My Thoughts on the Coronavirus: 8. Sketching a New Normal

First of all, congratulation for making it here, as this is likely the last post in my coronavirus mini-series. This is a longer and more perplexing post, not because I want to write more, but the subject is just very complex. Unleash your curiosity and let your cognitive journey begin!

It’s evident that our financial market and economy are very fragile. Since we are already reshaping our global supply chain, it begs the question “can we go further to rebuild a new economy?” Given the collective knowledge of the human race and the technological advance we have today, if we could redesign a new economy, what would it look like?

The Need for a New Economy

An economy is created when people voluntarily trade their unique productive output (e.g. a product or a service) with each other. To facilitate the efficiency and fairness of this trade, money (or currency) is created as a standard medium of exchange and store of value. So people transact in these trades and are rewarded through monetary means based on the value others place on their work.

At a high level, a viable economy must provide opportunities for everyone to be employed. It must have a budget that looks after the basic needs of its people (e.g. defense, education, healthcare, public infrastructures, etc.). Furthermore, for the economy to thrive, it must grow and improve the standard of living for all. This means it must increase the productivity of its constituents and the efficiency of trades among them. Finally, for the economy to sustain, it must maintain a good balance of import and export while keeping its currency stable. And it must keep our planet and environment healthy.

No economic system is perfect, because no matter which one you choose, it fails in some aspects. Although the global unemployment rate averages ~5%, the deviation is huge (>25%) across countries. In many countries (including the US), higher education and healthcare are only accessible to those who have substantial wealth accumulated. Capitalistic economies that excel at growing their GDP often create enormous wealth inequality that degrades the quality of life for the poor. Moreover, progress and innovation in economics are slow with repeated cycles of recessions. The current import and export practice and our globalization policy have clearly gone too far, and have created a dangerous web of interdependency. This not only deprives employment opportunities, but it’s often damaging to our planet.

It’s time to rebuild a new economy! This requires an interdisciplinary approach that spans economics, psychology, gamification, sociology, technology, public policy, management science, behavior economics, and beyond. So if you are unfamiliar with any concepts discussed, you should follow the hyperlinks and read up on them.

Promoting True Passion & Innovation

A central question that any economy must address is how to drive productivity and economic growth. The conventional belief is that extrinsic rewards (i.e. compensation) drive productivity, but we today we know that remuneration is merely a hygiene factor. It must be above a certain acceptable level, but beyondthat, its motivating power diminishes significantly. The most consistent driver of productivity is technological innovation, and the best way to innovate is through the sheer perseverance of passionate individuals. However, 18 years of data from Gallup shows that only about 1/3 of the employees are engaged at work. It’s no wonder that innovation is rare.

Today, innovators are rewarded heavily because there are so few of them. This creates 2 problems, both could degrade the quality and efficacy of innovation.

1. It attracts greedy people who want the huge reward after, but aren’t truly passionate about what they do.
2. By rewarding passionate people too much, it creates an overjustification effect that crowd out the intrinsic motivation of these passionate individuals. Yet, companies can’t reduce the compensation to these passionate innovators without losing them to competitors who are willing to pay more in a free market for talent.

To address problem 1, we need a way to compensate for people’s work that promotes passion but discourages greed. We know the textbook idealization of a free capitalistic economy without any government oversight won’t work. Neither does the opposite extreme of socialism or communism, where the economy is completely controlled by the government. As we discussed previously, a free-market operates best when there is strong governance to provide regulation, stability, and legitimacy. So a well functioning market is a hybrid of the 2 extremes, where each one would be overly simplistic.

Likewise, the ideal income distribution is likely a hybrid between the perfect equality (as prescribed by socialism) and a highly skewed exponential (as prescribed by capitalism). Perfect equality encourages freeloading, demotivates people from working, and reduces productivity. But in a perfect capitalistic free market where the rich get richer, there’s too much wealth inequality, and therefore destabilizing. A progressive tax that equalizes the income distribution can reduce such wealth inequality. Since the richest is taxed most heavily, it discourages those who are in it for the money. Progressive tax inadvertently promotes those who are truly passionate because they are less sensitive to monetary rewards. Although a progressive tax scheme doesn’t reward passion directly, it does create the social environment where pursuing one’s passion is more fair and rewarding.

Automation & Universal Basic Income

Problem 2 is a bit more challenging as it seems paradoxical! To address it, we need more technology and psychology than economics.

