Inequality, Unemployment and Technology

                                                     (Comments due by Oct. 5, 2014)

Productivity and profits are growing, but jobs and wages are not, creating an unsustainable economy

If you ever wonder what's fueling America's staggering inequality, ponder Facebook's acquisition of the mobilemessaging company WhatsApp.

Facebook is buying WhatsApp for $19 billion. That's the highest price paid for a startup in history. It's $3 billion more than Facebook raised when it was first listed, and more than twice what Microsoft paid for Skype.

(To be precise, $12 billion of the $19 billion will be in the form of shares in Facebook, $4 billion will be in cash, and $3 billion in restricted stock to WhatsApp staff, which will vest in four years.)

Given that gargantuan amount, you might think WhatsApp is a big company. You'd be wrong. It has 55 employees, including its two founders, Jan Koum and Brian Acton.

WhatsApp's value doesn't come from making anything. It doesn't need a large organization to distribute its services or implement its strategy. It doesn't require lots of people to assemble anything or sell anything or transport anything.

Its value comes instead from two other things that need only a handful of people. First is its technology -- a simple butpowerful app that allows users to send and receive text, image, audio and video messages through the Internet. Second is its network effect: The more that people use it, the more other people want and need to use it in order to be connected. To that extent, it's like Facebook -- driven by connectivity.

WhatsApp's worldwide usage has more than doubled in the past nine months, to 450 million people -- and it's growing by around a million users every day. On December 31, 2013, it handled 54 billion messages (making its service more popular than Twitter, now valued at about $30 billion.)

How does it make money? The first year of usage is free. After that, customers pay a small fee. At the scale it's already achieved, even a small fee generates big bucks. And if it gets into advertising, it could reach more eyeballs than any other medium in history. It already has a database that could be mined in ways that reveal huge amounts of information about a significant percentage of the world's population.

The winners here are truly big winners. WhatsApp's 55 employees are now enormously rich. Its two founders are now billionaires. And the partners of the venture capital firm that financed it have also reaped a fortune.

And the rest of us? We're winners in the sense that we have an even more efficient way to connect with each other.

But we're not getting more jobs, and our wages are stuck.

In the emerging economy, there's no longer any correlation between the size of a customer base and the number of employees necessary to serve them.

In fact, the combination of digital technologies with huge network effects is pushing the ratio of employees to customers to new lows. (WhatsApp 55 employees are all what its 55 million customers need).

Robert Reich

Can GM produce a real Luxury car

Can GM produce a competitive luxury car or are the American consumers wedded to German made vehicles? The record at GM has been mixed so far. Cadillac has produced two worthy competitors in the CTS and ATS models but has not done an admirable job on the 6000 pound Escalade. The market will get a chance to pass a verdict in the next 6-9 months.

********************************************************************

General Motors’ struggling Cadillac division is hoping that bigger is better.

While luxury competitors have been scaling down their offerings, Cadillac announced on Friday that it would add a new, larger sedan to its lineup next year, which it hopes will lure wealthy trendsetters.

G.M. did not release specifics of the yet-unnamed flagship sedan, but the automaker described it as a “top end, high technology” car intended to compete with the best from German rivals.

“The objective for this upcoming model is to lift the Cadillac range by entering the elite class of top-level luxury cars,” Cadillac’s president, Johan de Nysschen, said in a statement.

The new car will take aim at the BMW 7 Series, Audi’s A8 and the Mercedes S-Class — the top of each competitor’s lineup. Those sedans carry price tags starting in the $75,000 range and can exceed $100,000 for the most feature-laden configurations.

But while the luxury auto market has been surging this year, Cadillac has been left behind.

Through August, Cadillac’s overall sales were down 5 percent this year compared with a year ago, and the company’s sedans have fared even worse, down a combined 15 percent through August. The entry-level ATS sedan, though widely praised, has not taken off with buyers. Its sales were down 20 percent; the larger CTS sedan was down 6 percent.

The entire market for luxury vehicles in the United States has risen 14 percent over the same period, according to the auto research firm AutoData. Audi sales are up 15 percent, BMW up 12 percent and Mercedes-Benz up 9 percent this year through August.

“Cadillac still suffers from more of an older demographic,” said Jessica Caldwell, senior analyst with Edmunds.com.

Cadillac has also suffered from a seemingly endless cast of executives rotating through its top positions. In July, the company looked to the outside, hiring Mr. de Nysschen from Nissan’s Infinity division in an attempt to bring fresh ideas and long-term stability to Cadillac’s leadership.

Mr. de Nysschen is best known for his work at Volkswagen. He played an important role in transforming Audi into a true luxury competitor. Cadillac wants to be seen similarly as among the best luxury brands in the world.

One bright spot for Cadillac is China, where it sold more than 50,000 vehicles last year. The new sedan aims to capitalize on that market, said Xavier Mosquet, head of the Boston Consulting Group’s automotive practice.

Mr. Mosquet said that the European market had no appetite for large cars, and while Americans did, the number willing to buy an ultraluxury Cadillac was not large enough to justify the investment in the new model. Chinese buyers, on the other hand, are not only snapping up larger, more luxurious vehicles, but are also open to switching from one auto brand to another.

“Many in China are now first-car owners,” he said. “People are now about to make new choices, and many of them want to upgrade.”

