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Without immigrants, Silicon Valley would be a shell of what it is today. Yet bad restrictionist policies threaten to undermine American dominance in tech and stymie innovation.

Guests

Alex Nowrasteh is the immigration policy analyst at the Cato Institute’s Center for Global Liberty and Prosperity.

However, the recent turn towards immigration restrictionism is worsening the already problematic bottleneck on attracting global expertise to the US. Caleb Watney joins us to talk about how the flawed H-1B visa system is responsible both for worsening that shortage and for widening a competitive moat around the Big Tech companies that have the resources to navigate the visa morass.

What is the H-1B visa? Does our immigration system favor entrepreneurship? How many American college students are immigrants? What does our student visa system look like?

Further Reading:

You Are Now Free to Move About the Planet, Free Thoughts Podcast

Trump’s Immigration Crackdown, Free Thoughts Podcast

The Libertarian Argument for Open Borders, written by Grant Babcock

Transcript

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00:04 Paul Matzko: Silicon Valley has become such a metaphor for innovation that it’s hard to imagine a world which it never came about. If we clipped the Valley out of the US, it would be the 19th wealthiest country in the world on its own. Yet, it didn’t have to happen, Silicon Valley is the product of a surprising chain of coincidences, obscure regulatory tweaks, and what happens when you concentrate brilliant and eccentric people in one location and give them a rather peculiar set of incentives. Building Tomorrow is going to explore that birth, the birth of Silicon Valley, both what that has meant for innovation today, and how that past reveals the ways that the future of Silicon Valley, and innovation in America more broadly, is under threat. To introduce the first pillar of Silicon Valley, let’s start by thinking about how many people live on this warm blue marble that we call Earth. There are 7.7 billion of us, which is just over 23 times as many people as roughly 230 million people who live in the United States. And given that genius and talent are gonna have a rather naturally broad geographic distribution, even if opportunity does not, we simply can’t expect one nation to dominate technological innovation for as long as Silicon Valley has for perhaps half a century, all on its own.

01:20 Paul Matzko: And sure enough, that’s not what happened. Silicon Valley might be in America, but was built by some of the brightest minds both from here and from around the globe. To quote a little Broadway, “Immigrants, we get the job done,” it’s hard to communicate just how vital immigrants are to the Silicon Valley economy, fully 57% of tech workers with a college degree were born abroad, and it’s actually closer to three quarters, if you look just at Palo Alto. And they aren’t just working for other people. Researcher Ian Hathaway, over at the Brookings Think‐​Tank notes, “though accounting for less than 14% of the population, immigrants found almost a quarter of all new businesses, nearly one‐​third of venture back companies, and half of Silicon Valley high‐​tech startups.” More than half of all Nobel Prize winners were born abroad and get this, if you list the countries that have the most patents awarded to immigrant inventors, the US has more than the next 26 countries combined. Now, for more about the role of the immigrants in innovation economy, I sat down with Alex Nowrasteh, who’s the Director of immigration studies here at the Cato Institute.

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02:31 Paul Matzko: So, if you had to classify American immigration policy in comparison to international immigration policies, where would you situate us in compared to other nations?

02:43 Alex Nowrasteh: We let in comparatively fewer immigrants as a percentage of our population than most other OECD countries, and of that population we let in, it is disproportionately those who are family members of American citizens and other lawful permanent residents, whereas a lot of other countries like Canada, Australia, New Zealand, just to give some examples, allowing comparatively more higher‐​skilled immigrants who are more likely to be higher educated, etcetera, than the United States. So, we have a more family‐​focused system, most of the rest of the world has a system that tries to identify skilled workers and allow them in.

03:25 Paul Matzko: From my research, this appears to have two… There are two ways in which this flow of immigrants post ’65 play an important role in the rise of Silicon Valley, and it’s both to provide kind of unskilled labor, like the folks who work on factory lines in California factories. It’s a relatively cheap source of labor to build stuff, to build the products, but then there is a high skilled… Kind of a conduit for high skilled labor to come, the kind of people who are founding startups, who are engineers, software programmers, the innovators and startup and that scene as well. And so, in combination you really… It’s hard to imagine Silicon Valley without those two flows of immigrants, how do you see that playing a role in the rise of Silicon Valley?

04:15 Alex Nowrasteh: So, I think it plays a very large role, just to back up and sort of take a 35,000 foot view. The US population is only about 4.4% of the world’s population, but it disproportionately produces innovations, technology, a lot of these new things that Silicon Valley is the hub of that. So, it would be quite a coincidence, if all of those people who are the most innovative and productive in the world, come from a sub‐​population that’s only 4.4% of the world’s population, right? So these productive areas, whether it’s in finance in New York, whether it’s fashion in London and Northern Italy, or the movie industry in LA, or if it’s technology in Silicon Valley, disproportionally foreign‐​born. Just because the talent pool globally, there aren’t nearly as many hyper‐​talented people as there are the rest of us, so they need to be able to go to these hubs, these clusters, where people are able to innovate and work together to produce these amazing innovations that we all take for granted. So, these people basically, self‐​select, they’re driven by market forces, they also have to go to these areas, like Silicon Valley, where there’s a lot of innovation, and they have had a tremendously important impact on this.