Although numerous countries have experimented with Universal Basic Income (UBI), the recession caused by Covid19’s demand shock is forcing many governments to step it up. A temporary variant of UBI, such as the coronavirus stimulus package, has already been implemented to help families and businesses stay alive during the lockdown. If we want to jumpstart our economy after the pandemic, people need to have extra cash that they can spend after losing viable sources of income during the pandemic. UBI would provide just that. Digital currency and mobile payment platforms can further facilitate trade and cash flow by making transactions frictionless.

However, how could such a costly program persist? Advocates of UBI suggest a “robot tax” on the economic gain from the use of technologies that displaced the human workforce. Coincidentally, the Covid19 pandemic also accelerated digital transformation as well as the adoption of AI and robotics. The huge efficiency gain through automation could potentially support an economy with UBI, where people are not required to work for their survival or subsistence. This may sound farfetched. But humans have been reducing the amount of time they spend working ever since the Industrial Revolution due to the efficiency gained via mechanical machinery. It’s conceivable this trend could progress further with the help of intelligent machinery.

Although people aren’t required to work for subsistence, there is still an incentive to work for a wealthier life. When income dispersion is limited with the help of progressive tax, people will have more incentive to learn the skills of their predilection and pursue a more meaningful job. Since most of the mundane and repetitive work can be automated by AI and robotics in the near future, people can pursue their passion, and do what they love and do best. Moreover, due to the robot tax, businesses also have a tax incentive to hire and train people. This will ultimately lead to greater job satisfaction, happier citizens, higher quality products and services, and more innovative solutions.

The key to addressing problem 2 is to vastly increase the “supply” of passionate innovators in the talent market by allowing more people to pursue their true passion. This will keep their compensation reasonable and stable, so it won’t crowd out the intrinsic motivation for their work. This will ultimately lead to more innovation, which drives productivity and economic growth.

The Economy of Happiness

Most countries have some budgets for defense as that is necessary to maintain the nation’s sovereignty. However, other basic needs, such as education and healthcare are often not free, especially in under-developed countries. They are either privatized, which becomes expensive and inaccessible (e.g. in the US), or they are government-funded (e.g. in Canada and most of Europe), which requires higher taxation. Would you be happy about such a high tax?

Surprisingly, people don’t seem to mind the high tax rate as long as the government is transparent about how the tax is used to benefit its citizens. Leveraging on the early inspiration of the Bhutanese King, Jigme Singye Wangchuck, and subsequent development by Prof. Jeffrey Sachs, the World Happiness Index was created as an extension to the traditional measure of economic well-being. It’s an index that quantifies people’s satisfaction level with their lives (i.e. happiness) in 6 dimensions:

It appears that countries with higher tax rates are happier (e.g. Finland, Denmark, etc.). Moreover, a more progressive tax scheme makes people happier. Clearly, it’s feasible to subsidize most of the basic needs through taxation, but it certainly requires a reliable, competent, transparent, and trustworthy government. The digital transformation of governments will facilitate this by making it easier to create transparency, enabling co-creation, which builds trust.

The Covid19 pandemic has already revealed the dangerous web of interdependency we’ve created through globalization. This is a result of our maniacal focus on maximizing profit, which is myopic and unsustainable. It’s clear that we must shift our value. Because the marginal happiness (or utility) of incomes is always diminishing, rather than focusing on the pure materialistic pursuit and economic gain, we must take a multifaceted approach. Economic growth (GDP) is important, but it can’t be the only thing we care about. We must evolve and adopt a more sophisticated measure of success as a human race.

How about happiness? It includes GDP, but that’s only 1 of the 6 dimensions. Since maximizing happiness requires simultaneously optimizing all 6 factors, we can’t just focus singularly on profit anymore.

To further prevent hyper-globalization, a “business hygiene tax” can be used to penalize multinational corporations that fail to meet the “hygiene factors” established by the government. These hygiene factors may include practices in sustainability, labor protection, human rights, national security, self-sufficiency, economic resilience, and stability, etc. As you can see, there will be substantial government intervention in this new economy with many different taxes and regulations. It’s not a command and controlled economy, but it’s nowhere near a free market either. Yet it’s the reality.

Although Covid19 is a disruption at the planetary scale, it’s also an opportunity of the century. It could be a catalyst for a new economy based on happiness and sustainability instead of pure economic gains. After all, how often do you think we’ll get the chance to pause the world’s economy?

“The day before something is a breakthrough, it’s just a crazy idea.”

—Peter Diamandis

This article is part of a series, if you miss the previous installments, they are linked below.

1. Making Sense of the Reality
2. The Immediate Urgency
3. Socioeconomic Side Effect
4. The Dark Side
5. The Bright Side
6. Immediate Opportunities
7. Shifts on the Horizon