Why WhatsApp-Facebook deal is bad news for US economy

When Facebook sealed a $19 billion deal to buy WhatsApp, it became the highest paid for a start-up in history. It was a big win for WhatsApp:  its two founders are now billionaires, 55 employees are now enormously rich and the partners of the venture capital firm that financed it have also reaped a fortune.   But what about the US economy? Does this WhatsApp deal help in anyway? No, notes Robert Reich, Chancellor’s Professor of Public Policy at the University of California at Berkeley,   in his blog. WhatsApp represents all that is wrong with the US economy. “We’re not getting more jobs,” he argues.   WhatsApp doesn’t need a large organisation to distribute its services or implement its strategy. It only needs two things–technology and network. And that requires only a handful of people. Reich writes in his blog that the combination of digital technologies with huge network effects is pushing the ratio of employees to customers to new lows. “The ranks of postal workers, call-center operators, telephone installers, the people who lay and service miles of cable, and the millions of other communication workers, are dwindling — just as retail workers are succumbing to Amazon, office clerks and secretaries to Microsoft, and librarians and encyclopedia editors to Google,” he writes.   Meanwhile, jobs and wages are not growing in the US. (Read Reich’s blog here)   According to a study released last week by the Brookings Institution, a Washington-based think-tank, the economic divides in Atlanta, San Francisco, Washington, New York, Chicago and Los Angeles are significantly greater than the national average.   Incomes for the top 5 percent of earners in Atlanta averaged $279,827 in 2012–that’s almost 19 times more than what the bottom 20 percent of that city’s population earned. This ratio is more than double the nationwide average for this measure of income inequality. The top 5 percent of earners across the country have incomes 9.1 times greater than the bottom quintile.   Central to the debate is the age-old worries that excessive dependence on technology will result in fewer jobs.   A Firstbiz article had last week argued that the WhatsApp deal may be bad news for outsourcing companies like Infosys and Tata Consultancy Services. It shows that a small team that uses technology and innovation effectively can create huge wealth for all stakeholders, columnist Arjun Parthasarthy pointed out.   “A far cry from the market capitalization to employee ratio of outsourcing companies where it is just $0.2 million or even lower. It is clear that outsourcing, while a lucrative model given low cost labour is not a hugely productive model. The future of outsourcing could be in doubt if more and more companies innovate and optimize technology for maximum benefit,” he argued.