Obama and Krugman's Cluster F**k

Progressives have been doing a lot of talking about "clusters" lately. For example, in his recent press conference, President Obama said:

[W]hen you’re president, as opposed to the head of a private equity firm, then your job is not simply to maximize profits. Your job is to figure out how everyone in the country has a fair shot. Your job is to think about those workers who get laid off and how are we paying for their retraining? Your job is to think about how those communities can start creating new clusters so they can attract new businesses. Your job as president is to think about how do we set up an equitable tax system so that everybody is paying their fair share that allows us then to invest in science and technology and infrastructure, all of which will help us grow. And so, if your main argument for how to grow the economy is, ‘I knew how to make a lot of money for investors,' then you’re missing what this job is about.

Paul Krugman, too, in a column earlier this year rhapsodized about clusters:

[A] great job creator ... is one thing that [Steve] Jobs definitely wasn’t. ... Why does Apple manufacture abroad, and especially in China? ... [China] derives big advantages from the fact that so much of the supply chain is already there. ... This is familiar territory to students of economic geography: the advantages of industrial clusters — in which producers, specialized suppliers, and workers huddle together to their mutual benefit — have been a running theme since the 19th century. ... The point is that successful companies — or, at any rate, companies that make a large contribution to a nation’s economy — don’t exist in isolation. Prosperity depends on the synergy between companies, on the cluster, not the individual entrepreneur. ... The case for [the automobile company] bailout — which [Republican Indiana Governor Mitch] Daniels has denounced as “crony capitalism” — rested crucially on the notion that the survival of any one firm in the industry depended on the survival of the broader industry “ecology” created by the cluster of producers and suppliers in America’s industrial heartland. If G.M. and Chrysler had been allowed to go under, they would probably have taken much of the supply chain with them — and Ford would have gone the same way. Fortunately, the Obama administration didn’t let that happen.

All this talk goes back to the work that Krugman and Michael Porter did in the early 1970's on business clusters. According to one definition:

[A] business cluster is a geographic concentration of interconnected businesses, suppliers, and associated institutions in a particular field. Clusters are considered to increase the productivity with which companies can compete, nationally and globally.

That is, at some point in time and for various reasons, a particular industry reaches critical mass in a particular geographical locale. The critical mass of this industry facilitates and stimulates the interaction of individual local businesses in that industry with each other and fosters the development and growth of new local businesses in that industry. New workers and businesses are attracted from the outside and move to the cluster. This is a classic feedback loop. Hayek described this kind of spontaneous emergent self-organization in the late 40's.

The fallacy that Messrs Obama and Krugman are subject to in their analysis of clusters is when they argue that the cluster can be promoted, engineered into existence, as it were, or prevented from disintegrating, by centralized government industrial policy. The example of Silicon Valley shows the fallacy of this reasoning. There was no concerted government program after WWII to transform the sleepy farming community of San Jose into the high-tech capital it has become today. Instead, the development took place haphazardly, in a way not unlike the evolution of a biological ecosystem, where new business mutations and combinations sprang up and were tested in the crucible of local and international competition.

The idea that intelligent bureaucrats in a central government have enough knowledge at precisely the right time to be able to create such business clusters through industrial engineering is what Hayek labeled "The Fatal Conceit." According to Hayek, the driving force creating order is not centralized government, but rather the spontaneous, dispersed, self-organizing operation of a multitude of independent agents communicating information through the pricing mechanisms of markets and operating with detailed information about their particular lines of business, information that is available to them alone, and not to some omniscient overseer.

It is simply vanity for Messrs Obama and Krugman to believe they possess the kind of varied, real-time, dispersed knowledge that is possessed and acted upon in real-time by the thousands of workers of Silicon Valley. It is also simply vanity for them to believe that preventing failed American automobile companies from going bankrupt and being reorganized and restructured by market forces was a good thing. This was simply a postponement of the kind of creative destruction that Schumpeter found to be so fertile. It is precisely this kind of creative destruction that constantly tests and tempers high-tech companies in Silicon Valley and makes the Valley's economy so much more resilient than the economy of Detroit.

Mr Obama and the Democrats would have us believe that they know best and can best plan about everything: about our health care, about banks and financial institutions, about automobile companies, about energy. This is the fatal conceit of the Progressives. America and states like California will continue to struggle and stumble until the ossified, all-centralizing, constricting Keynesian ideology of these Progressives is swept away.

As a closing aside, if Progressives were genuinely concerned about preserving clusters and communities, they wouldn't pass dictatorial mandates ordering religious institutions to provide contraceptives and abortifacients in their insurance plans against their consciences, mandates that serve only to undermine age-old Catholic institutions and communities across America.

