High-Tech Industry Isn't the Solution to the Recession

Despite reports of rising wages, Silicon Valley will not solve the recession.

Aug. 14, 2009 — -- You may have been surprised by the news this week, announced by the U.S. Bureau of Labor Statistics ("After the Dot-Com Bubble: Silicon Valley High-Tech Employment and Wages in 2001 and 2008"), that wages have continued to climb in Silicon Valley right through this recession.

Indeed, the BLS statistics suggest that, in real terms, wages have jumped an average of $35,000 per year since 2001 for the average Valley technology worker, and that, in the words of reporter Scott McGrew of KNTV-NBC, "the greater pay means technology firms have the largest payrolls ever, pumping $60 billion into the economy -- far more than in the height of the Internet boom of 2000-2001."

This may seem like great news, at least for folks working for those technology companies. After all, where else in our crippled national economy can you find a similar oasis of prosperity and rising wages -- well, that is, outside of Washington, D.C.? Hey, everybody, let's move to San Jose, they've got jobs!

But if you look closer at these statistics, they aren't as wonderful as they seem at first glance. And, for this Valley veteran, I find these figures -- counterintuitively to the outside observer -- deeply disturbing. Let me explain why.

Let's look at the rest of the BLS numbers. First of all, keep in mind that the stats run from 2001 to 2008. Both dates are very important.

For one thing, 2001 wasn't 2000. I was running a business -- Forbes ASAP magazine -- both years. For most of 2000, with the dot.com bubble at the point of bursting, I couldn't pay enough salary to hang on to a lot of my employees. They were getting phone calls every day from my competitors and being offered -- even the youngest, least experienced kids -- huge salaries and impressive job titles. Just to stay in the game, I (or, more accurately, the Forbes family) was paying 25 year olds up to $70,000 per year for what in normal times would have been $30,000 per year jobs. And my competitors were offering more.

In comparison, by early 2001, it was becoming apparent that the Internet economy was going off the rails, and that the world really didn't need 16 online pet food stores. By mid-year, we had not only stopped hiring, but, as our advertising from the dot.commers dried up, we actually suffered an across-the-board salary cut. To save money, I even fired myself, taking a contributing editor position and promoting my executive editor to my old job with much less salary. It wasn't enough. Within months, Forbes ASAP, like most of its competitors, was gone.

The Bad Old Days of 2001

In other words, to measure Silicon Valley wages with a baseline of 2001 is to already start with a depressed figure.

Meanwhile, by comparison, the Valley's 2008 figures represent a very different distortion. The years from 2001 to 2008 were very good to Silicon Valley, at least for established companies. For one thing, they grew up: That is, instead of being whipsawed by the usual four-year, boom-bust cycle, frenetically hiring during good times and flinging people into the street during bad times, this time the more mature Valley companies -- Intel, Cisco, Apple, HP, Oracle, etc. -- for the first time, played the game conservatively. They hoarded their cash, were more judicious in their hiring, and grew as much through acquisitions of proven companies than expensive new market development.

As a result, when the market crashed and the economy froze last October, they were in better shape than most U.S. companies to take the shock -- and. indeed, several, including Intel and Cisco, maintained their R&D investment levels in order to come roaring out when good times return.

They also maintained and, occasionally, even increased salary levels for their employees that remained -- almost a first in high-tech history. Hence, the 2008 BLS numbers and the impressive gains since 2001 (not to mention, one suspects, that the 2008 survey came before the October crash).

That's the good news. Here's the bad.

With a closer reading of the BLS report, one finds that, even as wages were climbing during those seven years of the survey, 85,000 jobs were also lost by the region. In fact, the only areas in which total employment actually grew were in aerospace, pharmaceuticals, and scientific research -- in other words, not in the traditional Silicon Valley electrical engineering and software jobs.

I will even make the guess that most of those 85,000 lost jobs occurred in 2001-2002, when all of those dot.commers went home to their parents, and that job numbers grew slowly and steadily after that. So, rather than being the apparent job and wage boom that these statistics seem to show at first glance, what we are really seeing is a market that stripped out all of its volatility (and much of its risk) and that is now dominated by large, stable companies that have continued to reward their limited pool of employees.

Silicon Valley Is No Savior

In other words, if you think you can escape this recession by coming to Silicon Valley for work, forget it. In fact, just last month, Santa Clara County (southern Silicon Valley, including San Jose) saw unemployment reach just short of 12 percent. That's the worst unemployment in this area since the post-war crash of the late 1940s, when the Valley was mostly orchards.

But it is worst than that. What the numbers don't show you is that, the big established companies aside, Silicon Valley is economically very ill. Not mortally -- at least not yet -- but the Valley of myth, the Valley that sparked the digital revolution, that drove much of the new job growth and new wealth in the United States in the past two generations, and that transformed our daily lives forever, is now a fading shadow of its former self.

Government regulation (Sarbanes-Oxley, options expensing and now the White House's insane plan to crush the venture capital industry under banking-type oversight) and Washington's anti-Small Enterprise/pro-Big Business animus is quickly destroying the Valley's historically unique environment for growing entrepreneurs and new companies.

There is no available venture capital, the cost of running a start-up, in terms of time and money wasted on government paperwork (and probably taxes soon, as well), is through the roof, and there is no exit strategy -- i.e., a liquidation event where the risk-takers get rewarded for their success, such as an IPO -- other than selling out to one of the big companies.

That's the Big Bad News hidden in those apparently sunny Bureau of Labor Statistics figures. If Silicon Valley were healthy, those wages would have gone down slightly over the past seven years, as employees took pay cuts in order to participate in the high risk/high reward game of entrepreneurship. Instead, what was the greatest new company, new technology, new jobs, new wealth creation engine in history is now broken and sputtering along. Like any other aging business community, the fat cats are rewarding their own, while everyone else watches hope fade away.

High-Tech Industry in Low Spirits

And, if Washington thinks that the high-tech industry is going to pull the country out of the downturn as it has in the past, our government leaders better look elsewhere. Thanks to their efforts, Silicon Valley, still wearing a pretty face, is in grave condition.

This is the opinion of the columnist and in no way reflects the opinion of ABC News.

Michael S. Malone is one of the nation's best-known technology writers. He has covered Silicon Valley and high-tech for more than 25 years, beginning with the San Jose Mercury News as the nation's first daily high-tech reporter. His articles and editorials have appeared in such publications as The Wall Street Journal, The Economist and Fortune, and for two years he was a columnist for The New York Times. He was editor of Forbes ASAP, the world's largest-circulation business-tech magazine, at the height of the dot-com boom. Malone is the author or co-author of a dozen books, notably the best-selling "Virtual Corporation." Malone has also hosted three public television interview series, and most recently co-produced the celebrated PBS miniseries on social entrepreneurs, "The New Heroes." He has been the ABCNews.com "Silicon Insider" columnist since 2000.