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The problem with this theory is that in the hypothetical midwestern city you describe, there is no incentive for anyone to pay Silicon Valley salaries. Everyone

The problem with this theory is that in the hypothetical midwestern city you describe, there is no incentive for anyone to pay Silicon Valley salaries. Everyone can live on less money, so that sets the baseline. Premiums or discounts are applied to that based on the rarity of the employee's skill set. If you're running a company, you have a limited amount of capital to work with. Your pay scale is determined by the markets you operate in - the prices competitors are paying for employees, and the prices competitors are charging for their product or service. You can't just say, "Well, I'm generous, I'm going to pay a million dollars a year to all of my employees." You'll be bankrupt in a month that way. The real estate price inflation you describe is a side effect of this process, not a main element. With the exception of situations where external capital enters the system to finance a bubble, as in much of the US and Spain in the early 2000s, it's the sign of a healthy local economy where functioning businesses can employ large numbers of people because they're all generating enough cashflow to do so. The alternative scenario -- Detroit -- is far, far uglier.

api 14y ago
Interesting that you bring up Detroit. Detroit once had the highest salaries in the US from the auto industry, and priced out everyone not involved in the auto industry. Then the auto industry crashed. That's not the only reason Detroit crashed, but it's a contributing factor. The others were racism and "white flight." Detroit sort of got a perfect storm. If something ever does massively disrupt Silicon Valley, I could see the Bay Area undergoing a nasty crash too. Probably nowhere near as bad as Detroit since it's a prettier place to live and is more diversified, but still ugly. SV today really doesn't appeal to me because it is nothing but hackers. There are no artists, no hippie bohemian weirdos, no writers. These people can't afford to live there. In fact, I'd say it's even worse. There aren't even many hackers doing truly creative projects outside startups running around looking for funding, because you can't do anything that isn't going to get you that big cash out effect. Not if you want to afford to live there. You also can't easily bootstrap without outside funding, which means you can't own your own stuff. You have to have a financier with deep pockets. All of that is the fault, primarily, of real estate hyperinflation.

api 14y ago

Interesting that you bring up Detroit. Detroit once had the highest salaries in the US from the auto industry, and priced out everyone not involved in the auto industry. Then the auto industry crashed. That's not the only reason Detroit crashed, but it's a contributing factor. The others were racism and "white flight." Detroit sort of got a perfect storm. If something ever does massively disrupt Silicon Valley, I could see the Bay Area undergoing a nasty crash too. Probably nowhere near as bad as Detroit since it's a prettier place to live and is more diversified, but still ugly. SV today really doesn't appeal to me because it is nothing but hackers. There are no artists, no hippie bohemian weirdos, no writers. These people can't afford to live there. In fact, I'd say it's even worse. There aren't even many hackers doing truly creative projects outside startups running around looking for funding, because you can't do anything that isn't going to get you that big cash out effect. Not if you want to afford to live there. You also can't easily bootstrap without outside funding, which means you can't own your own stuff. You have to have a financier with deep pockets. All of that is the fault, primarily, of real estate hyperinflation.