The End of the Tech Boom

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Lizzie O’Leary: On the morning that Julia got laid off, she walked out of the gym and checked her email. The actual day I went to my gym, I come out of the gym, it’s like 830 in the morning. I just come out of class. I just check my phone as I do. And it’s like stripe h.r. Your role at stripe. And that’s not a note anyone wants to get. And it was a shock. There were no rumor mill. There was no, there was nothing like i’m telling you, I’ve been in companies, you know, they’re usually some sort of water quote like this was stealth. Absolute stealth.

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Lizzie O’Leary: Julia, by the way, is not her real name, but that’s what we’re calling her today. She knows her way around tech. She’s worked at a bunch of the big name companies, including Amazon, Microsoft, and she joined Stripe, the online payment processor, a little over a year ago to work on company partnerships just before a big expansion that was the highest valued privately held company.

Speaker 2: At the.

Lizzie O’Leary: I think it was at that time. It was like 95 billion, you know, as a rocket ship. Initially, COVID lockdowns and the subsequent online shopping boom propelled that rocketship even higher, but then gravity kicked it. Stripe laid off 14% of its workforce earlier this month, including Julia. In a note to employees, the company’s founders blamed inflation, rising interest rates and their own bad business decisions. Julia’s worried about her colleagues who are here on work visas. She’s already started networking for her next gig, but she’s also been around the block enough that she knows that, however brutal, this is what companies sometimes do. So I don’t really take it personally. And if you go to a startup like I guess this is the chance you take.

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Lizzie O’Leary: And at that time, like not everybody had jumped on the bandwagon, right? Like by as of last Thursday, it wasn’t like the entire industry had decided to do this. But since Julia got laid off, it kind of feels like the whole industry has decided to do this. Tens of thousands of tech workers, including at some of the biggest companies in the industry, have lost their jobs in November alone. So today on the show, we’re going to explore why, Because maybe something fundamental is shifting and tech shouldn’t be counting on rocket ships anymore. I’m Lizzie O’Leary and you’re listening to what next, TBD, a show about technology, power and how the future will be determined. Stick around.

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Lizzie O’Leary: It’s not just Julia’s experience, Stripe or Elon Musk’s whatever you want to call it, at Twitter.

Speaker 3: Winter holiday season is turning out to be the season of layoffs for the tech industry. The latest report Amazon will be laying off thousands of employees in its corporate and tech divisions. Well, turned out of the turmoil at Twitter. The social media giant appearing to be in disarray after as many as half of its employees were laid off under new owner Elon Musk.

Lizzie O’Leary: Facebook’s parent company, Meta, announced that it’s cutting more than 11,000 jobs, about 13% of total staff.

Speaker 3: Apple shares are trading lower this morning after CEO Tim Cook confirmed reports of hiring slowdowns at that company.

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Lizzie O’Leary: By even a conservative estimate. Some 40,000 tech workers have been laid off in November and the website layoffs. AI says more than 130,000 people have lost their tech jobs globally this year. It’s been an ugly fall in both senses of that word. For an industry that has been going gangbusters for about two decades. And I wanted to talk to reporter Timothy B Lee, who covers tech and economics because Tim wrote an essay titled The End of Silicon Valley’s 20 Year Boom that made me sit up and pay attention.

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Speaker 2: So you had the first decade of that 20 year boom. You had companies like Google and Facebook that in retrospect, we know they just straightforwardly were worth a lot more than people expected. And that was just because people weren’t really thinking through, you know, how everybody was going to be on the Internet. Search ads and Internet advertising was going to be a profitable thing. It was just hard for people to get their minds around how big these tech companies could be.

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Speaker 2: And then you had for the second decade in the 20 tens, you had a bunch of kind of follow on companies that were more focused on the physical world, your Ubers and Airbnbs and and scooter companies and stuff like that. And people are hoping that that would have the same kind of kind of growth potential. And the idea was, well, Google and Facebook, that’s just bits. And now we’re doing atoms and atoms is much bigger than bits. And so it should be bigger. And so people thought they were having this getting the same kind of valuation. But yeah, I mean, people were just thinking that these companies were going to grow up, going to blow up the way Facebook and Google did. And for the most part, those kind of early ones like Uber and Airbnb did grow, but not as much as people expected in the later ones like the Scooter startups or we work. Those did not grow at all and in fact kind of imploded once it became clear that that that growth potential wasn’t there.

