Revenge of the Rubes -- High-Tech Marches on in the Hinterland

For much of urban history, major cities have enjoyed a remarkable monopoly of technology, information and economic power. Today, that stranglehold is being threatened in unprecedented ways that threaten the long- term health of large metropolitan economies, such as that of the Bay Area.

Ironically, this shift is being accelerated largely by the spread of telecommunications technology, which has been nurtured in places like Northern California, but which now provides great opportunities for companies far from the urban core.

What anthropologist Robert McC. Adams labels the "awesome technological destruction of distance" now undermines many traditional advantages enjoyed by established urban centers.

This dynamic has accelerated since the collapse of the dot-com boom in 2000. Since then, the relative economic position of places like San Francisco and Silicon Valley has been ebbing in favor of smaller, less celebrated places like southwest Florida and the smaller cities of the Intermountain West.

Although the high-tech crash also hit many smaller places, many of these have recovered faster and now appear to have the wind at their back.

Take for instance a place like Boise, Idaho, hardly somewhere that many Bay Area residents think of as serious competition for high-end jobs.

Yet since the dot-com bust, the city of slightly less than 200,000 has pulled off a far more robust recovery than Silicon Valley, the Bay Area or a host of traditional high-tech "new economy" hotspots, from Boston to Austin, Texas, which have continued to lose jobs in higher-end fields.

Since 2001, for example, Boise's information jobs have grown by nearly 7 percent, while professional business services and finance have enjoyed double-digit increases. In contrast, San Jose (Silicon Valley) has experienced a 23 percent drop in information jobs, a 21 percent loss in professional business services and a 2.2 percent loss in financial services.

The growth in places like Boise undermines the onetime pre-eminence of Silicon Valley, says John Sien, a former executive at Hewlett-Packard.

"Silicon Valley used to be the center of the galaxy in technology when there were fewer planets," observed Sien, who now lives near Reno. "We controlled most of everything. Now that galaxy is distributed."

It's not only the Bay Area's galactic role in tech that is being threatened. In fields from retail to professional and financial services, the region, along with other traditional centers such as Boston and New York, are losing ground to smaller places in the hinterland.

When bad times come, these areas take the biggest hit; and when a recovery emerges, as is the case now, they are often last, and slowest, to take advantage.

Just 20 years ago, San Francisco was the home to the world's largest bank and an established global center for high-end financial services. Between 2001 and 2004, the city lost nearly 17 percent of its business service jobs and roughly 9 percent of the positions in its financial sector.

Today, professional and financial jobs that used to be in the city or in the surrounding suburbs are happily moving to places like Charlotte, Boise or Reno.

This is best seen as a two-stage process. In the last third of the 20th century, this involved largely the movement of large firms to the suburban periphery, where housing was cheaper, business regulations more lax and good schools attracted educated workers.

In 1969, only 11 percent of the United States' largest companies were headquartered in the suburbs; a quarter century later, roughly half had migrated to the periphery.

Since then, the suburbs, particularly in places like the Bay Area, have become more expensive, increasingly highly regulated, heavily congested, and now share some of the social problems associated with urban areas.

This has accelerated the relocation of high-end jobs to the distant hinterland.

This development -- pushed by factors such as the Internet and high housing prices -- threatens the region's overall economic relevance and the long-term health of places in a way even more profound than suburbanization.

Growth in Reno and Boise has far fewer benefits for San Francisco than expansion in Pleasanton or even Vallejo; people in these places do not tend to visit the city's restaurants, theaters or use its lawyers as much as those in the surrounding suburbs may have.

Not everyone seems very concerned about these developments. Many elite business players here -- including the governor's top economic adviser, Bay Area investment banker David Crane -- see the Bay Area's future as secured by its role at the apex of the global economy.

Although it needs to fix some of its more egregious problems, he argues, the region can survive the loss of some middle-class jobs by cherry-picking the choicest morsels in the labor market.

This notion is, from a long-term historical perspective, a bit nanve, even delusional. The seepage of middle-wage jobs out of an area retards the ability of companies to grow beyond the conceptual stage.

Silicon Valley can think of a great new invention, finance its development and even sometimes still market it, but as the technology evolves, it will be forced to spin most of its employment either abroad or to the American hinterland.

In a place where a yearly $125,000 income is often the minimum for buying a new home, it is hard to expect middle-class families, particularly those seeking a first house or coming from another region, to settle or start a business.

Indeed, according to one recent National Association of Realtors survey, the Bay Area ranked second, behind New York, as having the largest percentage of people "very concerned" about the availability of affordable housing.

Under these circumstances, we can expect the continued migration of middle-class people and jobs to places where the cost of living, and often the business climate, is far more favorable to those less than extraordinarily well-heeled.

Further evidence of this trend can also be seen in the accelerating migration out of the Bay Area since 2000, which has taken place as populations soar in less dense parts of Northern California and Nevada.

Many of these people, suggests Bill Frey, a demographer at the Brookings Institution, tend to be young, educated people, particularly those with families.

One clear harbinger of these trends can be seen in the migration of companies such as PC Doctor, a 60-person software firm that left the Bay Area two years ago, relocating in Reno. Once closely tied to PC producers in the Bay Area, the firm now finds it can operate more efficiently from its new hinterland redoubt.

"The Internet changed everything," suggests the firm's founder and chairman, Aki Korhonen.

"You have so much better connectivity today. The Bay Area has to face great challenges in the years ahead with (its) cost structure. For them, it may be easier simply to do businesses in Third World Countries. You can't make the argument for operations in the Bay Area versus India."

Korhonen, an immigrant from Finland, also sees Reno becoming a better place to lure skilled labor, particularly younger people interested in buying a home or raising a family.

People who bought their homes in the 1970s, '80s or even the '90s may think slow growth and high housing prices offer an ideal climate for refined affluence, but they miss the point that it is the middle class, and particularly young families, that drive urban progress.

This has been the case throughout history. When a great metropolis wishes to rest on its laurels and stops attracting young families, it seems destined for the slippery road to decline.

This occurred in the last centuries of imperial Rome, in 17th century Venice and 18th century Amsterdam. These cities enjoyed some lavish moments as their glory faded, then lost their ability to compete on a global scale.

What is to be done? Some argue the Bay Area should not even try to retain its middle class and should instead fancy itself as an exclusive area for the "creative" elite, and their requisite legions of service workers.

Perhaps, too, there is not the room to build enough new housing to bring down prices, or the political will to reform government so that young entrepreneurs and expanding companies may choose to locate there.

Yet if that is the case, the region's future will probably be much less promising than it appeared just a few years ago. Having emerged in the late 20th century as one of the world's great magnets of opportunity, the Bay Area may now only look forward to a long, leisurely and graceful decline.