Hochul Hokum

Photo by Rodolfo Cuadros on Unsplash

New York doesn’t want its workers to invent the future

New York Governor Kathy Hochul delivered a lump of coal for Christmas, vetoing a bill that would have universally banned non-compete clauses in the Empire State. The bill had passed the legislature last summer, but after months of intense lobbying from Wall Street and other industry trade groups, Hochul outright rejected the legislation in a surprise end-of-year decision.

The single most important ingredient to a region’s economic success is the talent of the people who choose to reside there. As emphasized by researchers like Ed Glaeser in Survival of the City and Richard Florida in The New Urban Crisis, quality of life is the basis for attracting and retaining the world’s best talent and the economic spillovers of their presence. That’s why fears of an urban doom loop in prime cities like San Francisco and Washington DC get so much attention from commentators. The dense networks of people that weave into a region’s community can strengthen wealth for all — or fray, leaving blocks of blight behind.

People don’t serve cities; cities serve people. The human right to freedom of movement (more and more exclusive to the world’s top talent) allows people to migrate their economic and social lives to wherever they see the most promise. That peripatetic market invigorates cities, placing them in constant competition with each other to provide the best quality public services, the highest quality of life, and the most vibrant culture at the most affordable price, namely taxes, rents and general inflation.

New York City is a competitive city, but one that has stagnated, with a population that has barely budged in a decade. Despite the Big Apple’s allure for millions across America and around the world, a lack of housing growth, an anemic expansion of the transportation system and extraordinarily uneven public schools have combined to limit the city’s dynamism.

Those are long-term problems requiring long-term solutions, but sometimes the wounds are much more acute and self-inflicted, such as what happened two weeks ago with Hochul’s veto.

Non-compete clauses are employment provisions that ban a worker (which can include both full-time employees as well as freelancers) from working for a competitor or even in the same broad industry for a period of time. That prohibition can extend up to a year or longer, which means that any person with a specialized talent (i.e. most of us in the knowledge economy) will forego the income from their most valuable skills. While it’s customary in the finance industry to pay for this non-compete time in what is traditionally dubbed “garden leave,” many non-compete clauses do not offer any pay at all. You are just not allowed to work – good luck with that mortgage!

The use of non-compete provisions has increased. Once exclusive to the contracts of senior corporate executives, these provisions have spread all over the American economy. The Minneapolis Fed’s survey data from mid-2023 found that roughly one in ten workers are now covered by a non-compete, with the highest percentage found among mid-career professionals in their twenties and thirties and declining with each additional decade of experience (a pattern that’s opposite the logic of senior employees jumping ship for a competitor).

The prevalence of non-competes shouldn’t be surprising, as companies view their employees as “assets” to be traded and protected. As I noted in “Brainwash Departures” last year, governments are similarly viewing their own citizens as assets to be economically controlled, often by abridging freedoms for people deemed important to national competitiveness (I gave the example of South Korea preventing chip engineers from traveling without an exit visa — a requirement not placed on any other type of worker).

For companies (and countries), the strategic question is how to protect themselves from unfair competition (and, let’s be frank, fair competition as well). In the industrial era, the barrier to entry was the factory itself, which required a large capital investment and significant time for construction. But in the knowledge era, the “asset” can walk out the door in a matter of seconds.

In New York, the finance industry is the biggest proponent of non-competes, worrying that, for instance, a trader at a quantitative hedge fund could copy a lucrative proprietary trading strategy and steal the alpha. That mirrors a concern from the biotech industry during a similar legislative fight over non-competes in Massachusetts in 2018. Biotech firms feared that employees could walk out with valuable research results in their head the moment a new entity has been identified as a potential cure, rushing the treatment to market and capturing the upside. In the end, Massachusetts governor Charlie Baker ultimately reached an agreement that would limit the scope of non-competes while still allowing them.

There are admittedly moments in certain industries and in certain positions where an employee has an extremely lopsided incentive structure for cheating. Copying a trading strategy could net an individual tens of millions of dollars when their normal compensation is a mere fraction of that sum. Copying a clinical result could capture expansive future revenue, without the millions of dollars in venture capital investment that were required to reach that result in the first place. It is worth protecting America’s innovation system from such cheating.

Nonetheless, such moments of employee leverage are plentiful once we start to look for them. Every employee will learn some proprietary knowledge that will benefit them personally if they were to use it effectively at a competitor or simply for themselves. That’s the whole point of the knowledge economy and the value of dense professional networks offered by cities: the constant and rapid diffusion of the best knowledge to as wide a number of people as possible. We don’t want cheaters, but all of us learn skills and knowledge on the job.