Obama Bites the Brahmin Hands that Feed Him

Felix Salmon recently made some snide remarks about private equity and venture capitalists:

IPOs, like leveraged buyouts, are financial tools used by financial professionals to make money. Those financial professionals surely like to think of themselves as job creators. But their real job is to make money, not jobs. [emphasis added]

These remarks are almost certainly a swipe at Mitt Romney, echoing the charges being made by the Obama team against Romney's activities at Bain. For example, in his recent press conference, the President said:

But understand that their priority is to maximize profits. And that’s not always going to be good for communities or businesses or workers…And when you’re president, as opposed to the head of a private equity firm, then your job is not simply to maximize profits. Your job is to figure out how everyone in the country has a fair shot. Your job is to think about those workers who get laid off and how are we paying for their retraining? Your job is to think about how those communities can start creating new clusters so they can attract new businesses. Your job as president is to think about how do we set up an equitable tax system so that everybody is paying their fair share that allows us then to invest in science and technology and infrastructure, all of which will help us grow. And so, if your main argument for how to grow the economy is, ‘I knew how to make a lot of money for investors, then you’re missing what this job is about.’ [emphasis added]

What the Progressives don't realize is that by attacking Romney's activities at Bain, they are essentially demonizing the entire private equity and venture capital community. This community has deep roots in California and has been a faithful donor to Democratic political causes there and nationwide. Furthermore, one of the most prominent members of the private equity community is Richard Blum, Chairman and President of Blum Capital, one of San Francisco's most widely respected private equity/leveraged buyout firms. Mr. Blum is also the husband of California Democratic Senator Dianne Feinstein.

We can imagine the brahmins of the California private equity and VC community are not pleased by President Obama's demonization of them. That is likely why Senator Feinstein has been so dismissive of President Obama's attacks on Bain. Said Feinstein of the attacks: "It’s done. Go on to other things now."

The ineptitude and hypocrisy of the Obama team and his Progressive backers is remarkable. First they turned their Wall Street donors against them with their attacks on "fat cat bankers." Now, with their sneering characterizations of venture capitalists as "finance professionals who like to think of themselves as job creators," they are starting to insult their California VC and private equity donors.

Maybe next time President Obama makes one of his fly-ins to Moffett Field and snarls traffic all up and down the Peninsula while being whisked to his latest Silicon Valley fundraising dinner, one of the VC brahmins who ends up sitting at the dais next to him can tell him to stuff a sock in it and let him know that Silicon Valley is proud of its VC-backed economy. We are not, after all, Michigan.

The Attack on the Silicon Valley Business Model Continues

The attack on the Silicon Valley business model continues. Reuters finance blogger and sometimes NYT columnist Felix Salmon attempts to debunk the idea that "IPO's create jobs:"

Once upon a time, when IPOs were primarily ways for young, fast-growing companies to raise the capital they needed to continue to grow, there was a strong case to be made that they helped create jobs. Today, however, IPOs are something else entirely. If there were more IPOs, that might be a good thing, but it’s silly to believe that we’d have more jobs that way. IPOs, like leveraged buyouts, are financial tools used by financial professionals to make money. Those financial professionals surely like to think of themselves as job creators. But their real job is to make money, not jobs. And so while there are reasons to bemoan the lack of IPOs in recent years, this idea — that we’d have many more jobs right now if there had only been more IPOs — isn’t one of them.

Once again, we have a commentator who likely has never set foot inside of a Silicon Valley company pronouncing on the merits of the Silicon Valley business model. Salmon entirely misses the point.

Let me stipulate that IPO's are simply one event along the way to the establishment of a successful young company. Say what you will about the actual IPO, there can be no denying that new jobs are created by young Silicon Valley companies coming into existence and growing. In the last several decades, these companies have usually been on the cutting edge of technology and have represented the future of American business. They have been founded by small teams of "heroic" entrepreneurs and engineers and have generally been funded at some point by venture capital. Their workforces are not unionized. At some point, many have gone public.

I have participated in 3 successful IPO's over my career. None of these companies existed in 1985 (to go all the way back to the earliest days; after all, what Mr Salmon seems to forget is that it's not just about an IPO; it takes years, sometimes decades of hard work to establish a successful young company). In its most recent 10-K, the first company states: "As of December 31, 2011, we had a total of 2,554 employees." In its most recent 10-K, the second company states: "As of November 30, 2011, we employed 2,965 persons." In its recent S1, the third company states: "As of January 31, 2012, we had 727 employees." I am currently still employed at the third company and I know that we are hiring as fast as we can. These three companies, all with market capitalizations in the low billions, are just a few of the medium sized companies in Silicon Valley.

