6 ms·

Why sclerotic California hasn't yet stifled the extraordinary Silicon Valley

20 points by grellas 16y ago

abstractbill 16y ago
California has piled every imaginable burden on businesses. Minimum-wage laws are among the highest in the country, and health and safety regulations are among the strictest; cities like San Francisco and San Jose require businesses to offer employees health insurance; labor laws are extremely union-friendly; environmental policies drive up energy costs—and on and on. I have never heard anyone at justin.tv complain about the impact on our business of minimum-wage laws, health and safety regulations, mandatory health insurance, union-friendly labor laws or environmental policies. The article claims to be talking about things that hurt Silicon Valley startups, but I don't recognize anything that rings true in the above paragraph.
- robryan 16y ago
  I think he was talking about high tech manufacturing jobs, which can't be competitive with places like china given what must be offered to even employees undertaking basic manual labour.
  - abstractbill 16y ago
    Later in the same paragraph, he says "...the cost of state regulations in 2007 reached an average of $134,122 per small business—the equivalent of one job lost per company." That doesn't seem to add-up if he's talking about minimum-wage manufacturing jobs.
    - mnemonicsloth 16y ago
      If you're going to question results published by a respected academic in a peer-reviewed journal, you really should mention that the results were published by a respected academic in a peer-reviewed journal. A recent study by Sanjay Varshney, dean of the College of Business Administration at California State University in Sacramento, estimates that the cost of state regulations in 2007 reached an average of $134,122 per small business—the equivalent of one job lost per company You could talk about their data or their survey methodology, but you sound like you're just scoffing because you don't like their conclusions.
      - abstractbill 16y ago
        No, I'm pointing out that the paragraph in the original article doesn't seem to add up. $134,122 is apparently the equivalent of one lost job. But that's not anywhere near the right figure for a minimum wage manufacturing job.
      - _delirium 16y ago
        It doesn't appear to have been published in a peer-reviewed journal, fwiw, and he carried it out not in his capacity as professor, but in his capacity as owner of the consulting firm Varshney and Associates, which was paid for doing the study. Doesn't make it wrong, but those two factors do make me give it somewhat less weight. Here's a copy: http://arc.asm.ca.gov/member/5/pdf/CostofRegulationStudyFinal.pdf http://arc.asm.ca.gov/member/5/pdf/CostofRegulationStudyFina...
- Rod 16y ago
  1) since when is justin.tv representative of the SV? 2) if you don't see how minimum-wage laws, health and safety regulations, mandatory health insurance, union-friendly labor laws or environmental policies can hurt businesses, then it's because you're not on the finance arm of such businesses.
  - abstractbill 16y ago
    1) What company would you pick? Is justin.tv very atypical of current Silicon Valley startups in some obvious way I've missed? 2) I've been at justin.tv since long before we were big enough to have a finance arm. I may have little idea of how those policies can hurt really big companies, but the interesting thing about Silicon Valley isn't the big companies - it's the startups.
    - Rod 16y ago
      1) I would pick no company because the SV is not a homogeneous habitat. You have capital-intensive startups founded by PhD's trying to capitalize on 20 years of research... and you have startups bootstrapped out of lunchmoney by a couple of college dropouts who believe their new app will be a killer. Seriously, technology is more than the web. 2) generally speaking, imposing constraints can only decrease the maximum of the objective function one is trying to optimize; I did not say that such policies do hurt, I suggested it's not hard to see how they can hurt.
  - cdavid 16y ago
    Most of those things could as well help business. Without data, it is rather difficult to say, especially since a lot of the points you raised are easy to see as cost, and their advantages less obvious to observe.
- natrius 16y ago
