Tuesday, January 31, 2023

A Techtonic Shift In Economic Geography

Remote work weakened Silicon Valley's grip on the US economy. In early 2022, the Federal Reserve Board finished the job:

Because the Fed [had] distorted asset prices by making cash free, tech companies did not focus on cash earnings. Now we’re in an environment when cash earnings and dividends matter. Tech was in an environment that incentivised growth. Now all that has changed.

Big Tech's growth paradigm concentrated venture capital near Stanford University. This 20-minute rule informed what economist Enrico Moretti titled, The New Geography of Jobs:

If you look at the economic map of America today, you do not see just one country. You see three increasingly different countries. On one hand there are cities like Seattle, San Francisco, Raleigh-Durham or Austin, with a strong innovation-based economy and workers who are among the most creative and best paid on the planet. At the other extreme are former manufacturing centers like Detroit, Flint or Cleveland, where jobs and salaries are plummeting. In the middle, there is the rest of America, apparently undecided on which direction to take.

Regions are either cool city tech hubs or Rust Belt. Everywhere else was in the midst of economic restructuring. Moretti didn't offer much hope for the places still relatively dependent on manufacturing employment. But "undecided" America could aspire to attract young, college-educated adults. The best someone in Cleveland could do was move away.

Remote work threw the old geography of jobs a bone. VC firm Andreessen Horowitz moved to the cloud (but not out of Silicon Valley). Not only could someone living in Cleveland work in Silicon Valley, a startup could stay in Cleveland and thumb its nose at the 20-minute rule. In this sense, the forces of economic convergence were gathering.

However, Silicon Valley's Detroit moment was not yet at hand. During the pandemic, Big Tech got drunk on talent. Telecommuting cuts both ways. Apple or Google could offer software engineers in the Rust Belt San Francisco wages. Local companies could not compete in that labor market. For a spell, the growth of Facebook seemed limitless.

When the Fed started jacking up interest rates to tame inflation, the music stopped playing for startups first. Instead of rapid growth, venture capital went searching for positive cash flows. Then investors turned their attention to public companies and, eventually, Big Tech. Perhaps Amazon could produce more value with less workers. If you read Moretti's book or understand what happened to US manufacturing, that should sound familiar. The new geography of jobs is starting to resemble the old geography of jobs.

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