Uber Will Lower GDP

Victor Hwang, CEO & Co-Founder of T2 Venture Creation, from Forbes

Here’s some news that might surprise you: Uber will lower America’s gross domestic product .  In fact, it has already started.  The more Uber grows, the worse our GDP will get.  And it’s not just Uber.  Many of its startup cousins—like Lyft, Airbnb, and others—are also guilty of shrinking our economic growth numbers.  The trend is about to become an epidemic.

How could that possibly be, you might ask?  How could new technology that gives us better, higher quality services diminish our economy?  Isn’t innovation supposed to make economies grow bigger and stronger?

This mystery is worth explaining, because the entire world’s GDP is about to start shrinking due to Uber and similar companies.  And it’s going to get significantly worse.  My prediction: within the next decade, this issue will become so problematic that presidents, prime ministers, and others will have no choice but to rethink the way they measure economic vitality.

So what is behind the “mystery of the shrinking GDP”?  Well, the problem is not with Uber, Lyft, or Airbnb.  The problem is not with America.  And the problem is not with GDP per se.  The culprit, in fact, is an invisible one.

Let me explain.  Uber is a high-profile example of the sharing economy, which revolves around the idea of people sharing underutilized resources.  In the case of Uber, it’s about spare passenger seats in cars.  Uber is a mobile app-based ride service, one that has upset many traditional taxi companies by stealing their customers.

The growing success of Uber means that people will get around more efficiently than before.  I’ve used Uber in several cities around the world already, and believe me, it is huge improvement over grabbing a random taxi and hoping for the best. Despite the political resistance that Uber and its cousins are facing in some markets today, they are going to win in the end.  Period.  They’re just vastly better user experiences.  Try them, if you haven’t yet.  You’ll see.

Despite that awesomeness, Uber will lower GDP, because GDP is about measuring production.  The more people use Uber, the less the economy will produce.  Why?  GDP is calculated by measuring (a) spending, (b) earnings, and/or (c) added value.  In the U.S., we calculate with spending.  Other countries use their own methods.  In theory at least, each of the measurements should work out the same.  One way or another, GDP measures things being produced, whether you look at it from the point of the view of the buyer, seller, or maker.

If someone takes an Uber ride instead of a regular cab, what happens?  The customer is spending less, a taxi driver somewhere is losing a customer, the Uber driver is making less than the taxi driver would have, and the customer gets where they want to go in a happier state.  Alternatively, traditional taxi companies may try to compete and start lowering their prices, as they appear to be doing.  Add it all up; you get a smaller number. GDP goes down.

How much will Uber lower America’s GDP?  I did some back-of-the-envelope calculations, based on numbers disclosed so far.  This year, it works out to about half a billion dollars, maybe more.  That’s not much in the big scheme of things.  Yet.  But it’s going to grow, especially as Uber or similar companiesexpand into corporate logistics and transportation.  That’s big money.  And new companies with other “sharing economy” models will launch, grow, and start to eat up our GDP too.

The problem is not that GDP is wrong.  It’s that GDP no longer measures much of the new value being created in our society.  We don’t have a measurement for the efficiency of the system itself.  Current tools, like GDP or inflation, measure what the system produces, not how the system functions.  The U.S. government recently tried to deal with this by adjusting the way it calculates GDP (by measuring R&D expenditures), but that is just trying to measure production of a different sort.

GDP is a useful indicator of economic health when companies are mostly focused on manufacturing things. However, we know today that an economy is not just indicated by the existence of things, like assets or wealth.  It’s also about how those things flow in the system.  And flow is driven by how interconnected people are, and how effectively the system enables connections to become valuable exchanges.  Trust among strangers, connections between diverse parties, mutual collaborations, shared visions, new teams being formed—these qualities drive flow, they lower systemic transaction costs.  That’s what we mean when we talk about ecosystems.

Uber might be helping us solve another puzzle.  It’s what economists call The Nordic Mystery.  For years,economists have struggled to explain the high quality of life in the Nordic countries, especially Denmark and Norway.  (Side note: I actually thought of this column while strolling in Stockholm.)  Despite their lower national GDPs, Nordic people retain high standards of living.  For example, Denmark’s GDP from 1991 to 2014 was only 0.37%.  Nordic countries may produce less, but they are more efficient at utilizing what they have. Nordic culture comes from large, close-knit tribes based on high levels of trust, which lowers the transaction costs for sharing resources.  Traditional Nordic culture might be called “Uber for everything.”

So what do we do about shrinking GDP?  For starters, we need to start seeing what is currently invisible.  We need a new measurement for the new economy.  Call it a Gross Ecosystem Index perhaps.  This would be a complement to GDP, not a replacement.  And it should be something that helps communities, cities, corporations, and countries get a practical grip on how to maximize their economic potential in the modern era.  By utilizing what they have, better.

Therefore, while Uber and its cousins will lower GDP in the years to come, that’s actually a positive thing.  They will help goods and services flow more efficiently, getting where they need to go at lower cost, with less production required.  Lower GDP shouldn’t worry us, as long as the loss is more than offset by more efficient utilization of what we already have.

And if the taxi drivers are friendlier, I’m all for it.

Victor W. Hwang is CEO of T2 Venture Creation, a Silicon Valley firm that builds startups and designs entrepreneurial ecosystems.  He is primary co-author of The Rainforest: The Secret to Building the Next Silicon Valley.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s