Why Government is Set to Constrict Silicon Valley

Throughout history, poverty is the normal condition of man. Advances which permit this norm to be exceeded — here and there, now and then — are the work of an extremely small minority, frequently despised, often condemned, and almost always opposed by all right-thinking people. Whenever this tiny minority is kept from creating, or (as sometimes happens) is driven out of a society, the people then slip back into abject poverty.

- Robert Heinlein

The secret sauce of Silicon Valley is the tradition of leaving established companies to start or join new ones, secure funding from venture capitalists, build the company to a suitable size, and then either float or sell the company for a windfall to the founders and early employees.  The incentive to continue this practice is the engine that keeps the fire of human technological innovation alive. 

Silicon Valley's unique ecosystem has so far been nearly impossible to eclipse.  The combination of research universities, the best and brightest immigrants from India and China, a culture of entrepreneurship, and a nearly perfect climate has kept the competitors to Silicon Valley at bay.  In the 1990s, the prevalent belief was that the high cost of living in Silicon Valley would enable Austin, Dallas, Seattle, and Phoenix to attract technology workers and cultivate their own tech sectors.  This did not happen, as the Silicon Valley ecosystem just had too strong of a gravitational pull. 

This, however, should not be an excuse for complacency, or a belief that Silicon Valley is a bottomless supply of tax revenue.  There are four steps that would make Silicon Valley prohibitively inhospitable to the formation of new ventures. Any one of these by itself would not be enough to dent the might of the Silicon Valley engine, but all four combined would exceed the breaking point.  The first two of these four steps have already happened, and the final two are set to happen, barring direct intervention. 

The four steps are :

1) Sarbanes-Oxley : This attempt to reduce the risk of another Enron-style fraud has inflicted a cost on the US economy greater than 100 Enron collapses.  In Silicon Valley, the crushing costs of Sarbanes-Oxley compliance (up to $3M a year) have dried up IPOs to a trickle, as the prospect of spending money of compliance that could otherwise be spent on R&D is unappealing.  IPOs are less frequent than they were even in the early 1990s, before the bubble, and start-ups can only hope to be acquired by a larger company.  In the last 8 years, only two IPOs were large enough to be considered 'blockbuster' : Google and VMWare.  This crushes the incentive to leave stable jobs to go work at a new venture. 

2) Tortuous Immigration Process : Any list of the most successful people in the history of Silicon Valley will quickly reveal that at least one third of them were born outside of the US.  In response, America has chosen to make it much harder for more such people to come here, even as the quality of life in their home countries is rising. 

While politicians pander to illegal immigrants with minimal education, they somehow refuse to make immigration easier for legal, highly-skilled immigrants who start new ventures in America.  This is significant given the fact that about half of Silicon Valley's skilled workforce is Indian or Chinese.  Many are choosing to return to their home countries in exasperation, and are advising their younger relatives that the US immigration process is so tedious that it is better to pursue their careers at home, working for Indian or Chinese branches of HP or Microsoft. 

Under current procedures, an engineer from India or China has to be on an H1-B visa for 6 years before he can get a greencard.  If he changes employers during that period, he has to start the clock again.  The immigrant's spouse cannot work during this period.  Even after the greencard, it takes 5 more years to become a US citizen.  Unsurprisingly, the best and brightest are deciding that this 11-year limbo is not worth it, and return to their home countries (eventually starting companies there rather than in Silicon Valley).  In the 1990s, Americans had not even heard of Bangalore or Suzhou. 

I have written up a detailed solution to this problem over here. 

___________________________________________________________________________

If these two factors weren't bad enough, two more negatives are about to be piled on. 

3) California State Income Taxes are Set to Rise : The budget shortfalls and underfunded pensions in California are a ticking time bomb.  CalPERS, which invests in many of the top venture capital funds that nurture the growth of start-ups in Silicon Valley, is in a shambolic state, and has to add $80 billion in assets just to meet present obligations.  The top income bracket in California is already taxed at 9.3%, and this is set to rise.  Sales taxes are also set to rise.  Due to this horrendous mismanagement worthy of a banana republic, California will soon reach a tipping point where taxes are so high as to destroy California's private sector, which until now has been the envy of the world.  It would, of course, be better to reduce CA state expenditures, but government officials have made it clear that raising taxes is their preferred course of action. 

Victor Davis Hanson explains California's black hole in more detail. 

4) Federal Income Taxes are Set to Rise : If the Bush tax cuts are allowed to expire, then from 2011 onwards, the top income bracket will be taxed at 39.6% rather than the current 35%.  Here, too, the concept of reducing expenditures is not palatable to Washington decision-makers.  While this does affect the entire US equally, when this is combined with the increase in California Sate tax, the combined marginal tax rate in California rises several percentage points, and possibly rises well above 50%.

