Joel Kotkin, in the Spectator, finds the former hub of innovation today sunk in decadence and decline.
‘We used to build the future. Then we designed it, now we just think about it’
The collapse of Silicon Valley Bank is the latest indicator that the Valley – site of nothing less than an economic miracle in recent decades – is now in big trouble. Other signs include mass layoffs in the tech sector and a post-pandemic real estate downturn. The Valley, it seems, is entering a period of decadence that raises the prospect of long-term decline.
The start of this decline has coincided with a shift from the physical to the virtual. The Valley’s roots were in the old engineer-driven economy, one connected to the rest of the country, and to working-class America – somebody, it’s easy to forget, has to make the hardware. Today tech is dominated by a cognitive elite of Ivy Leaguers, management consultants and MBAs. ‘We used to build the future,’ Leslie Parks, who formerly directed redevelopment efforts in San Jose, once told me. ‘Then we designed it, now we just think about it.’
But the Valley has slowly left the industrial battlefield – it has lost over 160,000 manufacturing positions over the past two decades. It bought into the idea that the unique genius of its financial and corporate culture would be enough for it to thrive and profit as production headed first to Japan, then China and, more recently, to other parts of North America.
This is a familiar story. Consider, for example, how British industry lost its edge: the Industrial Revolution created a new class of tycoons; then the tycoons’ sons sought a return to the aristocratic past, eschewing dirty factories for elegant postings in the City or a relaxed life in their country estates. More recently, Detroit’s world-beating automotive industry squandered its technological and manufacturing advantages in a rush, pushed by Wall Street and its own financial managers, to earn easy profits from inferior products.
To be clear, the Valley is not done as a major tech centre. It still boasts a venture capital community, a remarkable concentration of engineering and other management talent, powerful universities and the headquarters of some of the biggest companies in the world. And it remains home to many of the tech giants that now exploit their monopolistic advantages. But that is not the same thing as being the place where the world looks for a vision of the future, as it once was. Even if the Valley still matters, it may no longer dominate the future as its denizens once assumed it would. Instead, it will face fierce competition for tech supremacy – from other countries, and other parts of this one.
This reflects two different phenomena: rising competition from other regions – and an internal rot that has infected the Valley. In its first few remarkable decades, the Valley was defined by its openness, its culture of competition and connection to the general economy. The people who built it, such as David Packard and Bill Hewlett, Fairchild Semiconductor co-founder Robert Noyce, and Apple’s Steve Jobs were, foremost, industrialists. They had a vision of how to use new technology to enhance productivity and make money.
Over the last decade or two, the Valley has outsourced much of its industry. Apple produces two-fifths of its products in China, more than four times what is made in the United States. Other tech giants don’t make anything. Rather than trying to build a better mousetrap, big tech now makes much of its billions off surveillance – the source of the wealth generated by Google and Meta – and by disintermediating retail businesses. It is a far cry from the optimistic promise of a better tomorrow on which the Valley was built.
Three tech firms now account for two-thirds of all online advertising revenues, which now represent the vast majority of all ad sales, controlling in some cases upwards of 90 per cent of the market. Even in bad years, they can persist by laying off employees, relying on inertia to garner income without worry of competition in what the author David P. Goldman neatly summarises as ‘the transformation of disruptive tech companies into rent-seeking monopolies.’
Many progressives persist in seeing the Golden State, and particularly Silicon Valley, as harbingers of a better, greener, more egalitarian future. In the words of two leading academics ‘California Capitalism’ remains ‘distinctive,’ ‘a model of an environmentally friendly economy that epitomises fiscal responsibility, innovation’ as well as ‘inclusive, sustainable, long-term growth.’
This vision could not be further from reality. The stranglehold of mega-firms and the associated Wall Street and venture capital money machine has undermined competition in fields from video games to artificial intelligence to cloud services to the metaverse and AI. To be sure, there’s some competition among the giants, much as there was between aristocratic clans in Europe or Japan’s feudal daimyo, but there are vanishingly diminished opportunities for the sort of startup that made up much of Silicon Valley Bank’s deposit base. Tech today is largely a game played between giants who, if they see promising technology, simply acquire it. Tech entrepreneur turned author Antonio García Martínez has called the contemporary Valley ‘feudalism with better marketing,’ a ‘highly stratified’ quasi-medieval society ‘with little social mobility.’ With control of key markets, firms that columnist Michael Lind refers to as ‘toll-booth companies’ can exact money from consumers who have little choice of going elsewhere – a bit like feudal lords. And if these barons compete, it is against one another. Largely ignored has been the impact of these changes on the people who live in the Valley. In the Eighties and Nineties it was heralded as ‘an exemplar of middle-class aspiration.’ No longer. And that, too, is thanks in part to deindustrialisation.