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Lizzie O’Leary: You can think of those later companies Uber, Airbnb, various scooter startups drafting off the success of the biggies like Facebook and Google, riding their coattails to get lots of venture capital and spectacular valuations.

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Speaker 2: You had this ecosystem built up. You have these venture capital firms that just got in the habit of seeing fast growing, unprofitable companies and saying, Oh, this has the potential to become a very profitable business in the future. And that was just what they did. And they had, you know, they were raising money from institutional investors that were used to give it to venture capital. And so I think to some extent was just kind of momentum. They were just used to doing that. And so they kept doing it. And but that the kind of pickings became slimmer and slimmer and the opportunities weren’t as good as they used to be and just took a few years to build. Really notice how unattractive some of those opportunities were.

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Lizzie O’Leary: I want to talk about what was going on inside these companies in this time period. And when I read your piece, I was reminded of this famous internal memo at Facebook that Andrew Bosworth, known as Boss, wrote in 2016, and it got a lot of flak for basically revealing kind of the underside of a lot of these tech companies. But there’s this line that’s really telling. And he says, we connect people, period. That’s why all the work we do in growth is justified. And you wrote about growth and growth being the mantra in this time period. And I wonder. Why growth was so important, but also what ingredients are necessary inside. You know, a Facebook or Twitter to create growth and growth above all else.

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Speaker 2: And to some extent, I think it was just that in 2005 or 2010, there were just a lot of people in the world that weren’t on the Internet yet or were not using the Internet as much as they would be. And so there was just this big untapped market that had just been created. And the companies that kind of get there first and become the dominant players are going to grow a lot and make a lot of money because they’re just exploiting a new market. By 2012, or certainly by 2015 or 2020. That wasn’t so true anymore, at least in the developed world. Like pretty much everybody’s on the Internet, pretty much everybody’s using Google using Facebook. And so it just became much harder to find either new customers or new things for people to do on the Internet. And so if you wanted to create a new tech company, you had to kind of still market share from a different tech company as opposed to being a first mover in something like big new industry that didn’t exist before.

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Lizzie O’Leary: So you’ve got to still value growth above all else. Just find it somewhere different.

Speaker 2: If you run an electric utility or a hospital or something like he’ll grow, but you grow about the same rate as the overall economy because, you know, most people already have most services. And so you’re you’re trying to come from other companies. So I think tech is just transitioning into a period where it’s just kind of a normal company where it’s competing with other big companies. And yeah, there’s just not new customers and new services to to roll out as quickly as there was ten or 20 years ago.

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Lizzie O’Leary: Part of what makes these layoffs so striking beyond the sheer numbers is the tech has weathered a lot of storms that really hurt other industries. It came through the financial crisis intact and even thrived during the first two years of the pandemic.

Speaker 2: Yeah, I mean, I think there are two things that happened. One is obviously there was a shift to remote work, which then created some opportunities and just caused people to be on their computer more. So I think that did probably extend the growth rate.

Lizzie O’Leary: For hired like 30,000.

Speaker 2: People. Yes, absolutely. But then the second thing that happened is the Fed cut interest rates and Congress did a bunch of stimulus and they also injected all this money into the economy that caused the valuations of all the companies to shoot up a lot. And so I think that allowed even that allowed the kind of interest in investment to accelerate even beyond what the actual growth that was happening, because people saw their investments becoming more profitable. And so you saw I mean, the most extreme example of this was the meme stops, the game stops and, you know, crypto and stuff. There’s nothing fundamental happening to those businesses that made you think that they were like this huge opportunity. It was just there was so much money sloshing around that they had to go somewhere and they went various places. But those places then felt like they were kind of winning at the investing game as opposed to just kind of being part of this like gusher of money that was coming out of of Congress and of the Fed.