  Your office and your employees' homes are more expensive to rent because regulations make it expensive to build in California. The food you eat is more expensive in California because there is a high floor on the compensation required for the people who produce it. Your coworkers require higher salaries because it's more expensive to live in California. According to Salary.com's cost of living calculator[1], for every four $100,000 engineers in San Francisco, you can get five $80,000 engineers in Austin at the same salary percentile. Those five engineers would have a higher standard of living since it supposedly costs ~$60,000 in Austin to live like someone making $100,000 in SF. (I think that's probably a little low.) If no one is complaining about the impact of California's regulations on your business, then no one is thinking hard enough (or they've just resigned to the fact that things are unlikely to change). The benefits of being in Silicon Valley may outweigh the costs, but the costs of being in Silicon Valley could be far lower. [1] http://swz.salary.com/costoflivingwizard/layoutscripts/coll_start.asp http://swz.salary.com/costoflivingwizard/layoutscripts/coll_...
  - _delirium 16y ago
    I'd suspect a larger portion of the cost-of-living difference is due to desirability of the areas, i.e. relative amounts of demand for each, more than it is due to state regulation impacting supply. People are willing to pay lots more to live in SF than they are willing to pay to live in Austin. It's a pretty easy trend to notice on the most/least affordable lists that seem to come out periodically. If you look at this list of top 5 and bottom 5 affordable cities to buy a house, the trend is that the most affordable cities are ones nobody wants to live in (Indianapolis, Dayton, etc.), while the least affordable cities are ones lots of people want to live in (NYC, SF, Honolulu, etc.): http://realestate.yahoo.com/promo/most-and-least-affordable-cities-to-buy-a-house-2010 http://realestate.yahoo.com/promo/most-and-least-affordable-.... Even true within CA: it's not particularly expensive to live somewhere like Bakersfield, despite all the same minimum-wage/environmental/etc. laws applying there too.
    - natrius 16y ago
      The Bay Area could have enough housing to accommodate far more people at lower prices without sacrificing desirability. It doesn't because of regulation. (Finding the water for those people is another story.) New York is similar.
kiba 16y ago
I wonder why it seem that some of the world's biggest economies move faster to the brink of economic destruction?
ojbyrne 16y ago
I'm impressed that it doesn't even cross the author's mind that his ideology might be completely wrong. Perhaps health insurance, labor friendly laws, strong environmental, health and safety regulations actually attract the best people.
- lkjhghjk 16y ago
  If that was true you would have most startups concentrated in heavily regulated places like california and the UK/Eu rather than all computer startups being in Africa
- jerf 16y ago
  It isn't binary, either good or bad. Maybe it attracts the best people (and I note you had to say "perhaps" since you are just speculating), but it definitely raises the costs of doing business quite substantially, which means less ability to hire, expand, or exist at all. That's not speculation, that's the entire purpose of regulation like this; the government directs you to spend money in this manner or go out of business, no third option. You must also consider that the California system as a whole, which includes its regulatation system, has become unaffordable and California faces the task of either tearing some of it down or raising taxes to make up for it, and one way or another you must account that negative to that system, too. It's easy to "politic" away the problem of unaffordability for quite a while, just as we have done, until suddenly it produces a result far worse than if we had done the putatively-inferior-but-actually-affordable thing in the first place. Unaffordability is not a political matter, it's an objective one that can't be argued away. And I emphasize the "has become" because that is now past tense, it has happened. The author is sticking to the facts of the cost of doing business, rather than speculating about IMHO rather nebulous possibilities of "retaining the best people". I think a rather good case could be made that whatever positive effects such regulation has, it passed the point of diminishing returns a long time ago. I don't live in California, and I do not feel a pressing need to move there so my boss stops beating me. (Yes, that is rhetorical, but the basic point stands. At some point regulations just add cost and not much benefit.)
  - ojbyrne 16y ago
rdl 16y ago
Most of the relevant factors for startups are due to people and culture of the valley, not the California government, but there are some which are actually due to the state government: California has a few big advantages due to the state: * Non-competes invalid * Well-understood legal system for startups And big startup-relevant disadvantages: * High taxes on income and especially capital gains (taxed at the 10.3% rate!!!) which force out some angel investors, and potentially reduce capital formation for new angels. * High cost of living (which makes engineers expensive, and hurts during bootstrapping) -- some of this IS due to California government decisions. Employment law, minimum wage, etc. don't really affect startups directly. "Uncertainty due to the state being bankrupt" is a major new negative factor, however. Even though the current situation still leaves SFBA as the top startup location in the world, I could see a dying California enacting new policies which change this.