As might be obvious from the term “non-compete,” these provisions wreck the most important quality of an entrepreneurial, dynamic economy, namely the fierce competition between people, firms and cities that goads the best talent to congregate around the most meritorious ideas. An employee typically leaves a company for a better job, one that offers some combination of improved pay, better advancement and more seniority. A non-compete clause is like an anchor tied to a slower ship, forcing the employee to stay marooned from the propulsive vitality available to them.

California is often regarded as the most dynamic economy in the world, and one of the bedrocks of that success is the state’s broad prohibition on non-competes that dates back decades. By forgoing non-competes, Silicon Valley firms face keener competition to perform — if a startup falls behind a competitor, market incentives induce employees to quickly join the winner or leave for better opportunities. No quality of an innovative ecosystem is more important than bringing talent together around the best ideas — and ensuring that bad ideas are throttled to nothing. Ultimately, such a system delivers innovations faster, benefiting us all.

New York had an opportunity this year to match the West Coast’s economic dynamism, and outright declined. New York’s bill would have gone much further than the Massachusetts reform from 2018 by practically eradicating all non-competes without any form of reasonability standard. A last-minute compromise effort between the bill’s sponsor and Governor Hochul would have banned non-competes only for workers paid less than $250,000, which ultimately wasn’t enough to get a final signature from the governor.

The outcome is a shame, since there has been a nationwide effort to eliminate non-competes. In 2021, President Joe Biden directed the Federal Trade Commission to "to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility” as part of a wider executive order focused on antitrust and promoting competition. Last year in 2023, my home state of Minnesota passed a comprehensive ban on non-compete clauses, one of the first new statewide bans in a generation. That’s not surprising given Minnesota’s ambitious desire to be the top startup hub in the American Midwest.

Everyone and every institution wants to avoid competition, particularly if there are legal remedies that can reduce competition cheaply and easily. Who doesn’t want to work and invest less? But eliminating competition also takes the pressure off the impetus for growth and innovation, and represents a paean to incumbents rather than a bold boost to the next generation of entrepreneurs. New York’s decision to continue non-competes is opposed to the vigorous spirit of innovation that made the state the preeminent economic hub of America for centuries. New York’s mistake will, unfortunately, be another state’s gain.

Lux Recommends

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  • The Wall Street Journal has had a great series on “The New Era of Great Power Conflict” and one of my favorite entries so far is “American Spies Confront a New, Formidable China” by Warren P. Strobel. “Recruiting, or even meeting, Chinese agents is more perilous than ever. Beijing’s pervasive surveillance system uses big data analytics to mine feeds from millions of cameras in major cities, combined with armies of human watchers. ‘We’ve got to find a way to be able to enhance our ability, with the deployment of new technology by China and other nations, to be able to operate within their countries to gain intelligence,’ said [Rep. Mike Turner], the House Intelligence Committee chairman.”
  • Derek Thompson always has great ideas on the progress of science at The Atlantic, and over the holidays, compiled his nine favorite breakthroughs of 2023. “The theme of my second-annual Breakthroughs of the Year is the long road of progress. … CRISPR is this year’s top breakthrough not only because of heroic work done in the past 12 months, but also because of a long thread of heroes whose work spans decades.”
  • Our scientist-in-residence Sam Arbesman recommends Dave Karpf’s analysis on "An AI Future Is Much Shakier Than You Think.” “The world we inhabit today barely resembles the one that seemed inevitable during the Napster years. Copyright law did not bend to accommodate new technologies. The industries built upon those new technologies bent to accommodate copyright law instead. The new status quo hasn’t been great for musicians or artists. Their interests weren’t represented at the bargaining table, and it shows. Musicians in the ‘00s got pennies on the dollar from iTunes sales—more than the zero they received when music was pirated, but hardly enough to live on. Today’s struggling artists make a fraction of a cent from Spotify streams.”
  • Finally, Viola Zhou and Nilesh Christopher have a fantastic piece in Rest of World, “Inside Foxconn’s struggle to make iPhones in India.” "They detailed the successes, struggles, and cultural clashes that, over the past year or so, have played out on one of the world’s most consequential factory floors. In China, Foxconn demands long days, high targets, and minimal delays and mistakes — all of which proved difficult, if not impossible, to replicate in India. The stress clearly took a toll on the company’s local workforce.”

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