Silicon Valley has achieved a level of prosperity unmatched in human history. We’re geographically smaller than Rhode Island, but our collective wealth and regional output are on the scale of a G7 nation.
Yet we also have the world’s most pronounced income inequality, and our wealth gaps are staggering. The top tenth of Valley households hold 75% of the wealth; the bottom half, less than 1% of it.
In the 1990s, we were mostly a middle-class community with the normal range of outliers. Now we’re bifurcated, with roughly a third of our households not meeting self-sufficiency standards, and more than a third achieving wealth that was unimaginable a generation ago.
Is this a problem? Should we be concerned?
I’m not one to denounce capitalism. Most people think it’s better than any of the alternatives out there. But gaps the size of ours are breeding frustration and distrust, fraying the social fabric and creating the conditions for instability and upheaval.
These gaps have also put housing out of reach for all but a few, driving our children and grandchildren out of the region even though they’re making six figures. Our teachers? Our first responders? Skilled construction workers? They’re commuting from far-flung places to make it work.
Nobody can be happy about this.
Looking at it purely from the standpoint of self-preservation, you could say Silicon Valley is shooting itself in the foot. Why? Because our fabled dynamism has always depended on continuous inflows of new talent (especially among the young), and the promise of shared opportunity. Now it’s all in jeopardy.
So what do we do?
Within our reach
I must confess that for too long I have viewed the matter as beyond our reach, the stuff of ideology and national elections. Progressive taxation? Social insurance? Those debates unfold in Washington or Sacramento and in quadrennial elections.
But now I think this is a cop-out. Local leaders are not powerless. In fact, local decisions determine many of the outcomes relating to inequality, and we have the tools in our hands.
Housing is the premiere example of this. We simply don’t have enough — not even close. The scarcity drives prices into the stratosphere, but there are still enough high earners who can meet the price, so we spiral ruinously upward.
What many fail to appreciate is that the housing shortage functions like a regressive tax and becomes the central driver of Bay Area inequality. Housing is the culprit, not wages! And the shortage is the product of our own municipal decisions (zoning, permitting, land-use rules).
In other words, we’re doing this to ourselves.
I’m not saying it’s easy, but if we’re truly serious about our disparities we will demand that our representatives upzone housing near transit, speed up the permitting process, stop allowing the abuse of California’s environmental laws, incentivize office-to-residential conversions and promote employer-supported housing models.
If we don’t, then it’s our own fault. Prices will continue to rise, wealth will continue to concentrate among owners and you can say goodbye to your grandkids.
Local finance matters
Our inequality is also tied to the way we structure municipal finance, which currently creates disparities across our region.
Right now, Silicon Valley cities clamor for commercial development because their budgets depend on it. Retail generates sales tax. Office campuses build the property tax base.
Housing, pointedly, does not. In fact, it is quite often seen by local decision makers as costly and burdensome, or in any case failing to generate revenue. Small wonder our communities have a (perverse) incentive to dodge their housing quotas, even at the risk of penalty.
Over time, this dynamic greatly reinforces inequality. Cities with strong commercial tax bases accumulate resources and get further ahead. Others — often those housing more of the workforce — operate with less.
Similarly challenged regions have been bold enough to experiment. For example, Minneapolis-St. Paul found themselves looking at a kind of rapid suburban growth that created stark fiscal imbalances. Municipal competition was intense.
Then they enacted the Fiscal Disparities Program which had a simple premise: If a metropolitan economy functions as one labor market, its tax base should reflect that shared reality. Today, communities surrounding the Twin Cities contribute 40% of the growth in their tax base into a regional pool. They don’t touch residential taxes or existing wealth, just a portion of new commercial growth.
The pool is redistributed based on population and fiscal capacity by their Metropolitan Council. The results (going all the way back to the 1970s) have been durable. The system has stabilized municipal finances, reduced destructive forms of competition and is rooting out tax-based disparities.
This isn’t Scandinavian socialism I’m talking about. It was passed by business-friendly Republicans and a host of other suburban legislators like ours.
Nor am I suggesting you could just transplant this same model to California. You couldn’t. There would need to be creative adaptation.
Collaborate on solution
I am, however, arguing that Minnesota has shown us an important principle: When we take a shared approach to our fiscal responsibilities, we achieve balanced economic growth and create opportunities. If we don’t, we exacerbate the inequality we claim to deplore.
No, we can’t rewrite the federal tax code. No, we don’t need to bust out a new variant of capitalism. But yes, we can wrestle down our imbalances by expanding our housing stock, working as a team across municipalities and making smarter use of the policy tools we’ve already invented.
We didn’t become Silicon Valley by accepting constraints; we broke them. It’s time to bring that same pugnacity to our social and civic life. If we can’t make the region work for more people, then all our innovation will have missed the point.
Russell Hancock is the president and chief executive officer of Joint Venture Silicon Valley. He also teaches in the Public Policy Program at Stanford University.