- _delirium 16y ago
  People will be arguing over it forever (especially since people on different parts of the political spectrum want different answers to be true), but it's hard to say exactly what impact the high-tax/high-benefits regime had on Silicon Valley. As you imply, the taxes themselves are a negative, but some were spent on things directly relevant to Silicon Valley. One of the biggest was tons of university funding, especially up through the late-80s/early-90s (and especially compared to other states). In addition to the state generously funding UC Berkeley, Cal Poly, SJSU, etc. directly, Cal Grants used to pay full tuition for even private universities for CA high-school students above a certain academic threshhold, who chose to attend college within CA. That funneled lots of poor and lower-middle-class smart kids to in-state private universities, and indirectly subsidized the universities as well by having the state take on most of the need-based aid burden.
- hga 16y ago
  Unless and until there's another state makes non-competes invalid (or California reverses this century plus old public policy) it's hard to say just how important it is, but I think it's very important, at times clearly overwhelmingly important. The beginning of the silicon era of Silicon Valley simply wouldn't have happened without the exodus of the Traitorous Eight from Shockley Semiconductor followed by the exodus from Fairchild Semiconductor, and following that we've heard a lot about how cross-fertilization helped the industry move so quickly. On the other hand, I've personally experienced several startups that never got off the ground in Massachusetts and Virginia because one or more of the potential founders were restricted by a non-compete. In one case, a bunch of us just all did something else before getting back together.
ww8520 16y ago
California government did one thing right that few other states can match to encourage innovation - California Labor Code Section 2870. This single law negates many of the bullshit employment contracts required by companies to confiscate new idea and innovation from employees working at their home and at their own time. This actually helps to spawn off new startups. I will never move to and work in another state that doesn't have similar law.
- rdl 16y ago
  Few other states HAVE matched this, but it's one of the easiest legislative changes any state could make to advance new business creation. For non-US startup creation, I'd focus on "better" IP law, too. Most countries already don't have software patents.
- hga 16y ago
  Wow! I had no idea California has such a law, and I e.g. know that Honeywell's standard and no exceptions employment contract in Massachusetts in the early '80s was a nasty issue for some would be startups by Multicians. I always found such provisions to be more than distasteful, they start the whole relationship on a really sour note. As I and others have discussed elsewhere on this thread, sane and balanced employment law has had a critical positive effect on Silicon Valley. Given that SV is unique in the world, maybe an essential one.
DaniFong 16y ago
I was once asked by a Ghanaian student at Princeton how long it took to become incorporated. "What? I don't know. A day, and month? Something like that?" "and how much!?!" "Dunno. $150?" "My god -- I thought incorporation was the hardest thing." That's because in Ghana, it is. 3 years to get a permit! I suspect if you bribe the right people it would take only one year. But still -- a big advantage the US has in starting companies is that, somewhat tautologically, it is easy to.
spamizbad 16y ago
If California's state laws are truly a boot on the neck of entrepreneurs, by all means someone launch a startup in Alaska, New Hampshire, or Tennessee (The three states with the lowest tax rate and least amount of regulation) and prove this notable economist correct.
- natrius 16y ago
  That isn't a sound argument. Regulated California may be better than loosely regulated states, but that doesn't mean that an unregulated (EDIT: that is, more loosely regulated) California wouldn't be even better.
  - spamizbad 16y ago
    The tax/regulation issue can very easily become a red herring when it clashes with the reality of certain industries.
skybrian 16y ago
A correction: the article refers to Kevin Kelly as the "founder" of Wired, when actually it's Louis Rossetto. (I wonder what else they got wrong?)

