Instagram Deal Reflects Wrenching Structural Change

April 18 (Bloomberg) -- The U.S. is recovering only slowly from the Great Recession, and right now Europe isn’t recovering at all.

But what will a full recovery in Europe and the U.S. look like once we have it?

That’s not such an easy question. Recessions can accelerate structural change. Industries aren’t all damaged to the same extent. Some companies bounce back, others go under and stay under, and new businesses take their place. The same goes for jobs. This recession has been so severe that it will cause a bigger structural lurch than we are used to -- bigger than traditional politics can comfortably handle.

Structural economic change has always raised the same basic issues: who wins, who loses, and what do the winners owe the losers. Wherever you look, these age-old questions are being pressed with new urgency. And the answers we’ve come to expect from left and right need some work.

The proximate causes of the crash were financial incompetence and dumb regulation, but deeper structural trends only loosely tied to those factors were already at work. Globalization and information technology -- really, two aspects of a single phenomenon -- are the drivers. They were powerful before, but they’ll be even more potent as economies emerge from the slump and reshape.

Innovation Versus Inequality

Jobless recoveries -- something the U.S. already experienced after the recession of 2002 -- are one obvious danger. Another, more subtle threat is widening economic inequality. In both cases, what we’ve seen so far may be just the beginning.

Facebook’s acquisition of Instagram, a small software company with a popular photo-sharing application, is an extreme and illuminating case. Thanks to the Internet’s astonishing reach, a nifty product that required next to no labor and comparatively little capital quickly went from nowhere to tens of millions of users. The idea was valued at $1 billion even before there was a revenue model to support it, and who’s to say that’s too much?

A good day for rewards to innovation. Not such a good day for income inequality -- though, come to think of it, Mark Zuckerberg could say he’s spreading the wealth around.

The economist Sherwin Rosen wrote about superstars 30 years ago. In certain kinds of market competition, he explained, the winner takes all. This applies not just to rock stars and champion athletes, but also to entrepreneurs and innovators. Globalization and IT have multiplied the opportunities and grown the prize exponentially.

Globalization and market scale are driving wage inflation in top corporate jobs, too. Big multinational companies are harder to run and have more at stake, so the best managers command higher pay. Defects in corporate governance also play a part in this growth in pay: passive shareholders and CEOs who sit on each other’s compensation committees. So do disguised subsidies to the finance industry. But the result is mostly what you’d expect if the market for talent is working.

In the middle of the income distribution, the news isn’t so good. First, trade attacked high-wage manufacturing jobs. Then, cheap telecommunications did the same for many service jobs. That kind of outsourcing seems to have slowed. But let’s not delude ourselves. More automation of routine tasks, including white-collar work we used to call “skilled,” is a given. The jobs won’t necessarily go to India, but they will go. Doctors, lawyers and other professionals will not be immune.

American Crucible

Because IT-driven restructuring has barely even begun, the prospect on a business-as-usual basis is a further widening of income inequality, and all the economic, social and political stress that goes with it.

You’d expect this dynamic to express itself first and most forcefully in the U.S., the crucible of IT innovation, blessed (or cursed) with brutal, fast-moving labor markets and comparatively light-touch government. Most of Europe is moving in the same direction, just more slowly. Only the most stagnant economies will be exempt.

Previous revolutions wiped out whole industries and entire classes of worker. In 1800, 90 percent of Americans worked on farms. By 1900, it was a little more than 40 percent, and 100 years after that a little less than 2 percent. It shouldn’t need saying, but this was a good thing: The material affluence enjoyed by most Americans today would have been difficult to imagine 50 years ago, let alone in 1800. Official figures barely capture much of this improvement. What’s cheap hardly registers as gross domestic product; what’s free doesn’t count at all. The way we measure these things vastly understates the utility of, for instance, the smartphone and all its proliferating services.

What’s new is the rate of change. The IT revolution won’t take 200 years to work through. And telling an unemployable American middle manager in 2012 that change is good is not going to be any less wrenching, or any more adequate, than saying the same thing was to a British handloom operator at the turn of the 19th century. Conservatives mistakenly assume that they can tell capitalism’s losers that “creative destruction is how capitalism works” and leave it at that. It’s not sufficient, and it’s not good politics, either. If structural change is accelerating and income inequality is only in midsurge, as seems likely, it’s more wrong now than ever before. The winners do owe something to the losers -- and the more abrupt the transformation, the more they owe.

The equal and opposite mistake of the left, of course, is to see the whole idea of creative destruction as a scam. Structural unemployment and growing inequality are not byproducts of a hugely beneficial process of economic change, but evidence of a crime. The vocabulary is telling. The nefarious 1 percent are somehow “capturing” more of the value that the rest of us create. The Instagram people get a pass, I see. What they did was cool. But it’s different when the market gives magnificent rewards to men in suits. That’s stealing, and it has to stop.

Left and right will never come together on what winners owe losers. Let’s hope not, anyway. There’s no right answer and plenty of room for disagreement. But disagreement should be intelligent. Small-government conservatives and big-government liberals need to update their thinking, see what’s different about this new industrial revolution, understand what’s good and what’s bad, and thoroughly re-examine their traditional policy prescriptions.

I’ve got some things to suggest. I’ll offer conservatives some specific ideas next week and the left, the week after that.

(Clive Crook is a Bloomberg View columnist. The opinions expressed are his own.)

Read more opinion online from Bloomberg View.

Today’s highlights: the View editors on simplifying your taxes and Obama’s oil-speculation plan; Peter Orszag on saving money through health-care reform; Margaret Carlson on Ann Romney’s choices; William Pesek on China’s power shift; Roger Lowenstein on dodging Dodd-Frank; Ana Palacio on Spain’s outdated labor laws.

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