Pop Philosophy

The Great Disruption

What the global economy, Blockbuster, going solo, hook-up culture, asynchronous intimacy, the Apple Maps app and ‘Homeland’ all have in common

We live in a world of broken models, columnist Robert Samuelson noted recently in The Washington Post. In his essay, Samuelson speculated that “to understand why world leaders can’t easily fix the sputtering global economy, you have to realize that the economic models on which the United States, Europe and China relied are collapsing.”

Samuelson confined his analysis to macroeconomics, but he's actually on to something. We find ourselves in a world turned upside down.  The Greatest Generation had to survive the Great Depression; our generation, I believe, is being asked to navigate (rather than survive) the Great Disruption.

Let me explain. It's now conventional wisdom that companies from Blockbuster (RIP) to Borders (RIP) have seen their traditional business models disrupted. In the case of the former, their video stores were challenged by the advent of DVDs by mail, courtesy of Netflix. In the case of the latter, the transition from retail to e-commerce (and, soon, e-books) pioneered by Amazon hastened Borders’ demise. Even 'new' companies like BlackBerry (RIP soon?) are seeing their once mighty technological advantages being leapfrogged in the space of months, not years. It’s often said that “a week is a lifetime in politics.” This is increasingly true about business. For almost every company, the world as they knew it no longer exists.

But what if that described the rest of “life”, as well? What if our 'living models' are being disrupted today as much as business models have been?  This is exactly what's happening, only it may not be as obvious.

From the way we live, date, mate and marry, traditional pillars of society are being transformed.

Taken together, it seems that we’re living through a revolution just slow enough to slip by almost unnoticed, but significant enough to upend our world.

Did you know that for the first time ever, a majority of Americans (51%) today are single? How about that 1 in 3 of Americans live alone? That number, by the way, rises to half the population in cities like Washington, DC and Manhattan. It’s not just that people are increasingly “going solo” or are putting off getting married; in some cases they are postponing that milestone - forever. Holy matrimony is not happening as often as it used to. When weddings do occur, they’re no longer necessarily between a man and a woman ( that's a good thing), and the unions are not lasting as long as they used to (that’s a bad thing).

Even the road to marriages and baby carriages has changed. These days, finding that partner - let alone a future husband or wife - is more complicated than ever before. Courtship, if it does exist, is far removed from the Ritchie Cunningham era of dates, dances, making out and going out.

Today, young people are txting instead of talking, sexting instead of playing spin the bottle, surfing internet porn instead of sneaking peeks at Playboy magazines.

This is all part of Hookup Culture. But when did it become A-OK for girls to announce that they were DTF? We live in a brave new world of what I call ‘asynchronous intimacy’. People used to get know each other, then have sex. Today, it’s not an exaggeration to say that they have sex, and then get to know each other (if at all). 

Time-honored social norms have been abandoned. Some of this is progress, to be sure; but even desirable advances represent a double-edged sword. For instance, there are more women than men attending college now, and women are increasingly getting ahead in the classroom, the boardroom and the living room. The flip side is that soon it will be difficult for a university degree-holding female to find a similarly-educated boyfriend, or a husband who earns as much as she does. 

There are what economists call externalities to all of these developments - broader social costs that we rarely factor in when contemplating the full impact of such changes.

More people living alone means greater self-fulfillment, but probably an increased risk of social isolation as well. The notion of what constitutes a couple is simultaneously being defined down (hook-ups and “friends with benefits”) as well as more expansively (same-sex unions, common law partnerships). Girls feel more free to hook up, but it’s eliminated the requirement for guys to court and emotionally connect with them first. Women are moving up in the world, but they’re going to be forced to “date down”.

More generally, people don't have the benefit of "social GPS" anymore. They don't know where they are, they don’t know where they stand, and they don’t have directions to where they’re going. It’s as if all of  us are iPhones 5s, and we just downloaded the terrible Apple Maps App: the Statue of Liberty simply isn’t where it’s supposed to be.