20 points by grellas 16y ago

California has piled every imaginable burden on businesses. Minimum-wage laws are among the highest in the country, and health and safety regulations are among the strictest; cities like San Francisco and San Jose require businesses to offer employees health insurance; labor laws are extremely union-friendly; environmental policies drive up energy costs—and on and on. I have never heard anyone at justin.tv complain about the impact on our business of minimum-wage laws, health and safety regulations, mandatory health insurance, union-friendly labor laws or environmental policies. The article claims to be talking about things that hurt Silicon Valley startups, but I don't recognize anything that rings true in the above paragraph.

robryan 16y ago
I think he was talking about high tech manufacturing jobs, which can't be competitive with places like china given what must be offered to even employees undertaking basic manual labour.
- abstractbill 16y ago
  Later in the same paragraph, he says "...the cost of state regulations in 2007 reached an average of $134,122 per small business—the equivalent of one job lost per company." That doesn't seem to add-up if he's talking about minimum-wage manufacturing jobs.
  - mnemonicsloth 16y ago
    If you're going to question results published by a respected academic in a peer-reviewed journal, you really should mention that the results were published by a respected academic in a peer-reviewed journal. A recent study by Sanjay Varshney, dean of the College of Business Administration at California State University in Sacramento, estimates that the cost of state regulations in 2007 reached an average of $134,122 per small business—the equivalent of one job lost per company You could talk about their data or their survey methodology, but you sound like you're just scoffing because you don't like their conclusions.
    - abstractbill 16y ago
      No, I'm pointing out that the paragraph in the original article doesn't seem to add up. $134,122 is apparently the equivalent of one lost job. But that's not anywhere near the right figure for a minimum wage manufacturing job.
    - _delirium 16y ago
      It doesn't appear to have been published in a peer-reviewed journal, fwiw, and he carried it out not in his capacity as professor, but in his capacity as owner of the consulting firm Varshney and Associates, which was paid for doing the study. Doesn't make it wrong, but those two factors do make me give it somewhat less weight. Here's a copy: http://arc.asm.ca.gov/member/5/pdf/CostofRegulationStudyFinal.pdf http://arc.asm.ca.gov/member/5/pdf/CostofRegulationStudyFina...
Rod 16y ago
1) since when is justin.tv representative of the SV? 2) if you don't see how minimum-wage laws, health and safety regulations, mandatory health insurance, union-friendly labor laws or environmental policies can hurt businesses, then it's because you're not on the finance arm of such businesses.
- abstractbill 16y ago
  1) What company would you pick? Is justin.tv very atypical of current Silicon Valley startups in some obvious way I've missed? 2) I've been at justin.tv since long before we were big enough to have a finance arm. I may have little idea of how those policies can hurt really big companies, but the interesting thing about Silicon Valley isn't the big companies - it's the startups.
  - Rod 16y ago
    1) I would pick no company because the SV is not a homogeneous habitat. You have capital-intensive startups founded by PhD's trying to capitalize on 20 years of research... and you have startups bootstrapped out of lunchmoney by a couple of college dropouts who believe their new app will be a killer. Seriously, technology is more than the web. 2) generally speaking, imposing constraints can only decrease the maximum of the objective function one is trying to optimize; I did not say that such policies do hurt, I suggested it's not hard to see how they can hurt.
- cdavid 16y ago
  Most of those things could as well help business. Without data, it is rather difficult to say, especially since a lot of the points you raised are easy to see as cost, and their advantages less obvious to observe.
natrius 16y ago
Your office and your employees' homes are more expensive to rent because regulations make it expensive to build in California. The food you eat is more expensive in California because there is a high floor on the compensation required for the people who produce it. Your coworkers require higher salaries because it's more expensive to live in California. According to Salary.com's cost of living calculator[1], for every four $100,000 engineers in San Francisco, you can get five $80,000 engineers in Austin at the same salary percentile. Those five engineers would have a higher standard of living since it supposedly costs ~$60,000 in Austin to live like someone making $100,000 in SF. (I think that's probably a little low.) If no one is complaining about the impact of California's regulations on your business, then no one is thinking hard enough (or they've just resigned to the fact that things are unlikely to change). The benefits of being in Silicon Valley may outweigh the costs, but the costs of being in Silicon Valley could be far lower. [1] http://swz.salary.com/costoflivingwizard/layoutscripts/coll_start.asp http://swz.salary.com/costoflivingwizard/layoutscripts/coll_...
- _delirium 16y ago
  I'd suspect a larger portion of the cost-of-living difference is due to desirability of the areas, i.e. relative amounts of demand for each, more than it is due to state regulation impacting supply. People are willing to pay lots more to live in SF than they are willing to pay to live in Austin. It's a pretty easy trend to notice on the most/least affordable lists that seem to come out periodically. If you look at this list of top 5 and bottom 5 affordable cities to buy a house, the trend is that the most affordable cities are ones nobody wants to live in (Indianapolis, Dayton, etc.), while the least affordable cities are ones lots of people want to live in (NYC, SF, Honolulu, etc.): http://realestate.yahoo.com/promo/most-and-least-affordable-cities-to-buy-a-house-2010 http://realestate.yahoo.com/promo/most-and-least-affordable-.... Even true within CA: it's not particularly expensive to live somewhere like Bakersfield, despite all the same minimum-wage/environmental/etc. laws applying there too.
  - natrius 16y ago
    The Bay Area could have enough housing to accommodate far more people at lower prices without sacrificing desirability. It doesn't because of regulation. (Finding the water for those people is another story.) New York is similar.

