Having swept both Houses of Congress, Republicans have an opportunity to set an ambitious agenda to jump-start the economy, and they need to seize it.
There is less entrepreneurship today than for several decades. A recent report by the Brookings Institution revealed a persistent decline in the rate of new business formation since at least 1978, and critics blame America's legal and regulatory environment for that. They think it is time for America to take innovation and economic growth seriously again.
The vast majority of new jobs and economic growth comes from small business, not big business. Specifically, it comes from small businesses that are new. Companies less than five years old account for all of the country’s net job creation, and the technology sector leads the charge, according to data compiled by the Kauffman Foundation. Business formation is 23 percent higher in the tech sector than in business overall, and 48 percent higher in the red-hot field of communications technology, according to a 2013 research report the Kansas City nonprofit published jointly with Engine Advocacy, a San Francisco lobbying group that promotes high-tech startups.
These supporters of old-fashioned American entrepreneurship are convinced that new small businesses are the key to job growth, and preserving that growth demands a rethink of economic policy.
A smart economic agenda would foster dynamic competition and reduce barriers to entry for new businesses, they say. So it is vitally important to protect the interests of new small business, since those interests can differ radically from those of big business, which tends to favor regulation as long as it helps stop new small businesses from sprouting and becoming competitors.
If Republicans focus their agenda on startups, the country will benefit from robust economic growth. Dynamic competition could reinvigorate America and ensure that it remains the economic powerhouse of this century, just as it was in the last century. If the GOP fails to act, however, the consequences could be severe. Many countries are designing economic policy to foster innovation, and they are learning from America's mistakes.
The GOP must rebrand itself as the party of innovation, willing to confront cronyism in favor of dynamic competition to foster innovation.
By enabling the free market, new market models will challenge old industries, innovations and entrepreneurs will generate unprecedented economic development, millions of new and interesting jobs will be created, and our world will be revolutionized by amazing new products and services.
INCREASING ACCESS TO CAPITAL
Republicans can measure the success of their agenda by tracking which economic sectors are open for innovation, as revealed by the amount of investment dollars they attract and anecdotal evidence from venture capitalists and entrepreneurs.
U.S. companies have trillions of dollars sitting dormant in international bank accounts because the money cannot be repatriated without being heavily taxed. America's corporate tax rate is the highest in the world at 39.2 percent. While big corporations use accounting tricks, loopholes and deductions to reduce their average effective tax rate to 12.6 percent, emerging businesses typically get hit for the entire amount.
It would be difficult to design a tax policy more likely to stifle innovation. New small companies generally do not have the capacity to hide their profits in offshore accounts, partly because they face large competitive disadvantages against bigger, more established multinational corporations.
Permanently lowering tax rates, closing loopholes and eliminating deductions would bring billions of dollars back to the United States for investment at home. A temporary corporate tax holiday isn't sufficient because it would encourage established companies to shelter their profits abroad while they wait for the next holiday.
The new Republican majorities have vowed to give corporate tax reform serious consideration, even though House Republicans haven't voted on a tax reform measure proposed by outgoing House Ways and Means Committee Chairman Dave Camp, R-Mich.
While corporate tax reform is important, founders of startups dream of a world where they make enough profit to cover their taxes. Startups need angel funders and venture capitalists to invest in their businesses. One reason why the U.S. economy encourages innovation is that investment dollars are available to 18- to 25-year-olds with good business ideas. Investing in an early stage startup is risky, but the payoff can be enormous: Four months after Mark Zuckerberg launched Facebook at Harvard University in 2004, Peter Thiel invested $500,000 for a 10 percent stake in the venture. Less than eight years later, Facebook completed an initial public offering that valued the company at $104 billion.
The United States attracts an estimated 68 percent of the world's venture capital, but it could do a lot better. Venture capitalists try to target companies that are starting to show traction in their market segments, but to launch a startup an entrepreneur requires smaller rounds of investment through “angel funders” who are often friends and family members. Fortunately, only a small regulatory adjustment would drastically increase the availability of investment dollars for early stage startups.
In 2012 Congress passed the JOBS Act, including a provision to allow crowdsource investing, which would let average people help kick-start a new venture in exchange for an equity stake in the company. The theory was that allowing individuals to invest small sums in early stage startups would drive billions of untapped dollars into investment. This year, actor-director LeVar Burton launched a kick-starter campaign to revive his popular PBS television show “Reading Rainbow” as a Web application. He hoped to raise $1 million in five weeks, but actually collected $6.4 million.
