Can California Survive a Tech Crash?

LOS ANGELES

NEW GEOGRAPHY-California’s economic revival has sparked widespread notions, shared by Jerry Brown and observers elsewhere, that its economy — and policy agenda — should be adopted by the rest of the country. And, to be sure, the Golden State has made a strong recovery in the last five years, but this may prove to be far more vulnerable than its boosters imagine. 

 

The driver of the latest California “comeback,” the Silicon Valley-San Francisco tech boom, is beginning to slow in terms of both job growth and startup activity. The most recent job numbers, notes Chapman University economist Jim Doti, show that employment growth in the information sector has slowed over the past year from almost 10 percent to under 2 percent. Particularly hard-hit is high-tech startup formation, which is down by almost half from just two years ago. 

This slowdown extends also to the professional business services sector, which has become increasingly intertwined with tech. In a recent survey of professional business service growth for Forbes magazine, economist Mike Shires and I found that last year Silicon Valley and San Francisco growth rates were considerably lower than those in boomtowns such as Nashville, Tenn.; Dallas, San Antonio and Austin, Texas; Orlando, Fla.; Salt Lake City and Charlotte, N.C. With the exception of Orange County, the rest of Southern California performed below the national average. 

The historical perspective 

Historically, California’s great strength was the diversity of its economy, stretching from high-tech and aerospace to finance, entertainment, energy, basic manufacturing and homebuilding. Yet, during the most recent boom, the growth of high-wage job growth largely took place in one region — the Bay Area — while other sectors generally stagnated or shrank. 

Silicon Valley and its urban annex, San Francisco, have brilliantly expanded the scope of the digital revolution. Google and Apple have become the world’s most valuable companies, and the Valley, along with Puget Sound in the state of Washington, account for four of the 10 wealthiest people on the planet, and virtually all of the self-made billionaires under 40. 

This success has masked greater problems in the rest of the state. Southern California, home to over half the state’s population, has seen only modest high-wage job growth, both in tech and business services, since 2000. 

The dangers of consolidation 

We tend to see the growth of tech companies in California, notably the Bay Area, as the ultimate expression of both entrepreneurial drive and technical skill. Yet, the current tech boom, unlike those in the past, is largely defined by a few large firms, including the occasional megastartups like Uber and Lyft. Overall, the National Venture Capital Association reports that the number of startup deals is now at the lowest level since 2010. 

These trends may explain the slowing growth rates. The Valley’s elite is fat and happy, and expanding their purview into virtually every crevice of the economy, including business services, entertainment, automobiles and aerospace, all of which are expensive to enter and retain formidable competitors. Yet, with this growing power, there also seem to be fewer opportunities for new entrepreneurs. As one recent paper demonstrates, these “super platforms” depress competition, squeeze suppliers and reduce opportunities for potential rivals, much as the monopolists of the late 19th century did. 

The dominant firms, unchallenged by friendly regimes of both parties in Washington, now operate at a scale in terms of cash reserves and market power that other firms, even long established ones, do not enjoy. It is becoming a self-sustaining aristocracy which makes out like bandits even when they fail. Marissa Mayer, who recently stepped down as Yahoo’s CEO, earned $239 million over her five-year tenure — almost a million a week — as she drove one of the net’s earliest stars into oblivion. 

The prognosis for the rest of us 

The “boom” has left most Californians in a precarious position. Even in Silicon Valley, the working and middle class have, if anything, done worse economically than before the boom. Housing prices, in part driven by state and regional regulations, are gradually sending the seed corn — younger families — to more affordable places. 

If Silicon Valley falters, who can pick up the slack? The Inland Empire, one of the less expensive areas of the state, which should be a prime location for expanding firms, was one of the very few areas to lose business and professional service jobs since 2011. Southern California, by blending its genius in content creation with technology, could perhaps emerge as a major source of high-wage jobs, but it faces tremendous headwinds in terms of regulation, congestion and a massive poverty population. 

Perhaps most damaging of all, the allure of the tech boom has been used to justify Sacramento’s crushing regulatory and tax regime. The state’s strong performance since 2010 has convinced many in the political class and the media that business climate does not matter. It has made apologists able to ignore some 10,000 businesses that have left or expanded outside of the state, many of them employing middle- and working-class people. 

High-tech and entertainment are great industries to have, even at slower growth rates, but they cannot long carry such a diverse state with the highest poverty rate in the country and severe affordability challenges. California has been largely lulled to sleep by a now fading boom. We could experience a very rude awakening that will cause havoc to the state budget, produce a potential housing correction and challenge communities across the state.

(Joel Kotkin is executive editor of NewGeography.com. He is the Roger Hobbs Distinguished Fellow in Urban Studies at Chapman University and executive director of the Houston-based Center for Opportunity Urbanism. His newest book, The Human City: Urbanism for the rest of us, was published in April by Agate. He is also author of The New Class ConflictThe City: A Global History, and The Next Hundred Million: America in 2050. He lives in Orange County, CA.) Prepped for City Watch by Linda Abrams.

-cw

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