So, ignore Felix Salmon's irrelevancies. The fact is that VC-funded, IPO-driven Silicon Valley has been one of the few segments of the economy that has generated a significant number of new, well-paying jobs over the last several decades. Entrepreneurs, funded by venture capital, have created high-tech companies with non-unionized workers who participate in equity. Yes, these companies sometimes go public and generate a profit for the VC's that funded them. That's the whole idea! More importantly, they continue to grow and create additional jobs and encourage the development of even more venture-funded companies, creating even more jobs. This is the beneficial virtuous cycle that in my lifetime has transformed a sleepy farming community into Silicon Valley, one of the great economic engines in the world today.

Sierra Club Joins Progressive War against Progress

WSJ reports:

[N]ot too long ago the Sierra Club and other greens portrayed natural gas as the good fossil fuel. The Sierra Club liked natural gas so much (and vice versa) that from 2007-2010 the group received $26 million in donations from Chesapeake Energy and others in the gas industry, according to an analysis by the Washington Post. Some of that money was for the Beyond Coal campaign.

...

Researchers at Harvard's School of Engineering and Applied Sciences found that electric power plants reduced their greenhouse gases by 8.76% in 2009 alone [a remarkable reduction in a single year; imagine, for example, if President Obama had cut federal spending by a similar amount in one year]. Most of the carbon reduction was driven not by mandates or regulation but by the economics of lower gas prices. The lead researcher, professor Michael McElroy, says: "Generating one kilowatt-hour of electricity from coal releases twice as much CO2 to the atmosphere as generating the same amount from natural gas, so a slight shift in the relative price of coal and natural gas can result in a sharp drop in carbon emissions."

...

So why is the Sierra Club suddenly portraying natural gas as a villain? The answer surely is the industry's drilling success. The greens were happy to support natural gas as a "bridge fuel to the 21st century" when it cost $8 or more per million BTUs and seemed to be in limited domestic supply.

But now that the hydraulic fracturing and shale revolution has sent gas prices down to $2.50, the lobby fears natural gas will come to dominate U.S. energy production. At that price, the Sierra Club's Valhalla of wind, solar and biofuel power may never be competitive. So the green left has decided it must do everything it can to reduce the supply of gas and keep its price as high as possible. [emph. added]

...

The Sierra Club campaign underscores that the modern green agenda is about far more than clean air and water and protecting wildlife. The real goal is to ban all fossil fuels—regardless of economic cost. It's hard to imagine a campaign that poses a greater threat to the U.S. economy, energy security and American health. [emph. added]

The Progressive War against Progress in General

In two recent posts (here and here), I have written about The Progressive War against Computer High-Tech Companies. A more fitting title would have been The Progressive War against Progess in General. For, the Progressive movement is waging war not only against computer high-tech companies, but also against innovative companies in other industries as well. Their latest target in this war against progress is Chesapeake Energy Corporation (CHK) and its CEO Aubrey McClendon.

CHK is one of the main practitioners of two new technologies used to recover large amounts of previously unrecoverable shale gas: hydraulic fracturing (or "fraccing") and horizontal drilling. In a chapter entitled "The Natural Gas Revolution" in his recent book, The Quest: Energy, Security, and the Remaking of the Modern World, Daniel Yergin, one of America's foremost energy experts (and, IMO, a future Secretary of the Department of Energy), describes these technologies and their impact:

"Fraccing ... injects large amounts of water, under high pressure, combined with sand and small amounts of chemicals, into the shale formation. This fragments the underground rock, creating pathways for otherwise trapped natural gas (and oil) to find a route and flow through to the well. ... Advances in controls and measurement allowed operators to drill down to a certain depth, and then drill on an angle or even sideways. This would expose much more of the reservoir, permitting greater recovery of gas (or oil) from a reservoir. ... Shale gas [and oil], heretofore commercially inaccessible, began to flow in significant volumes. Combining the advances in fraccing and horizontal drilling is what would unleash what became known as the unconventional gas revolution. ... In 2000 shale was just 1 percent of natural gas supply. By 2011 it was 25 percent, and within two decades it could reach 50 percent. ... Electric utilities, remembering gas shortages and price spikes, had been reluctant to use more natural gas. But now, with the new abundance and lower prices, lower-carbon gas seemed likely to play a much larger role in the generation of electric power, challenging the economics of nuclear power and displacing higher-carbon coal, the mainstay of electric generation. As a source of relatively low-priced electric power, it created a more difficult environment for new wind projects. Shale gas also began to have an impact on the debate on both climate change and energy security policy. By the beginning of this decade, the rapidity and sheer scale of the shale breakthrough -- and its effect on markets -- qualified as the most significant innovation in energy so far since the start of the twenty-first century. ... The potential here is enormous.