05:30 Alex Nowrasteh: Economists struggle with understanding what causes innovation, we don’t really know what that is. We don’t even know what causes economic growth really, it’s sort of a big mystery about it. But a couple of the different theories about where innovation comes from, where economic growth comes from, basically means making things more efficient, like, getting more products out of fewer resources, fewer inputs, as well as entirely new leaps in ways of doing things. So, this could come from more entrepreneurs, founding new companies that are taking big risks, from increased patents, more profitable firms, as a result of both of these things, more business creation, new creation of products, and immigration has a big impact on all these things. So, what’s interesting is, just to give you an example of like entrepreneurship, which is sort of a one measure of a potential innovation, anyway, is that immigrants in the United States are one third more likely to self‐​own their own businesses.

06:31 Alex Nowrasteh: They are twice as likely to start any new business, in any new year compared to native‐​born Americans. Basically, they patent at double the rate of native‐​born Americans over the 1940 to 2000 time period, and over other time periods that we have information for. Their businesses tend to be a little bit more profitable when they find them, and a lot of times they are concentrated in industries that create new products. Now, none of those are a perfect measure of innovation. None of them are a proven measure of economic growth, of course, but all of the ones that people talk about as being potential sources, immigrants are over‐​represented.

07:09 Paul Matzko: My understanding for a lot of skilled workers in the US, they come in on something called the H1B visa. What is that? When did it start, how does that work?

07:17 Alex Nowrasteh: So the H1B is a temporary, low‐​skilled, guest worker visa program for specialty workers in high skilled occupations. It also includes super models and some other people like that, but that accounts for less than 1% of them. Basically, you have to have a wage of $60,000, have a job offered by an American firm. And it started in the early 1990s, as a part of the immigration after 1990, went into effect a few years later. It allows $65,000 annually to work in American firms, and an additional $20,000 who are graduates of American universities, especially like, graduate schools in the United States. So it’s effectively $85,000 per year for for‐​profit firms. There’s a limited number for non‐​profit research institutions. So you and I are actually very exposed to competition from foreign‐​born high skilled workers, much more so than any for‐​profit company actually in the United States on this. So the H1B is a tremendous way in which folks from abroad, or those educated in American universities can work and live in the United States. Rarely amongst US visas, they can also adjust their status, which means they’re on one visa, they can get another visa without leaving the country.

08:36 Alex Nowrasteh: So, they can be sponsored by their employers for a green card while they are working in the United States. But those green cards are very regulated, they’re highly limited in terms of numbers, the wait time for Indians for one of the variety of green cards is over a century. So that’s not like a great advantage to it, but H1B is the way that a lot of folks, especially South Asians and East Asians are able to get into that green card category. Because it’s expensive to sponsor somebody for a green card. It’s $10,000 to $35,000 in government and legal fees to do that. Most firms understandably wanna basically, try out the worker on an H1B before they invest this amount of money in hiring that person, and sponsoring them for a green card. So the H1B visa is basically a way to try that. The big problem with it today, is that nobody knows how many H1Bs are currently employed in the United States, but it’s hundreds of thousands in for‐​profit firms, multiple hundreds of thousands, perhaps, as many as almost a million.

09:40 Alex Nowrasteh: And the green card wait time for some of them is decades or centuries. So, because the green card numbers are so low, so you have a lot of people working on these visas, that aren’t the best visas in the world by the way. It’s difficult to change jobs, they can, but it’s difficult, it’s expensive. And if they basically lose their jobs, then they are deportable, almost immediately. So it’s not the best visa in the world. So as a result, you have a lot of these problems that occur because of it. Because of these regulations that make it difficult to change jobs, difficult to move, and because of the lack of the green cards. So it’s not the best situation.

10:12 Paul Matzko: So let’s say, I mean, I suspect that you like us here at Building Tomorrow generally favor opening the borders much more than they currently are restricted. But let’s say you had to pick like, “We can’t have everything we want. The amount of political capital to be spent is finite, it will only change some relatively discreet things.” What are two or three immigration policy changes that you would pick that would maintain the flow of talent that has made America a hub for economic growth and innovation? If you’re forced to choose, what are your top two or three?

10:44 Alex Nowrasteh: If we’re focusing on high‐​skilled, I would say, the one thing we definitely need is an entrepreneurship visa. We don’t have one.

10:51 Paul Matzko: Okay, so H1B doesn’t count as an entrepreneurship visa?