Some startups that previously would not have been able to attract sufficient seed money from banks or venture capitalists may now be able to raise even more from the Internet. So why haven't we seen a surge of investment in the years since President Obama signed the JOBS Act into law in April 2012?
One reason is that the Securities and Exchange Commission has essentially ignored the law. The JOBS Act required the agency to produce regulations on crowdsource investing within 180 days. But nearly 1,000 days have passed and still no final regulations have been proposed.
Unfortunately, few lawmakers are interested in this issue and it is not clear that Republicans will get around to it. If a Republican Congress doesn’t stand up to a Democratic administration ignoring a law passed in 2012, there may be little hope for the rest of any tech agenda.
COPYRIGHT AND PATENT REFORM
James Madison warned 200 years ago that copyrights and patents, as government-granted “monopolies,” must be “guarded with strictness against abuse.”
A congressional report published a century later concluded that the purpose of copyright is “not primarily for the benefit of the author, but primarily for the benefit of the public. ... Congress must consider ... two questions: First, how much will the legislation stimulate the producer and so benefit the public; and second, how much will the monopoly granted be detrimental to the public?”
By this or any other reasonable measure, modern intellectual property laws are off the rails. Copyright has become a tool for big businesses to bully upstart competitors, and the evidence of abuse is overwhelming. It reached fever pitch in 2012 when entertainment industry lobbyists sought to censor the Internet and stifle innovation through the Stop Online Piracy Act and the Protect IP Act (SOPA/PIPA).
In the 1970s, when Sony Corp. tried to export Betamax video cassette recorders to the United States, copyright law was used to slapped an injunction on the company to cease selling the technology. Sony’s potential liability was so great that an adverse ruling would have bankrupted the entire company. Its VCR was saved only by a 5-4 decision of the Supreme Court.
When Ford and GM decided to add built-in MP3 players to their vehicles — the technology is widely available in vehicles around the world — they found themselves served with a multibillion-dollar lawsuit.
Copyright law has become a minefield for innovators because it often is unclear and potential damages are huge. Major venture capitalists such as Y Combinator have warned companies dealing with copyright not to apply for investment money because the legal environment is just too dangerous. For many innovations, a risky legal environment may be survivable because the damages are manageable, but when technology intersects with copyright potential damages increase exponentially — a problem the story of Aereo clearly illustrates.
Aereo was a New York City company that allowed subscribers to stream broadcast television programming on an Internet-connected device. Broadcast networks filed suit soon after Aereo began offering its service in 2012. The Supreme Court ruled against Aereo on June 25. The company suspended service three days later and filed for bankruptcy in November.
The problems with patent policy are legion, putting many sectors of the economy off-limits to competition. Too often, modern intellectual property laws are allowed to kill innovation when light touch “regulation,” in the words of American Enterprise Institute’s James Pethokoukis, could foster innovation and creativity as the Founders intended.
A patent means government granting exclusivity to a product, and in some cases granting a monopoly to an entire business model. Granting patents to ideas that are not truly novel destroys industries, stops research and development, and spurs patent trolling, a modern form of tort abuse in which the players buy low-quality patents cheaply and use them to gouge market entrants who need them to develop new technologies.
The real problem is not the troll himself but rather the regime that allows him to flourish — cheap, low-grade patents and a system that allows shakedown litigation. There are many ways to combat tort abuse in this context, and there are signs that Republicans will take on the challenge.
The Young Guns Network, an organization founded in 2011 with support from House Republican leaders Paul Ryan of Wisconsin, Kevin McCarthy of California, and Eric Cantor of Virginia, published a report titled "Room to Grow" that included a chapter written by Pethokoukis calling for complete reform of U.S. intellectual property laws.
“America’s Founders thought that innovators needed to earn an economic return for their efforts and be protected temporarily from limitation,” Pethokoukis wrote in the report published earlier this year. “Over the years, however, copyright and patent law has evolved into cronyist protection of the revenue of powerful incumbent companies — a type of regulation that hampers innovation and entrepreneurship.”
Despite a conservative consensus that copyright and patents should be restored to their original purpose described in the Constitution, reform has proved difficult in the face of resistance from vested interests. In 2013, in response to 114,000 Americans signing a petition demanding action, it was President Obama, not the Republican House, who endorsed the copyright reform allowing consumers to unlock their cellphones and shop for better deals from rival carriers.
