What Paul Graham Misses On Value Creation and Income Inequality

One of the reasons I love business as a means for change is the focus on value creation. At its most simple, a successful, money-making business takes low-value goods and services, works magic on them, and sells them at a higher price. 7-11 sells old milk at a higher price than Safeway because it provides the value of a quick, convenient transaction to its customers. TriplePundit convenes a group of smart, highly-educated sustainability professionals, and our advertisers hope to catch your attention while you're here. I love the simplicity and efficiency of value creation. The other amazing thing is that there isn't a finite pool of value -- the whole Silicon Valley venture capital movement (and the influx of rapidly increasing numbers of 'unicorns') shows us that investors believe the sky is the limit on how much value can be created.

Last week, Paul Graham, the rich-and-famous founder of the Y Combinator accelerator, argued that income inequality isn't necessarily bad because when people get rich from value creation (as opposed to rent-seeking or taking advantage of poor people), they aren't taking anything away from anyone else. That's true to a degree -- the fact that WhatsApp was valued at $19 billion doesn't mean the mouths of babes were immediately robbed. A few founders got massively rich because they happened to have access to a customer base that was deemed very valuable to Facebook. They didn't get rich ripping coal out of mountains at the expense of coal miners' lungs and kids' asthma rates. Graham would argue that their massive wealth doesn't hurt anyone. But I see differently.

No, massively wealthy entrepreneurs don't directly hurt poor people. But their spending power does. Silicon Valley's concentration of extreme wealth and limited land means that individuals and businesses can very quickly drive property values sky-high.

Mountain View, California, whose commercial real estate landscape I covered in the fall as a part of our Tech Titans series, has sky-high residential property rates as well. The median home value right now in Mountain View is $1.4 million. Now, Mountain View is a perfectly nice place to live, but it's not a Shangri La. The schools are pretty good; its walk scores are mediocre. The only thing the location really offers is easy access to companies that pay extremely well -- which means many prospective home buyers have the income to be able to afford to bid up the prices of real estate. That's all fine and good -- supply is limited and demand is high, so the price goes up. That's exactly how the economy is supposed to work.

But the trouble with skyrocketing real estate rates is that the costs of doing business -- normal non-IT business like running a dry cleaner, yoga studio, bike shop or grocery store -- goes up too, which increases the cost of living across the board. Don't believe me? The average cost of gas in Mountain View is $2.83 per gallon, 39 percent higher than the national average. National daycare rates vary widely, from $3,582 a year up to $18,773 with an average of $11,666. Recent estimates from the Bay Area make the high end of that range sound sweetly affordable -- average rates are more like $1,500 to $2,500 per month or an average of $24,000 per year. Yes, that buys great coverage for people who can afford it. But that isn't the end of the story.

When costs go up faster than wages, real families get pinched from every angle. Especially if they don't happen to work for one of the gold-star companies that pays out the big bucks or they happen to have a single wage earner. For those folks -- and I'm not talking about mechanics and waitresses, I'm talking about lawyers, engineers, nonprofit directors, project managers and small business owners  -- the cost of living becomes impossible, and the choice becomes clear: Start coding and work for a tech titan, live like a pauper, or move out of the area. It's actually farcical when you do the math. A family can be in the top 5 percent for national incomes, earning over $166,000 per year, and find home ownership laughably out of reach.

The downpayment on one of those median Mountain View homes would be $280,000 with a mortgage over $5,000 per month. Add in $2,000 a month for a single child's daycare, and you are dangerously close to the $8,000 per month in net pay you'd take home on that $166,000 annual salary. There's only $1,000 left for savings, food, clothes, transportation and healthcare costs, for the whole family. It's simply untenable.

So, it comes back to: What's the point of it all? Well for me and pretty much everyone I know, work is about a lot more than a paycheck. We have the privilege of having meaningful work -- doing something we happen to be good at and making a difference at the same time. Many of us are trying in one way or another to make the world better than we found it -- and I don't mean world-changing in the software sense. If we have to give that up in order to live, life loses some of its purpose. And these middle-income families, so privileged in raw numbers yet poor in terms of local earning power, leave Paul Graham's Silicon Valley, increasing local income inequality.

"Innovators" in the startup sense provide financial value for their owners and investors, there's no doubt. But the floods of funding to a narrowly-defined "value" absolutely increases income inequality by raising prices across the board. Show me how I'm wrong, Paul.

Image credit: Democracy Chronicles, Flickr