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Lizzie O’Leary: When do you think things started to turn?

Speaker 2: I mean, I think the the Fed raising interest rates in early 2022 was a big factor because that kind of turned all that stuff I just talk about in reverse where now there’s less money sloshing around the economy. And so investors had to be a little bit more choosy. And so valuations started to fall. And then once valuations starting to fall, then tech companies started thinking, well, you know, just this business model of like growing now and worrying about profitability later, that doesn’t make much sense anymore. If if you can’t, like, raise more money to kind of help pay for your costs in the meantime. And so, yeah, I would say early 2022 is really when this started to change.

Lizzie O’Leary: Because I guess what I’m trying to tease out here is like, is this the the leadership of these companies looking at kind of macroeconomic trends and saying, okay, well, the Fed’s tightening and even though the labor market is still good, there’s like a little weaker data. Maybe we should worry about that. Or is there something specific to tech and like where these companies are in their life cycle?

Speaker 2: Mm hmm. Well, all right. So as I think I think that we are going to have a kind of deceleration of their hiring and their kind of focus on growth regardless. But the the kind of switch from stimulus driven growth to tightening kind of kind of sharpen that deceleration where rather than like gradually, you know, slowing hiring, they actually had to do some layoffs.

Speaker 2: So, yeah, I think that’s a big thing to change. And I think one of the things that happens is that when you’re a fast growing company, there’s a lot of value in having a deep bench because, you know, if some new market opportunity comes up, you want to be able to throw a bunch of people at it, kind of grab it before one of your competitors do. And so I think a lot of these companies got used to having a lot of extra people around for those kind of things. And particularly you look at companies like Lyft or like Twitter, you know, Lyft was really trying to become the next Uber or Twitter was kind of become the next Facebook. And so I think they were a little bit overstaffed because they’re they’re like aspiration was we were going to be like those bigger guys. And so we want to kind of have all the infrastructure and the talent that they do. And as long as they were growing pretty fast, that was an okay strategy because it helped them grow a little faster.

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Lizzie O’Leary: I think one of the things that’s striking is on the way up. Doing this was relatively cheap because software doesn’t have a lot of overhead.

Speaker 2: Yeah, that’s right. I mean, you think about the probably the most famous example of this. When Facebook acquired Instagram, they had I think it was 13 people and they had something like 40 million users at that point. And people thought it was crazy that Facebook was buying a 13 person company for $1,000,000,000. But obviously, we now know, like Instagram is a huge thing. We don’t know exactly what it’d be worth if it was independent, but to be a lot more than $1,000,000,000, I think the early promise of software companies was one programmer could write a line of code that every that millions or billions of users could use. And because of that, it should be very profitable because your marginal cost is very low and and therefore you can have a very large scale and make a lot of money.

Speaker 2: And I think one of the big questions about the industry now is like kind of what happened to that, because it’s definitely not the case now that you look at a company like Twitter. They bring in billions of dollars and seem to really struggle to make a profit. And and I haven’t I’ve talked to a bunch of engineers and heard different answers in terms of is it that when you reach a certain scale, it stops being cost effective? That doesn’t really make sense to me. Or there’s I mean, there are some other selling ads is expensive. Moderation is expensive. So it’s hard to say exactly what’s going on there. But I think you are going to see tech companies trying to get back to that to some extent to figure out, do we really need to have all these people added more things we can automate or side projects we don’t need anymore so that we can get back to this idea that that there should be a very cost effective industry.

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Lizzie O’Leary: Just because people are expensive and they come with health insurance and kind of all the associated costs that a person brings to the table.

Speaker 2: Just if you have more programmers, you got to you got to pay their salary every every year. And, you know, that’s great if they’re like doing work that needs to happen, but it should be possible. This should be like a manufacturing tech industry where you get more and more productive over time, as you get more efficient, as you figure out how to do more with less. And that’s how the economy overall grows as we figure out how to produce more, more stuff with fewer people.

Lizzie O’Leary: There was also this weird thing happening where some of these companies and I’m thinking of of Lyft and Uber were hugely subsidizing their own services.

