The ‘haves and have-mores’ in digital America

Is monopoly power one of the reasons that the equity markets remain high nearly 10 years into a bull market? It is something I have begun to wonder about recently, since a lack of wage inflation is a key reason that the Federal Reserve is not moving faster to raise interest rates. A rate rise off the back of inflation is one of the most reliable ways to pop a market bubble. Yet many economists believe that one of the reasons that wage growth — a typical driver of inflation — remains relatively flat despite unemployment being at nearly pre-crisis lows is because of job-disrupting technology itself. There are a few sectors, like finance and information technology, which have seen strong wage growth. Yet they create relatively few jobs. Finance takes 25 per cent of all corporate profits while creating only 4 per cent of jobs, since it sits at the centre of the dealmaking hourglass, charging whatever rent it likes. Meanwhile, wealth and power continue to flow into the technology sector more than any other — half of all American businesses that generate profits of 25 per cent or more are tech companies. Yet the tech titans of today — Facebook, Google, Amazon — create far fewer jobs than not only the big industrial groups of the past, like General Motors or General Electric, but also less than the previous generation of tech companies such as IBM or Microsoft. What’s more, it is not just the top sectors that control the majority of corporate wealth, but the top companies themselves.

The most profitable 10 per cent of US businesses are eight times more profitable than the average company. In the 1990s, that multiple was just three. Workers in those super profitable businesses are paid extremely well, but their competitors cannot offer the same packages. Indeed, research from the Bonn-based Institute of Labor Economics shows that the differences in individual workers’ pay since the 1970s is associated with pay differences between — not within — companies. Another piece of research, from the Centre for Economic Performance, shows that this pay differential between top-tier companies and everyone else is responsible for the vast majority of inequality in the US. One of the key reasons the top sectors and the top businesses can take so much of the economic pie is that they are the most digitised. As McKinsey Global Institute analysis of the “haves and have-mores” in digital America shows, industries that adopt more technology quickly are more profitable. Tech and finance sit at the top of that chart, but sectors that actually create the most jobs — such as retail, education and government — remain woefully behind the curve in terms of incorporating digital technology into their business models. That means you end up with a two-tiered economy: a top level that’s very productive, takes the majority of wealth, and creates very few jobs, and a bottom one that stagnates. This creates strange new market dynamics and exacerbates the disconnect between Wall Street and Main Street that was already well under way since the 1980s. The markets can do incredibly well, even if the majority of workers do not, because they are increasingly driven by a small handful of top-tier companies in the information technology business. This is not just a phenomenon in the US. As Ruchir Sharma, head of emerging markets at Morgan Stanley Investment Management, says, “technology has become the only big story in the markets” in high-growth countries such as China, where the weighting of tech stocks in major indexes is similar to roughly 25 per cent you see in the S&P 500.

Tech stocks — with the exception of the big platform companies such as Google, Facebook, Apple, Amazon, which control vast amounts of data — seem overvalued to me. Yet the only things that I can see that would prick that bubble is a significant move away from easy monetary policy — which cannot happen at the moment for reasons already discussed — or a shift in the regulatory environment for technology. While that probably will not happen in the next couple of years, it is interesting how quick the reaction can be from investors when they think the playing field has changed. A few weeks ago, the Chinese internet company Tencent saw its stock price fall quickly on the news that it would limit users under 12 years of age to one hour of play on its most popular game, Honour of Kings.

This followed criticism after the death by stroke of a 17-year-old who had been playing the game for 40 hours straight and reports of another teenager who broke his legs after jumping from a window when his parents stopped him playing. Extreme, but perhaps a harbinger of things to come as the public begins to understand the cognitive effects of digital technology. No wonder some big tech companies are trying to shift the “winner-takes-all” narrative and focus on their role in supporting larger economic ecosystems. In China, Alibaba is leading an effort to connect broadband into more than 1,000 rural communities, in order for local merchants to have access to the digital technologies that have become the only real place that wealth and profits live these days. In a more economically bifurcated and politically polarised world, there are plenty of good reasons for them to do so. Perhaps the US tech giants should take heed.