn’t immediately respond to a request for comment.

Other tech figures on the list include Facebook’s Mark Zuckerberg coming in at No. 4, Oracle’s Larry Ellison at No. 5, and Google’s Larry Page and Sergey Brin at No. 6 and No. 9, respectively.

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