Tax cuts and tech jobs won’t solve DC unemployment

Technology investor Mark Ein thinks high taxes and costly office space are the only things keeping DC from being a high-tech hub, thus keeping more of its residents employed. If only it were that simple.

If the major tech companies that started in the District hadn’t left, the city’s crippling unemployment problem would be addressed, Ein posited before the DC Chamber of Commerce’s 2011 Business Summit last week, the Current reported (huge PDF, page 9).

Ein says simply adding 10,000 more jobs will solve DC’s unemployment problem. That isn’t so many compared to the number that left the city in recent decades. And he recommends cutting corporate taxes to bring those jobs to DC.

But taxes aren’t the reason DC isn’t a technology hub, and tech jobs won’t address DC’s employment crisis. Putting DC residents back to work requires addressing the gross mismatch between the skills of the District’s unemployed and those required by the area’s knowledge economy.

Why have companies like MCI, Nextel, Corporate Executive Board, and the Friedman, Billings, Ramsey Group left the District? According to Ein, the culprits are corporate tax rates and the high cost of real estate.

By that logic, Omaha and Tulsa should be the nation’s high-tech hotspots.

I co-founded a tech company in the District in 2000 that now has 60 employees and is headquartered in Tysons Corner. We moved there despite very high rents for two reasons. First, my partners who live in northern Virginia would have far longer commutes into the District than I would have to Tysons. Second, Tysons Corner is where the potential software partners and vendors are — it’s where the action is.

Slashing the corporate tax rates in the District would benefit owners of DC businesses like Ein. It would do little to attract outside businesses and even less to help the unemployed, who are already threatened by cuts in social services by the cash-strapped city government.

Technology hubs form where there is a large source of very talented developers, capital and a large number of similar technology companies that serve as rivals or partners. According to Michael Porter, who wrote the definitive text on industry hubs or clusters, these are factors that contribute to clusters in any industry.

Tax rates, according to Porter, are not relevant to the rise of tech hubs. If they were, the largest enterprise software firm on the planet (SAP) probably wouldn’t be in Germany, and the largest tech hub in the world (Silicon Valley) wouldn’t be in the state that has the second-highest business tax rates in the US.

Ein claims that Washington has “been a place for people to start companies that want to tap into the deep population of one of the most well-educated, computer-savvy young workforces anywhere in the nation”. But Northern Virginia’s tech cluster didn’t just happen; firms located there to take advantage of federal government contracts.

Non-government software firms have been only a knock-on effect, or consequence, of the government contracting hub. My company, which sells software to phone companies, is such a knock-on effect, benefiting as we do from the local telecom sector hub that arose when telecom was heavily regulated by the government.

Washington is quite unlike Silicon Valley, Austin, or New York City with their legions of talented software developers. There is no leading computer science department in a Washington-area university, and there is no rivalry amongst local firms for the best developers as exists between Google, Facebook, and Twitter.

The number of tech companies founded in DC, to which Ein points as evidence of our lost potential, is actually not high for a city our size. One of the largest software companies in the world, Compuware, is based in Detroit, and no one is looking to the Motor City as the next Silicon Valley.

DC’s unemployed also aren’t jobless due to a lack of jobs. They simply lack the skills that even the bulk of existing jobs demand. More than 40% of jobs in DC require a college degree, while nationally only 20-22% of jobs require a college degree. Yet 36% of DC residents are functionally illiterate.

DC lacks a manufacturing base and is a hub for public policy, non-profit and legal sectors that require college or advanced degrees. We need to solve the root problem and not waste our time attracting more employers that require higher education.

Mayor Gray thinks job training will close this skills mismatch. That sounds great, but one wonders what cluster will form in the District that can provide 10,000 jobs for which functionally illiterate residents can train in a year or less. Gray hasn’t delved into such details, but it’s these details that must be worked out if job training in the District is to avoid being a multimillion dollar boondoggle.

Is there an industry that could employ the 30% of Ward 8 that is unemployed, yet find a home in a knowledge-based economy? The answer is key to the city’s ability to wash the moral stain of 30% of its children living in poverty.