ADAIR TURNER: Tech companies like Facebook may be contributing to the next credit crisis

Lord Adair Turner.Oli Scarff/Getty Images

• Lord Adair Turner talked to Business Insider about the effect of the tech sector on inequality, debt, and property.
• Tech companies create fewer jobs and concentrate more wealth than non-tech companies, he said.
• The prices of the products they create fall quickly, so they under-contribute to GDP growth.
• Tech companies also buy a lot of expensive property, driving up prices.
• Not-so-rich people need to take on debt to buy houses near that land — and banks are happy to extend that credit.
• Tech companies like Facebook, Google, and Apple thus drive credit booms due to land purchases, he argues.

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DAVOS, Switzerland — People do not generally link Facebook, Google, and Apple to the 2008 credit crisis or the global collapse of the property market that followed.

But perhaps they should.

Or at least, perhaps they should ponder the role tech companies play in generating inequality, the demand for property, and the debt that may create the next credit crisis, according to Lord Adair Turner.

Turner is a regular at the World Economic Forum in Davos, where billionaires and political leaders meet annually to discuss “the global situation,” as the conference portentously frames it. Turner was a consultant at McKinsey in the 80s and 90s, and has been a director of the Confederation of British Industry and a vice-chairman of Merrill Lynch Europe. In 2008, he took over as chairman of the Financial Services Authority, right as it was failing to prevent the collapse of several British banks. Currently, he is a senior research fellow at George Soros’s Institute for New Economic Thinking.

In other words, Turner is just the sort of ruling-class technocrat that Davos is repeatedly criticised for hosting.

His greatest heresy is his theory that the tech sector creates wealth inequality

Adair Turner / Institute for New Economic Thinking

But he is also one of the more radical — and because of his background, more credible — thinkers on the mountainside. His 2015 book, “Between Debt and the Devil,” asks an astonishing series of questions about the underlying structure of capitalism that most people at Davos dare not touch.

His greatest heresy is his theory that the tech sector creates wealth inequality (rather than alleviating it), contributes to property bubbles, and fuels the demand for debt that can hobble economies.

That’s anathema to the narrative Silicon Valley would prefer. Facebook and Google give away their products for free. They grant people new tools to grow their own businesses. They make our working lives more productive. Apple rarely does anything for free, of course, but it gives billionaires and paupers identical computing power and access to information. To get rich in tech does not require you to be born into the right family, or go to private school, or attend Oxford or Cambridge. You need only a minimal level of technical ability and — more importantly — a superior idea to succeed.

Surely, tech companies are the great democratizers of economics?

Well, no, Turner told Business Insider in a conversation prior to Davos.

Tech companies are concentrating income and capital into fewer hands

Duncan Hull / Wikimedia Commons, CC

For example, look at how Facebook creates capital and distributes employment income. In 2014, Facebook had just 5,000 employees and a market capitalization of $150 billion (£108 billion), Turner says in his book. In Q3 2017, it had 23,165 employees and $520 billion (£375 billion) in market cap, according to its most recent quarterly report.

That sounds like good news: Facebook has created jobs and created wealth.

But compare Facebook to Ford — a much larger company. Today, Ford has 201,000 employees and a market cap of $52.5 billion (£37.8 billion). In other words, it has nearly 10 times the number of paid staff but its investors hold only one-tenth of the capital that Facebook stockholders own.

You need a lot of people to make and sell cars. You need very few people to make and sell software.

Thus Facebook creates fewer jobs but more capital inequality than Ford.

By definition, tech companies are concentrating income and capital into fewer hands, and making them richer compared to everyone else.

The problem with rich people…

The problem with rich people is that they reach “satiation” very fast, Turner says. There is only so much food they can eat, so many clothes they can buy, so many cars they can drive.

“As more people, as a result of this process [tech investment], get richer, there’s a limit to how many mobile phones and bits of software and computer games they can buy, and those things keep on getting cheaper [anyway]. So they have more disposable money and they compete with one another for the thing which is in scarce supply,” Turner says.

And that thing is … land.

‘One of the biggest things that all of the big tech companies — the Googles, the Facebooks — now spend investment dollars on is land’

Adair Turner / Institute for New Economic Thinking

Land — real estate, property, buildings — is one of few economic sectors that is so massive its fortunes can make or derail entire economies. “Because it’s in terms of trillions of dollars, this has a much more important effect” than other sectors, Turner says “It’s many, many times bigger.”

Immediately, success in the tech sector starts driving up the price of land.

“One of the observable and interesting features of our modern economy is ‘clustering,'” Turner says. “When you have people who are good at making money out of all these technologies they tend to cluster in particular attractive cities to compete with one another, driving up the quality of that land. And again, the high-tech, high-touch paradox is, you think, ‘why did they need to do that in a world where technology has dramatically reduced the cost of communications worldwide? … Why don’t they just go live in the Highlands of Scotland?”