The kinds of tech jobs being created in the Valley produce opportunities only for a narrow subset of highly skilled, well-connected or credentialed employees. The Bay Area has been described as ‘a region of segregated innovation.’ Lower- and even mid-level workers at firms such as Google sometimes sleep in their cars while others have been forced into mobile-home parks or even homeless encampments.
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Grub Street has bad news for the residents of Portland and Brooklyn.
There was a time, not so long ago, when Pabst Blue Ribbon and the term â€œhipsterâ€ were more or less synonymous. The watery budget brew was catnip for urban creatives, and business was thriving. In 2003, when the Times first took notice of PBRâ€™s bike-messenger cachet, the paper reported that sales had risen 5.3 percent the year before. It was the start of a boom. By 2009, sales were growing by 25 percent. In 2011, someone went on record with the Chicago Tribune to call it â€œthe nectar of the hipster gods.â€ David Chang put it on tap when he opened a Momofuku outpost in Toronto.
Despite the name of the Pabst Brewing Company, they donâ€™t brew the PBR that was beloved by everyone living in Williamsburg in 2009. For years, Pabst has outsourced its beer-making to MillerCoors, a relationship that has suddenly gone sour. The two companies are locked in a half-billion-dollar court battle that, some say, could spell the end of PBR, as well as many other beer brands that Pabst owns. Pabst currently pays MillerCoors nearly $80 million a year to brew its beer; MillerCoors says that, after 2020, it may no longer have the necessary resources available, and is threatening to let the contract expire unless Pabst agrees to a fee thatâ€™s closer to $200 million per year, an amount that Pabst contends would â€œbankrupt us three times over.â€ …
Pabst closed its flagship Milwaukee brewery in 1996. When Pabstâ€™s last brewery, in Fogelsville, Pennsylvania, closed in 2001, it shifted brewing responsibilities to Miller. In the meantime, Pabst was also focused on buying plenty of beer brands that werenâ€™t PBR, including Lone Star, Schlitz, and Schaefer (â€œthe one beer to have when youâ€™re having more than oneâ€). â€œWe own 77 brands, and 50 of them are dormant,â€ current owner Eugene Kashper told a New Jersey paper in 2015. â€œWe have a virtual monopoly on American heritage brands.â€
What Pabst doesnâ€™t own is a brewing complex to make its beer. The company did recently offer $100 million for a shuttered facility in North Carolina, but that breweryâ€™s owner, which is â€” wait for it â€” MillerCoors, made a counter offer of $750 million, effectively ending negotiations.
Pabst is stuck. Its products are brewed, packaged, and distributed by a rival who seems to have no interest and, MillerCoorsâ€™s lawyers argue, no obligation to keep the relationship alive. Now, according to the AP, Pabst â€œis seeking more than $400 million in damages and for MillerCoors to be ordered to honor its contract.â€
In The Story of a Norfolk Farm (1940), Henry Williamson recounts the story of his own less-than-successful efforts to straighten out the tangled business affairs of his bumbling brother-in-laws to be.
When Papa died, the Boys, as Loetitia called them, would have some money from the trustfund of their parents’ marriage settlement. One of them had an idea, How about trying to get some of that money now? Only a little part of it, of course, about one hundred pounds. It was fatiguing work, pushing on the treadle-lathe hour after hour. Now with a hundred pounds they could buy an oil-engine, and two more lathes, and turn out more work. Keen on the idea, they went to see a lawyer.
