I feel your pain. It's a high-cost, high-salary environment. You see plenty of houses with deferred maintenance issues - paint pealing, poor landscaping, yet you know the owners are pulling in $200K plus. Basically, if you didn't get paid a lot, would you still live here?
To answer your question though, it is very logical what Google is doing because they are an established company with a large number of Silicon Valley employees. A simple proof: male employee earns $250K and moves from San Jose to Portland, Oregon. Female employee in Portland is earning $180K doing the same work. Bam! Equal Opportunity lawsuit entails. Only option for Google is either to reduce the salary of the male, or raise the salary of the female, and subsequently everyone else in her office. US law allows for variable pay based on location, but not based on sex (IANAL). Extend the logic, and you can see that a ripple effect would ensue: Google would have to raise the salary of every employee to the highest-common denominator, i.e, everyone in the US would have to be paid Silicon Valley salaries. As that would take time (and undoubtably be very expensive, even for Google), the gamers/arbitragers would take advantage of the system - get the job in San Jose, then move to low-cost city of their choice. This would exacerbate the situation, especially as it'd be pretty obvious to other local employees when the high-roller ex-California couple rolls up in his'n'hers Teslas. Further, there would be a serious disincentive for employees to work in any high-expense city. You might see a hollowing out of the workforce in Silicon Valley, NY City, Seattle, etc., as folks live like kings in Boise, Reno, or Colorado Springs.
Maybe that's what some people believe: Google will shift their centers of operation to these low cost cities, (that you could argue would gentrify due to the high-paid tech workers living there). But logically, if they actually ditched everything they current have in those places, and ignored the inherent attraction of them (Silicon Valley maybe expensive, but it's a really nice place to live, and there's a huge critical mass of smart people here), then logically you'd expect them to adjust salaries downwards because now, there's no need to pay the high Silicon Valley salary anymore. That ain't gonna happen though.
So, it's logical what they're doing, but that doesn't mean it doesn't have ramifications. One of them is that it breaks the implied meritocracy contract of these companies - you thought you were being paid $200K because you bring in $200K+ worth of value for the company. Actually, you're being paid (just) enough to get you to work here, do good work for the company, and not leave. The game theory is sound - it just sucks that we can't take the money and run!