Rising income inequality tremors

One of the few issues on which Donald Trump, Bernie Sanders, Ted Cruz, and Hillary Clinton agree is the growing problem of inequality in income and wealth. From the extreme left to the extreme right, everyone is angry about the one percent who own over half of global wealth. There has always been an income and wealth gap, but the divide between average worker and the very wealthy has not been so wide since the roaring twenties.

And the bad news is that technology is about to make things worse. Over the next decade, it will begin to disrupt almost every industry, wipe out millions of jobs, and make the rich richer. Even though everyone will lead better and healthier lives and benefit from technology advances, the widening rich-poor gap will generate greater resentment and create a cauldron of dissent. This is something we need to be prepared for.

Intellectuals are trying to build frameworks to understand why the divide, which first opened up in the 1990s, continues to worsen. French economist Thomas Piketty in his bestselling Capital in the Twenty-First Century explains that the economic inequality gap widens if the rate of return on capital is higher than the rate at which the whole economy (GDP) grows. His recommended response is to redistribute income through progressive taxation. A competing theory, by an MIT graduate student, suggests that much of wealth inequality can be attributed to real estate and scarcity. Silicon Valley has both: an explosion in wealth for investors and company founders, and a real-estate market constrained by limits on development.

So far, the valley’s moguls have largely been in denial that technology will wipe out millions of jobs and increase inequity. They prefer to believe they are building a utopia that doesn’t have a dark side. But one of the most influential people in Silicon Valley, Paul Graham, broke ranks and recently wrote an essay about the role of start-ups in exacerbating income inequality. It created a firestorm, but started an important debate.

Almost every point made in Graham’s essay was criticised by fellow venture capitalists, angry socialists, and the press. But his posers are valid. There’s a very good reason for which Silicon Valley hosts the majority of the world’s most dynamic technology companies. As Graham notes, start-ups create enormous value for society.

The best disruptive start-ups create far more value than they capture, even as they disrupt or even destroy older, less efficient industries. Uber may have generated much controversy, but few would disagree that the old ways of moving people around densely populated areas need to be improved. This goes beyond taxis and towards a future of weaving all transportation systems into a single intelligent, flexible service that makes it much easier to move around at lower cost, with lesser environmental impact. Twitter and Facebook may deserve criticism, but these social platforms are the primary information-distribution media that fueled the Arab Spring, and they continue to power other democratic uprisings around the world.

Yes, the economy’s digital transition is amplifying globalisation and adversely affecting American workers. Automation is already decimating the global manufacturing sector, transforming reliable mass employers providing middle-class income into much smaller employers of people possessing higher-level education and skills. The winner-takes-all nature of the tech industry explains why only a few giant digital companies compete with each other to dominate the global economy. A substantial part of the value they capture is concentrated at the center and mostly benefits a few shareholders, executives, and employees.

We need to have open discussions about the good and bad of technology and soften its negative impact. With robots and artificial intelligence increasingly doing the jobs of human workers and multiple industries being simultaneously disrupted, we are heading into a jobless future and need to rethink the nature of capitalism itself. This cannot only be about taxing the rich, because that is not what Americans want. They have never demanded income equality and have always admired entrepreneurs, the Henry Fords and the Mark Zuckerbergs alike. What Americans really want is economic security. What makes us unequal is not so much the money we have at any given moment but our capacity to face critical adversities such as cancer or falling behind mortgage payments. Advancing technologies make it possible to provide for the basic needs of every human being — so that a job isn’t about survival or subsistence any more.

A more fruitful discussion would be about how we can soften the impact of technology and social change. We need to discuss safety nets, retraining of workers, and the idea of a universal basic income for everyone. We need a nationwide dialogue on how we can distribute the new prosperity we are creating. Equally importantly, we need to create equity and fairness in our legal, justice, and economic systems — which are badly lacking. Otherwise we will see even more anger, and unrest nationwide.

(Vivek Wadhwa is a fellow at Rock Center for Corporate Governance at Stanford University, USA)