I'm a student of history. When it comes to change, I believe that much of what we say is du jamais vu has, in fact, been seen before. Globalization is one such ‘new’ development … that's been happening since Jean-Baptiste Colbert (no relation to Stephen) and the emergence of 17th century mercantilism. But what is new is the pace of change. Cars replaced horses over multiple decades; TV overtook radio in 15 years; Facebook went from a way for a nerd to meet girls to a 100 billion dollar company (at its IPO, at least) with one billion users in just 7.

How much have things changed in those last 7 years?

As Thomas Friedman remarked, in 2005 "when I wrote The World is Flat,  Skype was a typo, Twitter was a sound, 4G was a parking spot." Today’s ascendant generation - the Millennials - has never known a world without YouTube, PVRs or iPhones.  

Not only is every aspect of life getting fstr, the cycle times are getting shorter. We have less time to adjust to these deep and wide changes in society, and they're coming at us like a Twitter feed.

This is not a stable state, nor an end one necessarily. The old rules are out of date, but new ones haven’t been set yet. So what can we do in the face of this Great Disruption? First, grab tight and hold on.  Then, just as businesses had to reinvent themselves to adapt to new economic models, we need to rebuild our social models to adjust to the new realities. 

On one level, we have to become comfortable being uncomfortable.

We have to make peace with being a little lost. But we also have to make sense of this emerging landscape, and develop new (or old) ways to navigate it for the long term. This might mean moving forward, by redefining how society looks at single people and the state regards civil unions. It might also require, however, looking backward - and returning to a bygone era where people met, dated and mated in that order.

We can’t be trapped by the tyranny of “progress”, nor by the orthodoxy of the past. Perhaps most importantly, we can’t simply sit still. “Life” is being disrupted before our eyes, and all of us, individually and collectively, risk the fates of Blockbuster and Borders - of being left behind. 

I’m not arguing for a return to a “Happy Days” world, or an acceptance of a “Girls” one for that matter, either. But I do think that we need to snap back to a more thought-out and sustainable posture vis a vis this Great Disruption. My new favorite TV show is “Homeland”. It’s a taut psychological thriller that spins dark webs of deceit amid double-clutch plot twists and revelations. The two central characters - CIA agent Carrie Matheson and ex-POW and possible Manchurian Candidate Nicholas Brody - live in a lie-within-a-lie world. The show’s central appeal is the thoroughly disorienting sensation of not knowing what is real, who is the good character and the bad, and how both Carrie and Brody periodically lose and regain control of their lives.

In a sense, we all now live in a “Homeland” world - not one in which a Congressman may be a Muslim mole, or the CIA agent pursuing him may be mad - but one where good and bad, progress and regress, control and chaos all sit side by side.

Welcome to the Great Disruption.

Welcome to the 21st Century

 

Decades and centuries don't tend to start on time. The 1960s arguably began in late November, 1963, on the day John F. Kennedy was shot. His assassination was the first in a series of tumultuous incidents that dominated that decade socially and politically. Similarly, the 20th Century probably started with a seemingly inconsequential event, when Henry Ford launched his Model T car in 1908 giving us both the assembly line and the automobile, and changing our world forever. 

I believe that history will record that the 21st Century actually began in the autumn of 2008. Two milestones, one economic and the other political, mark its' starting point. The first was the September Wall Street collapse, the after-effects of which we are still feeling. In the days and weeks after Lehman Brothers declared bankruptcy and the Dow Jones Industrial Average fell an almost apocalyptic 777 points, markets the world over roiled with volatility, Iceland declared bankruptcy and governments scrambled to nationalize their banks. Experts almost instantly recognized the new nature of this challenge. Harvey Pitt, a former SEC Chairman, pointed out last month that part of the problem lay in the fact that "we've got a 21st century financial services marketplace and a 19th century regulatory model." Alan Greenspan, the former Chairman of the US Federal Reserve, characterized the chaos as a "once-in-a-century credit tsunami". All this confirmed the unprecedented scale and global scope of the storm, but also served notice that we were at an economic inflection point.

