At minimum it is unseemly, at maximum an example of chutzpah as practiced in Silicon Valley. Having shot themselves in the foot, some prominent tech billionaires want the president to bypass Congress and minister to their wound. They have poured cash into his campaign coffers, and now is payback time. They want him to increase the number of H-1B visas that allow them to hire high-skilled foreign tech workers. Which he has promised to do, never mind that Microsoft has just laid off thousands of workers. Or more important, that some of the very companies that want to cash in their Obama IOUs have been engaged in a conspiracy—get this—to depress wages.
Having formed a cartel to prevent “poaching” and competition for workers and having kept wages of these workers below levels that would have prevailed in a competitive market, CEOs in the home of fierce competition for technological advantage now find that below-free-market wages are producing a labor shortage. To dampen any increase in pay that American tech workers might finally get now that the conspiracy has been uncovered, the unchastened executives want Obama to increase the supply of foreign laborers.
For those of us who believe in the market system, there is something unsettling about the thought of the billionaire bosses of Google, Apple, Adobe, Intel, two Disney subsidiaries, and Intuit sitting around a table and agreeing not to compete for staff. Facebook declined an invitation from Google to join the conspiracy. Sheryl Sandberg, Facebook’s chief operating officer and a former Googler, announced that she refused to “limit Facebook’s recruitment or hiring of Google employees.”
These are the self-styled “disrupters,” believers in the virtues of a market system that allows them to compete for customers even if, especially if, that competition destroys existing enterprises. Schumpeter’s gale of creative destruction is, to them, holy writ.
Unless, of a course, a faint breeze of competition wafts through the Silicon Valley labor market. Then, with the notable exception of Facebook, competition for staff becomes “poaching,” a process that might start a “wage war,” putting a dent in their petty cash piles. So they agreed not to compete for skilled workers. “If you hire a single one of these people [Apple engineers], that means war,” Google cofounder Sergey Brin says Steve Jobs threatened him, also warning tiny Palm that if it poached any of his engineers he would initiate patent litigation that they would not have sufficient resources to defend. With Google signed on, Eric Schmidt, then its CEO, lined up Intel and Intuit. Paul Otellini, then president and CEO of Intel, called the arrangement “a handshake ‘no recruit’ ” agreement. And at one point, Schmidt agreed to the firing of a recruiter who had solicited an Apple employee. To avoid creating “a paper trail over which we can be sued later,” Schmidt and Otellini confined themselves to emails—reflecting a charming faith by these highest of high-tech executives in the confidentiality of emails of the sort that have made several Wall Street traders and previous price-fixers involuntary guests of the government.
With such an arsenal of smoking guns, and so many adversely affected high-tech workers, it should come as no surprise that in 2010 the Antitrust Division of Eric Holder’s Justice Department got wind of the cartel. In 2010 a Justice Department investigation brought the conspiracy to light and resulted in a complaint that was settled when the conspirators agreed to end their ban on cold-calling rivals’ staff. But not only did Holder, nowadays continually threatening unspecified bankers with jail time for unspecified crimes, not seek jail time for the specific miscreants that confessed to the specific crime of conspiring to fix wages. Justice did not even ask that the confessed conspirators be fined. Odd for a Justice Department that has become a profit-center for the government by virtue of massive fines levied on financial institutions and individuals who have committed crimes that in many cases are not quite so straightforward as those of Jobs, Schmidt, Otellini, et al.
One need not be a cynic to wonder whether there is an inverse relation between contributions to the Obama machine and the penalties for lawbreaking. After all, at minimum the Justice Department could have attempted to claim the extra profits earned by the conspirators by virtue of a plot that had the inevitable effect of depressing wages. In effect, Holder approved of the redistribution of income from the hardpressed middle-income Silicon Valley workers about whom his boss is ostensibly so concerned to shareholders and executives of some of the world’s most profitable companies.
Enter that much-despised breed—trial lawyers in search of a slice of any damages they can wrest from deep-pocketed conspirators. They sued for lost compensation on behalf of workers for the firms. In order to avoid what seemed an inevitable guilty verdict in a trial, and the trebling of any damages that might take the total hit to as much as $9 billion by one estimate, Apple, Google, Intel, and Adobe agreed to settle (as had Disney and Intuit several months earlier, for $20 million). To go to trial would have been risk-taking of an even higher order than these serial risk-takers dared. Federal judge Lucy Koh, in refusing to dismiss the case, warned the accused, “Defendants have conceded that there were a series of six bilateral agreements” to hold down their payrolls by not recruiting rivals’ employees. “All six of these agreements contained nearly identical terms, precluding each pair from affirmatively soliciting any of each other’s employees.” Damning emails were to be admitted at trial, every bit as incriminating as the paper trail Schmidt had advised his partners-in-crime to avoid.