kiba 16y ago

I wonder why it seem that some of the world's biggest economies move faster to the brink of economic destruction?

ojbyrne 16y ago

I'm impressed that it doesn't even cross the author's mind that his ideology might be completely wrong. Perhaps health insurance, labor friendly laws, strong environmental, health and safety regulations actually attract the best people.

lkjhghjk 16y ago
If that was true you would have most startups concentrated in heavily regulated places like california and the UK/Eu rather than all computer startups being in Africa
jerf 16y ago
It isn't binary, either good or bad. Maybe it attracts the best people (and I note you had to say "perhaps" since you are just speculating), but it definitely raises the costs of doing business quite substantially, which means less ability to hire, expand, or exist at all. That's not speculation, that's the entire purpose of regulation like this; the government directs you to spend money in this manner or go out of business, no third option. You must also consider that the California system as a whole, which includes its regulatation system, has become unaffordable and California faces the task of either tearing some of it down or raising taxes to make up for it, and one way or another you must account that negative to that system, too. It's easy to "politic" away the problem of unaffordability for quite a while, just as we have done, until suddenly it produces a result far worse than if we had done the putatively-inferior-but-actually-affordable thing in the first place. Unaffordability is not a political matter, it's an objective one that can't be argued away. And I emphasize the "has become" because that is now past tense, it has happened. The author is sticking to the facts of the cost of doing business, rather than speculating about IMHO rather nebulous possibilities of "retaining the best people". I think a rather good case could be made that whatever positive effects such regulation has, it passed the point of diminishing returns a long time ago. I don't live in California, and I do not feel a pressing need to move there so my boss stops beating me. (Yes, that is rhetorical, but the basic point stands. At some point regulations just add cost and not much benefit.)
- ojbyrne 16y ago

rdl 16y ago

Most of the relevant factors for startups are due to people and culture of the valley, not the California government, but there are some which are actually due to the state government: California has a few big advantages due to the state: * Non-competes invalid * Well-understood legal system for startups And big startup-relevant disadvantages: * High taxes on income and especially capital gains (taxed at the 10.3% rate!!!) which force out some angel investors, and potentially reduce capital formation for new angels. * High cost of living (which makes engineers expensive, and hurts during bootstrapping) -- some of this IS due to California government decisions. Employment law, minimum wage, etc. don't really affect startups directly. "Uncertainty due to the state being bankrupt" is a major new negative factor, however. Even though the current situation still leaves SFBA as the top startup location in the world, I could see a dying California enacting new policies which change this.