The financial crisis in turn affected the direction of another key contest. Barack Obama's election on Tuesday - widely credited, in part, to his calm reaction to those events - put an exclamation point on the start of a new century. One need only look at the emotional response to his victory to see why: a new US president has never elicited more interest and engaged more people across America and around the world. On those merits alone, it would have to be considered consequential. However, the true seismic impact of Obama's selection can be felt even more in its symbolism.

In some ways, Obama represents an idealized but contemporary reflection of the country he will soon lead. The Obama brand values of youth and cosmopolitanism find their echo in the real world. Today's America is being driven by younger and more multi-cultured influences. The 'Greatest Generation' of World War II, and the Baby Boomers who followed them, had produced every president since Eisenhower. On Tuesday, that torch was passed to a leader of a new generation, but also to a large swath of the electorate - the so-called Millennials - who voted for the very first time.  Young people weren't the only segment instrumental in putting Obama in the Oval Office: his support among African-Americans and Hispanics played an enormous role as well. Both these groups will grow in influence in the decades to come. By 2050, census projections indicate that the US will no longer be a predominantly white country. Yesterday's generational and ethnic minorities will become the governing majorities of tomorrow, and Obama's election anticipates that reality before it has actually happened.

 

Barack Obama represents America not only as it wants to be, but as it will be. The same can be said about the rest of the world, however. The US might be the first majority white country to elect a member of a visible minority as its' leader, but it will surely not be the last. As a result of globalization and population shifts, politicians of mixed ethnic identities will certainly surge into power and prominence in the coming years.

Famed science fiction writer William Gibson once wrote that "the future is already here. It's just not widely distributed yet." With the advent of the first global financial crisis and the election of the first multicultural American president, I believe that we have glimpsed the future and are simply waiting for it to become more commonplace. In that sense, then, we truly have turned the page on one era and have started something new.

Centuries don't begin on a calendar so much as they turn on inflection points in history. We experienced two such events this fall, and they signaled economic and political changes that will reverberate for decades to come around the world. Welcome to the 21st Century.

Forget the Economy - the Fundamentals of our Society are not strong

The financial crisis of the past few weeks has completely changed my life. 

The clang of the 4 pm NYSE Closing Bell is now as familiar to me as the theme to Hockey Night in Canada.  I follow the (rare) ups and (sadly regular) downs of the Dow like some of my friends fret over their Fantasy football stats. I watch CNBC like I used to watch ESPN (Dylan Ratigan is the new Tony Reali, and I have a major crush on Erin 'easy on the eyes' Burnett).

That's the fun part. More ominously, these past few weeks seem to have aged me in a policy sense. At the risk of sounding like John McCain (for the record, I have already voted absentee for Obama, would like to think I'm not that old, but I am cranky), I've come to believe that our society, and not just the economy, is in crisis. As bad as the financial situation is, it appears to be the symptom of a more serious disease: a cancerous consumerism, fueled by the steroid of cheap credit, coursing through the bloodstream of contemporary North American society.

If we stop for a second and look beyond the finger-pointing regarding the current housing bubble | mortgage backed securities | banking | credit crisis, there's a deeper cause for concern here. While the above heavily contributed to the sad state in which the economy finds itself now, the groundwork for this debacle, I believe, was laid decades ago in the steady erosion of sound fiscal but also personal values.

The decoupling of the previously twinned notions of 'work' and 'money'

Too many people have gotten the notion that 'money' and 'work' are only remotely (and not causally) related.  Many factors contributed to this impression over the years, from technological as well as behavioral changes. 

It used to be that employers handed out or, at minimum, mailed pay checks every two weeks. Not any more: today, we receive electronic wire transfers and the money magically appears in our accounts. This simple change has blurred the bond between work and pay; rather than linking units of labor with units of currency, there now seems to be a degree of distinction between the two.

