Investment and economic perspectives post-Covid, part 2

Yesterday in part 1, I wrote:

Tech investment in Silicon Valley will resume where it left off as if nothing happened. The virus will have no lasting impact. No bursting of tech bubble anywhere.

Payment processing companies such as Visa, MasterCard, Square, and PayPal will also continue to thrive.

And just today Stripe announced $600 million in funding, valuing it at $36 billion, making it the third most valuable start-up in the world, as evidence of how tech investment and the tech sector is unfazed by the virus.

Also, Amazon stock, which I own and have been recommending on the blog for years, inexplicably broke-out to $2400, a gain of almost 20% in a week, making it the most valuable company in the world at $1.2 trillion. It will be worth $5-7 trillion probably within 5 years as Amazon continues to consume brick-and-mortal retail (but Walmart will continue to do well), but also benefit from an economy that is still growing in spite of shutdowns and quarantines.

The v-shaped recovery in the stock market, especially in tech, is evidence that rather than the economy shutting down or shrinking, it is just being rearranged to an economy that is increasingly efficient, social-distanced, centralized, and digitized. The harsh reality is, as this post-Covid tech recovery and boom shows, many of the jobs and business lost or suspended as a consequence of the virus were mostly dead weight and the economy can thrive without them. I oppose the shutdowns and quarantines, yet this does not preclude the reality that many of these businesses and jobs are , economically speaking , useless or superfluous (such as cruise ships), redundant (you don’t need thousands of small, barely-profitable retail stores when Amazon and Walmart exist), or even a drag (due to needing to be bailed out). This is more of a positive than normative statement.

The juxtaposition of distancing and centralization may seem contradictory, but as people spend less time with each other and video conferencing and remote-learning replace meetings and classrooms, an increasing share of economic activity is passing through a shrinking pool of efficient, large companies, Amazon and Walmart being obvious examples, rather than such activity being spread out over many smaller stores, which requires more labor and is less efficient and less profitable. You don’t need thousands of retail jobs and stores when Amazon and Uber Eats can fill those roles more efficiently. No need to spends hundreds of dollars or even thousands at Disneyland when Netflix is cheaper.

A commonly-cited statistic is that many small businesses, such as restaurants, only have a few weeks of cash on hand, and thus cannot survive the shutdowns, but then why should something that is so frail even exist in the first place? That is the question we need to be asking ourselves. Why should policy markers being encouraging and incentivizing such risky , economically unproductive behavior? Small business, particularly retail, is not a driver of growth, but rather constantly on the precipice of insolvency.

Of course, a counterargument is that successful companies such as McDonald’s started small, but the median rerun is still poor even if a few hit it out of the park. But what the virus has done is reveal the extent of how undercapitalized and precarious most small businesses are, and that the main drivers of US economic growth and rising standards of living are concentrated in few as 100 large companies.

You can have a booming tech and consumer economy even with a lot of people not working, due to a combination of stimulus, B2B spending, increased efficiency, and global demand. It’s not that consumer spending is going to fall that much, but rather money is flowing out of brick-and-mortar retail and into online retail at an accelerating rate. Same for IRL entertainment being replaced by digital entertainment, while total spending only falls a little or is flat. And then there is also increased B2B spending, such as cloud hosting and video conferencing. Amazon’s cloud server business is laying the groundwork for America’s increasingly digitized economy.

But the obvious counterargument is, how can an economy that is dependent on consumer spending survive when unemployment is high? Who is going to buy the stuff? But consider:

-Increased B2B spending such as on audio and video conferencing and cloud hosting can offset some or all decline in consumer spending

-A 10-15% unemployment rate means most Americans are still employed. It’s mostly low-skilled people, who contribute the least to the economy and have a negative effective tax rate, who are not working. Those who remain tend to contribute more on a per-capita basis. This means that wealthy and upper-middle class people are still getting paid and can still consume.

-The rise of the wealthy consumer is enough to offset the decline of the lower and middle-class consumer. The total pie of consumer spending is not only growing, but that the wealthy are occupying an increasingly large share of the pie and also enlarging the pie at the same time.

-Amazon and Walmart expansion and hiring can also help offset small business job loss.

-Reduced discretionary consumer spending will be offset by spending elsewhere such as healthcare, education, or rent. Covid-19, for better or worse, will make healthcare more expensive as hospitals try to recoup losses from being forced to delay elective procedures. Same for colleges and landlords also recouping losses and passing those on to consumers.

It’s vindication of a hybridized economic system that combines quasi-socialist policies of bailouts and stimulus, with private property, ownership, and capitalism. Jeff Bezos and Gates are wealthier than ever and will keep getting wealthier and wealthier. It shows that these can be mutually inclusive, as opposed to being incompatible, which is how the capitalism vs. socialism debate is usually framed.