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Posts Tagged ‘start-up’


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.

 
Pikes Peak Economic Club May 4 Meeting

Local author, “The Decline and Fall of the American Entrepreneur: How Little Known Laws and Regulation are Killing Innovation”.

Dale B. Halling is a patent attorney located in Colorado Springs. His book, “The Decline and Fall of the American Entrepreneur: How Little Known Laws and Regulation are Killing Innovation“, explains that innovation is the key to getting out economy growing  again. Unfortunately, since 2000 we have passed a number of laws and regulations that are killing innovation in the US. The incredible innovation of the 90s was based on technology start-up companies built on intellectual capital, financial capital, and human capital. All three of the pillars have been under attack since 2000. Our patent laws have been weakened reducing the value of intellectual capital. Sarbanes Oxley has made it impossible to go public reducing financial capital for start-ups and the FASB rules on stock options have made it harder to attract human capital to start-ups.

May 04, 2010
from 06:30 pm to 06:30 pm
The Vanguard School, 1605 D South Corona Ave., Colorado Springs, CO 80905

For more information click here

 

There have been numerous articles and blog posts on the death of the venture capital model.[1] Only six companies that were venture capital backed went public in 2008, the lowest number since 1970.  There were also very few acquisitions of venture backed companies.[2] As a result, many venture capital firms are likely to disappear in the next couple of years.

Historically, venture capital funds have invested in a limited number of companies and taken an active part in the oversight of the companies.  Sarbanes Oxley and the likelihood of more financial regulation threaten the ability of start-up companies to go public.  Without a robust IPO market, it is unlikely that M&A activity will result in strong valuations.  Additionally, many IT start-up companies have low capital requirements and can forego traditional venture capital investments.

 

None of these securities laws were able to prevent the stock market decline of 2000.  Sarbanes Oxley was passed in 2002 in reaction to several corporate and accounting scandals including those affecting Enron, Tyco International, Adelphia, and WorldCom.  The legislation set new or enhanced standards for all U.S. public company boards, management, and public accounting firms.  The act contains 11 titles, or sections, ranging from additional corporate board responsibilities to criminal penalties, and requires the Securities and Exchange Commission (SEC) to implement rulings on requirements to comply with the new law.

 
Phoenix: Mythical Fed Chairman Muses on the Economic Growth of the 90s

Phoenix: Mythical Fed Chairman Muses on the Economic Growth of the 90s

The Federal Reserve Chairman was sitting in his office contemplating the fantastic problem that he and the other fed governors were trying to solve.  The Federal Reserve, since its inception in 1913, had never faced such a dilemma.  Huge federal budget surpluses were likely to wipe out the federal debt in the next couple of years and the fed chairman was concerned how the Federal Reserve was going to control the money supply.  Buying and selling treasury notes was one of the major methods the Federal Reserve used to control the money supply.  Controlling the money supply was necessary to control inflation, ease recessions and deal with banking crises, such as 1930’s style runs on banks.  The Federal Reserve buys treasury bills when they want to increase the money supply and sells treasury bills when they want to decrease the money supply.  If the federal deficit was paid off, then the Federal Reserve would have difficulty using open market operations to control the money supply.  The Federal Reserve could still alter the discount rate or the required reserve ratio of banks to alter the money supply, but open market operations have a more immediate.

 

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