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 | , , , , , , , , , , | 3 Comments

Great Again: Corp Tax Rate Driving Jobs Overseas

The excellent book Great Again by Henry R. Nothhaft with David Kline, points out that 2000 was the year in which the tax and regulatory burden in theUS reached a tipping point compared to other OECD (First World) countries.  2000 was also the year in which average corporate tax rates of OECD countries fell below theUS’s.  TheUS now has highest marginal corporate tax rate in the world (in most states) and our effective tax rate is 50% higher than the European Union average.  Is there any wonder why the US is losing high quality jobs to other countries?

The book’s identification of the year 2000 as the tipping point is ironic since this is also the year that I identified in my book as the tipping point for anti-technology startup regulations.  The book Great Again calls the decade from 2000-2010 the lost decade, let’s hope it is only a single lost decade.  Besides the negative effects of the US corporate and capital gains tax rates, the US has also significantly weakened our patent system and made it extremely difficult for startups to raise capital because of Sarbanes Oxley (although Dodd Frank only makes this worse).  The major asset of startups is their patents – legal title to their inventions.  Weakening our patent system has undermined this asset.

Some other interesting points made by the book include that a SBA (Small Business Administration) study showed that 1% cut in the corporate tax rate increases the number of start-ups by 1.5% and decreases the rate of failure by 8%.  A World Bank study showed that 10% increase in the effective tax rate results in 2.2% reduction in investment to GDP.

The policies necessary to grow high quality jobs and get our economy growing are clear.  The only conclusion is that the US is not interested in growing the economy, it is only interested in growing government power.

Great Again: Revitalizing America’s Entrepreneurial Leadership, by Henry R. Nothhaft with David Kline

May 19, 2011 Posted by | Featured Videos, Innovation | , , , , , , | Leave a comment

Could Apple Get Funded Today?

This intriguing question and its implications for US economic policy are tackled in the groundbreaking book Great Again, by Henry R. Nothhaft with David Kline.  They answer the above query with a series of questions:

Could a twenty-year-old college dropout, just back from six months in an ashram somewhere, attract funding for a capital-intensive venture based on the manufacture (yes, the manufacture) and sale of a $2,500 consumer product unlike any that had ever been bought by consumers before?  One whose potential uses were at best unknown, and possibly nonexistent?  And one for which the total current market size was exactly zero?

Not only could Apple not get funded today, it probably could not go public. Nor would Apple have received its first patent (USPN 4,136,359) in only 20 months.  The book asks “how many of today’s Apples are not getting a chance?”

The authors use the above example to make a broader point that theUSis failing economically and technologically because of the policies we are pursuing.  They show that all net new jobs created in theUSsince 1977 (and possibly longer) were created by startups like Apple.  All increases in real per capita income are due to new technologies and most revolutionary/disruptive technologies are created by startups and individual inventors.  So what are the policies that have undermined our economy, by undermining technology startups?

The book examines five areas:

1.Role of regulations.  The Authors show that our tax policies, Sarbanes Oxley and our indifferent (some might say arrogant) regulators’ application of well meaning regulations to startups is driving them either overseas or out of business.

2. Underfunding the patent office. This is costing theUS millions of jobs and billions in GDP.  According to the authors, each issued patent is worth 3-5 jobs on average, particularly patents issued to startups.

3. Manufacturing policies in the US.  Manufacturing is key, particularly in a world that does not respect property rights in inventions, to ensuring that theUS profits fromUS innovation and not other countries.  TheUS is also losing the global battle for human talent.

4. Battle for global talent. Our restrictive immigration policies are depriving theUS of talented entrepreneurs such as Andy Grove, founder of Intel.

5. Funding for research.  The book shows that our spending on basic science and engineering is not only declining as a percentage of GDP, but the system has become short-term oriented and bureaucratic.

While this book tackles complex issues, it is a quick easy read.  It is full of interviews from entrepreneurs, venture capitalists, and technologists who built America’s technology startups over the last three decades.  Great Again provides numerous real life examples to illustrate its points.

This pioneering book shows how the US can create jobs and increase per capita income.  The policy prescriptions are based on solid science.  Just cutting government spending (balancing the budget) will not cause theUSeconomy to grow vigorously, we need pro-growth policies.  The authors are some of the few people that understand what policies are needed for the US to be GREAT AGAIN.

Great Again: Revitalizing America’s Entrepreneurial Leadership, by Henry R. Nothhaft and David Kline

April 18, 2011 Posted by | Innovation, Patents | , , , , , , , , , , , , , , , | Leave a comment