State of Innovation

Patents and Innovation Economics

Nothhaft Interviews: Startups Create All Jobs

Henry R. Nothhaft author of the book Great Again was interviewed on the Dylan Ratigan show on MSNBC and the Harvard Business Review blog radio.  The Dylan Ratigan show focused on job creation and how all new jobs are created by startups not by small business or large corporations.  Mr. Nothhaft argues thatWashington is forcing a once size fits all government on American businesses.  He wants an immediate freeze on new regulations on startup business and a carve out from Sarbanes Oxley and Dodd Frank for companies with a market capitalization less than $500M.  He explains that multinational companies have choices to create jobs in theUS or outside the US and suggests that large companies have decided to create jobs outside the US.  While I think it is important to point out the current business climate in the US is causing companies to move overseas, the reality is that large corporations never produce large numbers of net new jobs and they are not the engine of innovation.  The host attempts to argue that labor rates are the only reason that companies are relocating outside the US.  Mr. Nothhaft explains that for high technology companies labor costs only represent 3% of their total expenses and it is the US tax and regulatory structure that are killing startups.

One of the panel members suggests that Google, Facebook, Twitter, etc show thatSilicon Valleyand innovation in the US are doing just fine.  First of all, Google was started in the late 1990s before SOX, other regulatory burdens and before the patent system in this country was undermined.  SOX and the changes to our patent system have destroyed the venture capital market in theUS.  Second, social media companies have not driven the entire economy like the Internet did in the 1990s and the personal computer did in the 1980s.  These companies and the social media industry are isolated islands of success that have little significance to the broader economy.  If the panel member had any insight to the US economy he would known that the number of technology startups has declined precipitously.  The Information Technology and Innovation Foundation index ranked the US dead last among 40 countries in the change in our rate of innovation last decade and many other indicators show the US is falling behind technologically.

The host of the show and the panel seemed to have no idea what Mr. Nothhaft was talking about.  My guess is that the host and panel are all Wall Street experts who believe finance is the American economy.  They believe in Keynesian economics in which manipulating the money supply and increasing demand by increasing government spending are all that matters.  They have no idea what affects technology startups and they do not really believe they are important.  They do not understand that technology startups create the inventions that increase our real per capita income.

The Harvard Business Review interview again focused on how startups create jobs.  Mr. Nothhaft again argues for a two-tiered approach to SOX and other financial regulations.  He argues that technology startups do not use leverage and do not pose a threat to the financial system of the US.  He also points out that Lehman Brothers, AIG, Goldman Sacs, etc. were all SOX compliant going into the current financial crisis.

He later explains that the patent system has been undermined by the theft of user fees from the Patent Office by Congress to the tune of over $1B in the last two decades.  Congress just stole another $100M from the Patent Office in the continuing resolution bill – See Stealing From Inventors.

The HBR interviewer is also ignorant of the US’s lack of innovation in the last decade.  She does not understand that increases in technology are the only way to increase real per capita income.  The host ends the interview with the condescending comment that it’s clearly a very complex issue.  It is not complex!  When the government interferes with property rights (particularly patents) and imposes absurd regulatory burdens (SOX, Dodd Frank) and the US has the highest corporate tax rate in the World it is straight forward that the result will be fewer businesses, fewer jobs, and a lower standard of living for all.

I respectfully disagree with Mr. Nothhaft’s two-tier approach to SOX and other financial regulation.  First of all, Mr. Nothhaft points out that SOX failed to stop financial fraud and the 2008 financial meltdown.  He points out that the companies he believes should be subject to SOX were all SOX compliant, but they were also the ones that caused the financial meltdown.  So if SOX does not work, why have a two-tiered approach?  SOX should be repealed – period.  Second, laws that only apply to certain people or businesses are the essence of tyranny.  A good law should apply to all people equally, much like a law of physics/nature.  When Congress exempts itself from certain laws (e.g., antidiscrimination, Social Security, Obama Care, etc) and makes convoluted tax laws to help the politically connected at the expense of the rest of the country, you know that you are on the path to tyranny.  Adding another law that only applies to certain businesses will only accelerate the US’s decline into despotism.

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May 21, 2011 - Posted by | -Economics, Featured Videos, Innovation, Patents | , , , , , , , , , ,

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