The Magazine

Silicon Chasm

The class divide on America’s cutting edge

Dec 2, 2013, Vol. 19, No. 12 • By CHARLOTTE ALLEN
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Master and servant. Cornucopian wealth for a few tech oligarchs plus relatively steady but relatively low-paying work for their lucky retainers. No middle class, unless the top 5 percent U.S. income bracket counts as middle class. Silicon Valley is a tableau vivant of what many economists and professional futurologists say is the coming fate of America itself, a fate to which Americans, if they can’t embrace it as some futurologists hope, should at least resign themselves.

While I was driving with Berkey around Atherton, Tyler Cowen, economics professor at George Mason University and author of The Great Stagnation (2011), published a new book, Average Is Over: Powering America Beyond the Age of the Great Stagnation. There, Cowen bluntly predicted what he called “wage polarization.” The increasing ability of computers to perform ordinary tasks will inexorably transform America into an income oligarchy in which the top 15 percent of people—with skills “that are a complement to the computer”—will enjoy “cheery” labor-market prospects and soaring incomes, while the bottom 85 percent, that is to say, 267 million out of America’s 315 million people, will be lucky to find Walmart-level jobs or scrape together marginal “freelance” livings running $25-a-pop errands for their betters via TaskRabbit (say, picking up and delivering a pair of designer shoes from Nordstrom) or renting out their spare bedrooms (if they have any) to overnight lodgers via Airbnb. That is, if they’ll be working at all. “There are many other historical periods, including medieval times, where inequality is high, upward mobility is fairly low, and the social order is fairly stable, even if we as moderns find some aspects of that order objectionable,” Cowen writes in his new book. 

In other words, what is coming is the “new feudalism,” a phrase coined by Chapman University urban studies professor Joel Kotkin, a prolific media presence whose New Geography website is an outlet for the trend’s most vocal critics. “It’s a weird Upstairs, Downstairs world in which there’s the gentry, and the role for everybody else is to be their servants,” Kotkin said in a telephone interview. “The agenda of the gentry is to force the working class to live in apartments for the rest of their lives and be serfs. But there’s a weird cognitive dissonance. Everyone who says people ought to be living in apartments actually lives in gigantic houses or has multiple houses.”

It’s hard to travel anywhere in the valley and not see what Kotkin is talking about. I took a walk on the Stanford campus, which occupies more than 8,000 acres, including a golf course, rustic Santa Cruz Mountain foothills, and an artificial lake, all bordering Atherton-Menlo Park. Stanford’s most photogenic structure is its historic Main Quad, a handsome sandstone-colonnaded, red tile-roofed exemplar of early 20th-century California Mission Revival architecture built soon after Stanford opened its doors in 1885. The Main Quad is the Stanford of illusion-based public relations, in place for camera-clicking tourists and prospective students, hordes of whom crowded the quad’s palm-decorated courtyard during my visit, and also for sentimental alumni in fundraising material. The real Stanford is a second quad, the 20-year-old and ever-expanding Science and Engineering Quad, whose massive, corporate-headquarters-looking buildings dwarf the original quad in bulk and classroom space. And also in academic significance: Computer science is Stanford’s most popular major. Only 15 percent of Stanford undergraduates major in the humanities these days, according to a recent article in the New York Times. During the 1950s and 1960s, by contrast, the most popular undergraduate major at Stanford was history.

Beyond the Science and Engineering Quad lies Sand Hill Road, Stanford’s northern and western boundary. And on the other side of Sand Hill, strategically sited close to Interstate 280, a pristine and scenic freeway that runs along the foothills to San Francisco, are the offices of the venture capitalists on whose investor money the Silicon Valley’s tech-empire has been built. The VC guys, well-known names such as Marc Andreessen of Andreessen Horowitz and John Doerr of Kleiner Perkins Caufield & Byers, controlling about one-third of America’s venture funds, their offices conveniently close to their estates in Atherton, Woodside, Portola Valley, and Los Altos, occupy the very apex of the peninsula’s socioeconomic pyramid. With a pneumatic money-tube running from the Science and Engineering Quad straight up Sand Hill, it’s not surprising that Stanford’s computer classrooms have a reputation as Silicon Valley’s farm team. It’s a reputation that Stanford seems desperate to dispel by hastily constructing a brand-new campus arts center and touting its high-culture amenities.

