Invest in innovation, not exploitation

The Thinker by Rodin

America is a supposedly country that rewards innovation. The trouble is, a lot of this innovation is really exploitation. I looked into this briefly a few posts back when I looked at Lyft and Uber’s “innovation”. The only really innovative part about these ride services is their app. They’re both cheaper and generally faster than taking a taxi. So much for the innovation part. The rest of it is pure exploitation, mostly of its drivers who get cash up front that doesn’t begin to pay a living wage, particularly if you consider the wear and tear on their cars.

These days much of what passes for innovation in our economy is finding newer and cleverer ways to exploit people, who are generally among the most vulnerable among us. Granted, this may be as American as apple pie. We bought Manhattan from the Indians for the price of some trinkets. These days, the exploitation is less overt. But even if you don’t use Lyft or Uber, you don’t have to look far to see examples.

At the macro level, large companies that pollute exploit us all. Their cost of business is discounted by using our air and rivers as a sewer, and we pay the price. Tens of thousands of Americans die from air pollution every year, and the Trump administration is doing its best to make sure more of us will die. Generally though it’s the poor and vulnerable that get exploited. This is our innovation economy at work.

Perhaps you saw John Oliver’s recent show on mobile home investing. This is exactly the sort of “innovation” that I wish we could outlaw. By definition, if you live in a mobile home you don’t make a whole lot of money. You might own your mobile home but in most cases these homes are not truly mobile. And if you wanted to pack up your mobile home and move it elsewhere, you probably can’t afford to do so. In most cases your mobile home sits on a lot that you rent. There are plenty of investor groups buying these properties and regularly jacking up rents, knowing they have a captive audience. Some say this is a great way to earn “passive income”. What you are really doing of course is exploiting the least among us. In many cases these people are skipping medications or food to pay these rent increases. Some abandon their property, which is repossessed and resold to the next exploited victim.

I’m not prone to anger but these sorts of schemes make me positively irate. They should be outlawed. There are all sorts of ways we pick the pockets of the poor among us: pay day loans with incredibly usurious interest rates, lotteries that take their money but rarely pay off, casinos with a similar idea, higher prices for substandard food because supermarkets won’t serve their communities and of course the traditional: substandard public schools that are grossly underfunded because wealthier school districts won’t share their wealth. If that’s not enough, we shame them for taking food stamps or trying to compete for the vanishingly small market of affordable housing.

Most of us though don’t distinguish between companies that make money via exploitation versus innovation. That’s because it requires research, thinking and our capitalist system sees nothing wrong with exploitation. Look at some of the recent IPOs. How many of these are really driving innovation? Lyft went IPO, but Uber was first to this market. Lyft’s app is not noticeably better than Uber’s. Both depend on exploiting drivers and frequently change their payment terms to drivers to increase their revenues at drivers’ expense. Both are working hard on autonomous car technology. They can’t wait to boot their drivers altogether because they’ve run the numbers and maintaining a fleet of autonomous cars is way cheaper than even exploiting their drivers.

Some companies are both exploitative and innovative. How should I feel about owning Amazon stock, which I probably do somewhere in a mutual fund or ETF in my portfolio? Most of Amazon’s model has been exploitative: they’ve undercut competitors by sustaining losses funded by investors until competitors are out of business. I can see the problem locally with so many vacant storefronts. These customers are using Amazon instead.

Amazon was shamed enough by Bernie Sanders so that they raised their wages to $15/hour, which is good, but it’s barely a floor for a survivable wage. Meanwhile, they are finding other ways to “innovate”, most recently by creating their own air fleet that innovates by screwing their pilots. But other parts of Amazon are truly innovative. Amazon Web Services was a completely new idea that Amazon figured out and which fundamentally changed computing, dramatically lowering computing costs, increasing uptime for connected systems and spurring all sorts of innovation in information technology. Its web services are now the most profitable part of Amazon’s business. It’s proven extremely profitable for Google and Microsoft too, who have pockets deep enough to compete in this market.

Ideally I would not own any stock in companies that are exploitative. But like most of you I suspect, I don’t own any stock directly. Instead, I own mutual funds, ETFs and bonds. Mutual funds and EFTs are collections of ownership in lots of stocks. I could own a commercial bond for a specific company, but even here most of these are amalgamations of lots of bonds funds. There’s no easy way to invest in pure innovation, and hard to avoid investing in exploitative companies.

It’s not entirely impossible, however. You can invest in “green” funds and there are some socially active funds that avoid investments in arguably “evil” countries, which include Israel, which is effectively an apartheid state. Kiplinger has some suggestions for this kind of investing. But it’s not easy and in some cases impossible.

For example, if your company does not allow you to invest your 401K in funds like these, you have no options and may pay a penalty for doing investing outside of your 401K, particularly if your employer makes matching contributions to your 401K.

Which is why in the end what you can do is limited, unless we had a progressive Congress that changed investment laws. At a minimum they could require companies offering 401Ks to provide options for employees who want to invest in funds that are innovative but not exploitative.

I am overdue for a talk about this with my financial adviser. Frankly, I wasn’t thinking much about this until my recent trip on Lyft. Much of our portfolio has moved with retirement from 401Ks to IRAs. These could be shifted toward funds that reward innovation and socially progressive. Fortunately, I have a call with him tomorrow.