10:53 Alex Nowrasteh: No, you can’t start a business on an H1B, you can’t sponsor yourself if you’re the business creator to do that. So what we need is a visa, or a way for people who are here on other visas to basically say, “If you wanna start a firm, give it a shot. Make it really easy,” that seems like a no‐​brainer to me, really simple, low‐​hanging fruit. The second way would be just to build within the current system, and say, increase in number of employment based green cards by say a factor of 10, [chuckle] or just make it so that we don’t have numerical caps, but just if there’s an American firm, that wants to hire you, and you’re highly skilled, then they can do it. And maybe charge a price, $1000, a couple of thousand dollars in government fees to do that. That’s sort of not crazy radical. I prefer that they don’t have to charge a price at all. But thinking about the political possibilities, make them charge a price, so that we at least give an incentive for them to go out of their way a little bit to try to hire Americans.

11:54 Alex Nowrasteh: That might be politically feasible to do. Those seem like two very good ways to do it. And then within the combination of this, I think we need more experimentation with temporary visas. So, Senator Ron Johnson, introduced a bill in 2013… Sorry, 2017 that will create a state‐​based pilot program, which allows states to create their own temporary guest worker programs. And I think a lot of states will create and experiment with higher skilled visas and entrepreneurship visas and investor visas. And I think that allowing that, putting that out into the states with some experimentation would be a wonderful way to figure out what types of visas work best or at least what work best in different regions in the United States. So I think the combination of those three types of visas would be basically what we need to do it all. And sorry, one other one that’s super easy. Anybody who graduates from an American university where a college degree or an advance degree should basically have a Green Card stapled to their diploma.

13:01 Paul Matzko: This actually introduces a subject I wanted to talk a little about here, “The student visa system.” And my understanding is that, it has been… American universities, they populate the list of the top universities in the world. There’s a reason why so many folks come to the US to study, to get both college degrees and advanced degrees, graduate degrees. When I was at Penn State, it was close to half, it might’ve been over half of all graduate students were immigrants or were here temporarily at least, especially in the Science and Engineering in the STEM departments. But that system has always been kind of cobbled together, it doesn’t feel like it was designed with a lot of forethought and then it’s been under pressure from the Trump administration. So can you talk about our student visa system?

13:49 Alex Nowrasteh: Yeah, so the “F Visa” is a student visa and it allows you to attend a US university. Now, the reason why the student visa is popular is because it’s the United States, and because people also want a chance of staying in the United States. And you can get an F Visa, you can get an H1B off of that. You can get something called OPT, which is a temporary work for I believe it’s up to 36 months in the United States without a H-1B visa in science, technology, engineering, and other fields like that. So, there are avenues to actually work in the United States. And if you get an H-1B, potentially a Green Card permanently. So, you have to take a look at that, right? It’s not just the value of coming to an American educational institution, which is valuable and whatever, but a lot of it is socially wasteful signaling. Yeah, but it’s a foot in the door and that’s what they’re paying for, that’s what’s very valuable. So a lot of these people, of course, are very smart, you have to be smart and intelligent and hard‐​working, and get into these universities in the first place, but this is the way in.

14:48 Alex Nowrasteh: So, nobody really designed the F Visa to be this like foot in the door to come in and potentially stay in the United States. But that is what has become. The Trump administration has been putting more restrictions on this, basically making it more difficult for folks to prove that they have a student visa to go through the interview process. You have to be interviewed abroad, you have to travel to a consulate or US Embassy to do the interviews. They’re basically making, so you have to do more interviews, there’s more paper work that needs to be filled out. And that’s just expensive for a lot of students, especially from poor countries who aren’t that well‐​off to begin with. A lot of the students are well off. We’re not getting the poorest people from India who are coming in on H-1B. It’s people who are fairly well‐​off in those places. Generally, at least above the median in terms of income and education or at least their parents are. But it does make it more expensive if you have to travel across the country to go to a consulate, do interviews, etcetera, basically hire a lawyer, go through this entire process without a guarantee of getting a student visa, that raises the uncertainty. So a lot more folks are going to European universities now.

15:53 Alex Nowrasteh: They’re going to Canadian, Australian universities, New Zealand, etcetera. I don’t think this is going to kill American universities, unless it continues for a long time, but this is a heck of a source of revenue for them. Because these students, they don’t pay any in‐​state tuition, they pay higher tuition, because they’re foreign, on top of all the fees and other things that they have to pay to the university and to the US government. So, it’s quite expensive for them to come in on the first place, and those extra fees subsidize a lot of scholarships for American students who are a little bit poorer or worse off, who are trying to be educated at these universities. It also lowers… Foreign‐​born students are more likely to patent when they’re at universities, so by blocking them a lot of universities lose out on patents, potential patents and in the long‐​run potential donors to the university. Like, I don’t weep that much for universities, because I pay a lot to go to university and I’m never gonna write a check, but a lot of them are going to lose out on this, and they have a very valuable product and they wanna be able to sell.

