A Tale of Two Cities

Everyone now associates Microsoft with Seattle. However, in the early part of its life, Microsoft was located a world away. In fact, the company was founded in 1975 in Albuquerque, New Mexico. That year it had one product, one client, and three employees. The client was MITS, an Albuquerque hardware firm that was making a successful home computer kit called the Altair 8800; the product used BASIC software to operate the kit. In the following months and years, Microsoft prospered in New Mexico. Its future looked so promising that by the end of 1975 one of the two founders, an intense, preppy-looking twenty-year-old named Bill Gates, took a leave of absence from Harvard to join Paul Allen, the other founder, who was already in Albuquerque. The business took off, and Gates never returned to Harvard to finish his degree. Not that he needed it. Sales were growing exponentially, and by 1978 they had already exceeded the $1 million mark and thirteen employees worked for Microsoft.

 But the founders were growing increasingly restless, and eventually they decided to relocate. This was not a business decision. Gates and Allen were both from Seattle, and they both wanted to go back to the place where they had grown up. On New Year’s Day 1979, the company packed its bags and moved to Bellevue, a sleepy suburb on the other side of Lake Washington from Seattle.

In 1979, Seattle was not an obvious choice for a software company. In fact, it seemed like a terrible place. Far from being the high-flying hub it is today, it was a struggling town. Like many other cities of the Pacific Northwest, it was bleeding jobs every year. It had high unemployment and no clear prospects for future growth. It was closer to today’s Detroit than to Silicon Valley.

Just like Detroit, Seattle’s problem was simple: its economy was heavily dependent on old-style manufacturing and lumber, a decidedly unattractive industry mix. Just like Detroit, about half of its manufacturing jobs were in transportation. Unsurprisingly, its employers were having a hard time and were downsizing. People were leaving the city by the thousands. Historically, aerospace had always had a strong presence in Seattle, anchored by Boeing and several subcontractors, but during the 1970s and early 1980s, Boeing suffered multiple slumps. Paccar, a large truck manufacturer and another major local employer, was also experiencing problems. There were some bright spots, such as Nordstrom headquarters and the port, but their presence was simply too weak to lift the local economy. With the exception of people employed by Boeing and the University of Washington, Seattle residents were not particularly skilled.

 As a result, the quality of life was declining. Today most people think of Seattle as one of the most pleasant cities in America, weather aside. But when Microsoft moved there in the late 1970s, the crime rate was significantly higher than in Albuquerque and there were 50 percent more robberies per capita. The quality of Seattle schools was mixed, museums were run-down, and the culinary scene, now so interesting and eclectic, was unremarkable. Starbucks, at the time a tiny local company with only three stores, was still serving the standard watered-down American brew and had yet to ignite the espresso revolution.

Just a few years earlier, The Economist had labeled Seattle the “city of despair.” In an article on the alarming decline of the local economy, its correspondent reported that “the country’s best buys in used cars, in secondhand television sets, in houses, are to be found in Seattle, Washington. The city has become a vast pawnshop, with families selling anything they can do without to get money to buy food and pay the rent.” Expectations about the future were so low that a giant billboard appeared near the airport saying, “Will the last person leaving SEATTLE—Turn out the lights.” The billboard, which is still very much talked about today, perfectly captured the mood of a city in decline.

Although the relocation of Microsoft from Albuquerque to Seattle seemed insignificant at the time, it helped turn Seattle into one of America’s most successful innovation hubs. What is remarkable is how serendipitous it was. Bill Gates and Paul Allen could have moved the company to Silicon Valley, where many other technology companies were already established, or they could have stayed in Albuquerque. With its dry weather, relaxed attitudes, the Sandia National Laboratories, and the University of New Mexico, Albuquerque seemed as if it was destined to develop a local high-tech cluster, and it probably would have if Microsoft had stayed there. From the point of view of Microsoft, staying in Albuquerque would not have been crazy in 1979. The idea of a move met some resistance at first, because some of the employees liked New Mexico and did not want to deal with the logistics, but Gates and Allen stood firm in their decision.

 More than any other sector, innovation has the power to reshape the economic fates of entire communities, as well as their cultures, urban form, local amenities, and political attitudes. We know this, and yet determining the precise interplay of all these forces and distinguishing cause and effect is difficult, especially in complicated places like Silicon Valley. By contrast, the history of the high-tech sector in Seattle can be traced to one specific and fortuitous event, which makes it an insightful natural experiment.

Before the move, the labor markets in Seattle and Albuquerque looked quite similar. In 1970, for example, the number of college-educated workers in Seattle was only 5 percent higher than in Albuquerque, relative to population. Salaries were also slightly higher in Seattle, because of all the Boeing engineers and the large number of hospitals and clinics associated with the University of Washington, but the differences were small and the trends were similar in the two cities. After the move, the paths of these cities started diverging in irreversible ways. By 1990 the difference in the number of workers with a college education had grown to 14 percent, and in 2000 to 35 percent with the explosion of the high-tech sector. It has now reached a staggering 45 percent. This is an enormous difference, similar to the one that exists between the United States and Greece. Importantly, salary levels have also been diverging, especially among skilled workers. In 1980 college graduates in Seattle were making just $4,200 more than college graduates in Albuquerque; they are now making $14,000 more.