“And observably, they don’t,” Turner says. “And it is a wonderful paradox. One of the biggest things that all of the big tech companies — the Googles, the Facebooks — now spend investment dollars on is land.”

‘You’ve got this extraordinary paradox that in this world where the technology which they’re developing would enable people to work anywhere in the world, they spend enormous amounts of money on extremely expensive land’

“They buy up land in particular locations which has some of the most expensive land in the world, in the Valley, in Palo Alto etc., because they want all their tech guys, their developers, to be together. And they want them to be together in a state-of-the-art campus which looks rather gorgeous. So you’ve got this extraordinary paradox that in this world where the technology which they’re developing would enable people to work anywhere in the world, they spend enormous amounts of money on extremely expensive land for them all to be in attractive locations.”

Again, this would not be a problem if land and property improvement added meaningfully to GDP. But it doesn’t, Turner believes. No more goods are produced, and no employment is created, by the buying and selling of property.

OK. But surely the new jobs tech companies create will add to GDP?

Tech has a self-limiting effect on GDP growth

Turner, when he was chairman of the Financial Services Authority, leaving Downing Street in 2009.REUTERS/Luke MacGregor

That is also a problem, Turner says. The products that tech companies create are increasingly cheap, and they are often free, so they contribute little to GDP growth. The supply of tech is endless so its value falls. And this creates a self-limiting effect of tech on GDP growth.

“You might think, ‘oh gosh, that means that more and more people will be employed as computer programmers, and more and more of the economy will be the amount that we spend on computers.’ And that turns out to be completely wrong because the technology is so powerful and it produces computers so efficiently, that the cost of computers simply collapses. And so, however many mobile phones and computers we buy, it stays a very small proportion of what we sell, because each year, we buy twice as much computing power for the same amount of money. As a percentage of GDP, it’s sort of self-defeating,” Turner says.

“The power of software is amazing. If you have a small number of clever people who create some really, really clever software, you don’t need any other clever people to produce a million copies of it, because every other copy other than the first is just produced out of thin air. That is software. It is infinitely replicable.”

‘I think we could see a decrease in the number of people operating in some aspects of software’

Adair Turner / Institute for New Economic Thinking

The next step is a proportional reduction in employment in the tech sector, he argues.

“I think we could see a decrease in the number of people operating in some aspects of software, because software is now getting so clever that software is writing software. I was briefly down in India to look into some of the big outsourcing firms, which do back-office processing IT development for companies, and their employment is beginning to shrink. It’s because the capacities of the software are that the only thing you have to have. You have software check your software, and make sure it doesn’t make mistakes,” Turner says.

In this theory, you’ve got a situation where tech is creating fewer jobs, concentrating more wealth, and driving up the price of land.

With land prices rising, consumers need to take on more mortgage debt to buy property

ALASTAIR GRANT AP/Press Association Images

That sets off another part of the chain reaction. With land prices rising, consumers need to take on more mortgage debt to buy property. Banks are happy to lend, because they see rising property prices as an underlying asset that supports the credit market they are making.

Turner writes in his book, “Paradoxically, the rising importance of land is in part the direct consequence of the remarkable progress of information and communications technology (ICT). And the faster ICT progresses in the future, the more the value of real estate and land may increase.”

“… If the supply of desirable locations is scarce, and the land on which desired real estate is irreproducible, the only thing that can adjust is the price. Thus the rising importance of real estate — and of the underlying land — in part reflects fundamental technological and consumer preference factors.”

Turner isn’t literally arguing that tech companies cause real estate credit bubbles, of course. He’s merely pointing out that they don’t help. They are a contributing factor. That’s a problem because most people think they are the solution to the problem, not part of the cause.

We’re living in a poker game in which the players who are losing can only stay in the game as long as players who are winning keep extending their credit.

Debt creation then becomes a real necessity. Now you have an economy where most people are not rich enough to buy the houses near the tech companies that are driving up property prices, and those tech companies are not creating enough jobs or contributing enough to GDP growth to make the poor richer through extra jobs. The problem is particularly extreme in Silicon Valley — where even a modest house costs more than $500,000 (£360,000) and one-third of all houses cost $2.5 million (£1.8 million) or more. New York and London are similarly plagued.

The non-rich now need more credit to get by. Consumer demand is only sustained because the rich are willing to extend credit — through banks — to those poorer than themselves.

The rich might be doing well, but everyone below them is not.

If this sounds like a doomsday scenario, that’s because it is. But it’s not fiction — it has already happened. As Turner describes in his book, it’s what caused the Great Depression.

“We know that the level of inequality, which had existed in America in the 1920s, seemed to drive a level of debt creation, which then became unsustainable. One of the greats who looked at this … was Marriner Eccles, who was chairman of the Federal Reserve from 1934-1951. He likened what was going on in the 1920s to a poker game in which the chaps who were losing could only stay in the game as long as chaps who were winning extended their credit.”

So how does it end?

“When the chips run out, and the game collapses,” Turner says.