16:56 Alex Nowrasteh: And the US government is basically getting in the way of US educational exports. And, I thought this administration love the exports. So, I don’t understand what the big deal is. And I thought they loved merit based immigration, but no, they don’t. That’s just a talking point. So, highly skilled immigrants primarily increase productivity through boosting innovation, the number of patents and a lot of business startups. So new innovations, patents and businesses generate new ideas and these advance the technological frontier, enhance productivity, increase a lot of our human knowledge. So, although it’s difficult to measure productivity enhancing innovations directly, patenting rates, probably come pretty close, right? They’re probably associated with higher productivity at the country and sector level. So, they’re like, not the worst proxy measurement out there. So, they’re pretty decent, I think for what we’re talking about. So in the US, citizens of foreign countries file at least a quarter of all patents, perhaps as many as 30% since 1976, but they are currently only about 13% of the US population.

17:56 Alex Nowrasteh: Immigrants patent double the rate of native‐​born Americans, due to their disproportionately holding science and engineering degrees. So for instance, two economists Hunt and Gauthier‐​Loiselle 2010 found that a one percentage point increase in immigrant college graduates population share, increased patents by 9% to 18%. So, a very dramatic result… Increase in that. The result of this was that an increase in patents per capita by 12% to 21% and appear where the total number of patents per capita rose by 63%. So basically, immigration and immigrant patenters, patentees accounted for about a fifth to a third of all the new pre‐​capita patent increase in the United States from 1940 to 2000.

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18:48 Paul Matzko: Clearly, Silicon Valley would be a shell of itself, were it not for the wave of immigrants that came to the US, starting in the mid‐​1960s. Maybe you’re asking why then? Well, what’s striking about the timing is that who actually came post‐​1965 was a bit of a legislative accident. That has had immense unintended salutary consequences. But first, let me briefly explain the immigration landscape before the 1960s. Now, if you go all the way back to the founding, immigration restrictions were of course essentially impossible prior to the mid‐​19th century. The federal government was too small, borders were too porous to effectively control. So for the first century of US history we effectively had open borders. Both the growth of federal bureaucracy and the rise of pseudo‐​scientific racism interest in excluding immigrants from “Undesirable countries” grew a pace. The Chinese Exclusion Act in 1882 explicitly banned all immigration from China. Now, immigration restriction‐​ism which would culminate in the next 40 years in the Immigration Act of 1924, they even just wanted to stem the Southern and Eastern European tide coming into the United States. That meant Italians, Greeks, Slavs, really all non‐​Protestants. They were just beyond the pale.

20:05 Paul Matzko: Then with the backing of progressive Eugenicists and the conservative second Ku Klux Klan, congress passed a new system of immigration quotas based on nationality, effectively closing the door at all, but the trickle of legal immigrants. But then during the height of the Cold War, Congress realized that the lack of skilled immigrants was hurting the US in the space race with the Soviet Union. So thinking that lifting the National quota system would lead to more German scientists and English doctors coming to the US, Congress passed the Immigration and Naturalization Act of 1965. Now if they’d known the effects of the bill congressional Democrats who were beholden to labor unions, they wouldn’t have passed it. Indeed, president Lyndon Johnson, in a signing statement said “This bill that we will sign today, it’s not a revolutionary bill. It does not affect the lives of millions. It will not reshape the structure of our daily lives, or really add importantly to either our wealth or our power.” LBJ couldn’t have been more wrong. It’s a testament to the power of free labor markets that repealing the National quota system played such an important part in unleashing incredible and unexpected innovation and prosperity.

21:13 Paul Matzko: One of the immediate consequences of the reform was an influx of skilled workers from all over the globe, not just from Western Europe like its authors thought. Congress at the time was comfortable imagining more white immigrants from developed countries, but what they got instead was a flood of skilled, educated, driven immigrants from China, India, South Korea and Africa. To give you just one concrete example, in 1965 and this is before the bill went into effect, only 47 scientists and engineers could legally immigrate to the US from Taiwan, just 47. Two years later, that number was 1321, that’s 28 times more in just two years. And the numbers kept growing rapidly. Well, it’s impossible to imagine Silicon Valley without these immigrants. It’s worth remembering that there are still high‐​skilled immigrants being turned away every year. That’s because the 1965 reforms it primarily increased family‐​based immigration, but there are still caps in the number of visas for skilled workers who don’t have family in the US. These visas are called H-1B visas which allows corporations to sponsor immigrants with in‐​demand skills.

22:25 Paul Matzko: However, most years, two to three times as many people in corporations apply for those visas as the number alloted, leaving thousands of engineers, doctors, and the like on the outside looking in. This is particularly egregious given that it’s estimated that the US faces a two million person deficit in the number of engineers our economy needs by 2022. That means research projects not pursued, innovation lying fallow and products not released. And the H-1B visa system is particularly damaging for innovation in the most cutting edge technological fields, like artificial intelligence and quantum computing research. To explain why I’ve asked Caleb Watney, a Research Fellow at the R Street Institute to join me. So Caleb, you’ve described before one of the unintended consequences of how the H-1B visa system works. And my understanding is that it tends to actually increase consolidation in the technology industry. What do you mean by that?

