How Silicon Valley Hacked the Economy

How Silicon Valley Hacked the Economy

Tech entrepreneurs like to present themselves as nerdy tinkerers—but they’ve been politically active since the earliest days of the microelectronics industry.


Over the past two years, data-privacy concerns, growing economic inequality, and the outsize market power of behemoths like Facebook, Google, Apple, and Uber—to say nothing of Russian espionage or the proliferation of online hate speech—have cost Silicon Valley’s entrepreneurial class its most powerful political asset: the myth that what’s good for tech is good for everyone.

Indeed, contrary to the popular perception of technology entrepreneurs as obsessive tinkerers above the fray (at least, until they are called to testify before Congress), they have been politically active since the earliest days of the microelectronics industry. Their politics have arguably had as disruptive an impact on the economy as their technologies.

Since the late 1970s, Silicon Valley has grown rich, in part, because its standard-bearers envisioned a tax regime that favored capital gains over ordinary income and, with the help of conservative political allies, willed that system into being with landmark acts of federal legislation. As a member of the tech community, I am concerned about how our industry has helped destabilize the balance between democracy and capitalism, something American society took for granted during the second half of the 20th century, and catalyze today’s populist backlash.

Silicon Valley’s current troubles notwithstanding, technology entrepreneurs have been more accustomed to harnessing the prevailing winds than being buffeted by them. Pragmatism is the cornerstone of their political tradition. In the 1950s and early ’60s, when the Department of Defense began using their transistors and microchips to give American weapons an edge in the arms race with the Soviet Union, they vigorously lobbied for military contracts while presenting themselves, shrewdly, as patriotic instruments in the Cold War struggle. They were proud to be the nouveau riche of the government funded Space Age.

Attitudes shifted in the 1960s, however, when the Department of Defense squeezed their profits by streamlining its procurement policies. Silicon Valley dubbed this episode the “McNamara Depression,” a pejorative reference to then Secretary of Defense Robert McNamara, and scrambled to find civilian applications for their technologies in order to wean themselves off their dependence on government spending.

Over the next decade, they encountered the state less as a consumer and more as a regulator: They resisted the government’s prohibition on the sale of commercial microelectronics, some of which had dual-use military applications, to Eastern Bloc countries; lobbied against plans to cancel a tax exemption that allowed them to export components to low-wage countries for assembly and then import them back to the United States on a tax-free basis; and advocated for an exemption to fuel rationing during the Arab oil embargo.

When Congress increased the capital-gains tax, making it less lucrative for entrepreneurs to “exit” their companies by selling stock, they mobilized to reduce that tax and reclassify profits from stock options—cash-strapped entrepreneurs used them to recruit workers—as capital gains, rather than ordinary income.

Patriotism had been the lingua franca of government contracting during the height of the Cold War. But in the post–Vietnam War and post-Watergate era, flag waving would have been tone-deaf; they needed new ways to make their agenda resonate. So, Silicon Valley’s political activists—venture capitalists, entrepreneurs, and corporate executives by day—adopted the populist language of the “tax revolt,” which was then gathering momentum around the country as conservative journalists like Jude Wanniski, and economists including Milton Friedman and Arthur Laffer, called for rolling back taxes and regulation to “free” the markets.

They astutely framed their proposed legislation as a job-creation initiative and a stimulus for small businesses. And in Edwin Zschau, the charismatic young president of a computer-peripherals firm with a business-management PhD and a self-effacing sense of humor, they found a spokesman who could present himself both as a knowledgeable authority on technology entrepreneurship and, crucially, as an heir to the American tradition of small-business populism.

As a chairman of the American Electronics Association, the industry’s trade organization, Zschau commissioned a study linking the availability of venture capital and job growth. Young firms dependent on equity financing were shown to create new positions faster than mature ones, in addition to generating other benefits for the economy like improved productivity and more exports. Cutting the capital-gains tax, then, could be sold as an investment in the American people.

With their local congressman’s guidance, Zschau and his associates persuaded William Steiger, a moderate Republican congressman from Wisconsin, to introduce their legislation. This was national news: A sympathetic op-ed in The Wall Street Journal, for example, claimed that their initiative was “not one tax provision among many, but the cutting edge of an important intellectual and financial breakthrough.” “Stupendous Steiger,” the paper exclaimed.

President Carter opposed the bill, but Zschau and his allies outmaneuvered the administration by forging alliances with other supply-side-advocacy groups, launching a national lobbying campaign and, over the course of multiple trips to Capitol Hill, systematically recruiting Democrats, who controlled both the House and Senate. Zschau even circulated a recording of himself playing a self-composed, folksy song called “The Old Risk Capital Blues.”

Their efforts paid off. In the summer of 1978, Congress passed the Revenue Act reducing the capital-gains tax to 28 percent, a remarkable victory that earned Zschau a local “Business Leader of the Year” award. Three years later, they helped usher in the Economic Recovery Tax Act, also known as the Kemp-Roth Tax Cut, which reduced the capital gains tax to 20 percent and reinstated lower rates for stock options.

By then, of course, the low-tax ideology was no longer iconoclastic. The election of Ronald Reagan, who garnered 60,000 more votes in Santa Clara County than President Carter, confirmed that the gospel of technology entrepreneurship as a force for shared prosperity matched the new neoliberal era as well as patriotic anti-communism had matched the height of the Cold War.

Reagan regularly romanticized Silicon Valley, even telling young people to “follow in the footsteps of those two college students [Steve Jobs and Steve Wozniak] who launched one of America’s great computer firms [Apple] from the garage behind their house…. You, too, can become leaders in this great new era of progress—the age of the entrepreneur.”

Today, of course, it is much harder to claim that lowering the capital-gains tax reduces inequality by “spreading the base of ownership,” or that lowering the rate on stock options is “vital to the maintenance of the competitive position of small companies versus large companies.” Whatever the benefits of those policies, the proliferation of billionaire brogrammers and the rise of Big Tech confirm that more economic equality and greater competitiveness between firms are probably not among them.

It is no small irony that framing entrepreneurship as an engine of inclusive growth helped concentrate more economic power in the hands of fewer people; that’s just how powerful the mythologies of Silicon Valley have been. Armed today with an understanding of how they pulled it off, activists and reformers should write new stories that promote, rather than undermine, a more equitable balance between economic individualism and inclusiveness. They need the right narrative for the moment.

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