So the accused decided to settle rather than face a trial, but in a manner and amount that would have made Ebenezer Scrooge proud. They agreed to pay $324.5 million. Reenter Judge Koh. That pittance, she ruled, is so disproportionate to the admitted offense that she rejected it out of hand. And with reason. Four of the conspirators—Apple, Intel, Adobe, and Google—between them are sitting on about $230 billion in cash. That is 800 times the agreed settlement, and almost 50 times the cash on hand in the U.S. Treasury. The $324.5 million was to be divided among the lawyers ($8.7 million for fees and expenses) for the sinned-against members of the Valley proletariat, and some 64,613 engineers, each of whom was to get a few thousand dollars.
Judge Koh, more often found presiding over the numerous patent suits these vigorous competitors periodically file against one another—it is easier to agree not to steal employees than not to steal each other’s intellectual property—found that the total settlement “falls below the range of reasonableness,” especially when compared with the $20 million separated from Disney and Intuit when those companies settled over a year ago. The defendants, she ruled, should “pay their fair share” for suppressing wages. She wants those who are late to the settlement route to put another $50 million in the pot.
Now comes the incredible bit. The cartelists are appealing Koh’s decision as “rigid and formulaic,” meanwhile engaging in further settlement negotiations and threatening that if the case does go to trial they will produce six expert economists, count ’em, who will testify that the no-poaching agreements did not depress wages. Five facts make this argument incredible.
First, paying each engineer a few thousand dollars in damages for the privilege of having depressed his or her wages for a long period is a profitable deal. Second, I have been involved in enough antitrust litigation as an economic adviser to make an informed guess that the legal costs of dragging this matter on will eat up a nontrivial portion of the money at issue. Third, there is the reputational cost of a trial: The trade press is salivating at the prospect of hearing the Silicon Five, or Three or Six, explain their emails, even though Jobs is now beyond the reach of a subpoena. Finally, there is the matter of those H-1B high-tech visas that a compliant president might well issue by executive order after the midterm elections.
There is little doubt that recipients of such visas have made a large contribution to the pace of innovation in America, and to the countries to which many of them return, often reluctantly. But that is not the question policymakers should be asking. It is, “Is an increase in these visas necessary because there is and will remain an inadequate supply of Americans who have or can with training obtain skills similar to those of the foreign visa-holders?” The answer to that is, “We don’t know.” The prospective employers have conspired to keep wages low, reducing the attractiveness of those jobs to Americans with the skills or the ability to absorb the training necessary to acquire them.
In essence, the Silicon Valley executives want to capitalize on the training these foreign workers have received overseas or at American universities, rather than bearing the cost of such training. These companies are arguing that there is no wage that will call forth an additional supply of workers with the needed skills. Not for them economist Tim Worstall’s quite traditional observation, “If computing engineers’ salaries rise in Silicon Valley then that’s a signal to everyone else in the rest of the economy, too. Some . . . will move to the Coast. . . . Some who might have studied physics, or finance, will study computer science instead. Others will move from lower paying career paths.”
Perhaps the president, freed of the need for campaign cash and with little he cares to do after this round of -fundraisers is completed, will consider finding a way to increase the number of high-tech visas, but granting them with the proviso that the hiring company train one American for every foreign worker it takes on, so that when the latter returns home, as he agrees to do when getting the treasured visa, his replacement is ready to take on the departing visa-holder’s chores. The incentive for the hiring company is long-run relief from the necessity of annually importuning contribution-hungry politicians for more visas in the hope that when the lottery distributing these visas is held, it will be among the winners. Since no company knows whether it will be a winner or loser in the visa lottery, all have to pay to play. Good for the politicians, not so good for the efficient allocation of our nation’s labor resources.
Better still, the president might order or persuade Congress to go along with a bidding system to replace the mindless lottery. Companies could bid for the available visas, with the company most able to use the incoming worker in a position to bid the most. The funds from the auction could be used for on-the-job training of American workers—at no cost to the taxpayers. It would be rather nice to see the president call on the market to allocate resources among these pro-free-market Silicon Valley entrepreneurs.
Irwin M. Stelzer is a contributing editor to The Weekly Standard and a columnist for the Sunday Times (London). He has served in the past as a consultant to Google and to counsel for AMD, an Intel competitor.
