Irving Wladawsky-Berger

A New Contract with the Middle Class

“The U.S. is a middle-class nation,” says the opening sentence of A New Contract with the Middle Class, an essay by Richard Reeves and Isabel Sawhill that was recently published by the Brookings Institution. “Since our nation’s founding, the American Dream has always been based on an implicit understanding - a contract if you will - between individuals willing to work and contribute, and a society willing to support those in need and to break down the barriers in front of them.” The essay is part of the Future of the Middle Class initiative launched by Brookings in November, 2018.

Why focus on the middle class? The reason, notes the essay, is that this is how the majority of Americans define themselves. “An aristocratic leisure class and a welfare-dependent underclass are equally unappealing to most Americans.” It’s why paid work is seen as so important. Americans want a society where everybody has the chance to “make something of themselves.” Joining the middle class is the very core of the American Dream, - the promise that anyone can get ahead and achieve success and prosperity through talent and hard work.

Who is in the middle class? While there are multiple definitions, most are based on income, partly because data on income are widely available, and it’s easier to come up with concrete, quantifiable definitions. But also because income tends be highly correlated with other attributes of social class, such as educational level, job status, consumer preferences, behaviors, aspirations, and cultural tastes.

The essay defines middle class as those in the middle 60% of household income distribution. “To be middle class, a household of three would have an income between $40,000 and $154,000,” - neither poor nor prosperous. “The middle class, by our definition, is diverse: 59 percent white, 12 percent Black, 18 percent Hispanic, and 6 percent Asian. Within a few decades, whites will make up the minority of middle-class families.”

The Post-Pandemic Outlook for Technology, Jobs, and Skills

“The COVID-19 pandemic-induced lockdowns and related global recession of 2020 have created a highly uncertain outlook for the labour market,” said the World Economic Forum (WEF) in The Future of Jobs Report 2020. The pandemic has caused labor markets to change significantly faster than previously expected. What used to be considered the future of work has already arrived. As McKinsey noted in a May, 2020 article: “we have vaulted five years forward in consumer and business digital adoption in a matter of around eight weeks.”

The WEF report aims to shed light on the post-pandemic outlook for technology adoption, jobs and skills over the next five years, including detailed quantitative profiles on 15 industry sectors and 26 advanced and emerging countries. The report is based on a survey of senior executives from nearly 300 global companies which collectively employ 8 million workers. The survey asked 49 questions on the outlook for their companies’ workforce through 2025, including major trends affecting the labor market, the technologies their companies are adopting, the expected evolution of jobs and skills, their training and reskilling programs, and the near-term impact of the pandemic on their workforce.

“The global shift to a future of work is defined by an ever-expanding cohort of new technologies, by new sectors and markets, by global economic systems that are more interconnected than in any other point in history, and by information that travels fast and spreads wide. … As a new global recession brought on by the COVID-19 health pandemic impacts economies and labour markets, millions of workers have experienced changes which have profoundly transformed their lives within and beyond work, their well-being and their productivity. One of the defining features of these changes is their asymmetric nature - impacting already disadvantaged populations with greater ferocity and velocity.”

The Intriguing Nature of Non-Fungible Tokens

The blockchain first came to light in 2008 as the digital ledger for bitcoin transactions. The blockchain creator’s original vision was limited to enabling peer-to-peer bitcoin transactions with no need for a bank or government agency to certify the validity of the transactions. But, like the Internet, electricity and other transformative technologies, blockchain soon transcended its original objectives.

Over the years, blockchain technologies have evolved along two major lines. One continues to focus on blockchain as the underlying platform for bitcoin, as well as a wide variety of cryptoassets, such as digital tokens and cryptocurrencies. The other focuses on the use of blockchain in the business world, - a kind of Internet 2.0. The cryptocurrency camp is based mostly on public permissionless blockchains, which anyone can join and require some kind of proof-of-work or proof-of-stake systems. The business camp, - best characterized by Hyperledger, - is based on private or public permissioned blockchain networks to support transactions among institutions that need not know nor trust each other.

Given my professional history with the Internet and e-business, I’ve been almost exclusively focused on the business camp for two major reasons. First, blockchain technologies can help us enhance the security of Internet transactions and data, by developing a layer with the required standard services and their open source implementations for secure communication, storage and data access. And second, blockchain technologies can significantly improve the efficiency, resilience, and management of supply chains, financial services, and other complex global applications involving multiple institutions across multiple countries.

I have not paid much attention to bitcoin or other cryptoassets. But recently, I’ve become quite intrigued by non-fungible tokens (NFTs). To me, NFTs are further evidence that, as with the Internet of Things (IoT), we’re increasingly living in a hybrid physical-digital world. Let me explain.

The Increasing Economic Value of Digital Capital

A firm’s financial statement comprises two distinct types of assets. Tangible assets are mostly physical in nature, and include vehicles, land, plants, equipment, and furniture, as well as financial assets like stocks, bonds, account receivables, and cash which have a concrete contractual value. On the other hand, intangible assets aren’t physical. They include patents, copyrights, trademarks, goodwill, brand value, human capital, R&D, software, and data. Intangibles do have a monetary value since they represent future potential revenue, but they’re more difficult to value because, unlike tangibles, their costs and market values are hard to determine.

The economic value of intangible assets has truly exploded over the past several decades. According to a 2019 research report , the overall value of the S&P 500 in 1975 was $715 billion, of which 17% was intangible. By 1995, intangibles had risen to 68% of a $4.6 trillion S&P value. The value of intangibles continued to climb in our 21st century digital economy, reaching 84% of the $25 trillion overall S&P value in 2018. The reason for this fast rising valuations is that intangible capabilities are a major source of a company’s long-term competitive strengths, and are generally quite complex to build and replicate. Yet, conventional accounting treats these capabilities not as company investments but as expenses, which means that their funding isn’t reflected as capital on balance sheets.

“For digitally-focused firms, investments in the intangible assets needed to realize value from new technologies – like cumulative investment in skills training, new decision-making structures within the firm, management practices, and software customization – often account for significantly greater total costs than the technologies themselves,” notes Digital Capital and Superstar Firms, an NBER working paper published in December, 2020.

The paper is focused on the digital capital that’s required to create value out of a company’s investments in hardware, software, and other IT assets that are recorded as tangible capital investments on a company’s financial statement. It introduces a set of methods for quantifying the value of digital capital investments, as well as their impact on a company’s long term productivity and growth.