Speaker 2: That’s right. Uber and Lyft in particular. They’ve really I mean, you’ve probably if you’ve used either services as a customer in 2015, it was not only much cheaper, but also much lower wage. I’m doing a reporting project on where I drove for Lyft for a week, and I also do this in 2014. So in 2014, as a driver, I had to wait a long time to get a ride. And I didn’t make very much money from the fares because the fares were low, but left a kick in these up, these huge subsidies. I got more from the subsidies that I did from the fares in 2014. Now it’s the opposite. They’re very little waiting. They’re very good at like queuing up your next passenger seat as soon as you drop the previous one. And the prices are higher, but you get no subsidies. And so I actually think, like Uber and Lyft are going to be fine in terms of they’re going to be able to get to being a profitable business. I think it’s just not going to be quite as big of a business as they were hoping it was going to be. And they’re going to probably have to tighten their belts a little bit to, you know, make a profit on that, but not quite as big amount of revenues that that they’re going to end up getting.

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Lizzie O’Leary: When we come back, bye bye, Big tech. Hello. Boring I.T.. Part of what made investors love Silicon Valley and made Silicon Valley self-mythologizing is that everyone was always looking for that next big thing. And if it took off, there was lots of money to be made right now with the more mature tech industry. It’s less clear what that next thing might be.

Lizzie O’Leary: You know, thinking about social media in this moment, like I’m thinking about Facebook in particular, right? First job cuts in 18 years of their core business. Facebook still makes money. Media is like, I don’t know, trying to do weird things where like, you don’t have legs or you have fake left right. And I just wonder, like, where does it have to go as a company? What’s. What’s the next thing? I’m sure Mark Zuckerberg is thinking about that. But it does seem from the outside that some of the flyers they took on, these next step businesses aren’t paying off.

Speaker 2: The story of tech over the last 20 years has been exactly. You know, you had PCs and then you had the Internet and then you had smartphones and then arguably had smartwatches. But like, you know, the CEOs of these companies are used to always looking for the next thing. And so Mark Zuckerberg is doing that. He’s going towards VR in the metaverse. And so far, it’s not paying off. I think the jury’s still out. I mean, it’s very possible that that that will pay off. And in the long run, this that’ll be kind of the.

Lizzie O’Leary: Next thing to buy. I’m not the CEO of Metta, but.

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Speaker 2: Maybe this whole conversation will turn out to be obsolete if, like every tech company is like doing their metaverse play and growth is continuing. I’m skeptical of that. But that’s the big question is like if the metaverse turns out to be a big thing, then the growth story can continue and Mark Zuckerberg will look at it. But at some point, I think there’s only so many like ways types of computer interfaces like you can have on your desk, one in your hand, maybe one in your face, but like they’re not going to be like five more of those. And so either now or after the metaverse thing, there’s going to be a point where this is just not a big next thing in like consumer tech. Google tried to do Google Glass ten years ago. That didn’t work out very well. Apple is rumored to be working on a VR thing and has been for years. So like every year that goes by that that that tech companies think that’s a thing and it doesn’t seem to be makes me a little more skeptical. But yeah, I think if there’s going to be a next big thing that kind of allows the growth to continue, what would be the betterment? I said so far it doesn’t seem to be putting out.

Lizzie O’Leary: When we think about these tech companies in Silicon Valley, sometimes I’d like to think about them as the supply. And then from a macroeconomic context, the demand for what they do comes from investors. And I wonder when you look at, you know, the course of, let’s say, the last 15 years, what role both Wall Street but also big money managers, big pension funds play in terms of what they are demanding these companies do.

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Speaker 2: So we had in the 20 tens, we had this environment of very low interest rates and very high stock valuations. And when that happens, anybody who’s managing a large amount of money wants to look for places where they can make riskier bets and potentially get a bigger payoff.

Lizzie O’Leary: Because their normal bonds are like nothing.

