March 31, 2020

Silicon Valley, like every place, has been upended by the COVID-19 pandemic. What will it mean for our economy, our communities, and our overall wellbeing in the near term? When the crisis subsides, what will the recovery look like?

Answers to these questions are difficult to come by, particularly because we don't yet have the kind of data we normally track at our Institute. But not wanting to be silent, we convened the Institute's research team for a broad conversation about what they're observing. Even in the absence of data, their insight and expertise helps us grapple with the perplexity and uncertainty before us.

(Prepared by the Institute’s Director of Research, Rachel Massaro)

Question

Is there any precedent for this situation and our community response? In all of Silicon Valley’s modern history, when has unemployment spiked, public health infrastructure been strained, or has our community required this magnitude of social solidarity? And given the impact on trade, what might be some longer-term impacts to our most internationally successful and relevant companies?

Margaret O’Mara

Silicon Valley is a boom-and-bust town, and it has experienced sharp dips in its economic health before—after defense cutbacks in the late 1960s, the flattening of the PC market and end of the Cold War in the late 1980s, and, most memorably, the dot-com bust of the early 2000s. Yet the COVID-19 pandemic is a challenge unlike any other in recent memory, not only in its magnitude but in the nature of its economic impact.

The closest the Valley has come to a crisis that demanded comparably rapid industrial action and a great degree of social solidarity was during World War II, when the Bay Area became one of the metropolitan hubs of defense mobilization and manufacturing to support the war in the Pacific. An infusion of people and workers strained the region’s infrastructure far beyond capacity and forced industrial producers to retrofit and increase production at a scale and speed never before experienced. Much of this activity happened north of Santa Clara County, especially in the shipyards of the East Bay, but the reverberations were region-wide in ways that are similar to today’s interconnected, multi-county and multi-city Bay Area economy.

Back then, economic mobilization happened by public and private sectors working together, at scale. In 1943, federal officials established a Metropolitan Defense Council to address the emergency shortages of housing and the clogged transportation infrastructure resulting from the enormous influx of soldiers and war workers. That entity spawned a successor organization, the Bay Area Council, after the war. This was a business organization driven by big-business interests, to be sure, but it played an important role in region-wide industrial planning in the postwar years, when migration to California ballooned the state’s permanent population even more. Way back in 1947, the Council declared that “the economic opportunities of all counties and localities in the Bay Area are not only interrelated but are interdependent.” Some pretty big thinking at a time when the South Bay was mostly fruit orchards.

The industrial expansion during and after the war didn’t only turn those orchards into high-tech campuses, but it also was coupled with strong public investment—in transportation infrastructure, housing, education—at both state and federal levels that made the Bay Area a place of shared economic opportunity, a remarkable escalator of social mobility. That level of investment has slipped away in recent decades. So has the sense among the Valley’s leading companies that they have an obligation to work together to build a shared future of regional economic growth and opportunity. This moment of crisis raises the stakes even further.

So what does economic mobilization and social solidarity look like in 2020? The virus does not discriminate: everyone living and working in Silicon Valley is to some degree vulnerable to this health threat, and all are having their lives affected by its social disruptions. Suddenly, as always-mobile, distractedly-busy lives are put on pause, communities realize that they are all connected, and seemingly old-fashioned things like mutual-aid networks have started to blossom.

Yet the virus also highlights, in even sharper relief the deep inequalities of work, housing, and social opportunity with which the Valley already was struggling. Spiraling housing costs are only one of the factors that have made life so economically precarious for workers in sectors like retail, restaurants, and other blue-collar service sectors. Now, many thousands of these citizens have lost a paycheck for the foreseeable future and face vastly increased food and housing insecurity. For venture-backed startups, even those beyond their early stages, the crunch has come swiftly. Layoffs are starting to mount.

In large tech companies, the outlook is quite different. The pandemic is making business even busier as people and companies around the world lean heavily on social media, remote conferencing, and digital infrastructure to work, learn, and communicate during this crisis. Many tech-sector workers find the transition to at-home work pretty seamless, despite barking dogs in the background of teleconference calls. Will the ease with which made-in-the-Valley technology has made remote work possible make more people and firms realize that they actually don’t need to be in the Valley anymore? Perhaps.

But there are bigger challenges here that demand a broad-based response going beyond quarterly earnings and corporate strategy. This is the time for the region’s power players to step up, and work together with one another, and work with government at all levels. The Bay Area mobilized successfully once before, and the long-term economic impacts were pretty extraordinary—we wouldn’t be the world’s tech capital if not for the things that happened here in the 1940s and 1950s. Time to think big, think cooperatively, and do it again.

