Tech Exodus: Is Silicon Valley in Trouble?

Distributed employment fundamentally challenges the rationale behind Silicon Valley’s sucess

*This article was originally published by Fair Observer

Hans-Georg Betz | On January 7, the news media announced that Elon Musk had surpassed Jeff Bezos as “the richest person on Earth.” I have a personal interest in the story. Two of my neighbors just bought a Tesla, and this morning, on the highway between Geneva and Lausanne, an angry Tesla driver flashed me several times, demanding that I let him pass. His license plate was from Geneva. Apparently, these days, driving a Tesla automatically gives you privileges, including speeding, particularly if you sport a Geneva or Zurich license plate. In the old days, at least in Germany, bullying others on the highway was a privilege reserved for Mercedes and BMW drivers, who, as the saying went, had an “inbuilt right-of-way.” Oh my, how times have changed.

Elon Musk is one of these success stories that only America can write. He is the postmodern equivalent of Howard Hughes, a visionary, if slightly unhinged, genius, who loved to flout conventions and later on in his life became a recluse. And yet, had you bought 100 shares of Tesla a year ago, your initial investment would be worth more than eight times as much today (from $98 to $850). Tough shit, as they like to say in Texas.

The Lone Star

Why Texas? At the end of last year, Elon Musk announced that he was going to leave Silicon Valley to find greener pastures in Texas. To be more precise, Austin, Texas. Austin is not only the capital of the Lone Star State. It also happens to be an oasis of liberalism in a predominantly red state. When I was a student at the University of Texas in the late 1970s, we would go to the Barton Springs pool, one of the few places where women could go topless. For a German, this was hardly noteworthy; for the average Texan, it probably bordered on revolutionary — and obscene.

In the 2020 presidential election, in Travis County, which includes Austin and adjacent areas, Donald Trump garnered a mere 26% of the vote, compared to 52% for the whole state. Austin is also home to the University of Texas, one of America’s premier public universities, which “has spent decades investing in science and engineering programs.”

Musk is hardly alone in relocating to Texas. Recently, both Hewlett Packard Enterprise and Oracle announced they would move operations there, the first one to Houston, the second to Austin, where it will join relatively long-time resident tech heavyweights such as recently reinvigorated Advanced Micro Devices and Dell. It is not clear, however, whether Oracle will feel more comfortable in Austin than Silicon Valley. After all, Oracle was very close to the Trump administration.

Recently, there has been a lot of talk about the “tech exodus” from Silicon Valley. Michael Lind, the influential social analyst and pundit who also happens to teach at UT, has preferred to speak of a “Texodus,” as local patriotism obligates. Never short of hyperbole, Lind went so far as to boldly predict that the “flight of terrified techies from California to Texas marks the end of one era, and the beginning of a new one.” Up in Seattle and over in Miami, questions were raised whether or not and how they might benefit from the “Texit.”

Lind’s argument is that over the past decade or so, Silicon Valley has gone off track. In the past, tech startups in the Bay Area succeeded because they produced something. As he puts it, Elon Musk and Jeff Bezos “are building and testing rockets in rural Texas.” Musk produces cars and batteries. Against that, Silicon Valley’s new “tech” darlings come up with clever ideas, such as allowing “grandmothers to upload videos of their kittens for free, and then sell the advertising rights to the videos and pocket the cash.”

The models are Uber and Lyft, which Lind dismisses as nothing more than hyped-up telephone companies. Apparently, Lind does not quite appreciate the significance of the gig economy and particularly the importance of big data, which is the real capital of these companies and makes them “tech.” This is hardly surprising, given Austin’s history of hostility to the sharing economy — at least as long as it associated with its industry giants. As early as 2016, Austin held a referendum on whether or not the local government should be allowed to regulate Uber and Lyft. The companies lost, and subsequently fired 10,000 drivers, leaving Austinites stranded.

In the months that followed, underground ride-sharing schemes started to spring up, seeking to fill the void. In the meantime, Uber and Lyft lobbied the state legislature, which ultimately passed a ride-hailing law, which established licensing on the state level, circumventing local attempts at regulation, which allowed Uber and Lyft to resume operations.

