Is Silicon Valley Automating Our Obsolescence?

This week, we're exploring the San Francisco Bay Area and the way income inequality is affecting the region. Check out the other pieces of the week, aggregated on this page.

Silicon Valley has created mind-boggling amounts of wealth. Entire industries have been invented here. Smartphones, search engines, cloud computing and cars that drive themselves are designed here.

Billionaires are minted annually, but inequality is rising rapidly.

This week we will be looking more closely at the tech-driven economy of the San Francisco Bay Area. Many economists across the political spectrum argue this place provides a glimpse of our nation's collective future.

History In Fast-Forward

Before Silicon Valley was called Silicon Valley it was known as the Valley of Heart's Delight. In the mid-'50s, this place was an agricultural paradise. I can still pick Meyer lemons in my backyard or persimmons from a neighbor's tree — even in mid-December.

Leslie Berlin is a historian at Stanford who specializes in the history of this place. I met Berlin last week in a doughnut shop in Mountain View.

"One of the reasons I love studying the history of Silicon Valley is that it's like someone took the history of the United States and pressed fast-forward," she said. "When you are at the end of the 1950s you are still dealing largely with [an] agricultural economy out here."

In the 1960s and '70s manufacturing exploded. In the 1980s, just as suddenly, the manufacturing economy here began to collapse.

It was replaced almost immediately by the knowledge economy, Berlin said.

"In Silicon Valley, you see it happen over ... 40 years — four decades and you have gone from a period of agriculture to [an] information economy and it makes your head spin," Berlin said.

Putting Silicon In Silicon Valley

Berlin and I met here at this specific doughnut shop in Mountain View because this is where Silicon Valley really began. We are right across the street from Intel's first silicon chip factory — or fab.

"This is where they started building their chips — this is where Intel first started getting inside all machines," Berlin said.

From 1968 when Intel launched this fab until the mid-'80s more than 200,000 manufacturing jobs were created near here. These were good jobs — really good jobs.

"The mobility that these workers could experience was enormous," Berlin told me. "The demand for employees was so high that the annual turnover at a Silicon Valley manufacturing facility was 50 percent."

To keep employees happy and on the job, Intel let them buy stock at a 15 percent discount. Line workers with high school educations met regularly with the company's founders.

"They were often immigrants from different parts of the world," Berlin said.

For years companies here spoke of themselves as families. The engineers who founded what became the world's biggest chip companies wanted to create an egalitarian economy.

A Thinning Middle Class

And then in the 1980s, global competition, automation and rising prices for labor and real estate here drove chip manufacturing out. By 2008, Intel had closed its last fab in Silicon Valley.

What happened to manufacturing here isn't really unique — it happened all across this country. But what happened next is different.

The same venture capitalists that helped build Intel and Apple began betting on software and design. The knowledge economy exploded. The Internet was created, then commercialized.

These businesses were cheaper to build. They scaled quickly. When manufacturing was required, it was done overseas. There are still new high-performance-chip makers in Silicon Valley, but they are almost all fab-less. The manufacturing is outsourced.

"Many more people are becoming quite wealthy, which is great, but there are a lot of people stuck in only OK service jobs," says Tyler Cowen, an economist at George Mason University. "They struggle to pay the rents of Silicon Valley, so there is a thinning out of the middle class."

Cowen, the author of the book Average Is Over, says someone who 30 years ago could get a job in a chip fab is now stuck working at a Starbucks. This is driving more income inequality here, and Cowen believes it's only going to get worse.

"I think once again you could say the future is happening first in California," he says.

A Rising Wealth Gap

Income inequality in the Bay Area is rising rapidly. San Francisco still lags behind New York and Los Angeles when it comes to uneven distribution of wealth and income but it is quickly catching up. And Cowen believes technologies being developed and commercialized right now in Silicon Valley will only exacerbate the trend.

But not all economists believe that rising income inequality here is a bad thing.

"If you want to see a more equal income distribution, go to Detroit," said Stephen Levy at the Center for the Continuing Study of the California Economy.

Levy argues that large accumulations of wealth here benefit low-skilled workers in Silicon Valley. He says today they have lower rates of unemployment and higher wages than in many other parts of the country.

The problem, Levy says, is wage stagnation. He says here and around the United States middle- and lower-income workers haven't seen wages rise for years.

Cowen argues that computers using artificial intelligence, as well as robotics and technologies like self-driving cars, will make that problem worse. He believes that soon these technologies will begin replacing what are now solid middle-class jobs. Even jobs in the knowledge economy aren't safe, he says.

Take Google's self-driving car. Riding in one is a trip. It could well save thousands of lives. But you have to wonder what's going to happen to taxi drivers and long-haul truckers.

Last week, I interviewed an entrepreneur who wanted to replace my financial adviser with a robot.

At the University of California, San Francisco, administrators are investing millions in a robotic pharmacy.

"Those are great examples, Cowen says. "They even now have artificial intelligence programs that can grade essay exams and seem to do it pretty well."

Cowen believes very few jobs are safe. At UCSF, a robotic pharmacist fills prescriptions for hundreds of patients automatically.

In the next room, pharmacists like Jon Hutchinson wearing sterile bunny suits supervise a robot named RIVA that mixes chemotherapy treatments. "It's more accurate and it's also going to be safer for the patient," Hutchinson said.

Administrators at UCSF reluctantly admitted that these machines could mean that their hospital may need fewer pharmacists in the future, and they say those pharmacists will need different skills.

Today your ability to add value and collaborate with a computer that can do much of your job automatically might be the only way to preserve job security for a shrinking middle class.

And while opportunities abound here, Silicon Valley has become a place with a stark divide between winners and losers.

Cut Off From The Starting Line

Back in Mountain View, historian Berlin says this place is in the midst of another rapid transformation.

"What we are seeing in the Valley, I think, is a starting line that has moved," she said.

"Silicon Valley has maintained its meritocratic culture among the people who are able to get to the starting gate. So if you are coming equipped with the right knowledge and the right experience ... it doesn't matter what your family name is. It doesn't matter what country you are from. It doesn't matter how much money you have. If you can get to the starting gate then you are good to go."

"The question is who can get to the starting gate now?" Berlin said. "And that really has changed."

Without the right education or exceptional skills today it's nearly impossible to enter the race.