Mr. Mosquet said that even though only the elite in China were likely to be able to afford the new flagship Cadillac, the aspirational effect for lower-tier buyers would be important. With so much of the Chinese market up for grabs, and no long-ingrained loyalties to weigh down buyers’ decisions, Cadillac has a chance to establish a reputation in China that matches that of the Germans.Production of the new Cadillac will begin next year in the fourth quarter. It will be assembled at G.M.’s Detroit-Hamtramck plant, which currently builds the Chevy Volt, Impala, Malibu and Cadillac ELR. The company plans to unveil the new model in the first half of 2015.

(NYT)

Gender Gap: Wages

Debates over the supposed differences between men and women are a staple of pop culture. But two new books offer an economic look at the evidence, giving support to both pessimistic and optimistic perspectives on the direction of gender relations and the prospects for more fairness and equality.

The first book, “Why Gender Matters in Economics” (Princeton University Press, 2014) by Mukesh Eswaran, an economics professor at the University of British Columbia, draws on data from past economic studies conducted under laboratory conditions to show how gender influences financial actions and relationships.

In one set of these experiments, called the dictator game, women were found to be more generous than men. Players were given $10 and allowed but not required to hand out some of it to a hidden and anonymous partner.Women, on average, gave away $1.61 of the $10, whereas men gave away only 82 cents.

In another test, called the ultimatum game, one player received $10 and then decided how much of it to offer to a partner. (Let’s say the first player suggests, “$8 for me, $2 for you.” If the respondent accepts the offer, that’s what each gets. If the respondent is offended by the unequal division or dislikes it for any other reason, he or she may refuse, and then no one gets anything.)

Photo

CreditMinh Uong/The New York Times

The depressing news was this: Both men and women made lower offers, on average, when the responder was female. Male proposers offered an average of $4.73 to male respondents, but only $4.43 to women. More painful yet was the behavior of female proposers, who, on average, offered $5.13 to men but only $4.31 to women. It seems that women were seen as softies who were willing to settle for less — and the discrimination was worse coming from the women themselves.

Another economic test involved a game in which players would fare best collectively if they cooperated, and yet individuals had an incentive to act more opportunistically for a higher payoff. The laboratory result was that women were more likely to start off by cooperating, but then would learn through bitter experience that they’d be taken advantage of if they continued to do so. By the time this game was played over multiple rounds, the initially cooperative behavior of the women converged into the more opportunistic behavior of the men, but women’s initial reluctance to use cutthroat strategies still brought them losses.

In another setting, women seemed quite willing to compete against other women but much less willing to compete against men. And in yet another study, women negotiated harder when they were working on behalf of others rather than for themselves, which implied a reluctance to push their own interests.

In sum, these research results suggest that women are perceived as easier to take advantage of in a variety of economic settings. That’s the bad news, and it comes from measuring a difference in gender behavior at a specific point in time.

There is greater cause for optimism, however, when we study changes over time. We find the more positive evidence in another new book, “The Silent Sex: Gender, Deliberation and Institutions” (Princeton University Press, 2014) by Christopher F. Karpowitz, professor of political science at Brigham Young University, and Tali Mendelberg, professor of politics at Princeton.

Continue reading the main storyContinue reading the main story

Continue reading the main story

Drawing upon data from politics, business meetings and behavior in the corporate boardroom, they portray a society where women participate less in many public settings, especially those in which real power is exercised. This links up with the experimental results described in Mr. Eswaran’s book, because an underparticipating group that doesn’t resist discrimination is more likely to suffer.

Continue reading the main stor

This sounds gloomy so far. But the authors show that once women achieve a critical mass in a particular area, their participation grows rapidly, at least after basic norms of inclusion have been established.

In fact, the general method of economics provides foundations for some feminist views. First, economics emphasizes that incentives matter and that incentives can be changed. These are common themes underlying feminist thought, which stresses how a fairer social environment can give people greater reason to choose better behavior.

Second, the long-term response to a change in incentives is often much greater and more important than the short-term response. For instance, Mr. Karpowitz and Ms. Mendelberg show that, over time, men behave in a less stereotypically male way when more women are participating in an organization or an activity.

As a former chess player, I am struck by the growing achievements of women in this great game — one in which men were once said to have an overwhelming intrinsic advantage. (Among the unproven contentions was that men were better at pattern recognition.) Although women were never barred from touching the chess pieces, strong female players were few in number.

These days, many more women play very well, and the gap between the top men and women in the game is narrowing. The main driver of the changeappears to be that more and more women are playing chess, creating a cycle of positive reinforcement that encourages ever more women to excel. We’ve seen a similar dynamic in the workplace, as more women have made great strides in the areas of law, medicine and academia. And this process may spread to other sectors of the economy as well, such as technology industries.

This longer-term, optimistic perspective has deep roots in economics, and was articulated eloquently in “The Subjection of Women,” John Stuart Mill’s 19th-century essay. Mill said men and women were indeed different, but he saw the achievements of women as dependent on incentives and the work environment, which he thought could be improved beyond what most people in his day — and perhaps ours, too — could easily imagine. For all the sexist behavior we economists measure in the lab, the research around the bigger picture is supporting Mill’s optimism about a better world to come.

Tyler Cowen is professor of economics at George Mason University. Follow him on Twitter at @tylercowen.