_delirium 16y ago
People will be arguing over it forever (especially since people on different parts of the political spectrum want different answers to be true), but it's hard to say exactly what impact the high-tax/high-benefits regime had on Silicon Valley. As you imply, the taxes themselves are a negative, but some were spent on things directly relevant to Silicon Valley. One of the biggest was tons of university funding, especially up through the late-80s/early-90s (and especially compared to other states). In addition to the state generously funding UC Berkeley, Cal Poly, SJSU, etc. directly, Cal Grants used to pay full tuition for even private universities for CA high-school students above a certain academic threshhold, who chose to attend college within CA. That funneled lots of poor and lower-middle-class smart kids to in-state private universities, and indirectly subsidized the universities as well by having the state take on most of the need-based aid burden.
hga 16y ago
Unless and until there's another state makes non-competes invalid (or California reverses this century plus old public policy) it's hard to say just how important it is, but I think it's very important, at times clearly overwhelmingly important. The beginning of the silicon era of Silicon Valley simply wouldn't have happened without the exodus of the Traitorous Eight from Shockley Semiconductor followed by the exodus from Fairchild Semiconductor, and following that we've heard a lot about how cross-fertilization helped the industry move so quickly. On the other hand, I've personally experienced several startups that never got off the ground in Massachusetts and Virginia because one or more of the potential founders were restricted by a non-compete. In one case, a bunch of us just all did something else before getting back together.

ww8520 16y ago

California government did one thing right that few other states can match to encourage innovation - California Labor Code Section 2870. This single law negates many of the bullshit employment contracts required by companies to confiscate new idea and innovation from employees working at their home and at their own time. This actually helps to spawn off new startups. I will never move to and work in another state that doesn't have similar law.

rdl 16y ago
Few other states HAVE matched this, but it's one of the easiest legislative changes any state could make to advance new business creation. For non-US startup creation, I'd focus on "better" IP law, too. Most countries already don't have software patents.
hga 16y ago
Wow! I had no idea California has such a law, and I e.g. know that Honeywell's standard and no exceptions employment contract in Massachusetts in the early '80s was a nasty issue for some would be startups by Multicians. I always found such provisions to be more than distasteful, they start the whole relationship on a really sour note. As I and others have discussed elsewhere on this thread, sane and balanced employment law has had a critical positive effect on Silicon Valley. Given that SV is unique in the world, maybe an essential one.

DaniFong 16y ago

I was once asked by a Ghanaian student at Princeton how long it took to become incorporated. "What? I don't know. A day, and month? Something like that?" "and how much!?!" "Dunno. $150?" "My god -- I thought incorporation was the hardest thing." That's because in Ghana, it is. 3 years to get a permit! I suspect if you bribe the right people it would take only one year. But still -- a big advantage the US has in starting companies is that, somewhat tautologically, it is easy to.

spamizbad 16y ago

If California's state laws are truly a boot on the neck of entrepreneurs, by all means someone launch a startup in Alaska, New Hampshire, or Tennessee (The three states with the lowest tax rate and least amount of regulation) and prove this notable economist correct.

natrius 16y ago
That isn't a sound argument. Regulated California may be better than loosely regulated states, but that doesn't mean that an unregulated (EDIT: that is, more loosely regulated) California wouldn't be even better.
- spamizbad 16y ago
  The tax/regulation issue can very easily become a red herring when it clashes with the reality of certain industries.

skybrian 16y ago

A correction: the article refers to Kevin Kelly as the "founder" of Wired, when actually it's Louis Rossetto. (I wonder what else they got wrong?)