MARKET UPDATE: December 14, 2020

Tugs of War

We can all breathe a sigh of relief, knowing that proven vaccines will eventually shut down the pandemic. Yet, as we celebrate this epic accomplishment, there is a tug of war on our emotions. We grieve those we lost to Covid-19, who now exceed the number of Americans who gave their lives in WW II—a sobering reminder to remain vigilant.

There is also a tug of war taking place in Congress—one that is equally striking. Last week’s bipartisan $908 billion relief proposal was stymied by Republican leaders, who insisted on attaching a “liability shield” to protect nursing homes, cruise ships, and other businesses from Covid-related lawsuits. According to the Fisher Philipps Covid-19 Employment Litigation Tracker, there are over 1,200 pending cases. In response, Democrats doubled down on including state and local aid and added stimulus checks. Meanwhile, massive food lines (1 in 6 Americans is dealing with food insecurity), late payments, and eviction notices continue to accumulate as first-time jobless filings accelerate, reaching 853,000 in the latest seven-day reporting period.

While not quite as pressing, another tug of war is at play between Big Tech and lawmakers. Less than two months after the U.S. Justice Department and 11 states filed an antitrust lawsuit against Google, the Federal Trade Commission (FTC) and 48 attorneys general disclosed two lawsuits against Facebook last Wednesday. These lawsuits take aim at Facebook for “devouring” its competition by acquiring the photo-sharing app Instagram, for $1 billion in 2012, and the messaging app WhatsApp, for $19 billion in 2014. Wildly popular, more than 2.5 billion people use one of Facebook’s apps every day. Prosecutors are asking a federal court to intervene by possibly forcing a sale or spinoff of those apps.

Here’s the rub: Facebook’s acquisitions of these apps required and received FTC approval when they took place. What has changed? For decades, regulators have permitted the tech giants to grow in the free-market economy. Why attempt to rein in their power now? In today’s Market Update, we will examine a potential—and more fundamental—concern.

To begin, let’s turn to what may seem a most unlikely source: The Federalist Papers. In a series of essays initiated by Alexander Hamilton that argue for ratification of the U.S. Constitution, you will find Federalist No. 10, authored by our fourth President, James Madison. In this highly regarded essay, published in 1787, he wrote about the power of factions—partisanship mentality that, when “inflamed with mutual animosity,” makes people forget about the common good. Nine years later, in his farewell address to the American people, George Washington echoed these same concerns. Believing that unity was the “main pillar” of liberty—of real independence, tranquility at home, peace abroad, safety, and prosperity—President Washington delivered a warning about the dangers of factionalism, asking citizens to consider: What happens when a nation forgets that it is one country?

Can it be that social media is facilitating factionalism in the United States?

When first launched in 2004, Facebook was simply a forum that helped friends connect with friends. Through a series of enhancements, the company has expanded into something much more powerful—some might add, with far-reaching tentacles. Let’s take a look at Facebook’s transformation.

When Twitter made its debut in 2006, Facebook countered with “News Feed,” its own version of abridged real-time information. Three years later, Facebook added the prolific “Like” button, incorporating a tool for measuring the popularity of content. Based on a user’s “likes,” Facebook then built an algorithm that prioritized and, thus, determined which posts a user would see. With this enhancement, users had a perpetual stream of curated content based on what they “liked” to read.

This innovation had unintended consequences. Facebook’s News Feed algorithm was not anchored in source credibility—only user engagement. As long as the content generated engagement (“likes”), any post by any producer could rise to the top of the feeds. “Fake news” thrived in this environment because blogs or posts could mimic the look and feel of the mainstream media. (This set the stage for foreign interference in the 2016 elections.)

Twitter upped the ante in 2009, adding the “Retweet” button. Until then, Twitter users had to copy and paste another’s content into their messages. By removing this hurdle, Twitter enabled the seamless spread of messaging. A single Retweet could pass someone else’s thoughts and opinions onto one’s followers—making it “viral.” In 2012, Facebook offered its own version of the Retweet, the “Share” button.

Facebook’s corporate mission is to “Give people the power to build community and bring the world closer together.” Twitter’s corporate mission is to “Give everyone the power to create and share ideas and information instantly, without barriers.” Taken at face value, these statements seem benign. Yet, who gets to determine what kinds of communities and ideas are being advanced in this hyper-connected world? (In July 2020, Facebook removed nearly 200 accounts associated with hate groups.)

Both Mark Zuckerberg, CEO and founder of Facebook, and Jack Dorsey, CEO and co-founder of Twitter, have been repeatedly called to Capitol Hill. At the most recent hearing on November 17, they were being held accountable for fueling factions across America. Republicans allege an anti-conservative bias, while Democrats demand the companies to do more to police content. At the heart of this debate is a fiercely guarded 1996 law known as “Section 230.”

Tucked inside the Communications Decency Act of 1996, Section 230 states: “No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.” While this legal policy has enabled YouTube users to upload their own videos, Amazon and Yelp to incorporate customer reviews, Craigslist to host classified ads, and Facebook and Twitter to provide social networking to the masses, it has also given almost unfettered access to nefarious actors, both domestic and foreign. In recent months, lawmakers have advanced bipartisan proposals to revamp Section 230. We expect the momentum to pick up with the Biden Administration, even amid antitrust lawsuits.

 

PWA’s Perspective

Our First Amendment guarantees “Congress shall make no law… abridging the freedom of speech, or of the press.” With the anonymity provided by the internet, free speech can be taken to extremes. Online political discussions can become less rational; worldviews can become distorted; subversive forces can lure recruits. (When communicating face-to-face, we are better equipped to read a person’s body language, knowing when to take a breather.) With the internet-based mechanisms to receive and immediately promulgate threads of information that engage us—that animate us—is it any wonder that we have become more tone deaf, more insulated in our respective echo chambers?

We do not believe that social media is the only source fueling the factional potential that weighed so heavily on our forefathers. Other media, including cable and network television broadcasts and talk radio, contribute to this phenomenon. Indeed, numerous forces are pushing Americans toward greater polarization. We believe the facts speak for themselves: Social media along with broadcast media have accelerated the division we are experiencing in the United States.

In closing, it is our job to analyze political, economic, and social events from many angles to examine their potential impact on you, our clients. You are at the center of our business, our reason for being in business.

Thank you for your continued confidence.

Stay strong.

Joseph A. Scarpo

Founder & CEO

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