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05.14.13

America’s New Oligarchs—Fwd.us and Silicon Valley’s Shady 1 Percenters

Americans love their tech gurus, but the feeling isn’t mutual. Joel Kotkin on the new ruling class that’s gaming the system and jerking the rest of us around.

When Steve Jobs died in October 2011, crowds of mourners gathered outside of Apple stores, leaving impromptu memorials to the fallen businessman. Many in Occupy Wall Street, then in full bloom, stopped to mourn the .001 percenter worth $7 billion, who didn’t believe in charity and whose company had more cash in hand than the U.S. Treasury while doing everything in its power to avoid paying taxes.

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Executive chairman of Google Eric Schmidt stands near a statue of the late North Korean leader Kim Il Sung during a tour of the Grand Peoples Study House in Pyongyang, North Korea. (David Guttenfelder/AP)

A new, and potentially dominant, ruling class is rising. Today’s tech moguls don’t employ many Americans, they don’t pay very much in taxes or tend to share much of their wealth, and they live in a separate world that few of us could ever hope to enter. But while spending millions bending the political process to pad their bottom lines, they’ve remained far more popular than past plutocrats, with 72 percent of Americans expressing positive feelings for the industry, compared to 30 percent for banking and 20 percent for oil and gas. 

OUTSOURCE MANUFACTURING, IMPORT ENGINEERS

Perversely, the small number of jobs—mostly clustered in Silicon Valley—created by tech companies has helped its moguls avoid public scrutiny. Google employs 50,000, Facebook 4,600, and Twitter less than 1,000 domestic workers. In contrast, GM employs 200,000, Ford 164,000, and Exxon over 100,000. Put another way, Google, with a market cap of $215 billion, is about five times larger than GM yet has just one fourth as many workers.

This is an equation that defines inequality: more and more wealth concentrated in fewer hands and benefiting fewer workers.

While Facebook and Twitter have little role in the material economy, Apple, which continues to collect the bulk of its profit from physical goods—computers, iPads, iPhones and so on—has outsourced nearly all of its manufacturing to foreign companies like Foxconn that employ workers, often in appalling conditions, in China and elsewhere. About 700,000 people work on Apple’s physical products for subcontractors, according to the New York Times, but almost none of them are in the U.S. “The jobs aren’t coming back,” Jobs bluntly told President Obama at a 2011 dinner in Silicon Valley.

Perversely, the small number of jobs—mostly clustered in Silicon Valley—created by tech companies has helped its moguls avoid public scrutiny.

Not so much anti-union as post-union, the tech elite has avoided issues with labor by having so few laborers who could be organized. Andrew Carnegie and Henry Ford exploited workers in Pittsburgh and Detroit, and had to deal with the political consequences; the risks are much less if the exploited are in Chengdu and Guangzhou.

"There doesn't seem to be a role" for unions in this new economy, explained Internet entrepreneur and venture capitalist Marc Andreessen, because people are "marketing themselves and their skills.” He didn’t mention what people without skills in demand at tech companies might do.

But Americans with those skills shouldn’t rest easy, either. These same companies are always looking to cut down their domestic labor costs. Mark Zuckerberg, in particular, is pouring money into a new advocacy group, Fwd.us, with a board consisting of big-name Valley luminaries, to push “comprehensive immigration reform” (read: letting Facebook bring in a cheaper labor force). In a remarkably cynical move, Fwd.us has separate left- and right-leaning subgroups to prod politicians across the political spectrum to sign on to the bill that would pad the company’s bottom line.

Ostensibly, the increase in visas for high-skilled computer workers is a needed response to the critical shortage of such workers here—a notion that has been repeatedly dismissed, including in a recent report from the Obama-aligned Economic Policy Institute, which found that the country is producing 50 percent more IT professionals each year than are being employed in the field. The real appeal of the H1B visas for “guest workers”—who already take between a third and half of all new IT jobs in the States —is that they are usually paid less than their pricy American counterparts, and are less likely to jump ship since they need to remain employed to stay in the country. Facebook’s lobbyists, reports the Washington Post, have pressed lawmakers to remove a requirement from the bill that companies make a “good faith” effort to hire Americans first.

THE VALLEY OF THE OLIGARCHS

Even as market caps rise, the number of Americans collecting any cut of that new wealth has scarcely moved. Since 2008, while IPOs have generated hundreds of billions of dollars of paper worth, Silicon Valley added just 30,000 new tech–related jobs—leaving the region with 40,000 fewer jobs than in 2001, when decades of rapid job growth came to an end.

The good jobs that are being created are also heavily clustered in one region, the west side of the San Francisco peninsula—a distinct and geographically constrained zone of privilege. The area boasts both formidable technical talent and, more important still, roughly one third of the nation’s venture funds along with the world’s most sophisticated network of tech-savvy investment banks, publicists, and attorneys.

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The skyline seen from City Hall in San Jose, Calif. (Jeff Chiu/AP)

But little of the Valley’s wealth reaches surrounding communities. Just across the bridge to the East Bay are high crime rates and an economy that’s lost about 60,000 jobs since 2001 with few signs of recovery. Inland, in the central Valley, double-digit unemployment is the norm and local governments are cutting police and other core services and even trying to declare bankruptcy.