Margaret O’Mara is a Distinguished Fellow at the Institute for Regional Studies, the Howard & Frances Keller Endowed Professor of History at the University of Washington, a contributing opinion writer at The New York Times, and author of Cities of Knowledge (Princeton, 2005), Pivotal Tuesdays (Penn Press, 2015), and The Code: Silicon Valley and the Remaking of America (Penguin Press, 2019).

Question

What data will we need to adequately quantify the impact of this pandemic on our community? How long before it becomes available? Do you think Silicon Valley will be permanently changed by this pandemic? If so, in what way(s)?

Stephen Levy

The magnitude and duration of the economic impacts of the coronavirus spread will depend on the magnitude and, especially, the duration of the health impacts. When we will know much with certainty is complicated by Dr. Fauci's warning that the virus may reappear next year.

The first indication of job losses and increases in unemployment will come with the April data, which will not be published by EDD until mid-May. A month later we will be able to see how much the losses increased in May.

The health impact data is available on a more timely basis in terms of the number of positive cases, hospitalizations and tests. Still, we are in the beginning stages of knowing the spread of the virus and it will be several weeks before we know whether the physical distancing in Silicon Valley and the Bay Area is working to flatten the curve.

In terms of the short-term economic impact on families, the stimulus package and recent actions on moratoria on evictions and deferral of mortgage payments will help many. In addition many Silicon Valley companies are offering additional paid leave time and sick pay.

Though we do not know the magnitude or duration of economic impacts, we do know the direction. There will be short term losses in employment and income for many as well as lost production. We know that businesses that have to close and their employees will be hit harder than those who can work at home.

We also know that the spread of the virus will hit local and state budgets facing lower revenue while still needing to maintain service levels.

The virus spread comes at the same time that the region is struggling with high housing costs that have led some residents and businesses to leave even before the epidemic became known. In Silicon Valley there was an increase in WARN notices (impending layoffs) before the virus spread.

This makes separating the impact of the virus from what was going on already more difficult. As to the long term, that depends on the magnitude and duration of the economic impacts and is therefore unknown at this time.

I do not think Silicon Valley will be permanently changed in the way that phrase is being used today. But I do think we will come away with a wide range of ingenious innovations on the possibilities for living and working and, hopefully, a new perspective on life's priorities.

We know on the health care side, the nation was woefully unprepared. I hope this lesson carries over to the housing, transportation and climate challenges Silicon Valley faces and we learn the importance of preparing for the future in these areas.

Stephen Levy is an Affiliate Researcher with the Silicon Valley Institute for Regional Studies and Senior Advisor on the Silicon Valley Index. He is the Senior Economist of the Center for Continuing Study of the California Economy (CCSCE) in Palo Alto, working with public institutions and private companies to provide explanation and analysis of California growth trends and projections. His interests also include the conditions for economic competitiveness in California and the impact of immigration on the state economy.

Question

What might be the impacts of the COVID-19 pandemic on Silicon Valley’s housing market? What has or could be done to mitigate them? Might these short-term effect impact future policies concerning renters and housing affordability? Given the region’s pre-existing net loss of domestic migrants annually, should we expect an even larger mass-migration out of the region post-pandemic?

Issi Romem

The COVID-19 pandemic is likely to have two impacts on housing markets throughout the world in the short term:

• The housing market—both home buying and rental—is likely to freeze. Transactions will slow down sharply, perhaps even grinding right down to a halt, and people will make do with their current living arrangements for the foreseeable future.
• Rent and mortgage payments will begin failing at increasing rates the longer the pandemic persists. The failures will stem from individuals losing income and/or fearing future loss of income as the pandemic prevents entire sectors of the economy from operating, and as those negative shocks ripple through the rest of the economy.

In Silicon Valley, specifically:

• The above applies, especially to those employed in the sectors of the economy whose operation is most susceptible to the pandemic.
• Employers relying on venture capital funding to support their operation will find the funding environment far more challenging than it has been in many years, and many could fail as a result.
• However, the share of residents’ income deriving from exceptionally deep-pocketed employers (the largest tech firms) will help Silicon Valley be more resilient to the pandemic’s economic impacts than most other regions.

It would be prudent and commendable for mortgage lenders to allow borrowers to defer payments, thereby preventing defaults and/or bankruptcies. It would also be prudent and commendable for landlords to extend such deferrals to their tenants. These types of policies are being discussed broadly, and have already been enacted by some lenders. Meanwhile, the State of California and cities within the state are in the process of enacting moratoriums on evictions, which could help prevent some of the worst symptoms of the problem.

There is far less clarity around the implications of the pandemic for housing markets in the long-run. Whether prices bounce back to prior levels or behave differently will likely depend on how long the pandemic lingers, and on the depth of the economic damage it causes.

The pandemic will almost certainly halt migration while individual mobility is hampered. In the event that housing prices remain subdued after the housing market thaws, and that the local economy remains resilient compared to other regions in the U.S., that may reduce the magnitude of outbound domestic migration from California.

