Digital disruption is slowing growth – but it will make for better economies

Uber Tag On Rear View Mirror

There is universal consternation about the inability of most industrialised countries to return to strong economic growth, despite zero or negative interest rates and varying degrees of fiscal stimulus.

The common perception is that growth remains sluggish because monetary policy is impotent and fiscal policy ineffectual as a result of the continuing hangover from the global financial crisis.

That may be partly true, but there may also be bigger issues driving the current economic stagnation. One is the unrelenting expansion in technology and its ability to uncut and undermine old ways of doing business. While such progress will increase efficiency and productivity, the transition period can hold back the economy in what is for many industries a zero-sum game.

The poster children of this so-called digital disruption, Uber and Airbnb, show how transport and accommodation services can be provided just as efficiently by new entrants tapping into privately held idle capacity as by existing providers (some would argue more so) and at a lower price.

These firms can enter these markets with only minor investment in capital equipment – Uber does not need to buy cars and Airbnb does not need to build hotels or apartments.

And this is the nub of digital disruption and slower economic growth. Clearly there was spare capacity in privately owned cars, which sat unused for many hours each day. So too with apartments that were empty and unable to be let out by the owners when they were not there. Uber and Airbnb have tapped this idle capacity without adding to investment, and as they take business away from taxi companies and hoteliers, the rate of economic growth is held back.

These new entrants have forced taxi and hotel businesses to cut prices in reaction to declining market share. That brings weaker formal employment and, perhaps most critically, lower wages.

After all, why would drivers pay the owner of the taxi licence a high fee to drive the taxi if they can join Uber, use their own car and work whenever they want?

These huge structural changes are generally beneficial to an economy in the long run. An efficient, highly competitive and more productive economy is one in which markets deliver lower costs and a better service for consumers. They also mean strong profits for the most efficient provider of those goods and services. The old businesses must adapt or cease to exist.

In the interim, though, there are legitimate issues about regulation. If an Uber car crashes and the passenger is hurt, is the Uber driver insured? Does the Airbnb owner pay goods and services tax on the rent they receive, and income tax on their earnings? What about capital gains tax if the apartment is for income-generating purposes?

For workers, the idea of a job for life is becoming even more remote. Why not buy a snazzy little apartment and Airbnb it, and, in your spare time, drive for Uber? For people who do this, there is less need to work in a hotel for a safe and regular wage.

The new style of work means people will increasingly choose their own hours. Provided the income flow is sufficient, there will be flexibility and freedom.

That is the good side.

The bad side is that you have no certainty of work. What if there is a glut of Airbnb properties and you only let yours out for a third of the year? What about your sick leave risks? Superannuation? Insurance needs? Holidays? In the old economy, with a steady job working for a reliable employer, these were taken for granted.

Already there has been a casualisation of the labour force, but digital disruption means working conditions are continuing to move from a regular job with well-defined benefits, to one where there is great flexibility but greater uncertainty. While these changes take place, economic growth is likely to be dampened, even with very stimulatory policy settings in place.

Stephen Koukoulas is a research fellow at Per Capita, a progressive think tank.

Powered by Guardian.co.ukThis article was written by Stephen Koukoulas, for theguardian.com on Tuesday 8th December 2015 04.25 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010