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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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-.... 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.
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.
I suppose that's a possible hypothesis, but I'm skeptical. New York accommodates more people per square mile than anywhere else in the country, and your reason for why it's expensive is that it's not doing a good job accommodating even more?
California hasn't exactly been anti-growth overall. Los Angeles is a worldwide poster-child for unrestrained sprawl. The state not only allowed it to grow, but built a ton of freeways, making LA the world's first real car city. The Bay Area has not only interstates and state freeways, but county freeways, and stretches 75 miles across, with sprawl from Walnut Creek to Gilroy. And yet it's still expensive. Meanwhile, Portland has a strictly enforced Urban Growth Boundary, and it's cheap.
I suppose it's possible that in the 21st century, someone will show that there's an alternative possibility: a giant metropolis that, through less regulation, has cheap housing. Maybe Austin will become the utopia with 20 million people and $600 rents? We'll see...
> New York accommodates more people per square mile than anywhere else in the country, and your reason for why it's expensive is that it's not doing a good job accommodating even more?
Yes. Zoning restricts what can be built in the city, so less housing is built than the market demands. Skyscrapers everywhere probably wouldn't be too pleasant, so there's a place for regulation, but if you want prices to go down, loosening regulations will help.
> Meanwhile, Portland has a strictly enforced Urban Growth Boundary, and it's cheap.
Portland is only cheap relative to California and a few other cities. The growth boundary is part of the cause. That doesn't mean it shouldn't be done, but there are costs.
> California hasn't exactly been anti-growth overall. ... And yet it's still expensive.
California and most of the rest of America don't really control growth; they just force cities to grow horizontally rather than vertically. This is generally more expensive, and results in cities that are less walkable.
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.
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
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.)
In fact neither you nor he are right, and there is little connection either
way.
SV is where it is because (a) it got established here back in the late 50s, and (b) once established, hubs persist by default. And historically those factors were not what caused SV to be established here. Rather it was things like the universities,
the climate and scenery, and the adventurous atmosphere of the
Bay Area, which was already a magnet for optimists.
At most one could claim that SV and California's policies have
some of the same causes: that the optimists the Bay Area attracted also favored leftish legislation, at least a few decades ago.
On the last point, it seems to descriptively still be true, based on the outcomes of recent elections? SF itself is obviously quite to the left, but even within SV, Democrats almost always win, and pro-spending ballot initiatives usually pass with healthy margins, even when they involve tax hikes-- e.g. the 1% surcharge on >$1m incomes from 2004, or the recent high-speed rail bonds. HSR in particular strikes me as in line with a Bay-Area techie/leftish/optimist spirit, in favor of large, tech-flavored public works projects.
There are some "business conservatives" in the region, but somehow I don't associate them with tech or SV, Meg Whitman notwithstanding. When I think Bay-Area conservatives, I think east-bay hills and suburbs, or north bay, commuting in to the financial district, not Mountain View. But maybe that's not accurate?
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.
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.
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.
Since technology companies are a major cause of the high cost of living in Silicon Valley (by increasing the demand for housing by people who can well afford to pay), it's hard to see how you can reduce the cost of living without making Silicon Valley less attractive to entrepreneurs.
It's easy in principle if you focus on the supply side of the equation instead of just the demand side. Instead of decreasing the number of people looking for affordable housing, increase the supply of it.
In reality, so many people have a stake in the current level of housing prices that doing this will probably be impossible in practice, even if you have some stern court decisions backing such a push.
Supply is fixed by the amount of land, the consensus that remaining open spaces should be protected, and zoning laws in desirable communities that prevent higher density.
Of course this could be relaxed but that only buys us a few years before the new housing fills up and we're back where we started, but with a more crowded community, one step closer to Manhattan. The steady state in a built-up place like the bay area is zero growth in housing.
I think there are a lot of ways to in-fill housing in SFBA without affecting open space. Allowing tall skyscraper condos in downtown SF makes a lot of sense (and has been one of the major changes from 1995 onward); the continued replacement of light industrial with lofts (from the 1980s), and subdividing victorians into apartments (1920s?).