In spite of the tremendous promise of abundant, domestic, low-carbon natural gas, Progressive writers at the Rolling Stone (The Big Fracking Bubble: The Scam Behind Aubrey McClendon's Gas Boom) and the New York Times (Drilling Down: Insiders Sound an Alarm Amid a Natural Gas Rush) have in recent months mounted repeated attacks against the practitioners of fraccing and horizontal drilling, in particular Chesapeake and Mr McClendon. These attacks have consisted of essentially three charges:

• Fraccing is an environmetal disaster; surface pollution results from waste water that flows back out of the well; waste water and methane is released into adjacent water aquifers as a result of fraccing operations; fraccing and drilling operations transform bucolic landscapes into industrial wastelands.
• The promise of abundant, domestic natural gas is a mirage. The amount of proven natural gas reserves is far smaller than what is being promised by the fraccing companies. Companies like Chesapeake are inflating a "bubble" or engaging in "a Ponzi scheme," hoping, on the one hand, to persuade greater fools that the natural gas leases that they are "flipping" are richer than they actually are, while, at the same time, engaging in complex "Enron-like" financial transactions to conceal the weakness of their balance sheets. For example, Jeff Goodell of the Rolling Stone writes: "[The claim that there is enough natural gas to supply America for 100 years] is a great example of the kind of misleading rhetoric that Chesapeake – and the natural gas industry as a whole – specializes in. The assertion deliberately confuses what geologists refer to as the 'resource' and the 'reserves.' The resource is basically all the natural gas that geologists believe exists; the proved reserve is what they believe is currently recoverable at today’s prices, with today’s technology. The resource is indeed close to 100 years; but according to most calculations (including the Potential Gas Committee, a respected source that is cited by Chesapeake), the reserve is more like 11 years. The actual amount of gas we’ll be able to get out of the ground in the future depends on factors like price and demand and whether new technologies can be developed to get at hard-to-extract gas, and whether or not you care that it requires blasting and drilling our way through suburbs and national parks."
• Practitioners of fraccing and horizontal drilling like Aubrey McClendon, CEO of Chesapeake, are nothing more than <gasp> right-wing politicians, in the same mould as the evil Koch brothers. Goodell writes: "McClendon dominates America's supply of natural gas the same way the Tea Party-financing Koch brothers control the nation's pipelines and refineries. Like them, McClendon is an influential right-wing power broker."

These concerns all appear to be grossly overblown or simply irrelevant.

A report produced by Mr Yergin's Cambridge Energy Research Associates (CERA) provides a less hysterical assessment of environmental impacts:

Of the potential environmental impacts of shale gas development, none has raised more public concern than the fear of contaminated drinking water supplies. The focus of this controversy is on the hydraulic fracturing process and its potential to contaminate drinking water aquifers. However, the consensus among geologists, petroleum engineers, and government reports is that such an event is highly improbable. ... At present there is no evidence that liquids used for hydraulic fracturing of deep shales can migrate upward to contaminate drinking water aquifers, and there are strong geological arguments to the contrary. However, the disposal of wastes associated with hydraulic fracturing must be properly managed and regulated, as is the case for all other wastes from natural gas production. ... Oil and gas operations are widespread throughout North America, and drinking water supplies have been appropriately safeguarded from contamination from these activities for many years. This suggests that the risks can be managed and that shale gas development can proceed safely, with proper industry management and regulatory safeguards in place.

CERA's findings are confirmed by a report produced by MIT on the future of natural gas:

With over 20,000 shale wells drilled in the last 10 years, the environmental record of shale gas development is for the most part a good one. ... [T]here is substantial vertical separation between the freshwater aquifers and the fracture zones in the major shale plays. The shallow layers are protected from injected fluid by a number of layers of casing and cement — and as a practical matter fracturing operations cannot proceed if these layers of protection are not fully functional. Good oil-field practice and existing legislation should be sufficient to manage this risk.

On the other hand, a report from the U.S. Energy Information Administration (EIA), the statistical and analytical agency within the U.S. Department of Energy, lays to rest the concern that the supplies of shale gas are less than what is being claimed:

The U.S. Energy Information Administration's Annual Energy Outlook 2012 (Early Release) estimates that the United States possessed 2,214 trillion cubic feet (Tcf) of technically recoverable natural gas resources as of January 1, 2010. Natural gas from proven and unproven shale resources accounts for 542 Tcf of this resource estimate. Many shale formations, especially the Marcellus, are so large that only small portions of the entire formations have been intensively production-tested. Consequently, the estimate of technically recoverable resources is highly uncertain, and is regularly updated as more information is gained through drilling and production. At the 2010 rate of U.S. consumption (about 24.1 Tcf per year), 2,214 Tcf of natural gas is enough to supply over 90 years of use. Although the estimate of the shale gas resource base is lower than in the prior edition of the Outlook, shale gas production estimates increased between the 2011 and 2012 Outlooks, driven by lower drilling costs and continued drilling in shale plays with high concentrations of natural gas liquids and crude oil, which have a higher value in energy equivalent terms than dry natural gas.

