Five Things You Need to Know: San Francisco is Not Detroit
Debunking what was already a pretty silly notion
To learn about the origins of Five Things, scroll to the bottom of this piece.
At first, I thought it was a joke.
And then it became clear that it wasn't, that there are actually people who think that "San Francisco is the new Detroit."
By which they mean that San Francisco in the 21st century is suffering the same fate that Detroit did in the 20th, when the Motor City lost two thirds of its population over a 70-year period.
Which of course is insane, and highlights the dangers of reasoning by analogy instead of first principals (see #5)
1) But First, a refresher on what happened to Detroit
As the automobile revolutionized global society and the world economy in the early 20th century, Detroit became the world’s innovation hub and the wealthiest city in the United States.
By 1930, the Big Three automakers - Ford, General Motors and Chrysler - accounted for 80% of the country's car production. And all were headquartered in the Motor City.
The city's population and wealth boomed, reaching a peak of over 1.8 million residents in 1950 as it became the fifth largest city in the country.
And then it all came crashing down.
No one factor led to Detroit's demise, as competition from lower cost foreign producers, rising labor costs, demographic shifts and a series of oil shocks all contributed to the gradual downfall of the city's economic base.
After decades of urban decay, the sad story of this once-great city culminated in the dramatic federal bailout of the Big Three during the Great Financial Crisis of 2008 - 2010.
2) Hold up now, doesn't that sound a lot like San Francisco?
On the surface, suggesting that San Francisco's current struggles are analogous to what brought down Detroit isn't that far fetched.
Tech = Cars, so the story goes.
But as we dig into the similarities, it becomes clear that San Francisco being doomed to suffer the same fate as Detroit is an idea driven by politics and ideology more than an impartial review of the historic record.
In the 1950s, the auto industry represented between 25-30% of all jobs in Detroit.
And while there is a popular narrative that everyone employed in the San Francisco Bay Area is a techie, it's a myth: Current estimates suggest that around 11% of jobs in the Bay Area are in tech.
The Bay Area economy is remarkably diversified, and while technology is the undisputed engine of growth for the region, recovery from the bursting previous tech-fueled bubbles has been relatively quick - partly because the region’s economy is buoyed by other sectors as technology licks its wounds.
3) But it's different this time, right? San Francisco is dying, right?
As the pandemic wreaked havoc in San Francisco, residents fled as lawless seemed to spiral out of control. Which elicited a collective cheer from groups and people predisposed to hating what the city stood for.
Ultra progressive, San Francisco for some represents what is wrong with one side of the political aisle - what happens when unfettered left wing policies are allowed to run amok.
So to see the apocalyptic images flooding out of San Francisco during the pandemic's darkest days was proof that they had been right all along.
The truth of course is a bit more complicated.
People who have lived in or paid attention to San Francisco for more just the past few years know that problems like homelessness, crime, income inequality and high cost of living are not new phenomena.
These are decades-long struggles that have plagued the city, despite its broadly booming economy of the past 40 years which has been driven primarily by the rise of the technology industry.
But many believe the boom has run its course, that San Francisco's mistakes have finally caught up it and, good riddance.
I mean, look at what happened in Detroit.
This is the sentiment that drives comparisons between the two cities, despite the similarities being easy to debunk.
The most commonly cited argument in favor of San Francisco “being the new Detroit” is that the Bay Area is being replaced as the technology center of the world. And now that there are other options, people won’t tolerate San Francisco’s problems anymore.
There is some truth to this: ambitious technology entrepreneurs can now choose from other innovation hubs like Austin, Miami and New York, not to mention tech magnets around the world.
Further, the adoption of remote work has opened up vast options for companies to lower labor costs and avoid paying the high salaries San Francisco workers require to live in the city.
The similarities between Detroit’s past and San Francisco’s future basically end here.
These arguments ignore several factors which suggest that the Bay Area, and San Francisco by extension, is unlikely to collapse in the way Detroit did.
Despite recent departures of high profile business people and some major companies relocating out of the Bay Area, tremendous levels of wealth are anchored in the Bay Area.