‘We live in a bubble, and I don’t mean a tech bubble or a valuation bubble. I mean a bubble as in our own little world.’

“We live in a bubble, and I don’t mean a tech bubble or a valuation bubble. I mean a bubble as in our own little world,” Google’s Schmidt boasted to the San Francisco Chronicle in 2011. “And what a world it is. Companies can’t hire people fast enough. Young people can work hard and make a fortune. Homes hold their value. Occupy Wall Street isn’t really something that comes up in a daily discussion, because their issues are not our daily reality.”

Inside the bubble zone, centered around the bucolic university town of Palo Alto, employees at firms like Facebook and Google enjoy gourmet meals, child-care services, even complimentary house-cleaning. With all these largely male, well-paid geeks around, there’s even a burgeoning sex industry, with rates upwards of $500 an hour.

Those at top of the tech elite live very well, occupying some of the most expensive and attractive real estate in the country. They travel in style: Google maintains a fleet of private jets at San Jose airport, making enough of a racket to become a nuisance to their working-class neighbors. They have even proposed an $85 million flight center, called Blue City Holdings, to manage airplanes belonging to Google’s founders, Larry Page and Sergey Brin, and its executive chairman, Eric Schmidt. Like the Russian oligarchs, currently making a run on Tuscany’s castles and resorts, the Valley elite have embraced conspicuous consumption, albeit dressed up in California casual. In San Francisco, San Mateo, and Santa Clara counties combined, luxury vehicles accounted for nearly 21 percent of new car registrations from April 2011 to March 2012, more than twice the national average. Home prices in places like Palo Alto and the fashionable precincts of San Francisco go for well over a million—and routinely trigger all-cash bidding wars.

We’re the best thing happening in America,” one tech entrepreneur told the Los Angeles Times. Even a reporter for the New York Times, usually worshipful in its Valley coverage, described the spending as “obscene.” An industry party he attended included a 600-pound tiger in a cage and a monkey that posed for Instagram photos.

But past the conspicuous consumption, the most outstanding characteristic of the new oligarchs may be how quickly they have made their fortunes—and how much of the vast wealth they’ve held on to, rather than paid out to shareholders or in taxes. Ten of the world’s 29 billionaires under 40 come from the tech sector, with four from Facebook and two from Google. The rest of the list is mostly inheritors and Russian oligarchs.

Tech oligarchs control portions of their companies that would turn oilmen or auto executives green with envy. The largest single stockholder at Exxon, CEO and chairman Rex Tillerson, controls .04 percent of its stock. No direct shareholder owns as much as 1 percent of GM or Ford Motors. In contrast, Mark Zuckerberg’s 29.3 percent stake in Facebook is worth $9.8 billion. Sergey Brin, Larry Page and Eric Schmidt control roughly two thirds of the voting stock in Google. Brin and Page are worth over $20 billion each. Larry Ellison, the founder of Oracle and the third richest man in America, owns just under 23 percent of his company, worth $41 billion. Bill Gates, who’s semi-retired from Microsoft, is worth a cool $66 billion and still controls 7 percent of his firm. 

The concentration of such vast wealth in so few hands mirrors the market dominance of some of the companies generating it. Google and Apple provide almost 90 percent of the operating systems for smart phones. Over half of Americans and Canadians and 60 percent of Europeans use Facebook. Those numbers dwarf the market share of the auto Big Five—GM, Ford, Chrysler, Toyota, and Honda—none of whom control much more than a fifth of the U.S. market. Even the oil-and-gas business, associated with oligopoly from the days of John Rockefeller, is more competitive; the world’s top 10 oil companies collectively account for just 40 percent of the world’s production.

GREATER REPRESENTATION WITH MINIMAL TAXATION

Despite this vast wealth, and their newfound interest in lobbying Washington, the tech firms are notorious for paying as little as possible to the taxman. Facebook paid no taxes last year, while making a profit of over $1 billion. Apple, “a pioneer in tactics to avoid taxes,” has kept much of its cash hoard abroad, out of reach of Uncle Sam. Microsoft has staved off nearly $7 billion in tax payments since 2009 by using loopholes to shift profits offshore, according to a recent Senate panel report.

And now, these 1 percenters—who invested heavily in Obama—are looking to help shape the “public good” in Washington and, as with Fwd.us, what they’re selling as good for us all is what aligns with their interests.

Tech oligarchs control portions of their companies that would turn oilmen or auto executives green with envy.

There’s been a huge surge of Valley investment in Washington lobbying, not just on immigration but also on issues effecting national, industrial, and science policy. Facebook’s lobbying budget grew from $351,000 in all of 2010 to $2.45 million in just the first quarter of this year. Google spent a record $18 million last year. In the process, they have hired plenty of professional Washington parasites to make their case; exactly the kind of people Valley denizens used to demean.