This popular change was important to encourage competition in the wireless market, and it ultimately resulted in legislation being signed into law this summer. But instead of solving the problem permanently, the law allows the Librarian of Congress to continue to decide which technologies are legal under U.S. copyright law, creating significant uncertainty.
With the recent announcement that Rep. Darrell Issa, R- Calif., will become chairman of the House Judiciary subcommittee on intellectual property, actual reform of U.S. copyright law is now more likely than at any other period in recent history.
As for patents, while the 2011 America Invents Act was a good step, it did little to address the underlying problems. In 2015, the GOP Congress must substantively address the real problem: low-quality patents and a system that encourages rampant abuse. A conservative reform of patent policy would have a significant impact on the future of innovation, and recent statements by Sen. Orrin Hatch, R-Utah, demonstrate that some Republicans are interested in dealing with patent quality. Congress can fix this problem, which costs the U.S. economy as much as $60 billion a year, and restore patents to their intended constitutionally enumerated purpose: “to promote the progress of the sciences and useful arts.”
STOP WASTING SPECTRUM
Perhaps the most valuable commodity we have in this country is spectrum. But it is being misused and wasted. There is only so much spectrum to go around, and many growth industries, even the federal government, need more of it. Fortunately, improvements in technology are solving many of these problems, but more spectrum availability will jump-start new technologies.
The Federal Communications Commission's website notes that "despite significant investment in networks and advances in wireless efficiency, demand for mobile broadband service is likely to outstrip spectrum capacity in the near-term. Without action to address this ... service quality is likely to suffer and prices are likely to rise."
Expansion of 4G wireless data technology depends on more spectrum availability. Transitioning to 5G wireless technology and other services such as super Wi-Fi will require more spectrum. More spectrum means cheaper data, faster Internet, and fewer dropped calls. If more spectrum were available and phone Internet speeds continue to increase, many people could have a new, viable competitor for cable Internet. That is one area where more competition would be welcome. About 55 percent of homes have only one Internet service provider at speeds over 25 Mbps, according to the FCC.
Major reforms are needed to provide sufficient spectrum. Spectrum needs to be pried from the hands of government agencies, particularly the Department of Defense. Broadcast networks are also notorious for using (and wasting) a large amount of spectrum.
There are many ways to recapture and repurpose that spectrum. A nationwide inventory of spectrum utilization is needed to allow informed decisions to be made about its future use.
For decades politicians have called for the granting of more H-1B visas. Demand massively outstrips supply. Venture capitalist Marc Andreessen told New York Magazine recently, “Our companies are dying for talent. They’re like lying on the beach gasping because they can’t get enough talented people in for these jobs.”
Highly skilled immigrants are needed for economic dynamism and innovation. According to a study from the National Foundation for American Policy, 46 percent of America’s top venture capital-funded companies have at least one immigrant founder. Workers who speak English and have advanced degrees and job offers in vital sectors of the economy are precisely the type of immigrants America needs. There is an international market for such talent, and America barely participates.
Companies apply as quickly as possible for a share of the 85,000 H-1B visas allowed each year on a first-come, first-served basis. The visas can vanish in just a few days. This makes no sense. A visa should be stapled to every Ph.D. diploma in the country. H1-B visas need to be significantly increased, even doubled, and awarded based on competitive bidding.
Congress should also consider startup visas, such as in the Moran-Warner Startup Act, which would award visas to founders of new companies. Data from the Kauffman Foundation found that immigrants are nearly twice as likely as native-born Americans to start businesses. Many successful technology companies were founded by highly skilled immigrants, including Tesla, SpaceX, PayPal, Palantir, Google, eBay, Yahoo and Intel. Many distinctively American brands were established by immigrants, including Kraft, Procter & Gamble, DuPont, Goldman Sachs, Honeywell and Nordstrom.
In the wake of Obama’s executive order granting amnesty to millions of immigrants, a further loosening of immigration policy for high-skilled workers may prove difficult. But every year the United States grants visas to 1.3 million foreigners and only 85,000 of them are in the H1-B category for high-skilled labor. Doubling H1-B visas to 170,000 can be done while keeping the overall cap of 1.3 million and not granting amnesty to anyone. