The downside of tech IPOs

February 26, 2019 (1454 words) :: This year's lineup of high-profile tech IPOs is going to be really, really bad for anyone who wants to live in the Bay Area and doesn't have access to IPO money.
Tags: startups, inequality, housing

This post is day 57 of a personal challenge to write every day in 2019. See the other fragments, or sign up for my weekly newsletter.

Today I came across an article on the geographical consequences of all the tech IPOs coming up this year, courtesy of Rick Paulas: Upcoming Tech IPOs Will Mint Hundreds of Overnight Millionaires and Silicon Valley Vultures Are Licking Their Chops. The article specifically considers the effects of this new influx of tech money on the Bay Area real estate market:

2019 is slated to produce an extraordinarily long list of multi-billion-dollar IPOs from San Francisco Bay Area heavyweights like Lyft, Uber, Palantir, Pinterest, Airbnb, Slack, Postmates, and Instacart. The result will be a massive and sudden injection of liquid cash into a region already infamous for both the nation’s priciest real estate as well as a vast and growing wealth gap between rich and poor neighbors.

Rick, a Bay Area-based freelance writer, captioned this in a way that is both poetic and extremely depressing:

One way to picture this is by imagining a giant hose over the city just dumping a deluge of liquid gold that drowns everyone who can’t afford to rent the highest penthouses.

In more concrete terms: more money flowing into the housing market, chasing a mostly static supply of housing, will only result in increased prices. And the negative consequences will be disproportionately borne by the very poorest, who will find themselves priced out.

If you’re new to this blog, you might be wondering why I would take such a negative perspective on the topic of tech IPOs. Even if these tech IPOs indirectly cause displacement/eviction/homelessness, why would the people who cashed out during the IPO be to blame? Landlords are the ones raising rent and evicting tenants, not them. And in any case, the people who benefit from these IPOs worked hard for their employers, often taking below-market wages in the process, and so they deserve a share of the wealth created.

Just to be clear: I am not trying to assign blame to those who make money through lucrative IPOs & put that into housing. Buying a house in the Bay Area is a perfectly rational choice at this time, especially since rents are extraordinarily high in the region. Those who do so are simply responding to the larger system in which they find themselves, and the fact that their money comes from a tech IPO isn’t necessarily worse than any other source of massive wealth.

My point is that this system, as a whole, is just dumb. It’s maybe good for the lucky few who’ve won the startup lottery, and maybe for those who own houses that have appreciated in value as a result of the new tech-driven gold rush, but it’s bad for nearly everybody else. It’s inefficient; it’s designed to cater to a minority of people who happen to have winning lottery tickets. And designing your economic system around winning lotteries is, to me, so obviously misguided that I am having trouble coming up with the words to explain why it’s bad, because its suboptimality feels so self-evident. It seems to directly undermine the entire purpose of an economic system in the first place.

Why do I say tech money is like a lottery, with all the attendant implications of money accrued through random chance, rather than deserved? Well, to be fair, that’s a bit of an exaggeration - the money accrued is not entirely due to randomness. Structurally, on a macro scale, the tech industry’s ability to attract so much money has to do with its relation to capital: the way technology is seen as an outlet for surplus capital, capable of generating vastly higher returns than other industries. It’s a new gold rush (this time revolving around software products), and, as I’ve said in my blog post on the California gold rush, the comparison to gold rushes is a decidedly critical one.

So when I say that the money isn’t deserved, I mean that in a sense that’s almost alien to the usual way we think about money. I don’t mean it in an accounting sense (as in, who contributes to making money); I mean it in a moral sense. Just because the tech industry is valuable to the system - just because it’s increasingly becoming the engine that keeps capitalism chugging along - doesn’t mean it’s good. And empirically, we’re seeing a deluge of startups that create mediocre products attaining vertiginous valuations that seem way out of whack with whatever social value they actually create. Compared to median salaries (and really, what better measuring anchor is there?), the soaring wealth of the tech industry seems so far removed from any possible legitimation of that wealth. The wealth isn’t really created, it’s more that it’s captured, thanks to an economic/political consensus that is currently heavily skewed in favour of private companies.

My critique departs from the position that tech wages are way too high, in general. There are nuances to that view, of course. Most of the tech wealth is concentrated at the top, among founders and investors who make their money through capital gains (i.e., stock), which means that the bulk of the problem lies in the stock market, not salaried compensation. And I’m not saying that tech workers should have lower salaries than other workers - I’m saying that other workers who are currently paid less should probably be paid more, especially (though not only) if those workers are contributing to tech startups’ profits. But my viewpoint begins from the premise that inequality is bad, and it’s not a premise that you need a masters degree in inequality to understand (though it did help, in my case). The extreme level of wealth inequality that we’re seeing - in an economic landscape where even the most basic human rights like shelter, healthcare, and food are commodities - is a recipe for disaster. It’s inefficient, and it’s unjust.

So what can we do? I think the problems can be tackled from two different angles. One is to limit the effects of this influx of wealth on the housing market through decommodifying housing. Housing should not be an asset - its primary function should be as a place to live, not a passive investment. And while we’re at it, let’s ban the construction of huge and ostentatious McMansions, so rich people can’t simply hoard space.

Simultaneously, it would be useful to tackle the problem at the root, by preventing this much wealth from being created in the first place. The radical long-term vision would probably be to abolish the stock market. (My conceptual understanding of this is limited at the moment - it’s mostly an instinctive reaction to the stock market being a facilitator of wealth concentration, rather than a well-fleshed-out and theoretically-based policy proposal; I’d love reading recommendations on this topic.) In the short term, it would be enough to limit capital gains realised through the stock market, by setting really high marginal tax rates above, say, $10 million or so (and lowering that amount as quickly as possible). The promise of potential multi-million gains in the tech industry almost always functions as a market distortion - a way of drawing people towards companies they wouldn’t normally want to work for, simply because the potential for vast wealth is too great - rather than an actually beneficial economic incentive that produces socially useful outcomes; dampening that possibility would improve the composition of the industry (there would be fewer obvious cash-grab startups).

When I write all this out in such a matter-of-fact way, it feels so obvious. Like, why aren’t we doing this already?

The sad truth is that this stuff may be obvious, but it’s also basically impossible, at least in our current political climate. It belongs in an equilibrium point (in the game theoretic sense) that is extremely far away from where we are now, which is essentially a globally suboptimal local maximum. And getting to a different equilibrium point will require a huge fight, because our current equilibrium point has created a class of people who both enjoy the status quo and are powerful enough to resist any efforts at radical change.

To conclude: the problems caused by excess tech money are really problems of wealth inequality. These consequences are currently concentrated in the Bay Area, because that’s where a lot of people with tech money happen to live, but the Bay Area housing crisis is merely a regional symptom of a wider problem of massive wealth inequality combined with highly precarious, marketised life for the working class. Tech startup IPOs may be welcomed by the few who benefit from them, but that doesn’t mean they’re good for society as a whole.

« See the full list of fragments