Why Conservatives Hate San Francisco's Nancy Pelosi (it has nothing to do with communism and everything to do with the disruption of markets)

Republicans really hate Nancy Pelosi. Last week, in the midst of a pandemic taking 1,000 lives a day and a reminder that we still have 11 million newly unemployed people, the most popular story on Facebook was about Nancy Pelosi's haircut. On a related note, I've seen a number of Trump fans holler about how a vote for Biden will be a vote for socialism or communism, some of it explicitly tying this charge back to Pelosi who - in their eyes - apparently is a socialist or represents a socialist part of the country.

Nancy Pelosi -Democrat - is the Speaker of the House. Mitch McConnell - Republican - is the Senate Majority Leader. There are 535 members of Congress but these two easily have the most influence on legislation. By comparing the regions that elected them as representatives, you can learn a lot about who Republicans and Democrats are.

Kentucky is the 2nd most dependent state in the union, taking in far more money than it pays in taxes. California is 41st on that list.

Kentucky had 39 startups attract $743 million in venture capital in 2018. San Francisco had 1,127 startups attract $24 billion in venture capital, 30X the number of startups and venture capital in spite of the fact that San Francisco's population is only 20% that of Kentucky's. No Republican has explained why venture capitalists are so enamored of the communists in San Francisco but so avoidant of the capitalists in Kentucky.

Average income in San Francisco and % of folks with a BA are both 2.4X higher than in Kentucky. In Pelosi's San Francisco, households make nearly $100,000 more than those in Kentucky. In January, the unemployment rate in Kentucky was twice as high as it was in San Francisco.

The Republican - Democratic divide along with income is not limited to Kentucky and San Francisco. Of the 8 states with the highest per capita income, Biden is strongly favored to win all 8 (per fivethirtyeight's forecast 6 Sep). Of the 8 states with the lowest per capita income, Biden is favored to win only one. This November, the other 34 states will be deciding whether to follow the lead of the communities that host Silicon Valley, Wall Street and Harvard and MIT or to follow the lead of rural Mississippi, Alabama and Kentucky.

How do politicians like Mitch McConnell manage to convince so many folks that the socialists are in San Francisco and the true capitalists are in Kentucky, a state that manages to attract lots of government subsidies but very little venture capital? In other words, a region highly dependent on the government but not capital markets?

Maybe it is because markets are disruptive and the real issue for Republicans is a preference for tradition over the disruption of change. The whaling industry was made obsolete by oil wells. Oil wells are being made obsolete by solar panels. Progress has little respect for tradition and for conservatives, tradition is more important than markets.

William F. Buckley was the right's favorite intellectual for decades. His most telling quote was, "A conservative is someone who stands athwart history, yelling 'Stop!'"

The Bay Area is not communist. It does, however, represent a threat to tradition. It continually tries new things with less regard for tradition than perhaps any other region of the world. Now California governor Gavin Newsom was the first elected official in the country to grant same-sex wedding licenses when mayor of San Francisco. Dee Hock - former founding CEO of VISA - helped to invent the modern credit card in San Francisco. Genentech was founded there, the first company to dare turn genetic code into intellectual property, starting the biotech industry which threatens to change humanity at a its most basic level: our DNA. For many conservatives, this sort of entrepreneurship, innovation and social invention is more threatening than any socialists. And yet it is the natural culmination of market economies, the very opposite of communism.

Has Wealth Creation Become More Exclusive?

As managing partner of Andreessen Horowitz, Venture Capitalist Scott Kupor argues that much of the gains from startups have shifted from later-stage, post-IPO to pre-IPO private markets. By the time we normal people get into the market, early investors have already captured a lot of the value.
From Scott Kupor's Secrets of Sand Hill Road (updated with data as of today).

"Consider the following example. Microsoft went public in 1986 at a $350 million market capitalization. Today, Microsoft has a market cap of approximately $1.2 trillion. That's a 3,430x increase in market cap as a public company. [An initial $1,000 investment in MSFT when it went public would now be worth $3.4 million.]
"In contrast, Facebook went public at a $100 billion market cap and now trades around $555 billion.[An initial $1,000 investment would now be worth $5,550.] ... For the public market investors to eventually earn the same multiple on their Facebook holdings as has been the case for their Microsoft holdings, Facebook would have to reach a market of more than $340 trillion. To put that in perspective, US GDP is about $20 trillion and global GDP is about $100 trillion. "

[Ron again, not Scott.]
In other words, folks who bought Facebook stock will never get the returns of folks who bought Microsoft stock.

Two possible explanations - not mutually exclusive.

My notion of the third economy is that finance was democratized (banks and stock markets made tools of us common folks in the same way that the first and second economies made tools of church and state). It seems sad that we've gone backwards on this and so much of the gain on capital has been pushed back into less accessible private markets that fund early stage startups where elite investors can get higher returns.

There may, of course, be another explanation for this. Capital no longer limits but knowledge workers do. Median pay at Facebook is $240k. That's median pay. It might be that the knowledge workers who are the limits to the information economy are now getting the returns that capital used to get.

There is no Bubble in Venture Capital for Tech Firms.

In 2010

• Residential mortgages were $11 trillion, down $700 billion from the previous year.
• Consumer credit was $2.5 trillion, down $200 billion from 2009.
• Venture Capital Financing for technical companies was $17 billion, up $4 billion.

Mortgage financing is 647X as much as what we plow into tech startups. Outstanding consumer credit is 147X as much as the VC community puts into technology startups.

Since the start of the year, Facebook has spent more than $21 billion acquiring startups and Google has spent $4 billion. That's $25 billion in acquisitions for just two of the more prominent names in tech in just the first 5 months of this year. Meanwhile, VCs put only $24 billion into startups all of last year.

My own sense is that the venture capital market is still far from mature, perhaps where consumer credit was in the 1970s when the modern credit card was just emerging. 

There is a question about whether Venture Capital is fueling another bubble, akin to 2000. Based on this data, I don't think so. Not even close. It seems to me - given the importance and potential of new ventures - the ratio of financing for new ventures is - if anything - too low compared to mortgages and consumer credit. In a decade we might find talk of bubble in 2014 comical.