Across El Camino from Stanford is Palo Alto, a once-sleepy college town whose poky bookstores and musical-instrument shops along University Avenue long ago gave way to Restoration Hardware, Lululemon, Whole Foods, the Apple Store, Starbucks, and dozens upon dozens of trendy restaurants. (A similar transformation has occurred in Mountain View, a formerly working-class town just below Palo Alto whose main drag, Castro Street, is now a nearly 100 percent foodie destination.) A charming Victorian neighborhood around the corner from downtown Palo Alto, nicknamed Professorville because so many Stanford faculty members lived there at the turn of the 20th century, houses hardly any professors nowadays—few of them can afford to buy a house in the $2 million range. (Stanford now supplies much of its faculty housing on its own campus.)

The same west-to-east trickle-down demographic prevails up and down the peninsula: tree-shaded property porn for tycoons in the foothills closest to the Pacific Ocean and million-dollar tract houses on modest-size lots in the sprawling valley center. San Francisco itself, although 30 miles north of the valley, has turned into yet another pricey valley outpost, spawning an entire literature of protest written by earlier generations of San Francisco gentrifiers against the “Google buses,” the white-painted free shuttles that daily cart youthful San Franciscans down the peninsula to the social-media campuses where they work. The price-pressure is exacerbated by the valley’s vise-like physical geography that crowds its residents onto the shoreline of the bay. The Santa Cruz Mountains, gorgeous with their shield of redwoods, Douglas firs, and California live oaks but mostly uninhabitable, occupy the bulk of the peninsula, so that the valley itself, technically speaking, consists only of the heart-shaped plain south of the bay between the Santa Cruz Mountains and their arid opposite number, the Diablo Range, which snakes up the bay’s east side.

In the industrial-zoned flatlands along the bay and along the truck-route Bayshore Freeway that runs alongside it are ethnic poverty pockets, mostly Hispanic and reputedly so crime-infested that few residents of other parts of the peninsula venture away from the through-traffic arteries transporting them to the Bayshore or to the Dumbarton Bridge that connects the peninsula to the East Bay. I discovered while gassing up my rental car one day that the Chevron station on University Avenue, just off the Bayshore in East Palo Alto and only a couple of miles from the Stanford campus, is a well-known haunt of squeegee artists and wraithlike crack beggars, even though it’s just across the road from an ultra-deluxe Four Seasons hotel.

Also along the Bayshore, strung like amber lumps on a statement necklace, are the high-tech behemoths of Silicon Valley, the biggest and most glamorous employers, and the names everyone knows: Oracle in Redwood City and, moving south, Facebook in Menlo Park; then Stanford the mother ship and, in Palo Alto, Tesla Motors and Hewlett-Packard, the latter founded by Stanford graduates Bill Hewlett and David Packard; and farther south, Google in Mountain View, LinkedIn and Yahoo in Sunnyvale, and Apple in Cupertino just below Sunnyvale. At both ends of this chain are startups: in San Francisco because hipsters like urban-scapes and group houses, and in San Jose because the living there is relatively cheap. But since three-fourths of startups fail, and the aim of nearly every startup entrepreneur is to be acquired by, say, Google, the “campuses,” as they call themselves, of the tech behemoths along the Bayshore dominate the valley’s economic and social landscape. It is that handful of companies that constitute Silicon Valley’s seemingly permanent tech oligarchy. They have also produced the valley’s celebrity billionaires on the Forbes list: Oracle founder Larry Ellison ($41 billion), Google cofounder Larry Page ($25 billion), Facebook founder Mark Zuckerberg ($19 billion), Apple founder Steve Jobs’s widow, Laurene ($12 billion), Tesla founder Elon Musk ($7 billion).

This was not always so. In the 1970s, the decade during which Silicon Valley got its name (its previous moniker had been the Santa Clara Valley and its chief product stone fruits), the area was an economically wide-open mecca that held out a graspable lure of middle-class prosperity to the middle-class engineers, often hailing from no-name schools, not Stanford, who flocked in to raise their families under the California sun in those then-affordable tract houses. The dominant companies of that era—Hewlett-Packard (Palo Alto), Advanced Micro Devices (Sunnyvale), Intel (Santa Clara), and later, Apple—were essentially manufacturing companies that built things (hardware and chips), so there were factory jobs for the working class. There was a democratic ethos. “During those 10 or 15 years, all you had to be was in the right place at the right time,” Samuel Abrams, a political science professor at Sarah Lawrence College, told me in a telephone interview. “It was a free-for-all, and the barriers to entry were very low.” Myths of origin, such as Hewlett-Packard starting out in the Palo Alto garage of David Packard, or Google starting out in 1998 in the Menlo Park garage of Google executive Susan Wojcicki, were grounded in reality. During the 1990s most of the manufacturing jobs disappeared, primarily to China, with the lowering of trade barriers, but the software revolution, generating startups all over the valley, kept the economy booming until the dotcom bust of 2000. 