Unfortunately for Lind, he also has it in for Twitter and Facebook for their “regular and repeated censorship of Republicans and conservatives” — an unusual failure of foresight in light of recent events at the Capitol. Ironically enough, Facebook has a large presence in Austin. Business sources from the city reported that Facebook is in the market for an additional 1 million square feet of office space in Austin. So is Google, which in recent years has significantly expanded its presence in the city and elsewhere in Texas.

Colonial Transplant

Does that mean Austin is likely to be able to rival Silicon Valley as America’s top innovation center for the high-tech industry? Not necessarily. As Margaret O’Mara has pointed out in the pages of The New York Times, this is not the first time that Silicon Valley has faced this kind of losses. And yet, “Silicon Valley always roared back, each time greater than the last. One secret to its resilience: money. The wealth created by each boom — flowing chiefly to an elite circle of venture investors and lucky founders — outlasted each bust. No other tech region has generated such wealth and industry-specific expertise, which is why it has had such resilience.”

Industry insiders concur. In their view, Austin is less a competitor than a “colony.” Or, to put it slightly differently, Austin is nothing more than an outpost for tech giants such as Google and Facebook, while their main operations stay in Silicon Valley. It is anyone’s guess whether this time, things will pan out the same or somewhat differently. This depends both on the push and pull factors that inform the most recent tech exodus — in other words, on what motivates Silicon Valley denizens to abandon the Bay Area for the hills surrounding Austin.

A recent Berkeley IGS poll provides some answers. According to the poll, around half of Californians thought about leaving the state in 2019. Among the most important reasons were the high cost of housing, the state’s high taxes and, last but not least, the state’s “political culture.” More detailed analysis suggests that the latter is a very significant factor: Those identifying themselves as conservatives or Republicans were three times as likely than liberals and Democrats to say they were seriously considering leaving the state.

The fact that 85% of Republicans who thought about leaving did so for reasons of political culture is a strong indication of the impact of partisanship. Among Democrats, only around 10% mentioned political culture as a reason for thinking about leaving the state. Partisanship was also reflected in the response to the question of whether California is a “land of opportunity.” Among Democrats, 80% thought so; among Republicans, only about 40% did.

Until recently, thinking about leaving hardly ever translated into actually going. COVID-19 has fundamentally changed the equation. The pandemic introduced the notion of working from home, of remote work via “old” technologies such as Skype and new ones like Zoom. In late February 2020, Zoom’s stock was at around $100; in mid-October, it was traded at more than $550. In the meantime, it has lost some $200, largely the result of the prospect of a “post-pandemic world” thanks to the availability of vaccines.

At least for the moment, remote work has fundamentally changed the rationale behind being tied to a certain locality. Before COVID-19, as Katherine Bindley has noted in The Wall Street Journal, “leaving the area meant walking away from some of the best-paying and most prestigious jobs in America.” In the wake of the pandemic, this is no longer the case. In fact, major Silicon Valley tech companies, such as Google, Facebook and Lyft, have told their workforce that they won’t be returning to their offices until sometime late summer. Given that California has been one of the states most affected by the virus, and given its relatively large population heavily concentrated in two metropolitan areas, even these projections might be overly optimistic.

Distributed Employment

And it is not at all clear whether or not, once the pandemic has run its course, things will return to “normal.” Even before the pandemic, remote work was on the rise. In 2016, according to Gallup data, more than 40% of employees “worked remotely in some capacity, meaning they spent at least some of their time working away from their coworkers.” Tech firms have been particularly accommodating to employee wishes to work remotely, even on a permanent basis. In May, The Washington Post reported that Twitter had unveiled plans to offer their employees the option to work from home “forever.” In an internal survey in July, some 70% of Twitter employees said they wanted to continue working from home at least three days a week.

Other tech companies are likely to follow suit, in line with the new buzzword in management thinking, “distributed employment,” itself a Silicon Valley product. Its most prominent promoter has been Nicholas Bloom of Stanford University. Bloom has shown that work from home tends to increase productivity, for at least two reasons. First, people working from home actually work their full shift. Second, they tend to concentrate better than in an office environment full of noise and distractions.

