Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

Is the Gig Economy Sustainable?

The fastest growing segment of the U.S. job market; the so-called Gig Economy, might not be sustainable.

The most visible Gig Economy Company is Uber which loses money like crazy. The ridesharing giant lost $708 million in first quarter 2017 and $991 million in fourth quarter 2016, The New York Times reported. The Times also listed 10 top Uber executives that fled the company during first quarter 2017.

It is easy to see why top executives are fleeing Uber, anonymous sources told Bloomberg Technology that the unicorn would $5.5 billion in 2016. Uber’s capacity for burning cash is incredible, the company lost $1 million a week on its Pool service in one city San Francisco, in 2016, documents obtained by BuzzFeed indicated. Uber also lost $4.93 on each Pool trip in June 2016.

Uber is only able to stay in business by raising large amounts of venture capital with claims of a valuation of $70 billion. Even that is disputed in August 2016 valuation expert Aswath Damodaran told Bloomberg Technology that Uber was really worth $30 billion. Damodaran; who teaches at New York University’s Stern School of Business, dismissed Uber’s valuation as nothing but wishful thinking.

Why we should be Scared of the Gig Economy

The shaky nature of Uber’s business should concern us because the Gig Economy is the fast-growing segment of employment in America.

“The gig economy…is now estimated to be about 34% of the workforce and expected to be 43% by the year 2020,” Intuit (NYSE: INTU) CEO Brad Smith said Wednesday on an earnings call. “We think self-employed [work] has a lot of opportunity for growth as we look ahead.”

Around four million people are now working on online platforms like Lyft and Uber, CNN Money reported. That number is expected to grow to 7.7 million by 2020, researchers from Emergent and Intuit predicted.

There are now around 68 million freelance workers in the United States, the McKinsey consulting firm found. Disturbingly 20 million of them are in gig work because they cannot find anything else, McKinsey concluded.

Could Uber or Airbnb Collapse

This situation is potentially explosive, because something like Uber or Airbnb might collapse at any time and leave millions of workers high and dry. Also left holding the bag would be all the entrepreneurs and businesses that cater to gig economy workers such as the factoring firm Payfully.

All it would take for something Uber or Airbnb to collapse is for investment bankers to turn off the money spigot. That might be why Uber executives are leaving now, they may have heard through the grapevine that Wall Street is about to pull the plug.

This should frighten us because tens of millions of Americans are now reliant upon gig-economy services for survival. Many people would not be paying the rent or the mortgage or buying groceries without Uber, Lyft, or Airbnb.

Those people will have nothing to fall back upon because the traditional economy of the 20th Century with its vast number of steady nine to five jobs is history. Manufacturing employment is drying up because of new technologies and retail jobs are quickly vanishing as thousands of stores shut down.

No Safety Net for Gig Economy Workers

The gravest danger here is that there is no safety net for gig economy workers. Many of them are not eligible for unemployment insurance and a lot of them have no savings.

The sudden closing of something like Uber would throw hundreds of thousands out of work at once. A great many of them would have nowhere to turn but Food Stamps or worse the Food Pantry.

Obviously new Gig-economy platforms would quickly emerge to fill the void but that will take time. A likely result of an Uber collapse is that a big automaker; such as Ford (NYSE: F), would simply buy its’ remains and keep it operating. BMW is already operating an Uber-type service called ReachNow in Brooklyn, Portland and Seattle.

Yet what do Gig workers until the new service comes online. Even though the gigs are gone their bills will keep coming in, many will turn to credit cards or to payday lenders for emergency finance.

A New Safety Net is needed for the Gig Economy

The safety net needs be modernized to meet the needs of gig economy workers because there are vast numbers of them out there.

The National Bureau of Economic Research estimated that that were 460,000 Uber drivers in the United States at the end of 2015. That means a half million people might be thrown out of work perhaps instantly if Uber were to shut down. A great many of them are barely surviving now, and they might lose their only source of income at any time.

There is no way a welfare system and safety designed for nine to five factory workers can handle that. Yet that is exactly what we have in the United States right now.

A New Safety Net for the Gig Economy

There are two major upgrades to the Safety Net that would be greatly advantageous to gig-economy workers. They are:

  • Single-Payer Health Insurance or Medicare for All. This would ensure that Gig workers would have access to healthcare. It would also open up more gig economy opportunities because a lot of people would probably quit nine to five jobs they are working at solely for health insurance if single payer were available.

  • Basic Income. A basic income payment would serve as unemployment or disability insurance for gig workers if the amount of payment were based upon taxable income. The gig worker would at least get some money and have an income if he or she were suddenly unable to work.

These reforms would be a hard sell because they threaten entrenched special interests; including the insurance industry and the social-services bureaucracy. Yet they are growing in popularity; polls indicate that around 60% of Americans favor single-payer and even Facebook (NASDAQ: FB) CEO Mark Zuckerberg endorses basic inomce.

Hopefully it will not take a catastrophe; such as the sudden collapse of Uber, to shock our leaders into reforming the safety net. Such reforms are needed because the Gig Economy is here to stay so we need to reform the safety net to protect its workers. If we do not civil and political unrest will sweep across our nation, and cost many politicians their jobs.