The danger here is that each of these factors by themselves are not life-threatening.  But all four of them in cumulative combination are deadly.  So on top of the difficulty of conducting an IPO, and the brain drain out of Silicon Valley back to Asia, if the financial windfall that a worker receives after his startup makes a successful exit is taxed at a grand total of 50-55%, fewer and fewer people will aspire to toil away for years in a startup.  As a result, fewer startups will form in Silicon Valley, and instead will form in Bangalore, Shanghai, and Taipei. 

Furthermore, after these forces have been in effect for a few years a simple reversal of the higher tax rates, dysfunctional immigration policy, and Sarbanes Oxley will not simply restore Silicon Valley to its prior grandeur.  The technology centers in Asia will have achieved critical mass by then, and Silicon Valley will have permanently lost its exclusivity.  It would never recover the dominance it once had. 

Silicon Valley will be reduced to a location that still hosts the headquarters of HP, Intel, Cisco, and Google, but 90% of the employees of these corporations will be overseas, and startups will be rare.  Silicon Valley will effectively become like Cleveland or Pittsburgh, which even today host the headquarters of more than 20 Fortune 500 corporations each, but still have a lower population than they each had in 1960, and cannot attract new young people to come and live there.  Cleveland and Pittsburgh are still functioning societies, of course, but their economic vibrancy is irretrievably dead. 

This bleak outlook can certainly be reversed if prompt action is taken now.  Sadly, the current path is one that is set to have a smothering effect on Silicon Valley. 

(crossposted on Techsector)

Comments

[jeffolie]

The difficulties that beset Silcon Valley is the beginning of the Creative Destructionism.

[GK]

jeffolie,

Not necessarily. Cleveland, Detriot, and Pittsburgh never recovered, and the next wave happened elsewhere.

As Silicon Valley stagnates, the new rise happens in Asian tech centers.

[Daniel Schumacher]

There are other tech-heavy parts of the USA. I live near Seattle, which has a thriving and growing software industry. Unlike Silicon Valley (which has quit a bit of electronics hardware business) Seattle has biotech, aerospace and a different mix of industries.

[GK]

David Schumacher,

Seattle only has the HQs of two big tech companies, Microsoft and Amazon. That is not quite enough. It is tiny compared to the growing centers in Asia. If several big IPOs happen in Seattle, then it would be a different story.

Boeing's HQ actually left Seattle.

Plus, 3 of the 4 factors killing Silicon Valley also affect Seattle equally (only the CA tax factor does not).

[jeffolie]

The Creative Destructionism does not pick a location, ala Silicon Valley. And the downturn takes substantial time to lay waste to the old technology industry. New technology will rise up from the ashes but I do not have a clue as to its location.

[GK]

The location will be evenly distributed between the US and Asia, thus resulting in Silicon Valley capturing less than half of the new wave, where it previously had monopolies on new waves.

[Dave]

I agree that California is becoming a more hostile business environment and that is lamentable. But where else other than the U.S. (and Silicon Valley in particular) can you find the unique combination of innovative, creative thinkers who give rise to successful companies? Certainly Asia has lots of smart, hard working people but their culture does not encourage independence or out-of-the-box thinking.

Many of Silicon Valley's companies started out as a glimmer in the eye of one individual who'd spent his formulative years tinkering in a garage and disregarding conventional thought. I just don't see that kind of culture in Asia.

[GK]

Dave,

You haven't been to the tech centers of Asia recently.

who'd spent his formulative years tinkering in a garage and disregarding conventional thought.

Not when it is almost impossible to take a company public, and even then, he will be taxed at a total of 55%.

Again, many of the people who made Silicon Valley great are from Asia to begin with. They can easily return if CA is inhospitable for business. Without these Asian immigrants, Silicon Valley would not happen.

[brokerdavelhr]

Great article man. Straight forward, to the point, and bound to get great responses. What long term impact do you see coming from this if none of the above listed conditions are not changed? Lets say by 2025? I know you are a busy guy, but if I could make a humble request - Please do an article on how the rest of the world will be able to maintain a sustained technical growth when (and if) our countries lags to far behind. Most interesting would be the impact of the economy and global politics and orders on such a situation, and vice versa. Thanks : -)

[jeffolie]

Here is an example of how lying, corrupt government in California can ruin even a modest technology development:

Funding for a $20,000 incentive for buyers of clean-fuel trucks has dried up. Some trucking firms have spent millions of dollars on greener fleets, expecting the cash.