In other words, the estimate of "reserves" is simply the most conservative estimate of what resources are available while the EIA's estimate of "technically recoverable resources" is a more liberal estimate. There is no reason to believe that the estimate of "reserves" is a better predictor of what amount of gas will eventually be recovered. As a matter of fact, the estimate of "reserves" is regularly updated as more gas resources are "production-tested" and new extraction technologies are developed. If Mr McClendon is engaging in "misleading rhetoric," then, so is the EIA, the US government agency responsible for official estimates about natural gas resources.

As for Mr Goodell's claim that the recovery of unconventional natural gas resources will require "blasting and drilling our way through suburbs and national parks," could there be a more obvious attempt to prejudice the discussion in advance? And, as for the right-wing political views of Mr McClendon, they have absolutely nothing to do with the technical questions of the value of fraccing and horizontal drilling and the exact amount of natural gas supplies, but obviously are also interjected to bias RS's and NYT's left-wing readers against Mr McClendon.

IMHO, the Progressive writers of the Rolling Stone and the New York Times are opposed to Mr McClendon not for technically sound reasons at all, but simply because he has right-wing political views and because his company is offering technologies that promise to postpone development of Progressives' preferred energy resources of the future, wind and solar (sources, which, by the way, themselves have their own environmental downsides, namely, windmills' potential to destroy vast flocks of migratory birds and solar's potential to blight vast tracts of land with ugly solar panels). As Yergin writes: "As a source of relatively low-priced electric power, [shale gas] created a more difficult environment for new wind projects."

Thus, Progressives continue to wage war against high-tech companies that introduce revolutionary technological innovations in order to advance their own backward, ideologically driven agenda, an agenda that threatens, on the one hand, to kill off American computer high-tech industries with charges of racism, tax avoidance, and lack of concern for preserving American jobs and, on the other hand, to condemn America to energy impoverishment by keeping us dependent on oil from Islamo-Fascists or uneconomical, immature energy sources like wind and solar. How Progressives could adopt a more "anti-Progessive" agenda it is hard to imagine.

Full disclosure: Along with Carl Icahn and BlackRock, two of the most astute energy investors in the world, I am long CHK. I hope thereby to make an enormous profit, something that Progressives these days seem to find utterly abhorrent, unless, of course, they are seeking to tax it.

A further aside: One of the most revolutionary (and lucrative) advancements in computer technology is the use of computer software and hardware to perform geological modeling. It is this modeling, along with sophisticated computer-driven sensors and monitoring systems (Yergin's "advances in controls and measurement"), that has enabled the fraccing and horizontal drilling revolution. Presumably, Progressives would view those hardware and software engineers who have developed this technology, not as having made a productive contribution to society, but as having sold out to Dick Cheney.

Progressives Train Sights on Facebook, Construct Berlin Wall to Keep Most Successful In

The Progressive war on high-tech industry continues unabated. Once again the Democrats are telling high-tech billionaires that it's not enough for them to be the engine of growth that is driving the national economy. Instead, they need to pay more taxes!

Eduardo Saverin, one of the original investors in Facebook, is now worth billions. Saverin has decided that he wants to renounce his United States citizenship and move to Singapore. By doing so, he will avoid paying some US taxes, although his US tax bill will still mount into the hundreds of millions.

Now, most of us would think that if one individual had helped to create thousands of jobs and billions of dollars in wealth and had generated hundreds of millions of dollars in tax proceeds to the government, he would have made an adequate, "fair" contribution to society. But not the success-envying Democrats. Democratic Senators Chuck Schumer and Bill Casey have decided to introduce legislation, called the Ex-PATRIOT Act (“Expatriation Prevention by Abolishing Tax-Related Incentives for Offshore Tenancy” Act) to punish anyone who tries to do what Saverin is doing. According to a press release on Schumer's website:

The senators called Saverin’s move an outrage and described a plan to re-impose taxes on expatriates like Saverin even after they flee the United States and take up residence in a foreign country. Their plan would also bar individuals like Saverin from reentering the country so long as they continued to avoid paying their taxes in full. ... Under the proposal, any expatriate with either a net worth of $2 million or an average income tax liability of at least $148,000 over the last five years will be presumed to have renounced their citizenship for tax avoidance purposes. The individual will then have an opportunity to demonstrate otherwise to the IRS by meeting specific IRS requirements. If the individual has a legitimate reason for renouncing his or her citizenship, no penalties will apply. But if the IRS finds that an individual gave up their passport for substantial tax purposes, then it will prospectively impose a tax on the individual’s future investment gains, no matter where he or she resides. This would eliminate any tax benefit and financial incentive from renouncing one’s citizenship. The rate of this capital gains tax will be 30 percent, in keeping with the rate that is already applied on non-resident aliens for dividends and interest earnings.