Money also comes out of a hole in the wall nowadays, but it might as well be falling from the proverbial tree; I'm speaking, of course, of the ATM. Yet it has essentially the same effect of abstracting the provenance of money, and thereby attenuating its' intrinsic value. Moreover, cash is no longer king and practically no longer current. In North America and even more so in Europe, we are methodically moving towards a cash-less society. Everything, it seems, can be paid by credit or debit cards today. I know people who don't carry cash at all now that many taxis in NYC and London take cards as well. Finally, the emergence, then expansion of e-commerce and online shopping (a vice that my girlfriend just discovered, much to my dismay) has, for its part, further removed the physicality and proportionality of spending money. Whether you're buying a book or a round trip ticket to Bali, the experience is identical and equally ethereal. Spending money is now a virtual experience, mediated by technology and frictionless transactions (more on this later). The net effect of all this is the decoupling of the previously twinned notions of work and money, but also between cash and consumption. Today, it's possible to spend money without thinking of work, and to consume without spending cash. These may seem like insignificant psychological changes, but I suspect that they've had a lasting effect on how we actually behave as economic actors.

The loss of commonsense values in the living room and the board room

The change in consumer psychology and behavior is not the only critical factor worth noting. North Americans seem also to have loss their common sense. If you'll bear with me while I perform a quick ratio analysis of key economic indicators, you'll quickly see what I mean.

In 1975, the median American annual salary was $11,800 ($39,302 in real, or today's, dollars as adjusted for inflation) while the average house price was $38,940 ($132,000 in real dollars). This meant that the income to cost ratio of home ownership was 1 | 3.3. In other words, the typical house cost the average (one-wage earning) family 3.3 times their annual salary.

Today, salaries have risen slightly to $48,201(a 23% increase from 1975), but median house prices have more than quadrupled to $275,000 in 2006 (real dollars again). The ratio is now 1 | 5.7, almost twice the size as it was only thirty years earlier. While we should factor in that today many households have two incomes to put towards buying a house (because increasingly both parents work), it's also clear that families these days need two paychecks to make these particular ends meet.

What do these statistics tell us? That in three short decades, wages grew anemically while housing prices grew astronomically. This is evidence of a bubble, certainly; however, it also points to the fact that most home buyers never looked critically at the market 'value' of their properties and questioned whether the seemingly inexorable rise in prices was sustainable. It clearly was not, as we started learning in the second half of 2006, when housing prices in the US started to taper. Many, if not most people, looked the other way because they were among those getting richer as their homes (the main asset in most households) rose in value. This may explain the behavior, but it does not excuse their collective irrational exuberance (to use Alan Greenspan's infamous phrase); this was a clear failure of common sense.

We probably don't need another example, but let's investigate one more metric anyway - namely the hotly-discussed topic of CEO compensation. How did it become acceptable to regular folks that the average chief executive was paid $10,982,000 a year in 2005, while the typical employee that year took home $41,861?

The following statistic, from an article last month in the New York Times, further crystallizes the point: "In 2007, the total compensation of chief executives in large American corporations was 275 times that of the salary of the average worker, the Economic Policy Institute, a liberal research organization, estimates. In the late 1970s, chief executive pay was 35 times that of the average American worker." 

Clearly, the pay scales swung completely out of balance in those three decades. On its' own, this would be a shocking development. Taken with the inflation in house values, however, we see that people simply took leave of their senses through much of the last 30 years. On the way to CEOs getting ridiculously rich and the middle class buying their McMansions, no one stopped to think whether this era of unprecedented economic expansion was built on strong fundamentals. Sadly but perhaps not surprisingly, the bill for this spending spree came due this September with the current crisis.

The Instant Gratification Generation and the twin ills of e-commerce and easy credit

So North Americans collectively took a vacation from economic history and assumed that markets would continuously rise. This isn't the first time it's happened, nor probably will it be the last. But there's an even deeper rot in our society, one that worsened the impact of our greed and stupidity. The simple values of earning money and delaying gratification have been eroded today. The US has the lowest savings rate in the Western world. The idea of 'saving for a rainy day' is a quaint anachronism. Why save and shop tomorrow when you can borrow and buy today? We live in an economy that depends on, if not demands, a consumer culture based on spending someone else's money.