Over the past decade, there has been another sea-change. The valley’s economic base has shifted from hardware and software to social media, where the profits come from advertising and the selling of users’ data. The Facebook campus, for example, occupies the former headquarters of the defunct components manufacturer Sun Microsystems, bought out by and merged with Oracle in 2010. Google occupies the former headquarters of the defunct Silicon Graphics, which made high-end computers and displays. The other shift has been to a venture-capital financing regime for startups that is “much more structured,” said Abrams. “There used to be a Wild West atmosphere, but now you’ve got angel investors and big players, and the small players all want to be bought by the big players. But still, if you can code, you can still do very well. People can still create new programs sitting in a coffee shop.”

The Google campus in Mountain View—because it’s the only one of the high-tech campuses where visitors are free to walk around (Facebook and Yahoo are barred by gates and security guards)—has become a required stop on the Silicon Valley tourist circuit. So I explored at noontime, taking in the huffing and puffing on Google-supplied bicycles painted in Google-signature primary colors, the posters for the Google-supplied free Thursday movies, the “Electric Car Lot” (Teslas, Volts, and Leafs), the parking-lot vans that offer everything from free dental checkups to free clothes-cleaning (today, it was a turquoise-blue “Pretty Palace” for female hair-styling), the Google Garden, a largely symbolic display of a handful of corn and tomato plants (who at Google has time to cook the stuff?), the similarly symbolic locavore Google recipe posted on the Google Garden fence (quinoa, scallops, and snow peas—who has time to make that?), and above all, the Google employees, cycling, walking with their baby strollers (Google offers free day care), eating under white outdoor umbrellas their Google-supplied free lunches catered by at least four different Google cafeterias. The Google male uniform (there aren’t many females in tech): a T-shirt or polo worn outside the pants with a clipped-on Google ID dangling from the hem. It was no country for old men. Males over age 50—make that age 40—who want a Silicon Valley job are advised to shave their heads, pull out their shirttails, and lose the watch (young people tell time exclusively from their iPhones).

Google is visually impressive, but this frenzy of energy and hipness hasn’t generated large numbers of jobs, much less what we think of as middle-class jobs, the kinds of unglamorous but solid employment that generates annual household incomes between $44,000 and $155,000. The state of California (according to a 2011 study by the Public Policy Institute of California) could boast in 1980 that some 60 percent of its families were middle-income as measured in today’s dollars, but by 2010 only 48 percent of California families fell into that category, and the income gap between the state’s highest and lowest earners had doubled. In Silicon Valley there has actually been a net job loss in tech-related industries over the past decade. According to figures collected by Joel Kotkin, the dotcom crash wiped out 70,000 jobs in the valley in a little over a single year, and since then the tech industry has added only 30,000 new ones, leaving the bay region with a net 40,000 fewer jobs than existed in 2001.

The big names in tech might be awash in capital and might have made their founders billionaires (New Economy founders typically retain large blocks of their own stock), but they employ surprisingly small numbers of U.S. workers. Google, the valley’s largest employer, has 46,000 people on its payroll. Facebook employs only 4,600, and Twitter, in San Francisco, fewer than 2,000. Apple claims 400,000 people putting together components and creating apps and other extras for its iPhones, iPads, iPods, MacBooks, and desktop computers. Yet only 16,000 of those are on the payroll in Cupertino. Another 31,000 work at Apple operations in Texas and other states, but the vast bulk of manufacturing is outsourced abroad via contractors to China and other cheap-labor purgatories. Yet those 16,000 in Cupertino make Apple the second-largest employer in the valley. Kotkin compares those numbers to the 212,000 employed by GM, the 170,000 employed by Ford, and the more than 100,000 employed by Exxon Mobil, all three presumably Old Economy dinosaurs. The New Economy generates prosperity all right, prosperity that mostly flows to those in the upper echelons.