Finally, the pandemic will likely remove the housing affordability crisis from the headlines temporarily. However—barring any grand rethinking of our human geography and the role of cities—the pandemic is unlikely to fix the underlying deep-rooted causes of California’s housing affordability crisis, and the issue is almost sure to return to the headlines once better economic times return.

Issi Romem is an Affiliate Researcher and Economic Advisor to the Silicon Valley Institute for Regional Studies, specializing in housing and growth. He is also the founder of MetroSight – a research consultancy focused on urban, labor, housing, and real-estate economics – and a fellow at the Terner Center for Housing Innovation at U.C. Berkeley.

Question

The coronavirus pandemic is increasing the divide between (generally higher-paid) knowledge workers who can work from home and receive a full paycheck, and those who will struggle to pay their bills due to reduced work hours or layoffs. What can we expect in terms of regional inequality? And how does this play into the historical trend?

Jon Haveman

The coronavirus pandemic is an inherently disequalizing phenomenon. Low skilled workers and those with a more tenuous connection to their employers are unquestionably going to be the hardest hit as a result of the pandemic. Silicon Valley, both San Mateo and Santa Clara counties have been experiencing significant increases in inequality over the last several decades. Note that this does not distinguish them from the rest of the state or the nation as a whole.

The irony is that, as a result of the pandemic, inequality in the region – according to the traditional measures – may well fall. This fall will not result from a compression of the distribution (a reflection of a more equitable distribution of income) but instead from a thinning out of the lower income part of the distribution. Throughout the San Francisco Bay Area, there are large numbers of families that are on tenuous economic footing. This tenuous footing derives from the high cost of living in the region, which is in no small part because of severe housing shortages.

What this event will highlight for many families is that remaining in the Bay Area is a highly risky endeavor. Accordingly, it is not unreasonable to expect a significant increase in outmigration from the region once the health crisis passes. Should this occur, it would slow the pace of recovery in the Bay Area relative to what it might otherwise be. Because of the impacts of the COVID-19 pandemic, the region will gain a greater understanding of the importance of low-income workers to the functioning of the economy, which will hopefully prompt policies that are conducive to a more inclusive region.

Jon Haveman is an Affiliate Researcher with the Silicon Valley Institute for Regional Studies, and principal with Marin Economic Consulting LLC. He specializes in regional economies and local economic development, the economics of seaports, goods movement, and international trade policy.

Question

While we still lack regional economic data, what techniques can be used later on to quantify the economic impacts of the coronavirus outbreak? What factors will be helpful to model the impacts and their ripple effect throughout the economy? Can we model the environmental impacts of the pandemic?

Heidi Young

Economic impacts due to the massive disruption of the COVID-19 virus will be felt widely—due to disruptions in both demand and supply—in economies throughout the world. In countries such as the U.S. in which personal consumption expenditures (for goods and services) account for 68% of Gross Domestic Product (GDP), social distancing and other needed measures to minimize spread have already had a significant short-term impact on food service and restaurants, entertainment, and travel industries; manufacturing (11% of U.S. GDP) and other industries have experienced a disruption to their supply chains. Shifting of consumer spending due to the pandemic has led to increased demand for some industries such as health care, and retail industries such as grocery stores and supermarkets. The net effect and the length and depth of these impacts remain uncertain and will potentially affect some communities more severely than others. The Silicon Valley region and California are already experiencing declines in local demand and a slowing of trade as a result of the pandemic.

Data is being collected and analyzed by public and private sector players in real-time to try to understand and predict both the short and long-term economic impacts. While there are many types of economic models that can be used, one such tool is a multi-regional input-output (MRIO) model. Drawing upon national and regional databases, MRIO models can be used to assess impacts to local, regional, and national economies based on a myriad of economic changes, such as potential job losses or gains in a given industry or industries (such as the 3.3 million people who applied for unemployment benefits last week, according to the U.S. Department of Labor); impacts of policy responses (such as the recently-passed legislation providing a $1,200 per person federal payment for those with an adjusted gross income of up to $75,000); a reduction in manufacturing and/or a reduction in exports from a region; and impacts across varying household income groups and shifts in consumer spending. MRIO models assess the downstream effects of changes to industries and take into account how one industry is interconnected with another and how one region is interconnected with another.

In addition, input-output models will allow us to measure the environmental impact of the pandemic in terms of the reduction in greenhouse gas and chemical emissions associated with a reduction in industry output. The effects will ripple through economies, and time will tell if the impacts we see in the short-term will linger and result in long-term structural changes to our Silicon Valley economy and those around the world.

Heidi Young is an Affiliate Researcher with the Silicon Valley Institute for Regional Studies and long-time public policy and economic development practitioner. Her work has focused on economic impact studies, cluster analyses, workforce development, land use and real estate development-related projects.