Apparently, Schumer and Casey aren't acquainted with average net worths in Silicon Valley. Heck, just owning your house outright in many cases will get you half way to $2M. Throw in a few stock options from a successful venture or two and, well, suffice it to say that many residents of Silicon Valley would end up being subject to the provisions of Schumer and Casey's legislation.

So, what the Democrats are essentially saying is: if you try and fail in America, well, we don't give a fuck about you because you're not worth anything to us. But, if you risk everything and make it in America, we will hold you hostage. You will not be able to move to a more tax friendly country without paying confiscatory taxes for doing so. Just as the Federal government under Obamacare will tell you what health care treatments you are allowed to seek, so now they will be the sole arbiter of whether you have "a legitimate reason for renouncing your citizenship." After all, we are all in this together.

Do Messrs Schumer and Casey have any idea what effect such a hare-brained scheme would have on venture capital investing in the United States? In essence, Silicon Valley will be surrounded by a kind of tax-based Berlin Wall to lock people in. Before this happens, all the denizens of Sand Hill Road will simply up and move to Singapore, taking their money and the software jobs they would create in California with them.

Saverin has responded:

I am obligated to and will pay hundreds of millions of dollars in taxes to the United States government. I have paid and will continue to pay any taxes due on everything I earned while a U.S. citizen. ... In 2004, I invested my life’s savings into a start-up company that initially was run out of a college dorm room. Since then the company has expanded dramatically, has created thousands of jobs in the United States and elsewhere, and spawned countless new companies across the United States and other countries. I will continue to invest in U.S. businesses and start-ups, and believe and hope that those investments will create many new jobs in the U.S. and globally. I also hope that these investments will create opportunities for many other individuals to start companies and benefit society.

When are the high-tech voters of Silicon Valley going to wise up? The Democrats have declared war on us. If Schumer and Casey get their way, they will drive venture capital investing and the software jobs that remain in California from our shores.

Bob

I have made two posts (here and here) to my blog concerning racial diversity in Silicon Valley. In these two posts, I have noted that there are very few black software engineers in Silicon Valley. This does not mean that outstanding black software engineers and computer scientists do not exist. I want to point out one in particular: Bob Bell at AT&T Labs. Bob's expertise is in the fields of statistics and machine learning. He was a member of the team that won the Netflix Prize, awarded for developing software that could do a better job of predicting the movies customers would like than Netflix’s own in-house software, Cinematch. You can read more about Bob's credentials here. Bob is way smarter than I am. Any software engineering operation would be absolutely delighted to have Bob on their staff.

It is interesting to note, however, that the ethnic distribution of the staff at AT&T Labs confirms the general assertion I have made in my two earlier posts, namely: although the percentage of blacks and Hispanics in the population of (software) engineers is significantly lower than their percentage in the general population, nevertheless software engineers as a whole are a very diverse group, if, by diversity, you mean a mix of individuals from every corner of the world, You need only to peruse AT&T Labs' staff directory yourself to convince yourself of this fact. The ethnic mix of the AT&T staff would be familiar to anyone who has worked in a software development operation in Silicon Valley.

So, now the $60K question: Is AT&T Labs a racist organization because the percentage of blacks on its staff is lower than the percentage of blacks in the general population? I, for one, do not believe this to be the case. Why would AT&T Labs, when they so obviously are willing to hire computer scientists of all ethnic backgrounds, discriminate against blacks, especially if there is some hidden pool of immensely talented Bob's somewhere. Unfortunately, the situation is not like the old Negro Leagues in baseball. Then, it was obvious to anyone who cared to look that there was an enormous pool of very talented black ballplayers. I just do not see the equivalent deep pool of black computer professionals. I don't know why that is. But that doesn't make it less of a fact.

But I am growing disgusted with this discussion. I have not made my posts in order to malign blacks, Hispanics, or women as a group for not having contributed more software geeks to society. I have merely wanted to make the point that it is unfair to insinuate that high-tech companies are racist or sexist because blacks, Hispanics, and women are underrepresented on their engineering staffs. I feel as if I have gone too far. The very people who work on these staffs would be repulsed to hear themselves being discussed in terms of their ethnicity (or any other inessential characteristic, like sex or sexual preference). What these people want you to remember them for is their technical ability, and, in rare cases, like Bob, their technical brilliance.

