What’s wrong with the economy — a techie’s perspective on Bitvasion and Lazy Leechie

Look at these graphs:

In spite of

Something’s rather wrong with the economy, and it’s not getting better.

The political left says: “offer more government assistance, print more money etc.” The right says: “cut government spending, remove stifling regulation etc.” Both will continue unisono with “…and everything will go back to normal”. Except that I don’t think it will. It’s time to speak up about it.

I’ve come to believe that two elephants have settled down in the middle of the room of our economy, and we need to acknowledge their presence. If we don’t, we will keep being dumbfounded why things break and the room stinks in spite of the money being spent on it, which is where we have been for some time. Let me introduce you to Jumbo One, who I have affectionately nicknamed “Bitvasion” and Jumbo Two, also known as “Lazy Leechy”:

  1. Atoms are being replaced by bits, and more and more bits are becoming free. The invasion of the free bits has happened, and they have taken over. The atoms, and the people who worked with them, are forever out of business.
  2. Too many lazy “leech industries” have negotiated themselves deals that allow them to suck ever-more exorbitant rents out of the productive part of the economy while accomplishing little, and innovating even less. We have let them, and that needs to stop. We need to dismantle the Lazy Leeach cartels by re-introducing competition.

These two elephants in the room need to be acknowledged, and then dealt with. Otherwise no other policy will make much (perhaps any) progress.

Here’s a simple example for the Bitvasion:

When I was a kid, if I wanted to play chess, I would go out and buy a chess board. Driving to the store would move atoms, and generate GDP. The store would have people help me find the product and ring it up. More moved atoms, and generated GDP.  Before that, the board had to be assembled, wood had to be cut, trees cut down, boxes shipped etc. All moving atoms and generating GDP. And to meet with my chess-playing friend across town, I would have to travel there, which moved more atoms and generated more GDP.

Today, I go to chess.com or a thousand other on-line destinations, where I can play chess just as well (perhaps better), and no atoms are being moved at all. No gas burned, no wood cut, no store clerks, and no revenue. (Axcept for a tiny amount for the electricity involved, and the ads.) All those moving atoms have stopped moving. All the people who did the moving aren’t doing that any more. The jobs and GDP has gone away, never to come back. (Some have gone to Foxconn to assemble iPads, but few.)

The chess board is a trivial example. But the same is true for other games. For books, music and movies: they used to be moving atoms with associated GDP (tapes, CDs, DVDs, paper pulp), now they are bits which, in many cases, are free. People used to move them around, and bits don’t need people to move them around. So there’s no more need for travel agents. For insurance brokers. For warehouse managers. For lots and lots of middle-level jobs that have been replaced by free bits because there are no more atoms to move. Free bits that, in many cases, are more capable than the expensive atoms and people that they replaced: nobody wants to go back to spending hours in a travel agency with a stressed agent who knew nothing about the place you are going to either.

The scary part is that an entire section of the job market — middle-paying jobs — has gone away all across the economy. That is very different from previous economic dislocations: just because horse-drawn carriages and their drivers got replaced by cars driven by the owners themselves, the other jobs at the same level of qualification and pay did not away, so workers could re-train and get similar-paying jobs somewhere else. But what if most jobs in an entire pay range go away? People cannot move into a different industry, because the jobs on that level don’t exist there either. They cannot move up either, because if they were qualified, they would have worked there in the first place. They can only move down in responsibility and income, which in my view is the primary reason for the downwards shift in employment and wages that we are seeing.

Money printing cannot “fix” the consequences of the Bitvasion, not can government assistance, deregulation, “sound money” or anything else that I have heard proposed. All those people who lost a middle-paying job, and everybody who was hoping to get a middle-paying job, will never get a job there again of the kind that our parents had. The only solution I can think of is for them to move up the qualification/competence/capability ladder, by a very substantial amount. This might well require a completely revamped education system, not simply a hope that things will go back to where they were — which is all that I’m seeing as proposed and attempted remedies.

Secondly, Lazy Leechie. It is my conjecture that big sectors of the US economy are fundamentally parasitic, and not competitive. They can be because they managed to get themselves a “special deal”, a privileged position in the economy that gives them a bigger share of the loot than they create value for. I suggest we detect those leech industries by looking for the following “features” that they often have:

  • Customers cannot leave. If they could leave, many would because the value they get from Lazy Leechie companies is deeply unsatisfying for the amount it costs. (Example: public education)
  • Even where customer can leave, they can only leave to competitors who aren’t any better. Customer service across their entire industry is crappy. (Example: telecom/cable)
  • New market entrants are disallowed or stymied in various ways, e.g. through regulation, in particular if they would employ disruptive business models that would force the incumbents to be less lazy. (Example: taxis)
  • They get most of their revenue from the government, or they are being favored by the government with special terms like bailouts, low interest rates etc. (Example: banks)
  • People working on those industries have salaries, bonuses, or pensions, that have grown far more than for others in other industries, or have largely been recession-proof. (Example: public sector)

By these criteria, here are some “leech” sectors:

I’m sure there are more, but those Lazy Leechies already add up to about third of the economy. Note I’m not complaining that they aren’t doing their “fair share”, whatever that is, but that they get away with overpriced, subpar service because of backroom deals. “Regulatory capture”, to use the fancy word.

Imagine the boost if a cozy, lazy third of the economy suddenly had to deliver the value their customers expect from them. It might even create enough value so that we could afford to teach lots of unemployed middle-income people new tricks higher up the value chain.

Conversely, imagine the Bitvasion continuing, reasonable-paying jobs disappearing, average income of 2/3 of the economy going down, while the Lazy Leechie other third continues to extract more and more of the value out of the productive 2/3.

Come to think of it, that’s just how the world looks like today. So, it’s time to break up the cartels, otherwise the parasites will kill the host sooner or later. And even free Chess cannot fix that.

P.S. Of course, and while the details may differ, the big picture is the same in almost all countries. Which is why it sometimes feels like the entire world is going to run off the cliff at the same time.