Speaker 2: Right. Yeah, you get 2% or something. I feel normal bonds and you’d like to get more than that. And so they got very comfortable with this this proposition that you take. You invest in a money losing company, but it grows very fast and then eventually it becomes profitable. And because it’s so huge, it becomes very profitable. And you know that that only works. So if there is in fact a profitable business at the end of the process, and I think they’re just running out of those options. So I think it all depends on what happens in the future. I mean, if it’s possible there are some some future Googles and Facebooks being on it now that we just to notice that it additive. So it’ll continue. But if, if that doesn’t happen and it doesn’t seem like it’s happening, then I think institutional investors will start to learn that actually like VC, maybe it’s not the cash cow it used to be and we’ll see that industry shrink.

Lizzie O’Leary: How much of this do you put at the feet of the Federal Reserve?

Speaker 2: I think it’s unclear which way the causation runs. I mean, the way it’s supposed to work is when you cut rates, then the economy accelerates and then you can raise rates again because the economy is growing quickly. And the Fed was really trying to make that process happen in the 20 tens and it didn’t happen. And so was that was that the Fed holding rates down or was that the Fed trying to get the economy growing and failing? I think it kind of argued either way.

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Speaker 2: And what we have seen in the last couple of years, though, is that when Congress engages in stimulus spending, that really does work. And so one way you could look at it is that there should have been more stimulus spending after the Great Recession. In which case we would have had a faster growing economy and higher interest rates. But certainly, I think the higher interest rate environment, whether you want to play by the Fed or other factors that I definitely think is was a big factor in why we got the kind of the kind of market we had in the 20 tens where where companies were able to raise a lot of money and subsidize services in the pursuit of growth and not worry about profit. If interest rates had been high in 2015, it just would not have worked that way because it wouldn’t have made sense.

Lizzie O’Leary: You have this really interesting argument that I kind of want to spend some time with an argument that that maybe all of these lay offs might be good for for workers and for the larger economy. Can you tell me a little bit about that? Because I think if you just lost your job, you might be willing to say like if you. Tim, I don’t agree with that.

Speaker 2: Mm hmm. I’m not sure. I would say it is good for the workers, per se. I mean, so Silicon Valley just pays a ton of money these days. And certainly if you’re a, you know, a Google engineer that’s making or Amazon engineer is making $500,000 and you’re not able to find another 500,000, I’m not going to say that’s good for you. But, you know, there’s there are many, many jobs in the economy for programmers at banks or manufacturing companies or retailers or any other number of businesses that just kind of do normal stuff and are not primarily in the tech business, but they have websites, they have software to manage their supply chains, etc., etc..

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Speaker 2: And I would say that those kind of companies have just really struggled to get kind of top tier programmers because those programmers can make my money at Google and Facebook. And the reason those companies are willing to pay so much money is because they were kind of in this land grab to get big market share in this, what they expected to be a very, very lucrative industry in the future, not so much because they’re creating a ton of value like right now for customers.

Speaker 2: And so I think it’s very possible that as these tech companies slimmed down a little bit, some of the very talented people that used to work at those companies will go work at a bunch of other companies across the economy and just make all those companies a little bit more productive because they’re able to get better talent to make their computer systems better, their websites better, their, you know, internal software better.

Lizzie O’Leary: But is going to work for, I don’t know, some giant hospital system in the Midwest, as sexy as it is to to write code for Facebook.

Speaker 2: Probably some of the programmers won’t be that excited about it. I mean, you know, they’re not they’re not particularly fun jobs, but they are really important. So, like, my wife’s a doctor and she doesn’t particularly like the software that her hospital uses, but she would be a more effective doctor if, if like if their software was as like, easy to use as Gmail or Google maps, like that would be great for her and great for her patients and like everybody. So, yeah, I mean, I think it’s probably not great for programmers per se, but I think it’s probably great for the people that use the software that the people outside the tech industry like. There’s just a lot of software and outside the tech industry that’s not very good but is very important. People really rely on. And if that became better over the next two years, that would be, I think, good for the economy as a whole.

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Lizzie O’Leary: And that does seem to be where, you know, actually some of these big tech companies are thinking about their next move. Right. Whether it’s Amazon Pharmacy or some of these bets that Google has been been trying to make on, say, big health care systems.

Speaker 2: They are trying they.