There could be no surer way to kill the marvelous institution of AT&T Labs than to introduce inessential considerations like racial or sexual quotas into its engineering hiring policies. Let's keep Silicon Valley, and high-tech in general, quota-free.

And, btw, all you little black kids out there, one day Bob is going to leave AT&T Labs and start a software company and become the next Mark Zuckerberg. Think it over.

Forward!

How desperate! His record is so abysmal that Obama does not dare to run on the past. To distract us from his wretched actual performance of the last 3 years, he tries to focus our attention on a nebulous future. Hope and change redux. More like: the last hurrah.

OK, President Obama, we will accept your premise: you want to talk about how you will lead us forward. What, then, do you propose to lead us forward into? More trillion dollar deficits and greater national debt? Further downgrades of our sovereign credit rating? Higher taxes? A world where energy prices are sky-high because we won't take advantage of abundant North American natural resources? A permanently stagnant economy barely able to grow at 2% per year? Ever lower workforce participation rates? More race baiting and class warfare and red-versus-blue division? More pandering to government service employee unions? More government interference in our lives?

Don't think about it. Just keep moving forward! Thus cried the lead lemming.

The Progressive War on Apple and Other High-Tech Companies

Over the past year, various Progressive scolds, acting as proxies for President Obama and the Democratic Party, have mounted a concerted attack against various high-tech companies in Silicon Valley, in particular, Apple. For example:

• Last August, avowed socialist Harold Meyerson attacked Apple for not creating more manufacturing jobs in America.
• Last November, CNN reporter Julianne Pepitone accused Apple and other Silicon Valley companies of not having diverse enough workforces, thereby implying that high-tech companies like Apple are racist.
• In January, New York Times reporters Charles Duhigg and Keith Bradsher attacked Apple for not employing enough American workers. Yesterday in the Times, Duhigg and David Kocieniewski excoriated Apple for not paying enough state and federal taxes.
• In January, Nobel prize winning economist Paul Krugman argued that jobs are not created by "heroic entrepreneurs" like Steve Jobs, but by actions like President Obama's bailing out of GM and Chrysler.

These attacks all have a common theme: although they are among the most profitable companies in the history of American business, high-tech companies like Apple are not "companies that make a large contribution to the nation’s economy" -- to use Krugman's dismissive phrase -- because they pursue business goals rather than social goals. So, for example, high-tech companies do not go out of their way to hire African-American or Hispanic workers to achieve the goal of racial diversity in their workforces. Nor do they go out of their way to preserve unionized American manufacturing jobs to achieve the goal of building a prosperous middle class in America. Instead, they focus solely on profit and do everything they can in order to avoid paying their fair share of taxes. Those CEO's who do not acknowledge their obligation to address social, as well as business, issues are engaging in "Social Darwinism," to use President Obama's phrase.

According to Meyerson:

Steve Jobs ... has abandoned nonprofessional American workers. It wasn’t always thus. In his first stint at Apple, in the mid-’80s, he built, with Jobsian attention to form and function, a heavily automated factory in Fremont, Calif., that employed hundreds of workers to turn out personal computers. But the Macs didn’t sell fast enough, Jobs was fired, and, in 1992, the factory was closed. ... [Apple now] employs no U.S.-based production workers. Which is why Jobs’s elevation to our national pantheon is premature. Bringing some of those production jobs home while holding down the price of his products probably would require devising factories so automated that they wouldn’t employ all that many workers. Then again, Apple is sitting on $76 billion in cash, and Jobs is still Apple’s chairman. Devoting a few billion to reshape and restart American manufacturing, even if it employs fewer people than in Henry Ford’s time and narrows Apple’s profit margins, could work wonders for exports and, just possibly, lead to Jobs’s most amazing invention of all: a newly vibrant American working-class.

According to Pepitone:

How diverse are Silicon Valley's offices and executive suites? Activists have been trying for years to answer that question, but some of the industry's largest and most influential employers -- including Apple, Google, Amazon and Facebook -- closely guard that information. ... Among American adults age 25 to 64 -- typically considered the working-age population -- around 11% are African-American, but black workers account for just 3.5% of Intel's domestic workforce and 1.3% of its top officials. Hispanics are similarly under-represented: They make up nearly 15% of the American workforce, but only 8% of Intel's workforce and 3% of its management ranks. In contrast, Asian workers -- a category that includes those of Indian descent -- have made strong inroads in the tech industry. They account for less than 5% of the U.S. working population but hold nearly 20% of the jobs at the companies CNNMoney surveyed.