By Ronald D. White
January 27, 2009

It sounded like a good deal: The Port of Los Angeles offered to pay $20,000 incentives as part of its Clean Trucks Program, launched Oct. 1 in conjunction with the neighboring Long Beach port to reduce pollution from trucking fleets serving the harbor.

On top of that, state officials nixed funding assistance and a federal agency blocked the collection of fees to support the program, forcing the L.A. port to dip into its strained budget for $44 million to cover the first 2,200 trucks.

[GK]

brokerdavelhr,

Technologies and products invented in Asia will still sell to the US consumer, as the US is the biggest market. All the latest products will be in Best Buy.

But the new wealth created from inventing new technologies will not happen in America. The startups will be in Asia, where a lot of bright Americans will voluntarily go to.

So America will not rank behind in adoption - it will still be the top. But it will rank behind in startup creation/product invention.

By 2025, Silicon Valley will be like Cleveland and Pittsburgh - still hosting the HQs of big companies from a bygone era, but remaining a shadow of its former grandeur.

[brokerdavelhr]

Technologies and products invented in Asia will still sell to the US consumer, as the US is the biggest market. All the latest products will be in Best Buy.
Only as long as the money to buy said products is in the pockets of the consumer. Our national debt is skyrocketing- literally. As the markets grow more regulated and inflation sets in (this is a best case scenario), the average consumer will have less in not only investment options for play money, but for retirement funds as well. How long before China calls our ‘money bluff’ when it nears the point of being worthless? Also, for technology to grow, there has to be a market for it. High tech ‘toys’ are expensive. How will the consumer be able to create said market with no money outside of more debt currency to do so?
But the new wealth created from inventing new technologies will not happen in America. The startups will be in Asia, where a lot of bright Americans will voluntarily go to.
Unfortunate but true. New wealth based off what anyway (my curiosity is tweaked)?

So America will not rank behind in adoption - it will still be the top. But it will rank behind in startup creation/product invention.
Top? How is it possible to be #1 all the time? Second place is not all bad as it creates a more competitive spirit. This is something I think the US is in desperate need of. As a corollary, the competition we do possess tends toward the internal. Due to a lack of global awareness, most people tend only to concern themselves with the ‘keep up with the Jones’ strategy. We have up to this point (even the low to mid classes) enjoyed a good living standard when compared to many other countries I have been too, but no one ever wants to talk about its sustainment outside of creating more debt. But in spite of this thought, I mostly agree with your statement.

By 2025, Silicon Valley will be like Cleveland and Pittsburgh - still hosting the HQs of big companies from a bygone era, but remaining a shadow of its former grandeur.
True as well? Is there anyway way you can do an article on how the world will sustain all of these endeavors? In spite of technology, MIT has only created a walking, man sized bug. NASA has yet to surpass an advanced space shuttle. Asimov is improving, but still only comparable to a 2 year old in physical abilities only. Money is being spent on technology alright, but as always, goes more toward creating the latest and greatest gaming platform rather then the next space vehicle, or AI beings. Cars (tesla etc) have shown tremendous leaps and bounds. But as car companies (all save the foreign ones) are mentally and financially deficient, less money will be going to R&D there as well. Rather then stay out of it, the govt makes it worse by examples like you listed in your article. If indeed the rest of the world is using US treasury bonds etc as a baseline of some sort, then they will all be forced to find some other means as their investment in such vehicles deplete in both value and stability. Doing so is very expensive, and comes with a great amount of uncertainty. So if we are broke (and we are), where is the rest of the world getting their funding for R&D of such projects? I refuse to believe that any other country out there has such a means, and that is the only reason our debts etc remain uncalled. Once a new financial system outside of the US comes along, who knows? The only way out of an impending disaster (either to our freedom or our livelihood- choose your poison), is for most of America to open their eyes, start doing their due diligence on both the government as well as their own finances, and start making smart choices vs. the easy and entertaining ones. If this does not occur, I see ancient Rome happening all over again. At the time, they were one of the more advanced societies out there, with a military force unrivaled in the world. Yet due to poor ‘management’, and lack of values in the populace, it ended up getting toppled onto its hind end. We are getting close, and this thought scares me.

[hix1050]

Successful systems acquire parasites.

Stupid parasites kill their hosts.

There is always more stupidity than you thought (1st Law of Stupidity)

[Protagonist]

Why are we letting these morons do this?! When does it become justified--nay, necessary--to get guns and start shooting the stupid fascists who make these laws?

How many people are going to die because they didn't get the medicine from an biotech IPO that could've/should've happened? How many people are going to live powerless and ignorant because technologies that could've/should've revolutionized humanity were never developed? Dammit, these bureaucrats are killing us and impoverishing us, and all we can do is blog about it while the world goes out with a whimper.