Certainly, said the lawyer, he would make inquiries on their behalf. The inquiries were so thorough that in less than a week he gave them the good news that much more than a hundred pounds could be arranged, if they liked. Why not sell all their reversions? Then they would have nearly three thousand pounds, with which they could enlarge their engineering shops more profitably. They thought him an awfully nice fellow to have taken such trouble for them, and agreed that it would be fine to have a big Works in the garden, right by the house, so convenient for business. So they signed the document; and a few months later, when Loetitia left to share the precarious life of an unknown and unconventional author, building began. They gave the job to a small local builder, to help them. There was no contract, no price agreed between them. When the building was finished, the little builder hired a cab, bought a barrel of beer, and drove around town visiting his friends. For a whole week the little man celebrated: the dream of his life had come true: suddenly he had a lot of money.
As for the Boys, inexperience and trust in human nature had resulted in a factory being erected with walls of only a single brick in thickness. Part of those walls fell down, and had to be rebuilt. Only the roof held them together. This had cost about Â£1600, but when the fire insurance inspector came to look over the completed building, he said that in the event of a total loss his company would indemnify them only to the full value of the building, which was Â£600.
This begins with the historical merchant banks. These were firms that helped fund the Age of Exploration, and grew along with their clients during the Industrial Revolution.
A merchant banker was knowledgeable in one or more lines of business, put his own money into investments, and gathered more investors based on his own reputation. A merchant banker was the finance department for his clients. He not only lent and invested, he advised on markets, delivered correspondent services, knew the broader economy, and participated in the risks.
That was a lot of hard work, and a lot of sincere risk taking, and the merchant bankers were well-respected. …
as government grew, it had a baleful impact on banking. Government imposed increasing regulation, it set ever more complex tax schemes, and it used capital markets for its own deficit financing. The classic â€œelephant in the bath tubâ€ of economic distortions.
By the 1970s, the investment banks, starting with Drexel, responded to these new signals. Investment banks began to disintermediate the commercial banks, with high yield bonds. Here, the investment banks acted as agent, not principal. They matched borrowers to investors but took no principal risk. That removed the need for capital, but also left the investors with both the default and liquidity risk. This further detached banks from clients, and in fact made them competitors in trading.
It turned out there were more â€” and more profitable â€” opportunities in arbitraging tax and regulation than there were in actually serving businesses. …
[T]he new-style investment bankers sold bonds to investors, and then traded against both the investors and the issuers, making a relatively safe turn on each sale. Or else they read the tax code, and fabricated deals that were tax-deductible debt for the IRS, but counted as regulatory capital for the other parts of government. Thatâ€™s easier and more profitable than actually building something.
In short, rather than solving real challenges, todayâ€™s investment banks work to exploit the growing incoherent web of government intrusions on the market. Profitable, yes, but not worthy of our respect.
Brett Arends, at Marketwatch, debunks Donald Trump’s claim to being sooo much more competent that all those professional politicians.
The Republican front-runner has made much of his supposed â€œsuccessâ€ in business and says he now wants to do the same for America.
But the only part of his business track record for which we have the full picture shows that Trump wasnâ€™t a successful executive but an absolute catastrophe.
For 10 years between 1995 and 2005, Donald Trump ran Trump Hotels & Casino Resorts â€” and he did it so badly and incompetently that it collapsed into Chapter 11 bankruptcy. His stockholders were almost entirely wiped out, losing a staggering 89% of their money. The company actually lost money every single year. In total it racked up more than $600 million in net losses over that period.
Trump was chairman of the board throughout the entire time, and CEO as well for about half of it.
This is the sort of record usually associated with an Enron or a WorldCom or a Pets.com.
Meanwhile, over the same period, all his competitors were enjoying an enormous boom. Take a look at our chart. …
Donald Trump ran the worst performing casino company on the stock market. This isnâ€™t a matter of â€œopinion.â€ This isnâ€™t speculation or politics. Itâ€™s a matter of plain fact.
However, one person associated with Trump Hotels & Casino Resorts did make money:
Donald J. Trump.
A review of the companyâ€™s public filings show that over that period, while his ordinary investors were getting hosed, Trump himself was siphoning millions out of Trump Hotels & Casino Resorts through salary, â€œbonusesâ€ â€” yes, really â€” and cozy â€œservice agreementsâ€ or side deals with his private corporations.
In total, Donald Trump pocketed $32 million over nine years, while his public stockholders lost more than $100 million.
Follow the money. It really isnâ€™t that complex.
Now his supporters want to put him in charge of the federal government. They actually hope he will do for America what heâ€™s already done for his business.