Most of this has been focused on SF itself. I'd be happy to see more apartment complexes in the 2-5 story range replacing single family homes in parts of the peninsula. Improving transit can also make the east bay and San Jose itself more viable. HSR will arguably make Stockton/Modesto an option for a lot of people.
Actual home space isn't the limiting factor I think. I'd like to see the supporting infrastructure be more dense and efficient (roads/transit, schools, utilities).
Of course, once I bank my first $250mm, I'd like a $20mm house in Palo Alto as it is right now, and a $10mm loft and $10mm house up in SF. :)
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.
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.
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.
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.
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.
37 comments
[ 3.4 ms ] story [ 82.0 ms ] threadI 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.
That doesn't seem to add-up if he's talking about minimum-wage manufacturing jobs.
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.
Here's a copy: http://arc.asm.ca.gov/member/5/pdf/CostofRegulationStudyFina...
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.
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.
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.
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_...
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-.... 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.
California hasn't exactly been anti-growth overall. Los Angeles is a worldwide poster-child for unrestrained sprawl. The state not only allowed it to grow, but built a ton of freeways, making LA the world's first real car city. The Bay Area has not only interstates and state freeways, but county freeways, and stretches 75 miles across, with sprawl from Walnut Creek to Gilroy. And yet it's still expensive. Meanwhile, Portland has a strictly enforced Urban Growth Boundary, and it's cheap.
I suppose it's possible that in the 21st century, someone will show that there's an alternative possibility: a giant metropolis that, through less regulation, has cheap housing. Maybe Austin will become the utopia with 20 million people and $600 rents? We'll see...
Yes. Zoning restricts what can be built in the city, so less housing is built than the market demands. Skyscrapers everywhere probably wouldn't be too pleasant, so there's a place for regulation, but if you want prices to go down, loosening regulations will help.
> Meanwhile, Portland has a strictly enforced Urban Growth Boundary, and it's cheap.
Portland is only cheap relative to California and a few other cities. The growth boundary is part of the cause. That doesn't mean it shouldn't be done, but there are costs.
http://www.kiplinger.com/tools/bestcities_sort/index.php?sor...
> California hasn't exactly been anti-growth overall. ... And yet it's still expensive.
California and most of the rest of America don't really control growth; they just force cities to grow horizontally rather than vertically. This is generally more expensive, and results in cities that are less walkable.
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.)
SV is where it is because (a) it got established here back in the late 50s, and (b) once established, hubs persist by default. And historically those factors were not what caused SV to be established here. Rather it was things like the universities, the climate and scenery, and the adventurous atmosphere of the Bay Area, which was already a magnet for optimists.
At most one could claim that SV and California's policies have some of the same causes: that the optimists the Bay Area attracted also favored leftish legislation, at least a few decades ago.
There are some "business conservatives" in the region, but somehow I don't associate them with tech or SV, Meg Whitman notwithstanding. When I think Bay-Area conservatives, I think east-bay hills and suburbs, or north bay, commuting in to the financial district, not Mountain View. But maybe that's not accurate?
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.
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.
In reality, so many people have a stake in the current level of housing prices that doing this will probably be impossible in practice, even if you have some stern court decisions backing such a push.
Of course this could be relaxed but that only buys us a few years before the new housing fills up and we're back where we started, but with a more crowded community, one step closer to Manhattan. The steady state in a built-up place like the bay area is zero growth in housing.
Most of this has been focused on SF itself. I'd be happy to see more apartment complexes in the 2-5 story range replacing single family homes in parts of the peninsula. Improving transit can also make the east bay and San Jose itself more viable. HSR will arguably make Stockton/Modesto an option for a lot of people.
Actual home space isn't the limiting factor I think. I'd like to see the supporting infrastructure be more dense and efficient (roads/transit, schools, utilities).
Of course, once I bank my first $250mm, I'd like a $20mm house in Palo Alto as it is right now, and a $10mm loft and $10mm house up in SF. :)
For non-US startup creation, I'd focus on "better" IP law, too. Most countries already don't have software patents.
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.
"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.