Furthermore, the oligarchs of Silicon Valley seem intent on keeping the social pyramid stacked in exactly the same layers in which it’s stacked right now. After decades of political quietism during which Silicon Valley entrepreneurs expressed libertarian sentiments but mostly voted Democratic and funded Democratic candidates who shared their elite-class social and political views, Silicon Valley has finally mobilized—for immigration expansion. In April Mark Zuckerberg, with help from Yahoo CEO Marissa Mayer, LinkedIn cofounder Reid Hoffman, and venture capitalist John Doerr, launched FWD.us, a $25 million-and-counting lobbying group aimed at lawmakers in both political parties. FWD.us, unlike other pro-immigration groups, isn’t much interested in amnesty for illegal immigrants or easier border-crossing for lettuce-pickers. Its chief interest is in expanding the H-1B work visa program for “highly skilled” workers that’s mostly used by tech employers to hire temporary guest-workers from foreign countries, usually from East and South Asia. Valley executives have been calling for decades for H-1B expansion (the current cap is 65,000 visas annually, although thanks to loopholes and related programs, it’s actually about double that). During the 1990s the argument was that native-born U.S. programmers were set-in-their-ways oldsters (translation: men and women in their forties) whose brain cells couldn’t make the transition from, say, COBOL to more up-to-date coding languages. The new argument is that tech workers are in dangerously short supply, especially “the best, brightest, and hardest workers,” as New York City mayor Michael Bloomberg, an H-1B expansion advocate, testified before Congress in February.

FWD.us certainly has allies in the bay area’s substantial Indian community. At a gym in Fremont, a middle-income suburb directly across the bay from East Palo Alto that counts 40,000 Indians among its 222,000 residents, I interviewed 38-year-old Nikesh Kalra, Santa Clara-born of Indian immigrant parents, who, with an MBA from Oxford, is an executive for Equinix, a cloud-storage landlord headquartered in Redwood City. “The perception is that Indians are taking away good American jobs,” Kalma said. “The reality is that you Americans can’t turn out engineers fast enough.”

The anti-H-1B faction has a response to that: statistics. One of them, from an April 24 briefing paper produced by the liberal Economic Policy Institute, is that only one out of every two U.S. college graduates with a degree in engineering or computer and information science is hired into those fields, despite a doubling of the number of homegrown computer-science graduates between 1998 and 2004. Others argue that employers mostly don’t use H-1B workers to fill “best and brightest” jobs, but, rather, relatively low-paying routine programming positions, and that the most avid users of the visas are India-based outsourcing companies that use the visas to provide a few months of U.S. training for their employees, who then return to India.

Most damning of all is that, despite persistent claims of tech-worker shortages, programmer salaries overall have inched only slightly higher from what they were 20 years ago: from $60,000 a year to about $75,000 a year in 2012 dollars, according to the Economic Policy Institute. Engineers fare somewhat better: The average annual starting salary at top valley employers such as Google is about $100,000, with the median for experienced engineers at about $150,000. Even with the stock options many employers offer, that doesn’t go far toward buying even the smallest million-dollar valley house. A group of software engineers has a pending lawsuit alleging that four of the biggest employers—Apple, Google, Intel, and Adobe Systems in San Jose—violated federal antitrust laws between 2005 and 2009 by agreeing not to “poach” each other’s employees with offers of higher pay. 

On top of those perhaps deliberately depressed salaries and the high cost of existing housing are a raft of California “green” laws—enthusiastically supported, as one might expect, by the valley’s tech elite in a post-manufacturing economy—that make life there even more expensive, and family-friendly housing even less attainable. Renewable-energy mandates drive up utility costs, and environmentally driven land-use restrictions and “smart growth” plans have made the construction of new single-family homes in the valley all but impossible for everyone except those affluent enough to own a large-lot teardown.

Not surprisingly, the lower-echelon tech employees and midskill workers cram themselves into the enormous apartment complexes that line El Camino and some of its side-arteries, many of which are attractive enough for singles although not especially hospitable to raising children. Then they give up and move to Utah or Texas or some other state with lower taxes and cheaper housing, or they resign themselves to hours-long, traffic-clogged commutes to Fremont and other less expensive, less pretty suburbs across the bay in Alameda County, where housing prices are also rising but not quite so rapidly.