Lizzie O’Leary: Have not been successful so far.

Speaker 2: Yeah, No, I mean, I think it’s a very different thing because, like, you know, those kind of software systems to do them right, you have to know a lot about this specific industry, about the pharmaceutical industry or, you know, whatever it is. And I think the big tech companies are used to kind of building their own things from scratch and not so much doing a lot of like interacting and thinking about the needs of of a specific industry. I think it’s great that us that the big tech companies are going into those industries, but it’s not going to be as easy for them to win as in those industries that it is for them to do kind of in their home turf.

Lizzie O’Leary: We’ve talked a bit about the allure of the next big thing, right? Everybody chasing whatever that’s going to be. And I think for a while you could probably make the argument that the next big thing was crypto.

Speaker 2: Mm hmm.

Lizzie O’Leary: This has been a rough week for that. Do you think the RTX implosion takes the bottom out of that argument?

Speaker 2: Yeah, I mean, I guess so. I’ve been writing about crypto since 2011, so and back in 2011 I was actually pretty bullish about it because it didn’t seem like it could be the kind of thing where it could have big it could make big changes in the way that the financial industry works. And, you know, everybody’s just kind of waiting for like, what’s the light consumer application of this? They’re like normal people will use. And you look at after the accident had the Super Bowl ad kind of basically saying like, you’re a sucker if you don’t get into crypto. But if you think about what you were supposed to do with, what you’re supposed to do is like gamble with it and like try to become wealthy and like, that’s just like, that’s not ultimately creating any value. That’s just you’re trying to like, you know, win by like trading against other people and so like that. Ultimately, there has to be some like tangible thing that, you know, Amazon delivers packages to people. Apple creates like phones that are actually useful for people. There’s no like thing that in order and consumer uses for crypto other than like gambling on it. And so for crypto to be the next big thing I think we really do need to see like what’s the tangible use case?

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Lizzie O’Leary: Is it time to toss out the next big thing? Rubric.

Speaker 2: I think it might be. I mean, one thing I’ve been thinking about is if you think about other industries that used to be kind of similar to think about the car industry in the early 20th century, there was a period where there are a lot of new car companies being started. Cars got better much faster. A lot of fortunes were created. But then sometime, I don’t know, around World War Two, it was sort of that period ended and it was there was the big three, Big four automakers. And, you know, it’s not like those industries went away. They continue to be very big, important, profitable industries, but they just became normal industries that grew about as fast as the broader economy. And nothing that exciting happened. No huge fortunes were made. And I think I don’t know if it’s going to be now or ten or 20 years from now, but it’s somewhat technically the same kind of thing where the consumer Internet is just an established industry like all the others.

Speaker 2: And yeah, it’s there’s now the next big thing. I mean, I think in the broader economy there’ll be next things, there’ll be probably the clean tech thing seems like it’s going very quickly. Eventually we might have, you know, self-driving car. If I car self-driving cars, there’s like other stuff not kind of in consumer tech, but in consumer tech. I think at some point that I’ll just be kind of a mature technology where stuff doesn’t change as much as it has over the last 20 years.

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Lizzie O’Leary: Make tech boring again.

Speaker 2: Yeah, absolutely.

Lizzie O’Leary: Tim Lee, thank you so much for talking with me.

Speaker 2: Thank you.

Lizzie O’Leary: Timothy B Lee is a technology and economics reporter. He writes the newsletter Full Stack Economics. And that is it for our show today. What next?

Lizzie O’Leary: TBD is produced by Evan Campbell. Our show is edited by Jonathan Fisher. Joanne Levine is the executive producer for What next? Alicia montgomery is vice president of Audio for Slate. TBD is part of the larger What Next Family and is also part of Future Tense, a partnership of Slate, Arizona State University and New America. And if you’re a fan of the show, I have a little request for you. Become a Slate Plus member. Just head on over to slate dot com slash.

Lizzie O’Leary: What next? Plus, to sign up, we will be off on Friday for the holiday, but back next Sunday with new episode. So have a lovely Thanksgiving. I’m Lizzie O’Leary. Thanks for listening.