The AI boom is a totally different tech boom than anything the city has seen before.
That was what Ted Egan, San Francisco’s chief economist for the last 19 years, said at a Wednesday night panel about the city’s economy, moderated by Io Yeh Gilman, a reporter at Mission Local.
Over the past three years, 60 percent of U.S. venture capital investment in AI went to companies in San Francisco, said Egan. Last year, that was close to $190 billion in venture capital, distributed among 2500 AI startups.
This investment, however, carries a totally different economic impact than the dot-com boom of the late 1990s, or the surge in local tech investment that followed the 2008 mortgage crisis, he said.
The AI boom is adding much more money to San Francisco’s economy, said Egan, but its impacts are different. During the dot-com boom, and the pre-pandemic tech boom, companies spent freely on office space. In the past three years, many of those leases have expired, resulting in a net loss of about 7.5 million square feet of occupied office space across the city.
While the tech boom of the 2010s created new jobs, the AI boom appears to be jettisoning them. The city lost over 30,000 tech jobs in the past three years — nearly all of the job losses reported citywide.
In 2018, tech companies based in San Francisco paid almost half of their payroll expenses here, according to their business tax filings, said Egan. But between 2021 and 2024, that share has declined, from 44 percent of payroll to 11 percent.
“One of the things I’ve kind of struggled with is, why is the apartment market so hot when the labor market is so cold?” he pondered. “It does appear that whether people are hiring in San Francisco or not, tech workers are moving back to San Francisco after several years of saying, ‘I’m going to Miami or Austin or wherever.’”
Still, Egan said, the startups and the money involved are reasons for long-term optimism about the city’s economy. “I do think a certain corner has been turned,” he said. “The AI thing could be a bubble that blows up tomorrow, but I think that as long as that money is there, the worst of it is behind us.”
Still, panelists made it clear that there is an abundance of bad ahead to be dealt with. Seated next to Egan was his boss, San Francisco Controller Greg Wagner, who was sworn in for a 10-year term as the Controller in February 2024. Wagner’s office was responsible for calculating the $643 million two-year deficit that San Francisco now faces.
“How painful will fixing this structural deficit be?” Gilman asked Wagner.
“The elusive answer is it’s going to be up to the mayor and the board,” said Wagner. Labor is the single biggest cost the city incurs, Wagner said. “About half of the city’s budget is for people.” And there’s more jobs buried elsewhere in the budget. “The second biggest piece is on grants and contracts,” Wagner added. These contracts often pay the salaries for people who work for organizations that contract with the city.
Earlier this month, Mayor Daniel Lurie announced plans to reduce city spending by $400 million this year to reduce the deficit. He plans for $100 million of cuts to come from getting rid of positions and layoffs. His office recently gave 127 city employees layoff notices as part of that plan, though labor unions have pledged to fight every one of the proposed layoffs.
Usually, Wagner said, the solution to a budget shortfall is to try to squeeze a little more efficiency out of the government, rather than cutting the services provided by city employees and contractors. However, “the size of this deficit is beyond squeezing efficiency,” he explained. “It’s big enough that it really does mean some conversations about service levels, the number of positions that are in the city government.”
“How much control does the controller have?” asked Gilman.
Not as much as you might think, said Wagner. A controller’s job is to prevent misuse or misappropriation of city funds, said Wagner. “There’s a lot that feels completely outside of my control.” Wagner’s office can calculate the deficit, but it has no power over the city budget, which is controlled to a large degree by the Mayor’s Office and to a lesser degree by the Board of Supervisors.
The city’s economy is “always in a state of transition,” said Egan. The dot-com boom brought an influx of money and new residents into the city, but did little to disrupt 30 years of stagnant job growth that had been underway since the 80s. Post-2010, San Francisco became one of the two fastest growing cities in the United States — “entirely unexpected,” Egan said. During the COVID-19 pandemic, the city lost more population than any other city and experienced the biggest rent drop. Now the city’s population is on the rise again.
That’s a good thing, said Wagner. “Our financial recovery is based on people coming to San Francisco and working in San Francisco,” Wagner said. If the two upcoming ballot measures to fund local and regional public transit systems don’t pass, he said, that could impact the city’s recovery. “It’s a little bit hard to square significant reductions to the public transit system with an economic recovery that works for the city’s budget.”
Some have expressed hopes that AI could be used to increase efficiency in city government, and reduce the impacts of the budget shortfall on city services. There’s no “off the shelf solution” to do that without considerable trial and error, said Egan. AI’s tendency to hallucinate makes it problematic for use in contexts like building code or critical services.
“There is a lot of conversation about how to use AI in the city,” said Wagner. “City Administrator Carmen Chu is really pushing us to do some structured thinking about how to use AI.” City governments tend to be late adopters of technologies, he said.
If you’re an AI skeptic, said Egan, that doesn’t mean that you disapprove of AI. The models are just so new. In five years, we’ll be able to see what they can actually do.
Also, bureaucracy has the tendency to grow regardless of the amount of work to be done. “You would know better than me,” said Egan, to Wagner. “Have we ever rolled out a big technology system that left us with less people than before?”
“Never seen it yet,” said Wagner.