The oligarchs believe their control of the information network itself gives them a potential influence greater than more conventional lobbies. The prospectus for Fwd.usheaded up by one of Zuckerberg’s old Harvard roommates—suggests tech should become “one of the most powerful political forces,” noting “we control massive distribution channels, both as companies and individuals.”

One traditional way the wealthy attain influence is purchasing their own news and media companies. Facebook billionaire and former Obama tech guru Chris Hughes (who owes his fortune to having been another of Zuckerberg’s college roommates) has already started on this road by buying the New Republic. (His husband, perhaps not incidentally, is running for the New York State Assembly.) Leaving old-media legacy purchases aside, Yahoo is now the most-read news site in the U.S., with over 100 million monthly viewers, and the Valleyites are also moving into the culture business with both Google-owned YouTube and Netflix getting into the entertainment-content business.

Great wealth, and high status, particularly at a young age, often persuades people that they know best about the future and how we should all be governed. Twitter founder Jack Dorsey, a 37-year-old resident of San Francisco, recently announced on 60 Minutes that he’d like to be mayor—of New York, a city he’s never lived in.

Expect more of this kind of hubris from the new oligarchs. Some cities, ranging from Seattle, where Amazon is leading the charge, to Las Vegas and even Detroit now are counting on tech giants to expand or restore their damaged central cores.

But if those oligarchs do come, they will have little interest in retaining or expanding blue-collar jobs in construction or manufacturing, which they see as passé; the housing they build and even the public amenities they invest in will be for their own employees and other members of the “creative class.” The best the masses can hope for are jobs cutting hair, mowing grass, and painting the toenails of the oligarchs and their favored minions. You won’t see much emphasis, either, on basic skills training and community colleges, which are critical to auto manufacturers, oil refiners, and other older businesses and can provide opportunity for upward mobility for middle- and working-class youth.

Yet these limitations will not circumscribe the ambitions of the new oligarchs, who see their triumph over cyberspace as a prelude to a power grab in the real world, a proposition they’ve tested over the last three presidential cycles. “Politics for me is the most obvious area [to be disrupted by the Web],” suggests former Facebook president and Napster founder Sean Parker.

IF YOU’RE THE CUSTOMER, YOU’RE THE PRODUCT

Perhaps an even bigger danger stems from the ability of “the sovereigns of cyberspace” to collect and market our most intimate details. Moving beyond the construction of platforms for communication, the oligarchs trade on the value of the personal information of the individuals using their technology, with little regard for social expectations about privacy, or even laws meant to protect it. Google has already been caught bypassing Apple’s privacy controls on phones and computers, and handing the data over to advertisers. The Huffington Post has constructed a long list of the firm’s privacy violations. Apple is being hauled in front of the courts for its own alleged violations while Consumer Reports recently detailed Facebook’s pervasive privacy breaches—culling information from users as detailed as health conditions, details an insurer could use against you, when one is going out of town (convenient for burglars), as well as information pertaining to everything from sexual orientation to religious affiliation to ethnic identity.

As Google’s Eric Schmidt put it: "We know where you are. We know where you've been. We can more or less know what you're thinking about."

But while Facebook and Google have been repeatedly cited both in the United States and Europe for violating users’ privacy, the punishments have been puny compared to the money they’ve made by snatching first and accepting a slap on the wrist later. 

It's no surprise then that Silicon Valley firms have been prominent in trying to quell bills addressing Internet privacy, both in Europe and closer to home. Washington is where big firms have always gone to change the rules to protect their own prerogatives and pull the ladder up on smaller competitors. Like previous oligarchical interests, the Valley, predictably, has become a regular and crucial fundraising stop for Obama and other Democrats crafting those rules.

Al Gore—who owes much of his Romney-sized fortune to lucrative positions on the board of Apple and as a senior adviser to Google, as well as to energy investments heavily backed by federal funds—has emerged as the symbol of the lucrative, if shady, intersection of those two worlds.

Green is an easy sell in the Valley. If California electricity is too unreliable or expensive, firms will just shift their power-consuming server farms to places with cheap electricity, such as the Pacific Northwest or the Great Plains. Middle-class employees who, in part due to green “smart growth” policies, can no longer afford to live remotely close to Palo Alto or in San Francisco, can be shifted either abroad or to more affordable locales such as Salt Lake City, Phoenix, or Austin, Texas. Meanwhile, with supply restricted, the prices on houses owned by the oligarchs and their favored employees continue to rise into the stratosphere.

What we have then is something at once familiar and new: the rise of a new ruling class, arrogant and self-assured, with a growing interest in shaping how we are governed and how we live. Former oligarchs controlled railway freight, energy prices, agricultural markets, and other vital resources to the detriment of other sectors of the economy, individuals, and families. Only grassroots opposition stopped, or at least limited, their depredations.

But today’s new autocrats seek not only market control but the right to sell access to our most private details, and employ that technology to elect candidates who will do their bidding. Their claque in the media may allow them to market their ascendency as “progressive” and even liberating, but the new world being ushered into existence by the new oligarchs promises to be neither of those things.