Growth, Jobs and Silicon Valley

A non-technical, political post today (I did warn readers there would be some).

The overriding theme of the upcoming presidential election is jobs, with the candidates sparring aggressively over who can create more of them. Unemployment is still high across the country, and finding work, especially if you’re a new college grad, is a daunting challenge. 

And yet here in Silicon Valley companies can’t hire fast enough. If you’re a new CS grad you’ll have no trouble at all getting several job offers to choose from. Your starting salary, on day one of your career, might be higher than the current salary of either of your parents. And if you’re an experienced engineer, designer or product manager then the sky is pretty much the limit. 

This raises tempting questions: Can the presidential candidates learn from Silicon Valley’s success? Does the tech industry point the way towards a nationwide economic renaissance of job growth?  Is what’s good for startups good for America? And if so, do the political endorsements of tech luminaries carry extra weight?

Innovation and Growth

Many people in Silicon Valley believe that the answer to all these questions is yes. 

For example, several movers-and-shakers in the startup world, including Reid Hoffman, Dave Morin, Drew Houston and Craig Newmark, recently recorded a series of videos promoting innovation as the driver of economic recovery, and announcing their support for President Obama as the right leader to increase innovation and parlay it into economic growth.

As another example, Paul Graham recently posted his informal presidential election survey of startup community leaders, who apparently, by a 2-1 margin, favor President Obama over Mitt Romney, as does Graham himself (and as do I).

Graham writes:

Encouraging economic growth is a big theme, perhaps the biggest theme, in the current presidential campaign. Here in Silicon Valley, economic growth is something we understand well. Growth is the defining quality of a startup, and the leaders of the startup community are arguably the world’s leading experts in making it happen.

These claims of expertise in innovation and growth are valid. All these folks have experience with both, and their opinions unquestionably carry significant weight within the tech community. But whether that expertise carries over to the rest of the economy is a more nuanced question.

Growth vs. Jobs

Silicon Valley does indeed lead the pack in innovation and in capital growth, but the true big theme in this presidential campaign is jobs. And Silicon Valley is, by some measures, a poor job creator. 

The following chart (1) shows that capital in the technology sector yields far fewer jobs per $ than capital in other sectors:

image

As you can see, the big tech industry darlings are near the bottom of the list, along with the oil companies. And Google’s numbers would be even lower if not for the Motorola Mobility acquisition, which added around 20000 employees for “only” $12.5B. 

I didn’t include data for privately-held startups, as I don’t know them with any precision. But if you plug in whatever numbers you estimate for Twitter, Foursquare or a host of other startups, you’ll likely get similar ratios. For example, a guesstimate of $9B for Twitter’s market cap and 1400 for its number of employees gives a ratio of 155. And using 400/$3B for Square we get a ratio of 133.

By this metric, at least, Silicon Valley, while good at growing capital, is bad at growing jobs. If I had $1B to invest, and my goal was to create profit, tech would be a good place to put it. But if my goal was to create as many jobs as possible, investing in tech might give me poor returns.

Obviously this is not to say that the tech industry doesn’t provide immense value. It continues to revolutionize how we produce, consume and locate information, how we interact with people and places, how we shop and how we do business. But these transformations are due to Silicon Valley’s expertise in technology and innovation, not its expertise in capital growth. The latter may have little applicability outside the rarified air of SoMa and Menlo Park.

Inequality

You can debate whether employees-per-market-cap is a valid metric, but it’s hard to argue with the fact that, while the nation needs millions of low- and medium-skilled jobs all across the country, especially in the Midwest and the South, the tech industry produces small numbers of highly-skilled jobs, mostly concentrated in the San Francisco bay area. Apple and Google aren’t even making iPhones and Android handsets in the US, which could have created large numbers of manufacturing jobs in states that most need them.

The true economic leitmotif of the past 20 years and more hasn’t been growth, or even jobs, but inequality. Increasingly huge amounts of wealth have been concentrating in fewer and fewer hands, while everyone else, at best, struggles to stay in the same place, and at worst plunges into poverty. The tide has been rising, but instead of lifting all boats it’s been flooding the basements. 

Silicon Valley is no exception when it comes to this hollowing out of the economy: the wealth created here is concentrated firmly in the hands of a lucky few (myself included). We’re rewarded handsomely for happening to have skills for which demand greatly outstrips supply. But the impact on the rest of the area economy has been mixed. For example, tech wealth has driven house prices and rents in San Francisco to such heights that many people vital to the city’s fabric, the people who make SF the world-class city it is, are being priced out. (2) 

I’m not saying that Silicon Valley is evil, or that the way it allocates wealth is wrong. The tech industry has created value by providing incredible new products and services to consumers worldwide.  And in any case, to steal a great phrase from Fred Wilson: you can park your outrage at the door of capitalism. But there’s a happy medium between socialist redistribution and a world of Eloi and Morlocks. If you want to build an economy in which everyone thrives, instead of just the select few with world-class educations and unrivaled access to opportunity, Silicon Valley is not an ideal model.

(1) Click here for original spreadsheet. Data retrieved from Google Finance on Oct 14th. Companies chosen from lists of largest market caps, lists of largest non-state employers and leading companies in various sectors. And Whole Foods, because I was hungry when I wrote this.

(2) See David Talbot’s recent article in San Francisco magazine for more on this, and other effects of the tech industry’s rise on the rest of the city.