The Only Thing Silicon Valley Really Needs from the Government

Inside Redfin

The Only Thing Silicon Valley Really Needs from the Government

With America’s economy in crisis, Silicon Valley has emerged as a new authority on how to create jobs. Mary Meeker at Kleiner Perkins has analyzed the U.S. government as if it were a high-tech business, arguing convincingly for a reduction in spending, while mostly restricting her comments on revenue increases to the less-helpful claim that not enough poor people are paying taxes at all.

Many in Silicon Valley share the point of view of my friend Prasanna Srikhanta, a software engineer at Clarium Capital, who yesterday quoted admiringly from the debt-crisis book, Endgame:

We will need 15 to 18 million new jobs in the next five years, just to get back to where we were only a few years ago. Without the creation of whole new industries, that is not going to happen. Nearly 20 percent of Americans are not paying anything close to the amount of taxes they paid a few years ago, and at least 10 million are now collecting some kind of unemployment benefits or welfare. The jobs we need will not come from government transfer payments. As we saw earlier, they can only come from private businesses. And in reality, as we discussed in previous chapters, it is business start-ups that are needed, as that is where the real growth in net new jobs are. And that means investment. But if we allocate our investment money to government bonds, if we tax the capital needed by entrepreneurs who invest in and start businesses, we delay that return to growth.

Their message is clear: the government has diverted capital from private enterprise. Taxes are too high. The government is too large.

Maybe they are right. Maybe these are America’s big problems. But these certainly aren’t the problems faced by Silicon Valley today.

For starters, the problem in Silicon Valley isn’t a lack of capital. With Russian investors promising to fund an entire class of startups sight unseen and Sequoia Capital telling its whole portfolio to raise money now, there is, by common consensus, more capital than we need. Sometimes it is hard to look into the seeds of time and say which grain will grow and which will not, but many, many grains are getting plenty of water and sun. And since interest rates on government debt are at historic lows,  the government is hardly competing for resources with entrepreneurs.

The problem isn’t muffled incentives either. You can’t throw a rock in Silicon Valley without hitting a would-be entrepreneur crazed to make her first million. Tax breaks already ensure that venture capitalists and entrepreneurs alike pay taxes on million-dollar paydays at a lower rate than the average middle-class family. If taxes were higher, the 24 year-olds starting companies today wouldn’t even realize it, much less be deterred.

The problem isn’t cumbersome regulations, which hardly affect companies with less than 100 employees. Most startups are a regulatory free-fire zone, in which engineers and sales-people are not entitled to overtime pay or other workforce protections. Entrepreneurs can hire or fire whomever we want with impunity, even when we are like Kurtz in the lawless world of “Apocalypse Now,” completely isolated and deranged.

The problem — the only problem, so overwhelming that it is shocking to me that entrepreneurs complain about any other — is human capital. There simply aren’t enough software engineers, mathematicians, writers, designers for most technology companies to fulfill their potential. With U.S. unemployment above 9%, Redfin has still had some positions open for more than a year. We have a dozen projects that could become multi-million dollar businesses, but no one to lead them.

The short-term solution is to import talent, ensuring that the U.S. is the obvious destination for the world’s smartest, most ambitious people. No one in Ghana or Brazil believes that she can pick up and start a business in China. But that is still the American promise, that you can come to America and become a king of our economy in a single generation.

We also need to retain talent in the sciences, by funding basic research. There are many people in labs creating the next Internet or a new cure for cancer, who have no clue how to commercialize their research or write a business plan that could attract funding; too many abandon research because government grant money has become so hard to come by.

But the long-term solution is that the U.S. must lead the world in education, in math, science and writing — not in business, marketing, or sales. We have to get better at designing and making stuff, and the stuff we have to make isn’t steel or toys or timber, the kinds of things that a post-war generation with a high-school education could easily manufacture.

The stuff we have to make now is the hard stuff, the stuff you need a degree in physics or computer science to make: solar panels, social networks, mobile-phone applications. The reason there is a widening gap between rich and poor in America, why there’s a Silicon Valley boom and a main-street bust, isn’t mainly because of  plutocratic government policies, but because there’s an education gap. Technology creates more and more leverage for educated people, who make more and more money.

So as a society, we need to invest more than we did 50 years ago in our human capital. This is not spending, which is just money you’ll never get back. This is an investment, in which we can all expect a return. There are conservative and liberal approaches to this investment. The conservatives believe we need to bust up the teachers’ unions so we can get more value for our money, and allow for more innovation with magnet schools and vouchers. The liberals believe that simply paying enough to attract and retain talented teachers is the answer. They’re both right.

The truth is the government’s relationship to Silicon Valley is like the parent of a gifted college student, hovering around, asking how to help and mostly being told “just leave me alone.” The parent can’t do much at this point in the student’s life, except to be the one blamed for everything wrong in the world.

But what the parent did many years ago really matters, and this is also true of the government. Redfin hires plenty of people who went to Andover for high school and Harvard for college; not enough of these people exist. Most of us went to public schools all the way through, and the ones who did often work the hardest and make the most of our opportunities. If the government hadn’t educated those people, we’d be up the creek.

We should stop talking about Obama’s or Bush’s or Clinton’s jobs-creation policy. The government can’t create jobs quickly. It can print money or not print money. It can police corruption and fraud. Its main functions, taxing and spending, have marginal effects on current economic activity. The rest of what the government does is all long term.

Current economic activity comes from people who know how to make the stuff that other people want, which has such immediate and obvious rewards that it requires no incentives whatsoever. We just need to make a collective, long-term commitment to create more people who can make stuff. That’s Silicon Valley’s problem, and that’s our only problem. We can take political positions on other people’s problems but they’re just that.

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