And most of it is outside San Francisco:
In just one example, Sand Hill Road in Menlo Park, home to major Venture Capital and Private Equity firms, still has the highest office rents in the country. Earlier this summer, prominent VC firm Andreesen Horowitz signing a new 34,000 square foot lease in a market where asking rents are as high as $170 per foot.
This kind of entrenched wealth generation machine, which is rooted historically in the innovation engines of Stanford, Berkeley and other top Universities in the area, is a buffer against the kind of systemic decline that befell Detroit.
Meanwhile, San Francisco itself is currently seeing an influx of new residents coming in from across the country and the world. Away from city's troubled downtown, apartments are leasing quickly and some homes are receiving as many as 50 offers.
This does not sound like a city in decline.
Another common argument for San Francisco's imminent downfall is the rise Artificial Intelligence, and wouldn't it be ironic of the baby birthed in the San Francisco - where OpenAI is headquartered - was what ultimately led to the city's downfall.
But again, that's an argument that rings true only if you are already looking for reasons to contend that San Francisco's days are numbered.
If anything, AI is raising the importance of the most important technology center in the world. The world's economy is becoming increasingly dependent on technology to survive, to run everything from airplanes to ships to medical procedures to oil drilling to manufacturing to logistics.
Which means more investment in the companies and people that develop, build and maintain those systems.
4) Evolution, not Revolution
To argue that San Francisco will suffer the same fate as Detroit, one has to believe that either the Bay Area will cease to be somewhere that people want to live, or that the Bay Area will be fine and that San Francisco will devolve into a hellscape within perhaps the most temperate and desirable place to live in the world.
Both seem far-fetched to anyone who doesn’t want that to happen as proof to back up their ideological beliefs.
It’s of course disingenuous to ignore the problems San Francisco faces - including the city's dramatic revenue shortfall stemming from the emptying out of its downtown financial center.
But one cannot ignore the city's history of reinventing itself, decades of booms followed by busts. Which give way to yet another boom.
It’s no accident that the city's flag depicts the Fenix, which doesn't refer to the city's recovery from the devastating 1906 earthquake and fire as many believe, but has actually been on the city's flag since the 1850s.
5) Fine, you sold me. But what's to make of all this?
As I said at the outset, the flaky argument that San Francisco is the next Detroit is more rooted in politics and ideology than legitimate historic analysis.
So why is it so easy to fall into this trap, to glom onto a story that seems at first so compelling, even if upon further review the argument falls apart?
This is a common mistake when we reason by analogy rather than from First Principals.
From our friendly AI, ChatGPT:
Reasoning by Analogy: involves solving a problem or understanding a situation by comparing it to a similar, previously encountered problem or situation. It relies on recognizing patterns, similarities, or parallels between the current issue and something familiar.
Reasoning from First Principles: This method involves breaking down a problem into its most basic, fundamental elements and then building up from those basic truths to reach a solution or understanding. It avoids assumptions and relies on core principles or laws.
The benefit of the former is basically speed and ease of use, while its drawbacks are that we often arrive at incorrect conclusions because its hard to know everything about the situation we are using as a starting point.
Reasoning from First Principals, while time consuming and difficult, tends to yield better and more innovative results since its rooted in our best assessment of the facts as they are.
Its no surprise than in our age of hyper-rapid communication and information consumption, reasoning by analogy becomes the default. It’s quick and easy, and if one is already predisposed to a certain viewpoint, confirmation bias rules and we neglect to look much further.
Meanwhile, most innovators and entrepreneurs kneel at the throne of First Principals - and for good reason.
Fortunately, its this group that San Francisco depends on for its survival.
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The Story of “Five Things You Need to Know”
During a stint at Minyanville, a financial news and education media company, I was fortunate to work under the tutelage of a talented editor named Kevin Depew. Depew is now the deputy chief economist at consulting firm RSM, and wrote prolifically during the Great Financial Crisis, brilliantly capturing the mood of America during that trying time.
Depew’s "Five Things You Need to Know" was required reading every week for thousands across Wall Street and even down to DC, and covered topics from high finance to macroeconomics to social trends. This series is an homage to Kevin, who patiently mentored me and often quipped "I majored in philosophy, but since none of the big philosophy firms were hiring, I went into finance."