23:24 Caleb Watney: Yeah, that’s a great question, Paul. So I think it’s important to just take a step back first and realize that for a lot of emerging technologies, that AI but also biotech and lots of other areas, access to high‐​skill human capital, human talent is incredibly important and it’s really the biggest bottleneck right now to AI progress, not only between countries when you’re looking at how is the US comparing to China, but also for specific companies that are trying to compete against each other, access to high‐​scale talent is hugely important, and for something like AI or machine learning, you’re seeing a huge supply shortfall. Demand for these skills is far outstripping the available talent both in terms of the absolute number that we have, and also the number that are being produced or created through US universities, especially.

24:19 Paul Matzko: There’s only so many people in the world who have the level of expertise. And these are cutting edge and remarkably complicated fields, like whether it’s…

24:27 Caleb Watney: Absolutely.

24:27 Paul Matzko: Artificial intelligence, or quantum computing or whatnot.

24:31 Caleb Watney: Yeah, and we’re not talking about just run‐​of‐​the‐​mill computer scientists, yeah. These are really the top of the top people that are in top machine learning PhDs.

24:39 Paul Matzko: And are maybe a few dozen, a few hundred of them in the world capable of really advancing this work at the moment.

24:45 Caleb Watney: Yeah, I mean it’s, numbers trying to quantify this population is very difficult, but as a rough proxy, we could look at the number of machine learning or related sub‐​fields for PhD and master’s students, right? And of that population, we’re seeing roughly 70% of those students are international students. So really the majority of the supply that’s being created every year of new machine learning, talented skill engineers are international students, which then means that the immigration system specifically as you mentioned, the H-1B visa, which is the primary pathway through which a lot of these students can stay in the United States long‐​term, the way that that system is set up, really ends up inadvertently shaping the distribution of where that talent ends up going in the United States.

25:35 Paul Matzko: So on one hand, I mean the simplest or most straightforward problem is that there’s only so many H-1B1 visas to go around. There is going to be talent left out because of that, people who wanted to immigrate, who would be working at a startup company or at a tech firm and cannot just because the pool of H-1B1 visas was filled early in the year. And I think people get that. That’s a fairly straightforward problem, and it’s a real problem. It’s a reason to increase the number of H-1B1 visas. But my understanding is that there’s a second problem that I don’t think is quite so obvious to observers.

26:13 Caleb Watney: Yeah.

26:14 Paul Matzko: What’s that problem?

26:14 Caleb Watney: Yeah, so that’s basically, in a completely… Beside the question of how many of these students or how many of these visas we have, is what’s the process for applying to have one of these visas in the first place, and how does that end up shaping where this talent goes? So we can see, if you look at ex ante career interests for a lot of these international students, they actually report a higher desire to want to work at a startup or a small company than a otherwise equivalent United States students in that program, but in actuality students are way more likely, almost twice as likely or more likely to end up working at a big incumbent firm, whether that’d be Google, Facebook, Amazon. And the biggest reason for that is essentially immigration hurdles. So if you are applying to have an H-1B visa, it’s really helpful to have a huge HR department that’s capable of braving the immigration bureaucracy. You have to have immigration lawyers on staff. There are very expensive fees. The timeline, the complexity, all of this makes it very difficult for startups to be able to actually apply to have access for this really high‐​skilled talent versus big companies that basically specialized in having this.

27:28 Caleb Watney: And so you can only see sort of that difference between both what’s the career ex ante interests of these students and where do they end up? But also, there’s been recent empirical work that looks at what are the outcomes of startups that do end up having access to this talent. So the H-1B visa because it’s primarily a lottery system, it’s random, which as a good economist looking for experimental design, [chuckle] that’s great. You have a natural experiment right there. And so you can see what is the difference between startups that through complete randomness luck and no other factor, it’s isolating out everything else with that randomness, those that just happen to get more lucky in actually getting the talent that they’re applying to get to the H-1B visa lottery. What happens to those that do end up getting more lucky? And so you can see a one standard deviation increase in the visa win‐​rate, basically companies that are luckier than average in terms of having access to this talent, they end up having or it’s correlated with a 20% increase in the likelihood of getting a major funding deal, another 20% increase in the likelihood of successfully IPO‐​ing, of being successfully acquired, there is an increase in the number of successful patent applications that are filed.

28:40 Caleb Watney: Across a whole broad range of metrics, you can see that startups that just again through complete luck happen to have better access to this talent end up being much more successful than companies that don’t. And so I think this combination of looking at the ex ante career interest and seeing the big mismatch there and combined with these cool new empirical results indicate that we do have, a entrepreneurial talent that we could be unleashing in the United States, talent that would like to go create startups or work for a small startup but currently cannot. And so I think especially as we’re talking about competition issues in the United States and are Google, Facebook, Amazon too big? I think a side question is, what is preventing small companies from competing against them? And I think this talent issue seems to be a very big deal.

