Peak California

California is hard to beat. There are richer places with worse weather, there are (a few) nicer climates with worse economies, but it’s really hard to find any place on planet earth that’s nicer to live in and to work in. There’s a consensus among smart people that the Bay Area is the place to be, and they relocate accordingly.

Smart people are generally right on average. But whenever the consensus among smart people is that you can make a given decision without thinking too hard, beware: the flip side of intelligence is the ability to rationalize bad decisions rather than admit your mistakes. It took a lot of intellectual horsepower to rationalize Superbowl ads and free shipping for cat litter in 2000; it took a similar amount of braininess to believe that subprime mortgages could be aggregated into securities that were as safe as treasuries.

There are three related problems that make California economically tenuous, and a fourth that makes the situation worse:

1. It’s no longer the best place in the world to start a startup.
2. The gains from the existing tech industry increasingly accrue to a) passive investors, and b) lucky landlords.
3. The state government is a levered bet on tech compensation.
4. These three problems, which are interrelated, won’t show visible symptoms until well after they’re terminally un-fixable.

Here in New York we prize elegant design and high production values.

The good news, such as it is: part of my bear case on the Bear Republic is that its most valuable assets can just pick up and leave, so it’s not a bad place to be right now. If you get a nice offer from a big tech company, by all means, go to Mountain View or Los Gatos or even San Francisco. (If you can afford Pacific Heights rents and ride-sharing everywhere, you can pretend you don’t live in SF at all.)

But if you’re considering starting a company, maybe take a look at Austin, Brooklyn, Denver, or Seattle.[1] All of these places have some of the same problems as California, but at a smaller scale.

The California Cycle

Since the late 1970s, California has benefited from a virtuous cycle that goes like this:

1. A group of smart people decide to solve a challenging technical and business problem.