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.

Discussion

  • http://dannyman.toldme.com/ Daniel Howard

    *applause*

    I vote for Glenn.  Thanks for debunking the current dogma and daring to speak the obvious.  I might also note that the political system seems to suffer from a talent shortage, and I suggest you might keep that career option in mind if you get tired of entrepreneurship.  ;)

    -danny

    • http://blog.redfin.com GlennKelman

      I would be a terrible politician and I would hate it too but thanks for the kind words Danny!

  • http://twitter.com/chrisamccoy Chris McCoy

    Awesome stuff Glenn

    • http://blog.redfin.com GlennKelman

      Thanks Chris!

  • Jay

    Our K-12 school system is broken. Bill Gates just spent $5 Billion on education and didn't make a dent. Arne Duncan just passed out waivers so schools can catch a break on being accountable. Im pretty sure “competition” is a dirty word in the classroom. So we're going to teach our kids science and math so they can join a start up?  Great idea in theory, but what is a *real* plan to implement it ?

    • http://blog.redfin.com GlennKelman

      I do think Bill Gates is making a dent. It's easy to despair and assume nothing will get better, but maybe it's just happening slowly.

  • Kyle

    Glenn, I've read your blog for a while now, and this is the first time I've had to say I completely disagree. Could our schools do a better job? Absolutely. If they did, would that solve the issue with American labor in Silicon Valley? No way.
    No matter how good or bad our education system is, there have always been a proportion of students who graduate with the ability to be good at whatever they want. The problem is that Silicon Valley isn't convincing them to be engineers. You can teach a kid all the math and science you want, but there's some sure things every smart kid learns: I can be a Wall Street banker and get annual bonuses bigger than most families' paychecks; I can work hard to be a doctor or lawyer and I'll be considered rich and powerful; I can work hard to be a nerdy engineer and, if I'm pretty good at what I do, retire with the same paycheck that my lawyer friend will bring home on her first day. It may not be completely true, but it isn't very far off, either.
    Engineers definitely make solid working wages, but in my experience with start-ups, the best paid non-management engineers make less than the junior sales guys. Silicon Valley loves to import foreigners to be our engineers because they are cheaper than talent here in the USA, keeping wages for the rest of the engineers depressed at the same time. Plus, with an outsourcing plan practically being a requirement for VC funding, Silicon Valley has announced to every adolescent considering their career path that engineering is a sure way to watch your moderate-paying job disappear in ten years when even H1-B wages aren't low enough.
    The fact of the matter is that you can't push career paths on people by educating them better. You have to make kids WANT to be engineers, and the best way to do that isn't through education, it's by making engineering a more desirable profession in the USA.

    • http://blog.redfin.com GlennKelman

      Excellent point Kyle, but don't you think a movie like The Social Network — I've heard that more freshmen are signing up for computer science degrees than ever before — or just seeing Mark Zuckerberg's face on the cover of so many magazines, helps with that? I also tend to think that the world needs more than just engineers: mathematicians, physicists, writers, designers. Final point: we meet plenty of people with degrees in computer science who can't actually code. So quality of education matters too…

      • Kyle

        Perhaps what Silicon Valley really needs is a little more help from Hollywood? This sort of thing is great for getting people interested and making the engineer lifestyle more socially acceptable. I can appreciate that stronger education will improve abilities in all aspects of business. I'm just concerned with the idea that great technologists are a natural result of improved education. In my experience, success starts with desire, and that part is up to the industry searching for talent.

        I've also met many mysterious codeless graduates, and it lends some credit to the need for stronger education. On this one, though, I have to wonder how how many of those coders are only in computers because that's the direction their career counselor pushed them? In the end, I think we agree on the importance of both education and desire, but maybe we disagree on their weight.

  • Greg

    “We have a dozen projects that could become multi-million dollar businesses, but no one to lead them.”

    Where are you looking for these leaders? They exist, but they do not necessarily live in Silicon Valley. I live in the Midwest where startup opportunities are less common unless a person creates one or finds a startup willing to hire remote workers. Finding people interested in creating startups or initiating new lines of business within an existing company (like me) that live in other parts of the country might be an option to explore.

    • http://blog.redfin.com GlennKelman

      That's a good point Greg. We already have offices in San Francisco and, I suppose, Austin. Where do you live? And do you think you could recruit a small team?

      • Greg

        I live in the northern half of the Midwest (I prefer not to be specific in the comments). My team recruiting in the past has primarily been for technical positions, but I'd feel good about building a team containing more diverse roles.

        • http://blog.redfin.com GlennKelman

          Good to know Greg!

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  • Chris Diez

    Three cheers for our fearless leader!

    • http://blog.redfin.com GlennKelman

      Three cheers for you Chris!

  • http://www.aaronfyke.com Aaron Fyke

    Bravo.  The labor shortage ties in with the immigration reform debate and Bred Feld (and others') push for a startup visa.  A green card should be stapled to every graduating engineer's degree and we need an immigration system which rewards, and fast-tracks, bringing the best to this country.  Other countries are far ahead of us and our lumbering system.

    Here's a post from just a few days ago.
    http://www.feld.com/wp/archive

    • http://blog.redfin.com GlennKelman

      Absolutely agree Aaron; my colleague Matt Goyer was surprised I didn't emphasize this more…

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