You can write all you want about how great the future is going to be, but it's not going to be great until idiots like these are taught a lesson.

[Capt. Barbosa]

Im not sure I follow that they would relocate to foreign nations. I just dont think the environment is right there.

I could potentially see other parts of our nations, the more tax freindly ones, becomeing a haven for these facilities to flourish in, florda and Texas, who do not have an income tax, are but a few thoughts.

Panama Beach Fl, is seeing an influx in real estate value, as wealth is trickling down from New York and other high tax states.

[Ant8904]

This makes me think about Boston and its former Route 128? At one time it was greater than Silicon Valley and still second (distant second). What does it take revive that? Surely there has to be elements that want to bring a comeback if Silicon Valleys ails from the above.

[Marshall]

You left the end off of the Heinlein quote:

... Whenever this tiny minority is kept from creating, or (as sometimes happens) is driven out of a society, the people then slip back into abject poverty. This is known as "bad luck."

[GK]

Ant8904,

If Silicon Valley ails, Boston will not revive. Has Boston become *more* business friendly in the last 20 years?

The tech industry will leave the US altogether, migrating to Asia.

[Sockpuppet racist (formerly using another person's name)]

Up until 1998 the Silicon Valley workforce was 98% white American males and the economy was booming. The flood from India and China began in late 1998 and it's been all downhill ever since. A state economy that once had a huge tax surplus is now going bankrupt. FOR LEASE signs are everywhere. Outside of Apple which still hires mostly Americans, the place is a disaster. White Americans are fleeing SV and CA in record numbers. The only tiny minority that has been driven out are the Americans who created SV long before China and India ever saw a keyboard.

"This makes me think about Boston and its former Route 128? At one time it was greater than Silicon Valley and still second (distant second). What does it take revive that? Surely there has to be elements that want to bring a comeback if Silicon Valleys ails from the above."

Stop driving Americans out of the IT industry and replacing them with IQ81s from India and uncreative people from China. It's not the brains that count, it's the creativity. And China and India both have miserable track records in creativity.

[John C. Welch]

"Again, many of the people who made Silicon Valley great are from Asia to begin with. They can easily return if CA is inhospitable for business. Without these Asian immigrants, Silicon Valley would not happen."

Really? Can you name the immigrants? Brin? Pfft. Moved here at age 3, grew up here, was educated here. He's more American than anything. Same with Jerry Yang! of Yahoo. And both Google and Yahoo! had 1 American co-founder each. Microsoft, Apple, Oracle and Sun? Overwhelmingly white American founders, except for Kohsla (and no one really knows what his contributions were). I think eBay is the one exception, but he was a European founder.

Can anyone name even one major household name IT company founded *and made profitable* *** entirely *** by Asian-born founders? How about one new modern industry or invention to come out of India or China? The Japanese tried to take over software in the early 90s and failed miserably.

Silicon Valley was built by Americans, not Asians. There were almost no Asians in SV before 1998.

[James. L Burns]

http://american3p.org/establishment-news/white-american-workers-put-last-once-again/

Non-Hispanic whites lost 986,000 jobs over the last year while 392,000 foreign-born Hispanic immigrants gained jobs, a new report from the Pew Hispanic Center has shown.

The 986,000 white job losses make up the overwhelming majority of the U.S.-born job loss total which reached 1.2 million over the past year, the report said.

The unemployment rate amongst whites rose during this time period from 7.7 percent to 8 percent.

Immigrant whites, on the other hand, gained 214,000 jobs, pushing their unemployment rate down from 7 percent to 6.3 percent.

...

Some 656,000 new immigrants of all races and ethnicities gained work in the U.S., with 392,000 foreign-born Hispanic immigrants forming the largest block of that group.

...

On all accounts, then, white American workers have been put to the back of the queue — in the country which they and their forefathers created.

[Quequeg]

I'll never forget the time in 2004 when the Chinese QA manager of the company I was working at called me into a conference room with his newly hired entry-level QA person from India. He looks at me and says "Our goal is to EXTRACT your knowledge and five it to here".

Yep, Silicon Valley just can't do without all those Asian brains.

[Quequeg]

American blows the whistle on visa and tax fraud at InfoSys.

[Clown]

http://timesofindia.indiatimes.com/business/india-business/American-employee-accuses-Infosys-of-visa-tax-fraud/articleshow/7580371.cms

[GK]

W. Ian Blanton, John Welch, James Burns, Queequeg, etc. are all the same guy. Someone who thinks changing names can create the appearance of different people, and is ignorant of IP addresses, is a technological retard to begin with. The reason he could not create a career in technology is obvious already.

