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The Brave New World Comes to California

The Brave New World Comes to California
Technology has been a major force, but the current surge is unprecedented. The past five years, five technology companies grew in value by $2.7 trillion.
Technology Briefing


In a way not seen since the early days of the industrial revolution, the shift to a digital economy has created an enormous accumulation of wealth. Technology has been a major force in California for decades, but the current surge, and its extraordinary concentration, is unprecedented. In the five years from 2013 to June 2018, five technology companies grew in value by $2.7 trillion, the fastest increase in growth over a five-year period in American financial history. And, for the first time in history, the top five companies on the S&P 500 are in the same industry sector.

In past eras, even though we may have seen similar or even higher percentages of concentration among the top-five, they have been from diversified industries.

The clustering of so many top firms in Silicon Valley and the San Francisco Bay Area has generated an extraordinary, and youthful, coterie of the ultra-rich. In fact, 70% of the 56 U. S. billionaires under 40, live in California; 12 in Francisco alone. And, as the tech firms exploit their quasi-monopolies and enjoy exceedingly high profits, it's not costs that are likely to make them go elsewhere.

Three decades ago, the late futurist Alvin Toffler optimistically saw these tech firms as critical to creating "the dawn of a new civilization," with vast opportunities for societal and human growth. Instead, the tech economy seems to be creating greater inequality, especially in its Bay Area base. In fact, it appears we're heading gradually towards what the Japanese futurist Taiichi Sakaiya described as "a high-tech middle age," where only a wealthy few control the commanding heights of the economy and political life. Ironically, as recently as the 1980s, the San Jose area boasted one of the country's most egalitarian economies. Jobs in manufacturing, assembly, transportation and customer support helped middle, and even working-class families to achieve "the California dream."

The shift of employment from industrial to software industries has meant fewer opportunities for assemblers and other blue-collar workers. Over the past quarter-century, Silicon Valley has greatly expanded in information jobs, but it has lost over 160,000 manufacturing positions. The new software companies simply need fewer workers per dollar than traditional tech firms do; their revenues per employee are two to three times those of, for example, Intel. They also often employ non-citizens on temporary visas, who now constitute upwards of 40 percent of their workforce.

Ultimately, what has emerged is a region that is fragmented and divided. The high-tech community is largely isolated from the broader region and particularly from those parts of the region that are less fortunate.

The valley may be minting money for some tech workers but, as a Joint Venture Silicon Valley report showed, incomes have declined for the largely working-class Latino and African American populations.

In fact, the Bay Area has become "a region of segregated innovation, where the rich wax, the middle-class wanes, and the poor live in increasing poverty. Specifically, about 76,000 millionaires and billionaires call Santa Clara and San Mateo counties home. At the other end of the spectrum are the thousands of people who struggle to feed their families and pay their bills each month, with nearly 30% of Silicon Valley's residents relying on public or private assistance.

Under current circumstances, we can expect more of the same. The regional planning agency projects that barely one-in-five new jobs will be middle income; the rest will be at the lower end. At the same time, housing prices are so high that even many Google and Apple engineers are unable to afford a house in the area.

As a result, recruiting new workers has become increasingly difficult. In a 2014 survey of more than 200 business executives conducted by the Silicon Valley Leadership Group, 72% of them cited "housing costs for employees" as the most important challenge facing Silicon Valley businesses.

To demographers like Joel Kotkin, the society epitomized by Silicon Valley increasingly resembles that in Aldous Huxley's Brave New World. Those at the top, the Alphas, live in comfort. Families have been abolished except on reservations for misfits, and people widely enjoy a remarkable access to pleasurable pharmaceuticals and unconstrained, commitment-free sex in the city.

Huxley's future seems to eerily resembles the one favored by the Silicon Valley oligarchs. As author Greg Ferenstein notes, they house their workers in a largely childless, college campus environment, and they will pay women workers to freeze their eggs. Services are provided by low-wage workers, largely imported from the suburban fringes, much like the Deltas, Gammas and Epsilons of Huxley's world. In the Bay Area, the largest rise in poverty is in its exurbs, far from the best job opportunities.

Not surprisingly, the oligarchs have little trouble with this kind of relationship. Rather than expect and encourage their workers or consumers to grow and achieve greater independence, notably by owning houses and starting companies, they reject the idea of dispersing wealth. Gregory Ferenstein, who interviewed 147 digital company founders, says most believe that "An increasingly greater share of economic wealth will be generated by a smaller slice of very talented or original people. Everyone else will increasingly subsist on some combination of part-time entrepreneurial 'gig work' and government aid." Such part-time work has been growing rapidly, accounting for roughly 20 percent of the workforce in the U.S. and Europe and it's expected to grow substantially, according to McKinsey.