29:29 Paul Matzko: So, these intersects like you mentioned with the anti‐​trust, the corporate consolidation conversation, which is a legitimate concern, I don’t think there can be a temptation for vulgar libertarianism to say, “Well, it’s a re‐​actively pro corporate. Anything a corporation does is good, ergo.” But no, what we’re talking about here is a form of unintentional, I don’t think the companies didn’t have any role in designing the H-1B visa program.

30:05 Caleb Watney: No, no, yeah.

30:05 Paul Matzko: But it’s almost a kind of, they’re the beneficiaries of an arbitrary government process that is creating a competitive moat around them. It’s a sense, a kind of indirect regulatory capture or something. And we should have a problem with that on anti‐​trust consolidation competition issues. And here potentially, I suppose, there’s common cause with folks who come from a different kind of ideological or political perspective, who might have different reasons for being concerned about anti‐​trust and consolidation, but we can all kind of agree, this is an example of it that folks from across the political spectrum can kind of work together on.

30:44 Caleb Watney: Absolutely, I think both sides of the isle, regardless of where you fall on the anti‐​trust issue, I hope that the goal is a competitive equilibrium, basically. We don’t want incumbents to be winning just because they’re incumbents. We want more innovation, more consumer welfare, lower prices, a whole host of things that we care about, and also good work conditions for the workers. And yeah, the competitive equilibrium is really what we care about. And I think you’re right, that sometimes libertarians are free market folk who kind look at the current equilibrium, assume that it’s competitive because we are broadly a market‐​based system here in the United States, and assume that that must be the effect of the competitive equilibrium. And it may be, I don’t wanna say that if we made this change tomorrow, Google, and Facebook, and Amazon will come collapsing down, right?

[laughter]

31:30 Caleb Watney: It may be that, they really are the most efficient use of the capital, but, oh sorry, this human capital. But we wanna check that, we wanna make sure, right? It could be that the reason they are so much more successful is because they have this unequal access to this very important human capital. And so, yeah, I hope that both sides can come together, and say “Hey, Look here seems to be a very obvious example of a way in which the market is not efficient right now, human capital is not being allocated to it’s highest valued use. So let’s fix that.”

31:58 Paul Matzko: Right. So we have this one kind of angle, the consolidation competitive equilibrium approach, but there’s also a downside from just the pure innovation perspective, which is, I think there is a pretty robust literature suggesting that larger incumbent firms are more likely to… No, they’re not less likely to develop new technology, like they often have in‐​house R&D outfits ConCo works etcetera. But there is a long track record of big incumbent firms slow rolling, or even sitting on technological innovation, because it challenges, it disrupts their current market model. The infamous examples are pre‐​digital, you think of, like, the Kodak’s sitting on the digital camera for two decades, functionally, which they developed in‐​house. So it’s not that they weren’t doing innovation, they were gonna roll it out, however. So if this is a problem, if the top minds in AI, and in quantum computing etcetera, are flocking to incumbent firms, because of a quirk of the visa system. This comes with a penalty for innovation that’s… So it’s not just about the particular companies, it’s about stymieing innovation across the entire tech economy.

33:07 Caleb Watney: Yeah. No, that’s a great point. I think especially, with the way that the AI field in particular is working, you’re seeing a lot of the top breakthroughs are coming from these top companies. Whether it be Google DeepMind, or OpenAI, or other larger firms that have deep established research labs, and can spend lots and lots of money, and again, have lots of immigration lawyers on staff [laughter] that can operate their system. And it might that there is a certain economy of scale that’s required to be making these breakthroughs, but I think, it’s sometimes difficult to know the full impact of startups. I think, startups play a useful role in the ecosystem, regardless, of whether or not you’re actually seeing the top innovations happen through there. Because they sort of correct for some incentives. So big incumbent firms, it’s very easy for them to get bogged down in particular management structures, and also in particular technological architecture.

34:00 Caleb Watney: You can continue building up everything on a certain platform that, maybe is no longer the best way to be building a certain application. And startups can kind of come in and… Good thing about creative destruction, right? Sometimes path dependence, and technology, and in Management structures can end up leading to inefficient outcomes continuing to maintain. Startups maybe are almost like a dissolution, they basically can dissolve some of this path dependence that forces technology on to inefficient paths for long‐​term. And now, but actually, more quickly correct to what the more efficient path is, right? Because they are much more flexible, they’re leaner, they can try out new, both structures in terms of how should firms be organized. And also in new technologies, whether a more decentralized approach to quantum computing, or something might be better that’s much more difficult for a big company to experiment with. And so you either get the outcome of then that startup based on this new change, or this new tweak, out‐​competes the incumbent firm, and that’s great or alternatively, maybe that forces the incumbent firm to be more innovative and forward‐​looking in terms of, how things might respond, regardless.

35:07 Caleb Watney: This gets back to Schumpeter‐​The Economist in his essay, when he’s describing creative destructions says, “Even if it may look like there’s no any competition, so long as it is a competitive dynamic, the incumbent always has the threat of being out‐​competed by a small firm.” That forces them to behave as if they were under perfect competition in some sense. And so I think, yeah, it goes back to again, making sure that we have a competitive equilibrium, and that if these incumbents are in fact, building out inefficient technologies, or inefficient management structures that, they can be competed away. And again, I think startups play an important role in that regard.