Now, let's deconstruct this failure of a man :

Up until 1998 the Silicon Valley workforce was 98% white American males and the economy was booming. The flood from India and China began in late 1998 and it's been all downhill ever since.

Dead wrong. Indian and Chinese were quite numerous in Silicon Valley even by 1995. Companies like Sun, Juniper, Marvell, nVidia, Yahoo, etc. had a co-founder who was Indian or Chinese.

Now, posting as John C. Welch, the same loser claims :

Really? Can you name the immigrants?
There were almost no Asians in SV before 1998.

Khosla, Rekhi, Jerry Yang, Sehat Sutarja, Jen Huang, Sanjay Jha, to name just a few. All were founders of successful companies by 1998.

You don't really know anything about Silicon Valley, and are using racism as a crutch to mask your own inadequacies.

and replacing them with IQ81s from India and uncreative people from China.

I have just one question for you :
If Indians and Chinese are so inferior, how is it that they outcompeted you? What does that make you?

It is un-American to whine for special treatment, as this loser is. Fools like this are the ones who have destroyed Silicon Valley, while at the same time not realizing how his own actions caused it.

Thankfully, the fact that this loser had to pretend to be 5 different people shows that his racism is unpopular.

[DoesNotMatter]

You also forget that San Jose referred to as Man Jose by a lot of Engineers. I worked in San jose for 3 weeks and could not handle it any more. Men, men and more men, everywhere you look. I said fuck it, took a 15% pay cut (after tax) and moved to Austin, TX which is a great place to be a guy. So many cute women. Hell, I'd takea 30% pay cut for this. This ofcourse has nothing to do with your article which is a serious one. My comment is simply frivolous. Just thought to inject a bit of color and jocularity to an otherwise serious discussion

[W. "Ian" Blanton]

As The Futurist above notes, the guy posting as "W. Ian Blanton", "John Welch" at least (I don't know about the Queequeg one) is a troll, swiping the names of people from another site where he got his ass handed to him. So stupid, he didn't even sign my name right.

If I had to make a wild guess is that's it's a guy named Michael Amorose (aka; an assload of sockpuppet accounts). Apparently this was his way of trying to get some kind of "revenge". Pathetic little guy who has to post under other peoples names.

Anyways, I just wanted to be clear that the above post is NOT by me (which would be obvious to anyone who actually knew me online. :))

Since the jackass used my name, if it's at all possible, I'd appreciate it if you could delete the posts, since I don't care to have reprehensibly stupid comments attributed to my name (unless of course, I write them. :))

[John C. Welch]

Yeah, what Ian said. Little racist Mikey still hating on teh eeeebul brown and yellow devils

Sad

[GK]

W. Ian Blanton and John Welch,

Noted. It is sad to see someone impersonate others, that too for such a pathetic and futile purpose. He doesn't even know that IP addresses can be checked in an instant.

You could retaliate by not just pointing out to him the rise of skilled immigration, but how in many highschools, the pretty white girls are dating the Indian and Chinese boys now too. That might give him the vein-popping stroke he is courting.

[Vitalina]

Long time lurker, first time cmemonter. This makes me so enraged, almost more than anything else she has ever done (although I know there are many things she's done that are much more hurtful to specific individuals). I live in Silicon Valley, about 95% of my friends know how to program, and the economy is complete shit for most of us. I have several friends in the tech industry who are currently unemployed, and most of them went to OMG IVIES (or top tech schools like Caltech & MIT) and have excellent grades. It's true that many of the big name companies like Apple, Google, Facebook have started hiring again but that doesn't mean that all the people that were laid off in the last year have landed on their feet yet. Also, she's completely ignoring all recent grads (2009 or later) and anyone who is still in school or grad school. The vast, vast majority of jobs available today in this area require 1-2 years experience minimum, and no, grad school doesn't count. And even though tech itself is slowly picking back up many of the industries that support it around here (legal, consulting, maybe finance but I know less about that) are still hurting very, very badly. Not to mention of course, as The Manta pointed out, all the people who live everywhere else in the country and can't uproot their family or went to school to do something completely different and can't afford to go back for more education. You know nothing about this part of the country, Julia, and for that matter you know nothing about having a job or working for anything ever in your entire life. Please go away.

[Pallav Gogoi]

Silicon Valley is the ultimate garage for experimenting things that will build things for future humans. In order to progress, we need garages like these however too much technology can kill human emotions completely hence these garages are also planning for some greener things to make humans happier. We need constant innovation. If one Silicon Valley is constricted, another will evolve.