Subsidizing massive tech companies isn't paying off for workers

Municipalities all over the world are scrambling to give massive subsidies to tech companies. It's not worth it

Published September 4, 2017 7:00AM (EDT)

  (AP/Ross Franklin)
(AP/Ross Franklin)

This story has been corrected since it was originally published.

On August 24, Apple CEO Tim Cook made a joint announcement with the governor of Iowa and the mayor of Waukee that the small town had been chosen as the site for a new $1.3 billion data center. At a time when struggling Midwestern towns and cities are trying to present themselves as emerging innovation hubs in an attempt to attract a sliver of Silicon Valley’s wealth, the photo op gave the politicians fodder for their inevitable reelection campaigns. But what made Waukee attractive to Apple?

There are plenty of municipalities like Waukee competing against one other for the attention of Apple, Google, Microsoft and the other tech giants. Many of these towns and small cities continue to follow a growth model which assumes that by attracting skilled millennials working in tech or the arts — the “creative class” — economic prosperity will follow. Yet the major cities that have most successfully pursued this approach now find themselves plagued by growing economic divides, historic levels of inequality, and housing crises that are displacing even middle-class residents. Richard Florida, the urban theorist who promoted this pattern of development, has acknowledged its negative, unforeseen consequences.

But for many American mayors, the problems that come with gentrification are more attractive than the alternative faced by many struggling rust belt and rural towns: population decline and stagnating economies that missed the post-recession “recovery.”

Thus, in an effort to win investment that they hope will accelerate the process of renewal, some of these struggling cities, with the backing of state officials, are putting up big money to win the tech industry’s data centers and factories — even though the vast sums on offer ensure the projects never really pay off. For agreeing to build a data center in Waukee, Apple received $213 million in tax breaks for 50 permanent jobs — that’s $4.3 million per worker — and even bigger subsidies are on offer for factories. Tesla received $1.25 billion in assistance to build its gigafactory in Nevada, and Foxconn is poised to get a $3 billion incentive for its proposed Wisconsin factory, despite a legislative analysis showing the state won’t break even for at least 25 years.

The biggest beneficiaries of this corporate welfare are the giants of Silicon Valley; tech companies that not only work prodigiously to minimize their tax burden and the number of people they employ, but whose dominant positions in their respective industries are important contributing factors to rising inequality and to the larger economic difficulties the country is facing. Tech giants promote themselves as sources of progress and prosperity, but a growing body of evidence suggests that their size is having significant negative effects on economic growth, job quality, competition and even the very innovation they claim to drive.

Tech industry oligarchies mean fewer jobs

The tech giants that demand that the public cough up subsidies aren’t exactly struggling. To the contrary, the tech industry has become a massively consolidated, almost oligarchical operation. Peter Thiel, the infamous libertarian venture capitalist and early Trump supporter, once said that “competition is for losers.” A look at the consolidation of tech companies shows that Silicon Valley agrees. Google controls most of the search engine market, Facebook (and its subsidiaries) dominate social media, Apple and Samsung own the phone market, Uber dominates ride-hailing, and Amazon is the king of e-commerce and cloud computing — and its tentacles keep reaching for new industries. The lack of competition in the tech sector has been spun as a positive outcome for consumers because of the convenience it provides, but its consequences are increasingly being felt on both individual and national levels.

The justification for less antitrust enforcement was that it would result in lower prices for consumers, but how has that really worked out? Has consolidation helped to bring down internet prices? It certainly doesn’t seem to have helped make pharmaceuticals more affordable. That’s because the promise of lower prices hasn’t materialized. According to a study by antitrust expert John Kwoka, 75 to 80 percent of the mergers approved by regulators have resulted in significant price increases, meaning the main promise of this new regime was a lie. And that isn’t the only way these mergers have left the country worse off.

The biggest tech companies with some of the largest market caps require far fewer employees than the corporate behemoths of the past. According to the Economist, the three major Detroit carmakers employed 1.2 million people in 1990, with revenues of $250 billion and a market cap of $36 billion, while the top three companies in Silicon Valley in 2014 had just 137,000 employees, similar revenues, and a market cap of $1 trillion. But it’s not just tech companies that have slashed the number of people they employ. As they’ve consolidated, traditional companies have also slashed their workforces — Exxon employs half the people it did in the 1960s, despite having merged with Mobil — and the results have not been good for working people.