According to Duhigg/Bradsher:

[T]he company’s decisions pose broader questions about what corporate America owes Americans as the global and national economies are increasingly intertwined. “Companies once felt an obligation to support American workers, even when it wasn’t the best financial choice,” said Betsey Stevenson, the chief economist at the Labor Department until last September. “That’s disappeared. Profits and efficiency have trumped generosity.”

And Duhigg/Kocieniewski write:

Apple ... has avoided millions of dollars in taxes in California and 20 other states.

According to Krugman:

[Republican Indiana governor Mitch Daniels] tried to wrap his party in the mantle of the late Steve Jobs, whom he portrayed as a great job creator — which is one thing that Jobs definitely wasn’t. And if we ask why Apple has created so few American jobs, we get an insight into what is wrong with the ideology dominating much of our politics.

Some of the claims of these Progressive voices are patently absurd. For example:

• Krugman writes "Prosperity depends on the synergy between companies, on the cluster, not the individual entrepreneur." According to Krugman, the "synergistic cluster" of American auto manufacturing companies was saved by President Obama's bailout. Apparently, the existence of the American automobile industry had nothing to do with the heroic actions of the American entrepreneur, Henry Ford. The greatest example of a synergistic cluster in the world is Silicon Valley. Does Mr Krugman not realize that this synergistic cluster exists only because of the risk taking of individual heroic entrepreneurs like Steve Jobs and Steve Wozniak? (Every once in a while Mr Krugman comes up with a real howler; for example, America should declare war on space aliens, not the Taliban; or, the shooting of Arizona Congresswoman Gabby Giffords was the result not of the actions of a demented lunatic, but of the climate of political hatred fomented by right-wing extremists. Krugman's claim that the efforts of entrepreneurs like Henry Ford and Steve Jobs had nothing to do with the creation of the auto or personal computer industries is just such another howler.)
• The idea that Silicon Valley is not diverse is utterly ludicrous. It is obvious that anyone making such a claim has not stepped onto the floor of the software development department of any Silicon Valley company. It is true, of course, that African-Americans and Hispanics are underrepresented on the engineering staffs of Silicon Valley companies, but it is just as true that Indian and Asian workers are vastly overrepresented in comparison to their distribution in the general population. It is unclear why Indian and Asian diversity should not count as "real diversity."
• Finally, the idea that Apple could move its electronic manufacturing operations back to the United States without suffering any adverse effects just doesn't make any sense. Apple employs entire teams of workers to figure out the most efficient, cost-effective way of manufacturing electronic devices. Apple executives would jump at the opportunity to manufacture electronic devices in the United States if it were actually cheaper to do so. No, the reason why Apple does its electronic manufacturing overseas is because it is demonstrably more cost effective to do it there.

It is high time that workers in Silicon Valley assess just how friendly the Progressive wing of the Democratic Party is to businesses in Silicon Valley and how ruinous the impact would be if Progressive policies were applied in Silicon Valley rigorously. To help Silicon Valley workers perform such an assessment, here is a set of questions for candidate Romney to pose to President Obama:

1. Does the President feel that Apple and other high-tech companies (and their employees and the recipients of their dividends) pay their fair share of taxes? Does the President believe that the fiscal mess California finds itself in is the result of high-tech companies in Silicon Valley not paying their fair share of taxes or is it instead the result of a dysfunctional California state legislature that has been dominated for decades by the Democratic Party, which has found itself unable to address key issues like reform of the pension system for public service employees?
2. Does the President feel that Apple should bring more manufacturing jobs back to America? Can the President explain why Solyndra, a high-tech company that received federal funds to establish a major manufacturing facility in Silicon Valley, went bankrupt?
3. Does the President feel that workers in Silicon Valley are diverse enough? Or does the President believe that Jesse Jackson and Al Sharpton ought to be invited to Silicon Valley to work with ("strong-arm" is the more appropriate term) CEO's of high-tech companies to establish racial quotas for African-Americans and Hispanics in the engineering workforces of these companies? Can the President explain why Asian and Indian diversity does not count as real diversity?
4. Does the President feel that more unionization ought to be promoted throughout the high-tech industry of Silicon Valley? Can the President explain how union rules and job banks would enhance, say, software development?
5. Does the President feel that Silicon Valley companies have a "dual mandate" to promote a social agenda as well as to pursue business goals? Why is it not enough that Silicon Valley through the actions of heroic entrepreneurs and venture capitalists (pace Krugman) has transformed what was once a sleepy farming community into the most vibrant "synergistic cluster" of economic activity in the nation, providing a livelihood for thousands of new working families and a steady stream of tax revenues without which the State of California could not survive?
6. In short, does the President feel that the economy of Detroit ought to be transplanted to California to replace the economy of Silicon Valley?