If you can manage to hoist yourself precariously—most likely via a high-earning spouse—into the valley “middle class,” you can lead a fairly comfortable, if extremely expensive life. You are, after all, living in one of the most beautiful parts of California, with the mountains and the Pacific Ocean at your back door, and, not far away, the luscious Napa Valley wine country and Sierra Nevada hiking and skiing. “The climate here is great, and the food is really good,” a midlevel tech executive told me over the telephone. “People talk about all the luxury cars that you see on the Bayshore Freeway, but if you’ve got a long commute, and your house isn’t all that big, spending money on a car that’s comfortable and makes you happy makes perfect sense. Fifty-thousand dollars, $75,000 for a car is nothing compared with your housing costs. That’s why people do it. And it’s not like Hollywood here, where if you don’t succeed, it’s winner take all, and you’ve got to go wait on tables for the rest of your life. Here, you might go to work for a startup, and if it fails, you’ve at least made a comfortable salary you can live on—and you can go to work for another startup. There’s a sense of community here. Everybody knows everybody, and you can make connections.”

The extreme economic and social inequality that characterizes Silicon Valley is not exactly the way it was supposed to be. Globalization and de-industrialization were supposed to free up Americans for better-paying, more interesting work; all they had to do was retrain themselves for the information age. The 2002 book The Rise of the Creative Class, by Richard Florida, then an urban studies professor at Carnegie Mellon University (he is now at the University of Toronto), urged Americans to embrace what Florida called “the knowledge economy” and touted high-tech entrepreneurs as massive job-creators. Florida launched a lucrative side-career for himself advising Northeastern cities ravaged by deindustrialization on how to attract some of those entrepreneurs and other affluent young professionals by reinventing themselves as hip, gay-friendly, arts-promoting hubs where the cool people would want to hang. As recently as late October of this year, Florida, in a blog entry for the Atlantic, was promoting Silicon Valley and its environs as America’s number-one jobs-generator. Florida wrote: “[H]igh-paying, high-tech jobs are key factors in economic growth and prosperity.”

The current long-running recession, together with the fact that most of the jobs that have been created recently are at the low-wage bottom, has led the futurists to adjust their rhetoric radically. They have switched from the manic-phase optimism of the 1990s and early 2000s to a combination of putting a happy face on middle-class disappearance and telling Americans to get used to it. Florida, for example, candidly admitted in one of his recent Atlantic posts that what he called the “talent clustering process,” the agglomeration of “highly skilled knowledge, professional, and creative workers” in “knowledge-based metros” such as Silicon Valley “provides little in the way of trickle-down benefits” to those lower on the scale of brains and education.

The bright-side-of-life school argues, au contraire, that the benefits will continue to trickle, if not exactly as palatably as the 1990s optimists envisioned them. That school includes Enrico Moretti, a labor economist at the University of California, Berkeley, writing for the Wall Street Journal last September: “For each new software designer hired at Twitter in San Francisco, there are five new job openings for baristas, personal trainers, therapists and taxi drivers.” Michael Mandel and Judith Scherer of South Mountain Economics, in a 2012 paper titled “The Geography of the App Economy,” arrived at a similar ratio, as long as you count pizza-deliveryman as a tech-economy spinoff job. Ray Fisman, a Columbia Business School professor writing in Slate, advised victims of deindustrialization to move to tech centers, where they could collect “more than a few crumbs” working as manicurists and lawn cutters for their more creative overlords.

Tyler Cowen in Average Is Over is more forthright. He advises the construction of Rio de Janeiro-style shantytowns for the 85 percent of Americans whose livelihoods will be swept away by the New Knowledge Economy he touts—although no shantytowns, please, in Cowen’s own neighborhood in upscale Fairfax County, Virginia! And also, says Cowen:

There is one final way in which we will adjust to uneven wage patterns and that is with our tastes. Many of society’s lower earners will reshape their tastes—will have to reshape their tastes—toward cheaper desires. Caviar is an expensive desire and Goya canned beans is a relatively cheap desire. Don’t scoff at the beans: With an income above the national average, I receive more pleasure from the beans, which I cook with freshly ground cumin and rehydrated pureed chilies.

Yes! Let them eat beans! Master and servant. Oligarchs and serfs. Two years ago the Occupy movement of progressives raised a battle cry against the “1 percent,” who were supposed to be striped-pants, Republican-voting tycoons lifted from the Monopoly board. What they didn’t know was that the 1 percent actually wear rubber shower sandals, ride bicycles—$20,000 bicycles—and vote Democratic and green, green, green. It was them. It was the future, and it has already arrived in the Silicon Valley.

Charlotte Allen, a frequent contributor to The Weekly Standard, last wrote on surrogate mothers. She is a graduate of Stanford.

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