Even though the job market is approaching levels that previously constituted full employment, workers seem to be struggling more than ever because of how consolidation has changed the nature of work. Uber and the gig economy are often (rightfully) used as examples for how tech companies are degrading worker protections, but even companies that don’t pretend their employees are contractors are getting away with similar abuses.

Not all tech jobs are good jobs

Amazon has made a big deal of its hiring sprees for warehouse workers, but the Institute for Local Self-Reliance estimates that it has actually eliminated 149,000 more retail jobs than it has created in its warehouses. And those warehouse jobs are pretty terrible. The people who work there are paid terribly and work in exhausting conditions, and the company usually considers them seasonal temps even though many work year-round. They’re also heavily surveilled and micromanaged thanks to new technologies that have quickly spread throughout major companies, making work even more stressful for people who are already struggling.

This mass consolidation has also contributed to the wage stagnation that has left average workers making about the same amount they did 40 years ago, even though the profit rates of these companies have increased to near record levels as they’ve gobbled up their competition. Where has all that money gone? Many companies are sitting on massive cash piles they don’t know what to do with, and instead of sharing those gains with workers, profits have been passed upward to wealthy shareholders, resulting in levels of inequality unseen since before the Great Depression. Simcha Barkai, an economist at the University of Chicago, calculated that workers would be earning about $14,000 more every year if concentration had remained at the same level as 30 years ago — which is a big deal when you consider that the median income in the U.S. is $28,000.

Workers haven’t been the only casualty of the concentration of economic power in the hands of a shrinking number of companies. Those at the top have undoubtedly benefitted — CEOs now make 347 times what the average worker makes — but the economy as a whole has taken a number of crucial hits, many of which became particularly evident during the recent uneven recovery.

Since 1978, the number of businesses that are new firms has halved, illustrating the staying power of these new corporate giants, but another economic shift also took place over that period which seems to have been completed in the aftermath of the recession. From 2010 to 2014, 60 percent of counties across the country saw more businesses close than open, and where the new businesses emerged was telling. During the recovery in the 1990s, counties with less than 500,000 people created 71 percent of net new businesses; counties with less than 100,000 people were responsible for 33 percent. The same can’t be said for the 2010 to 2014 recovery, during which only 19 percent of new businesses came from counties with less than 500,000 people and none came from those with less than 100,000. Consolidation has pulled economic activity to large urban centers along the coasts, decimating local economies across the country in the process.

Those pushing the Silicon Valley model would at least say there’s an upside to these structural changes: More people are becoming entrepreneurs and the technologies they create are inspiring greater innovation. Too bad the data shows the opposite. Not only has the number of new businesses plunged since the 1970s, but millennials are the least entrepreneurial generation so far. The reduction in the number of new small businesses, which have become more expensive to start against such entrenched competitors, has meant that millions fewer jobs have been created over the past several decades. And though Silicon Valley loves to point to (and buy up) innovative startups, when there are fewer new businesses competing against one another, there’s also less innovation. Even Steve Jobs recognized that when companies get too large, the sales and marketing people dominate the more inventive product designers and engineers. Sound familiar?

When towns, small cities and struggling states give uneconomical incentives to large tech companies in the desperate hope that a data center will revive the local economy, they’re perpetuating a trend toward increasing consolidation that’s hurting workers, devastating communities and making it harder for mom-and-pop shops to survive against multinational behemoths that can use the profits from one division to allow another to operate at a loss to eliminate competition. There’s a growing recognition among academics, politicians and regular people that the convenience offered by these large companies is not worth the many downsides that come with allowing them to have so much control over the economy.

That doesn’t mean reining in the tech giants will be an easy task — the antitrust battles of the 1930s can’t be easily mapped into a modern context — but until these companies are broken up or regulated like utilities, the social discord they cause will only increase. People deserve better than stagnating wages and having their data sold off to the highest bidder; and only through a renewed focus on curbing the power of these massive companies will that be achieved.

By Paris Marx

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