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Silicon Valley Is Detroit: Are Zoning Laws to Blame?

• December 19, 2013 • 8:41 PM

Intel headquarters in Silicon Valley. (PHOTO: WIKIMEDIA COMMONS)

Peter Thiel is concerned that innovation cannot afford San Francisco or New York City.

Detroit was yesterday’s Silicon Valley. Silicon Valley is well on its way to becoming tomorrow’s Detroit. Peter Thiel sounds the alarm to the Wall Street Journal:

WSJ: What’s holding back entrepreneurs and innovation?

Mr. Thiel: Let me give a Silicon Valley—and New York City—focused answer. We have to figure out ways to make housing more affordable in these places. When people start companies they are typically getting paid in equity and not a large salary. The way rent and housing costs have gone through the roof in a number of cities where people go to start companies is a tremendous problem.

Zoning rules, while well-intentioned, have had the effect of making it almost impossible for people to take a pay cut and make a leap. This is an underestimated challenge.

Today’s zoning rules are yesterday’s unions. Thiel is concerned that innovation cannot afford San Francisco or New York City. There is a term for that, economic convergence:

Apple engineers in Cupertino, California, conceived and designed the iPhone. This is the only phase of the production process that takes place entirely in the United States. It involves product design, software development, product management, marketing, and other high-value functions. At this stage, labor costs are not the main consideration. Rather, the important elements are creativity and ingenuity. The iPhone’s electronic parts—sophisticated, but not as innovative as its design—are made mostly in Singapore and Taiwan. Only a few components are made in the United States. The last phase of production is the most labor-intensive: workers assemble the hardware and prepare it for shipping. This part, where the key factor is labor costs, takes place on the outskirts of Shenzhen.

Emphasis added. For the innovation stage, labor costs aren’t a concern. For the manufacturing stage, labor costs are the primary concern. Innovation is diverging. Manufacturing is converging. The operative variable for distinction between economic divergence and convergence is cost of labor.

At first blush, Thiel’s plea for cheaper housing doesn’t fit Enrico Moretti’s economic model. Bottom line, Thiel scapegoats zoning laws as the reason would-be start-up talent won’t take the necessary pay cut. The employee needs to subsidize the employer. The end is nigh for Silicon Valley.

Moretti rings the bell of doom for Detroit when the price of people manufacturing automobiles becomes too dear. In San Francisco, the price for an innovator is now too dear. Peter Thiel said so.

Jim Russell
Jim Russell is a geographer studying the relationship between migration and economic development.

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