What Tim O’Reilly is Missing About Inequality

The following is an excerpt of a new post by Tim O’Reilly (“What Paul Graham Is Missing About Inequality“) in which he publicly responds to a draft of Paul Graham’s post, after it was posted. (What are friends for?) For the record, I found both Mr. Graham’s post, and Ezra Klein’s response, uneven as they both seemed to want to place blame at the feet of different monoliths, rather than looking at inequality as a set of issues with many interrelated causes. I’ll leave that aside for another day. (Let’s say Friday, the day when the first book by the Wicked Problems Collaborative, “What do we do about inequality?” is due out.)

For now, I want to take up a point made by Tim O’Reilly about the value created by tech companies which uses Google as an example.

Google’s founders created enormous wealth for themselves — Larry Page and Sergey Brin are each worth somewhere north of $35 billion — and through stock options distributed to every employee, they have also created wealth for everyone who has worked for Google, as well as for those who invested in the company.

But more importantly, they also have created enormous value for other businesses, and for society as a whole. Every year, Google chief economist Hal Varian and his team publish an economic impact report. They estimate that Google increased US economic activity in 2014 by $131 billion dollars. That means that value created for other businesses in 2014 was more than double Google’s own $61 billion in annual 2014 revenue. (Note that the value creation number from Varian’s study is US only, while the revenue figure is worldwide.) Given that Larry and Sergey founded Google in 1998, you can count the cumulative economic impact in the trillions of dollars. And the consumer surplus provided by free access to vast amounts of online information has to be far larger.

You can see from this example that there is no problem when a company’s founders and investors reap enormous value and become members of the very top 0.01% of the wealth distribution. As long as the startup creates more value for society than it takes out for itself, it can actually decrease inequality, rather than increasing it. 

-Tim O’Reilly

(Emphasis, and moral outrage, mine.)

That the Technorati is weighing in on inequality is interesting. I think we can view this a couple of ways. Either they’re truly concerned for society, or they’re getting nervous and trying to keep the natives from getting restless (potentially both). I’d put this example in the latter camp.

The argument that Google has provided great value to society sounds good on its face (Who hasn’t benefited from the convenience of a good search engine?), but there’s a hole in the argument through which millions (if not billions) in unpaid taxes are pouring through. WPC contributor Alex Cobham discusses Google’s settlement with the British government in which they’ve agreed to pay an additional £130 million in taxes.

Nobody quite knew what to say when Starbucks decided in 2013 to raise its tax payment after criticism. Margaret Hodge, famously stern then-chair of the Public Accounts Committee, summed things up by welcoming the payment while stressing that the system still needed sorting.

But the world has changed. Prem Sikka quickly calculated Google’s effective tax rate (given some necessary assumptions on relative profitability of UK operations) at around 2.77%. Richard Murphy suggested tax of around £200 million each year would be about right, as did Jolyon Maugham QC (and like Prem, put Google’s new effective rate near 3%).

-Alex Cobham

If the estimates are anywhere near correct, then I’d suggest that Google is not only coming up short on its civic responsibilities, it’s (as Alex suggested) been acting in direct contravention to its longtime (but recently dropped) motto of “Don’t be evil.” (As a point of reference, UK corporate tax rates were recently as high as 28%, and have since drifted down to 21%.) Some will say that they’re just doing what their competition is doing, looking to maximize their profits, but that’s a cop-out. “Leaders” who take this path aren’t just maximizing returns for their shareholders. They’re also enriching themselves-often egregiously so.

The logic provided by Milton Friedman and his ilk was a convenient excuse to give in to greed. Click To Tweet

The logic provided by Milton Friedman and his ilk (That the business of business was to increase the returns to shareholders) was a convenient excuse to give in to greed. It’s time to call it out for what it is, and start moving the economy, and humanity, in a better direction. It’s also time to call out those who give cover for such activities. Taking an internal study at face value, and neglecting to balance that out with the facts around the firm’s tax avoidance schemes is bullshit. (And we’re not even getting into questionable, for-profit activities around personal data.) Others might be given latitude for not putting two and two together, but Mr. O’Reilly runs a tech media company. He knows. So forgive me if I take his suggestion of Google’s giving us trillions of dollars in benefits with a grain of salt. More so for the logic that rests on that faulty foundation.