 Since Albuquerque lost Microsoft, its economy has limped along. Modest gains in the schooling of its workforce have hampered the growth of the local innovation sector. Intel and Honeywell have large production facilities there and Bank of America and Wells Fargo have large back offices in town, but far more typical are low-end jobs in low-value-added services. By and large, Albuquerque’s innovation cluster never reached the critical mass needed to sustain a truly competitive high-tech ecosystem. By contrast, Seattle has one of the largest concentrations of software engineers in the world. This agglomeration is so large that more than one-quarter of the salaries paid to North America’s software workers are in Seattle. T-Mobile, the fourth-largest wireless carrier in the United States, has a presence both in the Seattle area and in Albuquerque. But Seattle has the company headquarters—with all the high-paying jobs and their large multiplier effect—while Albuquerque has a customer service center, with many low-end jobs and a small multiplier effect.

As the economic fortunes of the two cities continue to diverge, all other aspects of daily life—from livability to cultural amenities, from school quality to food quality—are also growing apart. Although Albuquerque was safer than Seattle in 1979, its violent crime rate is now higher than Seattle’s, and its murder rate is more than double.

What happened to these two cities exemplifies the diverging economic paths experienced by many American cities over the past three decades. Because of the self-sustaining nature of economic development, cities that are similar initially can become very different over time as small differences become magnified. Winners tend to become stronger and stronger, as innovative firms and innovative workers keep clustering there, while losers tend to lose further ground. Economists have a term for this: multiple equilibria.

 How exactly does it happen? This is the part of the story that is the most important. Microsoft employs 40,311 people in the Seattle area, 28,000 of whom are engineers engaged in R&D. This may sound impressive, but how can 40,311 jobs possibly change the destiny of a metropolitan area of almost 2 million residents? The answer is that Microsoft’s ultimate effect on the local economy is much larger than the number of people it employs. First, when Microsoft moved to Seattle, the city increased its attractiveness to other high-tech companies. Microsoft effectively serves as the anchor of the local high-tech sector and a magnet for other software companies. The history of Amazon is interesting in this respect. In 1994, Amazon’s founder, Jeff Bezos, lived in New York and was vice president of a large and successful Wall Street firm. Although he had a job that paid what most people only dream of, he felt there was even more he could achieve. It was the beginning of the Internet era, and he wanted a piece of the action. Bezos eventually quit his job and started an Internet book retailer. He decided to name it after the earth’s longest river, the Amazon, and to locate it in Seattle.

Why Seattle? When Bill Gates made his choice, Seattle was an unattractive place to start a high-tech company, but he had personal reasons to be there. By contrast, Jeff Bezos had no personal reason to be in Seattle. He was not born there (in fact, he was born in Albuquerque!). But by the time he started his company, fifteen years after Gates’s move, Seattle had become a magnet for high-tech activity. Because Microsoft was in the city, software engineers and programmers had concentrated there in large numbers and venture capital firms had opened offices there. At a time when people who knew how to create good websites were still rare, Bezos found real talent in Seattle. He also found financing. The first nonfamily investor in Amazon was a Seattle-based venture capitalist named Nick Hanauer, whose $40,000 funding played a crucial role in helping the company survive its delicate early phase. Shortly after, another Seattle-based venture capitalist provided $100,000 to make the new website more user-friendly, which gave the nascent company a key competitive advantage.4

 Microsoft did not directly help Jeff Bezos start his company, but its presence triggered the creation of an entire high-tech cluster in the region. This highlights a remarkable feature of the high-tech world: success generates more success. It is a feature that has enormous implications for the future of many cities, and it is the main theme of this chapter and the next one. The moment Bezos left Manhattan and headed west, a series of events began that would ultimately bring thousands of good jobs to Seattle. Today the little outfit that Bezos started in his garage is a global brand with 51,000 employees worldwide, a third of whom are in Seattle.

A second channel through which Microsoft reshaped the local economy was by spawning a host of other companies in the Seattle area, as millionaire employees quit to launch their own firms. By one estimate, Microsoft alumni alone have started four thousand new businesses, the majority of them in the Puget Sound area. Expedia is one example of a local company that spun directly out of Microsoft. RealNetworks is another. Founded by former Microsoft employee Rob Glaser in 1995, it now has 1,500 employees and is one of the largest private employers in the city. In his spare time, Jeff Bezos founded a human space-flight company called Blue Origin. Located just twenty minutes outside Seattle, it is like something out of a movie: a private company that builds and flies spacecraft.

 But what if you are not a rocket scientist, software engineer, or computer scientist? What does all this mean for the average worker in Seattle? Because of the multiplier effect, Microsoft’s most notable impact on the Seattle labor market has been on workers employed outside the high-tech sector. I estimate that Microsoft is responsible for creating 120,000 jobs for service workers with limited education (cleaners, taxi drivers, real estate agents, carpenters, small-business owners) and 80,000 jobs for workers with college or advanced degrees (teachers, nurses, doctors, and architects). These numbers have been increasing over time because Microsoft salaries keep rising and because the company’s demand for local services keeps growing.

Innovation creates enormous social benefits, in the form of new drugs, better ways to communicate and share information, and a cleaner environment. These benefits are diffuse, in the sense that consumers all over the world can enjoy them. But innovation also creates benefits in the form of new and better jobs. These benefits are overwhelmingly concentrated in a small number of geographic locations. Of course, not all of these changes are for the better, and later we will look more closely at housing costs and gentrification. But first we need a clearer picture of the geography of innovation jobs in the United States. Seattle is certainly not the only innovation hub in America. To get a handle on where the jobs of the future will be, we need to figure out where innovation is taking place now.