On a macro-economic level, the system requires easy credit and care-free consumerism to thrive. The entire US economy has been propped up for years by the unfailing willingness of its citizens to consume like there were no consequences. In order to facilitate this, the Fed has maintained what were, in retrospect, almost criminally low interest rates. This ensured that everyone had access to cheap credit. 

On a commercial level, technology and industry cooperated to create a near-frictionless purchasing environment. Go to a big box electronics store and you'll be bombarded with offers to buys TVs "no money down, and no interest until 2010". Back in the day when people shopped by catalog, you paid right away and received the desired good later. That script has been flipped. There are literally no road blocks, let alone speed bumps, to buying any more: merchants allow you to take home today but pay tomorrow - and when "tomorrow" is not next month but next year, it seems even more distant.

Then there is the credit card. Its' very existence makes consuming an abstract, almost effortless exercise. Buy now and get the bill 30 days later. Purchase and cost are almost completed decoupled. When you swipe your card, it doesn't even seem real - as if it's happening in a video game as opposed to real life. Reality may intrude later, when you receive your bill. But even then many people pay their bills online, so the payment process is equally mediated. You've been sucked in to the money Matrix.

Here's a thought experiment:  the next time you buy a big ticket item - say a TV or an expensive purse - imagine purchasing it instead by withdrawing the cash rather than slapping down the card. In theory - and in pure economic terms - the two acts should be indistinguishable, because money is fungible. It makes no difference to the merchant what form it comes in (pace the credit card transaction cost, of course). But it makes a HUGE difference to the consumer. Would you feel as comfortable with the purchase if you watched the clerk count out the twenties in front of you while you waited?

Ubiquitous credit has almost certainly corroded our values. But that's not the only economic evil that tempts us today. We now have to contend with the malevolent effects of e-commerce in addition to easy credit. Have you ever shopped on Amazon? The exercise of browsing and buying is so streamlined that you're almost surprised to see something turn up at your door in a few days. Don't know what to buy? Check your wish list. Not sure you'll like it? Be persuaded by the reviews. Ready to check out? Not until you've been flashed recommendations for further shopping by Amazon's supersmart algorithms. All set to push the button? That's all you have to do, with their patented one-click purchasing system.

Easy buying doesn't just exist online, though that's probably where we find the the frictionless shopping experience in its' highest art form. Brick and mortar shopping is pretty damn easy, too. Have you been to McDonalds lately? "I'll have a Number 3 combo, please." How about ordering at Applebee's, or Montana's? You don't even need to read: just point to the photo in the menu and you're all set. At Starbucks, you don't actually require cash or credit: your own coffee debit card will do.

Getting the picture? The net effect is that it has become too easy to buy. But that's the point, isn't it? Merchants and Madison Avenue have colluded, if not conspired, to make it oh-so-simple for us to spend. And therein lies a major part of the problem. Unfortunately, it's only half of it.

We don't produce anything anymore: the modern economy is based exclusively on consumers spending borrowed money

I've tried to demonstrate how the demand side of our economy has lost much of the common sense that used to characterize consumers just a generation ago. But the blame doesn't all belong on that side of the ledger. The supply side of the economic system has become equally dysfunctional. Over the past two decades, the drivers of the North American economy have not been better products but increasingly bigger bubbles: first the tech and telecoms magic carpet ride in the 1990s and, more recently, the housing one that just burst last year.

Instead of leading the world in producing cars (GM was passed by Toyota this year as the globe's number one automaker, and is rumored to be perilously close to bankruptcy), the US' most recent contribution to the world economy has been the quiver of complex financial instruments that Wall Street used to create ostensibly 'risk-free' leverage. These tools - from securitized debt vehicles to credit default swaps - are so arcane that the supposedly brilliant heads of these financial services companies could not even comprehend them.

