Silicon Valley diaspora?

Sadly I have to agree with my friend Greg Gretsch on his main point in this piece on AO called "The Silicon Valley Diaspora." Here's the conclusion:

We now have our own Silicon Valley diaspora to moan about: the best and the brightest leaving these shores for bigger and better opportunities elsewhere. So watch out. While this first wave of India shining is dominated by call center and IT outsourcing, the next wave is likely to be dominated by software and hardware companies that build their products in India and their sales and marketing in the United States.

I've become convinced that just as the economic power base crossed an ocean in the last century it will cross another ocean in this century. However, while Greg says nothing about what to DO about the Diaspora I fear that he and I would disagree on this.

I recently had dinner with John Rutledge who made the point that what ultimately matters is not people flow but the flow of capital. Where will the investment capital go in the coming decades? There has been false comfort that the US is such a secure environment compared to the challenges of investing in China or India that we have an edge. But while this is true, the return on investment in Asia is so much higher that all they have to do is marginally reduce their risk profile and the money will flow there. Paraphrasing Rutledge, if you get 100% return on capital in China they may take 50% but that's better than 14% in the US. China recently added property rights into their constitution--clearly intended to make investment in China even more attractive (perhaps they've learned from Hernando De Soto.)

Meanwhile, in the US we layer on cost after cost that affect the investment profile of this country. Labor costs, regulatory costs, legal/tort costs, healthcare costs, tax costs, on and on. It seems that as a society we have decided, as the Europeans did last century, that we'd rather have wide and deep social programs and an active government than a competitive global economy. Of course businesses are leaving Silicon Valley--it's so darn expensive to do business here. This is not to say that we don't have advantages--we have one of the most economically adventurous cultures in the world, rife with risk takers, entrepreneurs, and an advanced investment and professional services infrastructure to support them--but the full equation is tilting towards Asia.

It is no wonder that with the US economy being the world's most dominant that we've made this choice--the Europization of America might be inevitable. But personally I think that America's highest priority should be to compete economically--and that this will provide the best social security blanket possible (after all, to those on the left, you need wealth in order to redistribute it.) Unfortunately, nary a politician has talked about making the US competitive. John Kerry talks about raising taxes and has shown protectionist colors, condemning outsourcing CEO's as "Benedict Arnolds" and going wobbly on NAFTA. Bush hasn't been much better though he has done much on the tax cutting front. Eventually we'll all clue into the fact that our status as the economic power of the world can't be taken for granted and we actually have to compete with the world--but when we do will it be too late?