Additional support for distributed employment has come from Gallup research. The results indicate that “remote workers are more productive than on-site workers.” Gallup claims that remote work boosts employee morale and their engagement with the company, which leads to the conclusion that “off-site workers offer leaders the greatest gains in business outcomes.”

It is for these reasons that this time, Silicon Valley might be in real trouble. Distributed employment fundamentally challenges the rationale behind the Valley’s success. As The Washington Post expose put it, in the past, “great ideas at work were born out of daily in-person interactions.” Creativity came from “serendipitous run-ins with colleagues,” as Steve Jobs would put it, “’from spontaneous meetings, from random discussions.’” Distributed employment is the antithesis of this kind of thinking. With the potential end of this model, Silicon Valley loses much of its raison d’être — unless it manages to reinvent itself, as it has done so many times in the past.

A few years ago, Berkeley Professor AnnaLee Saxenian, who wrote a highly influential comparative study of how Silicon Valley outstripped Boston’s Route 128, has noted that Silicon Valley was “a set of human beings, and a set of institutions around them, that happen to be very well adapted to the world that we live in.” The question is whether or not this is still the case. After all, at one point, Route 128 was a hotspot of creativity and innovation, a serious rival of Silicon Valley. A couple of decades later, Route 128 was completely eclipsed by the Valley, a victim of an outdated industrial system, based on companies that kept largely to themselves.

Against that, in the Valley, there emerged a new network-based system that promoted mutual learning, entrepreneurship and experimentation. The question is to what degree this kind of system will be capable to deal with the new challenges posed by the impact of COVID-19, which has fundamentally disrupted the fundamentals of the system.

In the meantime, locations such as Austin look particularly attractive. This is when the pull factors come in. Unlike California, Texas has no state income tax. In California, state income tax is more than 13%, the highest in the United States. To make things worse, late last year, California legislators considered raising taxes on the wealthy to bring in money to alleviate the plight of the homeless who have flocked in particular to San Francisco. Earlier on, state legislators had sought to raise the state income tax rate to almost 17%. It failed to pass.

At the same time, they also came up with a piece of legislation “that would have created a first-in-the-nation wealth tax that included a feature to tax former residents for 10 years after they left the Golden State.” This one failed too, but it left a sour taste in the mouth of many a tech millionaire and certainly did little to counteract the flight from the state.

No wonder Austin looks so much better, and not only because of Texas’s generally more business-friendly atmosphere. Austin offers California’s tech expats a lifestyle similar to that in the Bay Area, but at a considerably more reasonable cost. Add to that the absence of one of the most distressing assaults on hygiene: Between 2011 and 2018, the number of officially recorded incidences of human feces on the streets of San Francisco quintupled, from 5,500 cases to over 28,000 cases — largely the result of the city’s substantial homeless population. The fact is that California is one of the most unequal states in the nation. As Farhad Manjoo has recently put it in The New York Times, “the cost of living is taken into account, billionaire-brimming California ranks as the most poverty-stricken state, with a fifth of the population struggling to get by.”

Homelessness is one result. And California’s wealthy liberals have done little to make things better. On the contrary, more often than not, they have used their considerable clout to block any attempt to change restrictive zoning laws and increase the supply of affordable housing, what Manjoo characterizes as “exclusionary urban restrictionism.”

To be sure, restrictive zoning laws have a long history in San Francisco, going all the way back to the second half of the 19th century. At the time, San Francisco was home to a significant Chinese population, largely living in boarding houses. In the early 1870s, the city came up with new ordinances, designed “to criminalize Chinese renters and landlords so their jobs and living space could be reclaimed for San Francisco’s white residents.” Ever since, zoning laws have been informed by “efforts to appease the city’s wealthy, well-connected homeowners.” And this in a city that considers itself among the most progressive in the nation.

None of these factors in isolation explains the current tech exodus from the Bay Area. Taken together, however, they make up a rather convincing case for why this time, Silicon Valley might be in real trouble. Unfortunately enough, the exodus might contribute to the “big sort” that has occurred in the US over the past few decades, meaning the “self-segregation of Americans into like-minded communities” that has been a major factor behind the dramatic polarization of the American political landscape. The signs are there, the consequences known — at least since the assault on the US Capitol.

*This article was originally published by Fair Observer