To keep the "hoi polloi" from becoming rebellious, numerous oligarchs, including Mark Zuckerberg, eBay founder Pierre Omidyar, Elon Musk and founder of seed funding firm Y Combinator Sam Altman, have embraced ideas that mirror policies in early industrial Britain that offered "alms" to the proletariat. This is intended to keep the masses from starvation and off the street. Notably, these ideas, including the "guaranteed minimum income," do not involve stripping the oligarchs of their own wealth, but having taxpayers provide guaranteed wages, free health care, free college and housing subsidies. This also has the virtue of helping the oligarchs expand the use of 'gig workers,' who do not receive benefits from their employers. Low-paying and inconsistent "gig economy" jobs are one of the prime reasons for rising poverty in the Bay Area.

For the next generation, such handouts, including housing subsidies, promise a future not of owned houses, but of rented apartments. The oligarchs have tried to push legislation that would allow developers to build such structures even when they are opposed by neighborhoods and violate established zoning. Unable to grow into property-owning adults, these workers will subsist as "rental serfs."

Wired magazine's Antonio Garcia Martinez has labeled this, 'feudalism with better marketing." In Martinez's view, above all is the new aristocratic class, " inner party" of venture capitalists and company founders. Well below them is an "outer party" of skilled professionals, well paid, but given high prices and taxes, living ordinary middle-class lives. Below them lies the vast population of gig workers, whom Martinez compares with sharecroppers in the old south, "...with the serfs responding to a smart phone prompt rather than an overseer's command." Further below still lie those who constitute, in Martinez's phrase, "the Untouchable class of the homeless, drug addicted, and/or criminal."

He describes a society that, as in the Middle Ages, is, "...highly stratified, with little social mobility." High prices make it all but impossible for those who are not highly affluent to own their homes. Workers in the gig economy, much less the "untouchables," have little chance to improve their lot.

How this unfolds and the policies that California ultimately adopts will be important, not just for it, but for the whole country. And that's the reason that we're immersed in what we've called the Second American Civil War. For better or worse, America's progressive intelligentsia sees in California's current politics the future of the country.

As discussed in our January 2018 issues, Peter Leyden and Ruy Teixeira have suggested that, "California is in the vanguard of every positive trend, from racial diversity and environmentalism to policing gender roles." "California," they insist, "is the future of American politics."

If this is so, feudalism will have a bright future, not only there, but across the country.

The state has upped its greenhouse gas goals to well above those of the Paris Accords, a seemingly impractical level. It has even committed to removing all fossil fuels from its electricity grid, a policy that seems almost certain to boost energy prices even higher. The new mandate for solar on new houses, for example, could increase house prices, already at absurd heights, by another $20,000 without doing much, if anything, to reduce greenhouse gas (or GHG) emissions, notes Mike Shellenberger.

Even though California's green regulators predict that the implementation of ever-stricter climate rules will have a "small" impact on the economy, a recent study by researchers David Friedman and Jennifer Hernandez demonstrates that California's draconian anti-climate-change regime has already exacerbated economic, geographic, and racial inequality.

In fact, the primary impact of climate regulations, as laid out by Friedman and Hernandez, has been to chase away historically well-paying jobs in manufacturing, energy and home building, all key fields for working- and middle-class Californians. And to make things worse, since 2007, the state has ranked a mediocre 35th nation-wide in GHG reductions.

And today's Californians have many reasons to seek change, if not for themselves, for the next generation. A recent Los Angeles Times poll found that only 17% of Californians believe the state's current 18-30-year-old generation is doing better than previous ones. Meanwhile, more than 50% thought they were doing worse. And, most Californians, both liberal and conservative, have expressed concern about the state's inequality, despite the national 'boom,' while a majority expressed dissatisfaction with the economy.

California cannot succeed based onlyon high-wage tech jobs and low-wage service ones. Yet, today the state projects that only two of the fifteen fields expected to grow by 2026 would be high-wage, and the average pay of all workers will be $41,000, barely a living wage in a high cost state.

Sadly, the state is driving regions to adopt policies that could exacerbate these feudal patterns. The 2040 "Plan Bay Area" regional plan calls for 75% of new housing development to take place on barely 5% of the land mass, all but guaranteeing even higher prices. One alternative scenario assumes that 78% percent of new housing in the Bay Area would be multi-family and just 22% would be detached or attached single-family. The clear majority of new housing would be rentals.

This approach will not do much to address climate issues: A recent UC Berkeley study suggests that enforced densification would save less than 1% of the new 2030 reductions mandated by the state, which is statistically meaningless.