The gig economy model is exploitative and unsustainable

The Thinker by Rodin

I took my first Lyft ride the other day. I am pleased to say that the technology worked great! I picked up my luggage at baggage claim at Bradley International near Hartford, opened my Lyft app and within two minutes a driver was flagging me down and I was on my way home. I arrived home forty-five minutes later and just $55 poorer, but compared with taking a taxi I doubtlessly saved a bundle. In addition, my driver turned out to work part time for United Technologies configuring cloud services on Microsoft Azure for their customers. So we had lots to chat about and the drive went quickly. He fills his free hours driving people mostly to and from the airport and seemed happy to be a Lyft driver.

Until recently my daughter depended on Lyft and Uber to get around. She gave up her car a few years ago, convinced she didn’t need one in Washington’s far suburbs. If she needed to go somewhere, she’d either walk or use one of these services. Nonetheless, she snapped up the free car I offered her: my old 2005 Honda Civic Hybrid (now replaced by a Toyota Prius Prime). That was my reason for flying: I drove the car to Virginia to give it to her and took a United Airlines flight back. While normally my wife would pick me up at the airport, she recently had a knee replacement and couldn’t do it. So I experimented with Lyft, which I heard was the less evil of the two services. More to the point, it didn’t look like taking a taxi at Bradley was an option anymore. I didn’t see any I could flag down in Arrivals.

So it was a great experience until I thought about the model of Lyft and Uber in general. A lot of their drivers have too and have figured out that they are being exploited. Lyft and Uber are hardly alone using this model. In our new gig economy, the trick seems to be to create companies that find unique ways to exploit workers by making them not realize they are being exploited. In the case of Lyft and Uber, the first thing to do it not to label them employees. They are “independent contractors” who set their own hours and get paid fixed rates. One advantage to being a Lyft or Uber driver compared with being a Supershuttle driver is that they don’t have to rent a van from the company and probably aren’t working sixteen hours a day to keep paying Supershuttle’s franchise and leasing fees.

But they are getting ripped off. In the case of Lyft, they recently reduced payments to their “independent contractors”, which did not make them happy but did probably help lessen Lyft’s losses. Lyft went IPO last week but it’s bleeding money. Nonetheless, they aren’t too worried. Amazon used this strategy very profitably until their competition was either destroyed or bought out. Lyft is hoping for the same sort of success at this game. Its new shareholders don’t seem convinced yet as you can buy Lyft shares well below the $72/share price set at their launch.

These new companies exploit shamelessly and fight dirty. Customers tend to look the other way, basically because they don’t understand what’s going on. If you can save 30% or more with a Lyft ride compared to taking a taxi, you see a good deal plus in many cases they are faster and more convenient than a taxi. It’s clear to me though that these savings come principally from these “independent contractors”.

Taxi drivers are often independent contractors too. They usually aren’t employees. But they are regulated. Taxi commissions typically oversee these services and set rates that allow taxi drivers to earn a decent wage. In some cases they own their taxi, in some cases the taxi company owns them. But it’s a model that’s been working quite well because cities and towns have decided to make it work for both drivers and passengers.

Uber and Lyft decided to be disruptive, which was to just ignore these taxi commissions and brand their services as something other than what it is: a taxi service. The big difference is that their cars aren’t painted with the taxi company’s colors. You hop into one of these cars and hope that your driver won’t drive sexually assault you.

Doing background investigations on “independent contractors” of course raises costs. Hopefully both Lyft and Uber are at least doing cursory background investigations before offering contracts to these “independent contractors”. It’s more convenient to ignore these issues until it becomes too big a problem, and then hope to manage them.

But the real ones being exploited are not customers, but drivers. Basically they become drivers to get some quick cash to pay a few bills. What’s harder to see is the costs on their vehicles and how it eventually affects their bottom line. A car that was driven 10,000 miles a year that is now driven 30,000 miles a year will wear out more quickly and require more frequent maintenance. Neither Lyft nor Uber will pay for these expenses. You are supposed to figure that out as part of your business model, along with other things like withholding money for taxes and social security and Medicare, including the employer’s share. All these expenses plus the quick depreciation and higher maintenance costs on your car means that for most drivers, your effective wage per hour is below the minimum wage and you get all the hassles and costs of maintaining your car and paying taxes too.

These companies are prominent examples of this trend but they are hardly alone. Employers basically don’t want to employ: it’s costly, limits their ability to move quickly to market conditions and requires a lot of hassle. Amazon reluctantly raised wages for its warehouse workers to $15/hour, but it still hires lots of “independent contractors” who work for much less. Even my driver’s erstwhile day employer, United Technologies, is trying him out at part time wages and substandard benefits. He works from home and has to wait two more months before he is allowed to actually come into the office.

I don’t think this gig economy is sustainable. It endures until these “independent contractors” say enough and demand a fairer deal, which is hard to do if you have no union hall. Hopefully they will get a decent deal, but that will raises costs overall and make their whole business model less profitable.

But maybe it won’t matter. Like Amazon they hope that they will have gotten rid of the competition by then by hanging on as long as possible. This success though depends on cutting competition off at the kneecaps and exploiting people as long as possible. In the case of Lyft and Uber, so far it’s been decimating taxi companies. If ultimately it doesn’t work, they go out of business, leaving of course their “independent contractors” hanging.

In the case of Uber and Lyft, it’s clear this will happen eventually anyhow. The plan is to introduce fleets of automated cars as soon as the technology matures. And these “independent contractors” will be left holding the bag with cars with high mileage, lots of costs and no job.