They were created by the so-called Numerati. It sounds like a term borrowed from The Da Vinci Code, but actually they are the mathematical modelers who washed over Wall Street in recent years and gave rise to this financial engineering. The resulting products were positioned to be perfectly hedged against downside risk, but no one knew for sure. The CEOs who invested billions in them were either not smart enough to realize the actual risks, or more likely making too much money to worry about it. Their greed - and stupidity - put the financial system in unnecessary peril with what amounted to completely unregulated but legalized gambling. As incredible as it now seems, banks were allowed to make and take bets that bookies in Vegas would balk at.

These so-called derivatives were not the only big wagers these institutions made, sadly. Too many banks lent money to people who had no business borrowing. The 'sub-prime mortgage' is a very anodyne way of describing the phenomenon of banks and other lending institutions (Fannie Mae, Freddie Mac) loaning money to borrowers who fall outside the normal pool because of their poor credit history or insufficient income and collateral. This can work - for a time - when house values only go up, as the banks holding the 'paper' on these homes have a lien against an asset whose worth is rising. Even if the borrower can't make the mortgage, the bank has made money, theoretically. But like any financial scheme, there are risks. The house of cards came down as soon as people started massively defaulting on their mortgage payments, forcing a record number of foreclosures and, in effect, triggering a margin call on banks that they were increasingly unable to make.

Everyone owns their share of the blame

Yes, lenders were stupid and greedy. But they are not the only ones that deserve criticism and blame. We are guilty, too. We forgot the basic principles of both home economics and macro economics - that we shouldn't spend money we don't have and that markets that go up at some point will go down. Too many people bought too much house for their budgets. In the past decade we gave rise to a new term - House Porn - and a whole new genre of TV programming - the extreme home makeover. Too many people - especially in the US - used their houses like piggy banks, tapping the rising equity in their homes to re-finance their mortgages and borrow more to spend more. Just as many institutions took on too much risk - a process called gearing, or creating financial leverage - so too did individuals. 

Yet even these two groups weren't alone in all of this - Government allowed itself to get overleveraged as well. During 8 years of supposedly fiscally conservative Republican rule, the US spent far more than it earned. As a result, from the budget surpluses of the Clinton years 2009 will see the annual budget deficit rise to a staggering $750 Billion (6% of GDP). But this merely confirms that the rot runs deep, and that the fundamental lack of common sense and values corroded every element of our society. 

So what have we learned? The current financial crisis has its' roots, I firmly believe, in a series of lapses in the moral fiber and economic judgment of individuals and institutions alike. Wall Street didn't screw Main Street, because both own their fair share of the blame. Banks were greedy and reckless in racking up astronomical profits at enormous risk, but home buyers were equally foolish in raiding their real estate equity and refinancing at every occasion. Right now we need to contain this crisis, but we can't stop there. Our society - and everyone in it - needs to make some serious course corrections. Until we realize the importance of restoring the personal and professional principles that underpin our financial system, 'fixing' the economy's fundamentals will serve no purpose.

People have to learn to save again. We can't continue to spend someone else's money. Purchase and price, and for that matter labor and money, must get reconnected in our minds if not in our monthly budgeting. Let's get back to delaying gratification, and the proposition that putting off consumption today will give me more pleasure tomorrow.

Banks need to make smarter bets. They can't continue to lend out fifty dollars for every one they have in their coffers. They've got to get back to saying 'no' again - to borrowers who don't fit the bill, to wizards who want to sell them 'risk-less' instruments, to greedy executives who get golden parachutes after  crashing their companies into the ground.

Finally, governments must be the grown-ups again. They need to regulate rogue financial markets and rein in profligate profiteering, excessive executive compensation and reckless risk-taking. They've got to get back to living within their means, too, and restore the principle that budget deficits are acceptable only in times of national peril.

At the risk of sounding like John McCain, the fundamentals of our society are not strong, my friends. The formula for fixing the current financial crisis may not be obvious, but curing the cancer ailing our broader community is simple: a return to common values and common sense.