35:42 Paul Matzko: So you meant 70% of global AI talent coming out of universities, comes from abroad. Where is that coming from, in particular? What’s the national origin of that 70%?

35:55 Caleb Watney: Yeah, it’s pretty varied, but the two biggest sources are China and India. You’re seeing a pretty big focus in those countries on acquiring technical skills. And then I think both for actual human capital development like US universities just tend to be really, really good. Chinese universities are trying to make strides and start matching that. But I think also for signaling reasons, there’s just a lot of prestige that comes from going to US universities. And so in some sense our greatest export on some level, is the prestige of our US university system, but then attracts all of the world’s greatest minds. There’s a really good book called, The Gift of Global Talent, which kind of talks about, over the decades basically, the 20th century, where did all of the innovators and inventors end up going? And so he looks at the category of people that have at least one patent application in the United States, or otherwise. And net immigrators versus net emigrators.

36:58 Caleb Watney: So which countries had more of this population leaving than coming, and which had more coming than leaving. And almost like every single country is a net emigrator except for the United States, which is just this massive immigrator. So many people of this population are coming here. And I think that’s both, because innovation clusters form, and they’re very sticky. And you wanna be around networks with other venture capitalists, and other startup founders, and whatnot. And so that’s a huge draw, but I think the other part is our university system which is a great way in for a lot of really, smart, talented entrepreneurial people. And the fact that we don’t have an easier pathway for them to stay in the United States, is a huge problem. It’s really, the United States is like, super power as a country, is the fact that we have this huge natural advantage, and so then, it’s kind of bizarre that we’re not taking full advantage of that.

37:42 Paul Matzko: I know, right? At times it’s almost in spite of our politics, in spite of ourselves. [chuckle]

37:46 Caleb Watney: It really is. Yeah, the fact that our innovation clusters are so strong is yeah, certainly not due to robust federal support, or policy accommodating that, yeah, it is in spite of that. I think the other factor here though, is aside from the H-1B visa, the other thing I wanna point out is that, unlike other countries, Canada and Australia come to mind, we don’t have a startup visa. So on an H-1B visa, you can work for a startup, you can be a worker, but it’s very difficult structurally, to be a startup founder or a co‐​founder in the United States. There’s, I think, some provision with the H-1B that you have to be a fireable employee, which is difficult to do if you’re the founder of it.

38:26 Paul Matzko: Yeah. [chuckle]

38:27 Caleb Watney: And so, yeah, that leads to, I think, people then working at incumbent firms for long enough that maybe then they can get a green card, and then they can start a company or something, and so it’s again, another inefficiency. And so…

38:39 Paul Matzko: Or, I suppose we risk, they work for Facebook as an engineer for a while, accrue the skills, connections to venture capital, necessary etcetera, and then go back and start the company back in China or India.

38:51 Caleb Watney: Yeah, that too. You’re seeing, China especially, has been very aggressively trying to recruit back students and entrepreneurs from the United States that are Chinese nationals, and get them to come back to China. You hear pretty outrageous deals, equity‐​free financing, free room and board, almost anything you could need just as a way of trying to attract them back saying, “Hey, we recognize our equilibrium, our tech clusters aren’t quite as good as in the United States, yet. But please come back, we’ll give you all these free things.” I think sometimes there is an attitude that would push back on, say, part of this is just like necessary. You have to vet immigrants to a certain amount, and there’s just a certain amount of cost and complexity that is inevitable to the process, but you can compare and say, “What are US wait times, and what are US processing fees?” And compare them to other Western industrialized countries, and see the United States is much more expensive, and much longer of a process than some of these other countries like the UK and Canada, which, yeah, it seems like a major problem.

39:52 Paul Matzko: There’s a force called innovation arbitrage, that some of my colleagues have written about, which is sort of the idea that in the same way, physical capital or money can flow across borders, to the area where it’s taxed least. You’re seeing innovation and entrepreneurs are moving around to the areas where it’s most open and most welcome. And so sometimes, this takes the place of whose regulations are the best. So, drone testing for a while was shifting over to Canada, Australia, Switzerland, because those regulators were much more accommodating than the FAA was here in the United States. But, immigration is also a way in which you can have this differentiation, especially for fields where high school human capital is so important for actually creating the companies to begin with, that it’s becoming a major differentiator in terms of where you wanna start your business in the first place.