More importantly, this doubling down on the state's current housing agenda represents a threat to the future of middle-class families in the state. Some proposals, supported in large part by tech oligarchs, addressed these shortages by stripping local governments of their ability to control high-density housing in their areas, an attempt that elicited widespread opposition even in progressive cities like Los Angeles, San Francisco and Berkeley.

Opposition to dense development remains strong in many coastal communities, including Silicon Valley. Similarly, the notion that more high-density housing, widely favored by most urban theorists and planners, will relieve the state's affordability crisis, neglects to acknowledge that this kind of construction is up to five times more costly per square foot than lower-density construction.

If there is one single accomplishment that could restore the friendliness of California to middle-income households, it is the restoration of historic middle-income housing affordability.

Given this trend, we offer the following forecasts for your consideration.

First, until forced by the Federal government and market forces, California will refuse to reappraise its energy agenda.

Going 100% renewable by 2045, as the state recently mandated, is likely to boost energy costs even higher, and put more strains on middle-class and working-class households. The state's aggressively green policies, including a shift from nuclear and natural gas to so-called "renewable energy," have pushed California industrial electricity rates to a level that is twice as high as those in such competitor states as Nevada, Arizona and Texas. In early 2018, state electricity prices were 58% higher, and gasoline over 90 cents per gallon higher, than the national average. These high prices are particularly devastating to traditional blue-collar industries. Manufacturing employment, highly sensitive to energy regulations, has declined by 160,000 jobs since 2007. And, California has benefited far less from the national industrial resurgence, particularly this past year. Manufacturing jobs-along with those in construction and logistics, also hurt by high energy prices-have long been key to upward mobility for non-college-educated Californians. Such costs also put stress on many poorer house- holds, particularly in the interior, where roughly 15% percent of residents live under conditions of "energy poverty."

Second, California will block the policies needed to reduce housing costs, until forced to change by the market.

As Los Angeles has pursued densification under state and regional policies, housing prices and rents have soared, but transit ridership has continued to drop. A UCLA report explains one factor has been the incentives for real-estate speculation that have driven out the area's predominantly poor transit riders.

Third, for the next decade, California's roads will keep deteriorating.

The current regime in Sacramento is not much interested in building new roads. Instead it has gone on a "road diet."

This is based on the notion that if you make road conditions bad enough people will embrace public transit. Yet, in recent years, billions have been spent on transit, while ridership has increased at only one-third the rate of working at home, which now represents a larger share of workers than those who take public transit. California also continues to fund an ill-conceived high-speed rail system with costs that have more than doubled since initial planning. Despite considerable scaling-back, it is more than ten years behind schedule and as many as two-thirds of

Californians no longer want to fund it. Meanwhile, California's roads are ranked among the worst in the country.

Fortunately, the private sector may address some of the problem with new technologies, including autonomous vehicles, aerial commuting and expanded ride sharing in lieu of conventional autos and public transit.

Fourth, the state will continue to resist investment in infrastructure with long lead-times, like bridges, water storage, energy transmission lines, water pipelines. and desalinization plants.

Governor Brown and his advisors have been especially reluctant to build new water storage or roads for fear that they might induce the growth of communities, particularly in the interior parts of the state, that don't fit California's green density model.

Fifth, over the next five-to-ten years, California and the Federal Government will fight over policies based on who they wish to serve.

However impressive the wealth creation in Silicon Valley, the state cannot thrive with its aristocracy living in coastal splendor, while as much as one-third of the population lives amidst long-term, persistent poverty. The needs of California's middle and working class will increasingly be opposed to the needs of the oligarchs and well-placed pressure groups. Truckers and warehouses use roads. Factories need reasonable energy prices; farms and urban communities need reasonable water prices; and droughts tend to impact smaller farming areas, such as those in the San Joaquin Valley or the Central Coast, with lots of poor people. Despite the rhetoric from some "urban containment" advocates, California has lots of open land. Barely 5% of the state is developed, if you include exurbs and suburbs.

A critical priority is creating policies that allow interior counties with very different populations and economic challenges to employ more growth-friendly policies. And,

Sixth, as long as there is no focus on middle class priorities, education dominated by public employee's unions will continue to falter.

Once a model of educational success, California now ranks 44th in the country in educational performance according to U.S. News. It has among the lowest reading scores for 8th graders in the nation. Latino academic achievement is also generally lower than in the rest of the nation. Even in Silicon Valley, half of local public-school students, and barely one-in-five blacks or Latinos, are proficient in basic math. San Francisco had "the lowest black student achievement of any county in California," as well as the highest gap between black and white scores.


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