Question

How vulnerable is our community to job losses and reduced work hours? What share of our workforce must continue working while others shelter-in-place? What might we expect for the unemployment rate in the near-, mid-, and long-term?

Josh Williams, Ryan Young, and Philip Jordan

Given the current status and uncertainties regarding the COVID-19 pandemic, some industries like healthcare, delivery services, community and social services may be overwhelmed and in great need of workers. Healthcare practitioners and support workers, and those in community and social services alone comprise 7% (nearly 151,000) of greater Silicon Valley jobs; delivery workers are more difficult to quantify, as they are employed across a number of industries.

In contrast to these essential workers with continued demand for their services through this crisis, other industries are more at-risk for layoffs and/or reductions in work hours due to the coronavirus outbreak and subsequent statewide shelter-in-place order. These industries include retail; accommodation and food services; administrative and other support services; arts, entertainment, and recreation; transportation; and construction, among others (see Appendix B of the 2020 Silicon Valley Index for the breakdown of Silicon Valley employment by industry).

In total, these potentially at-risk industries comprise nearly half a million, or 27%, of Silicon Valley workers who may already (or may soon) be without the paycheck that they rely on. Furthermore, according to the recent estimates by the California Budget & Policy Center on “the most immediately impacted” industries/jobs by region, the greater Silicon Valley region is most vulnerable to losses in Leisure and Hospitality Jobs (254,150), retail trade (161,725), transportation and warehousing (59,975), and other services jobs (70,758); in total, employment in these “most immediately impacted” industries represents 24% of total nonfarm jobs throughout the region.

While data on unemployment levels for March 2020 (post shelter-in-place order) are yet to be made available on the regional level, the most recent statewide estimates indicate that California unemployment insurance claims jumped up by 34% from the prior week to a total of 58,208 filed during the week ending March 14, and ramped up to 80,000 per day on March 17 alone (according to Governor Newsom in an address on Facebook Live).

For Silicon Valley specifically, a broad statement could be made that if even 10% to 50% of the approximately 500,000 at-risk workers lose their jobs, the region’s near-term unemployment rate could soar from its 2.5% in January 2020 (for Santa Clara and San Mateo Counties combined) to somewhere between 5.8% to 18.9% using the most recent labor force and employment data. In comparison, Silicon Valley’s unemployment rate over the past two decades – even at the height of unemployment during the great recession in 2009 – has never exceeded 10.5%.

In the near-term, the region’s unemployment rate will be influenced by accommodation and food services (138,000 jobs in Silicon Valley), retail (136,000 jobs in Silicon Valley), and other “non-essential” industries. Together, these two industries represent 16% of all jobs in Silicon Valley and employ a higher share of “low income” workers as defined by Cornell’s Job Quality Index (www.jobqualityindex.com). In the medium- to long-term, these industries will continue to be affected along with manufacturing, real estate, education, and other government with impacts due to decreased tax revenue.

There are a variety of unknown factors that will be critical to mitigating the impact of COVID-19 on the Silicon Valley economy. These include the rate of infection, development of treatment and vaccine options, state and federal stimulus, and the duration and extent of social isolation. With so many variables it is difficult, if not impossible, to predict the long-term impact to the regional labor market and broader economy. These impacts, if as deep and protracted as many expect they will be, would ultimately result in job losses in non-grocery retail stores and their supply chains, real estate, and travel and tourism. These deeper cuts would also reduce tax receipts, which will eventually have corresponding impacts to public sector employment.

Despite the uncertainty in the data, it is clear that while the federal stimulus packages to date are focused on stabilizing the economy and supporting the economically vulnerable, future policy interventions in Sacramento and Washington must emphasize getting Americans back to work as quickly as it is safe to do so. Such measures could include immediate investments in critical infrastructure, improving the energy efficiency and electrification of schools and other public buildings (many of which will be closed for the foreseeable future), and investing in broadband and other remote learning and workplace tools with an emphasis on equitable access.

Josh Williams is an Affiliate Researcher with the Silicon Valley Institute for Regional Studies. He is President, Co-Founder, and Principal Researcher at BW Research, leading and directing applied economic, workforce, and customer research studies.

Ryan Young is an Affiliate Researcher with the Silicon Valley Institute for Regional Studies. He is a Senior Research Analyst for BW Research, and serves as a Policy and Data Analyst for the non-profit Economic Advancement Research Institute (EARI).

Philip Jordan is an Affiliate Researcher with the Silicon Valley Institute for Regional Studies. He is Vice President and Principal Researcher at BW Research, focusing on the impact of talent on economic prosperity and sustainable communities, and serves as Executive Director of the Economic Advancement Research Institute (EARI).