40:45 Paul Matzko: Given the current crunch on skilled labor, we should be having a conversation about increasing the number of immigrants legally allowed into the US. Instead, the Trump administration has been doing its damnedest to further restrict immigration across the board. Various proposals have been floated, and thankfully not yet enacted, to shrink the H-1B visa program, and end the chain migration, thus attacking the two key elements of the 1965 Immigration Reform. On the issue of student visas, which is a key pipeline for tech companies, what happens is, STEM graduates they come to study, then they stay permanently after graduation. Well, on student visas, the Trump administration, they can act without congressional approval by executive authority, decreasing the number of visas granted to foreign college students. They’ve done so by about a quarter, since Trump took office, with greater decreases expected this year or next. To put that in hard numbers, that’s more than 100,000 fewer students, many of whom once would have stayed in the US to work at tech companies. Put that in context. There are 87, $1 billion startups known colloquially as unicorns, in the US. Given that a quarter of those were founded specifically by an immigrant who first came to America as an international student, we’re going to feel the impact of these restrictions for decades to come, in lost innovation and economic growth.

42:07 Paul Matzko: It’s really a rather incredible self‐​own. Think about the continuing ramifications of that impact on immigrant communities. It makes engineers and programmers reconsider whether this is actually a stable, welcoming country. When political leaders indicate that not only will they, these naturalized immigrants not be fully accepted as fully American, but even their children, simply because of brown or black skin, might be told to go back where they came from, as Donald Trump did to several members of Congress. Well, I can guarantee you that leads the conversations going on in the homes of hundreds of thousands of skilled immigrants across the country. We’ve made a generation of engineers and entrepreneurs wonder if they should avoid America and apply instead for a visa in say, Toronto’s growing Maple Valley tech hub, or find a position in Singapore, Shenzhen, Dubai, Stockholm, et cetera, a more welcoming and also pro‐​tech place.

43:05 Paul Matzko: We so desperately need immigrants, to remind us that our future is not fixed in stone, and yet our ill‐​considered policies are pushing immigrants to consider settling in other countries. I already mentioned Toronto, Canada which has been nicknamed Maple Valley. Actually, even more precious than that nickname, instead of calling them 1 billion dollar startups unicorns, like we do in Silicon Valley, they’re calling them narwhals, after the single horn sea creature, which I love. In direct contrast to the US, Canada has opened its arms to immigrants, who comprise fully 20% of the national population, versus 14% in the US.

43:39 Paul Matzko: Last year, they reformed their version of the H-1B visa, so that it’s uncapped, meaning that you can apply for it and receive it in as little as two weeks, whereas it can take years to get the comparable visa in the US. They also allows your spouse to find work as well. It doesn’t lock you into working for a single sponsor company like the US version. It is better. As one Toronto an entrepreneur put it, “The brand of America as the land of the free, and the place of opportunity, has really taken a hit. It’s no longer the default go‐​to place for people who have world‐​class talent. There’s a chill going on south of the border. Right now, we’re positioning ourselves to be a lot more welcoming.” That welcoming attitude, is rapidly paying off. Toronto has added more tech jobs over the last five years, than Silicon Valley, and Seattle, and DC combined. Canadian Venture Capital is still small but with a much faster growth rate than Silicon Valley.

44:33 Paul Matzko: From just 300 million in 2013 to 3.5 billion in 2018. 10X in a decade. Tech companies including Microsoft, Uber, Intel, Google, NVIDIA and Shopify, are opening new headquarters in Toronto. And I could do similar vignettes for dozens of emerging tech hubs around the world, from Shenzhen to Singapore. And we, as people who are loyal to concepts like liberty and free markets, can take heart from those examples. This is globalization, at its best. We’ve reached a global tipping point where the future of technological innovation, does not depend on any one location. Cities and countries around the world are competing for the best and the brightest minds. If one country adopts short‐​sighted anti‐​innovation policies, another will take advantage of the opening. But, while my ultimate interest in technological innovation is that I believe it’s the best means of propelling prosperity and liberty for all of human kind, I am still American, and I want my native home to be as a large part of that success story as it can be, and I do think we have something important to add. So, what should we pro‐​innovation folks do, beyond resisting the immigration restrictionist madness?

45:41 Paul Matzko: Well, I’m an immigration maximalist myself. But even if you’re not, we should be able to agree that restrictions on skilled immigrants are self‐​defeating. Extend more students and H-1B visas at a minimum, which also is seriously consider the ideas of economists like Gary Becker, Pierre Lemieux and Madeline Zavodny for some kind of green card auction, which would itself undermine the inaccurate nativist rhetoric about immigrants as takers. Could even fund border control and some kind of grand compromise. Legalized dreamers who own 86% of fast growth Latina immigrant‐​owned businesses. There are concrete steps and policies that we can push for, that will ensure the future of America’s part in the global innovation economy. That’s the importance of immigration to the birth of Silicon Valley and the future of the global economy. In two weeks, we’ll return with the second pillar for the birth of Silicon Valley. But until then, be well.

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46:37 Paul Matzko: Thanks for listening, Building Tomorrow is produced by Tess Terrible. If you enjoy Building Tomorrow, please subscribe to us on iTunes, or wherever you get your podcasts. If you’d like to learn more about Libertarianism, find this on the web at www​.lib​er​tar​i​an​ism​.org.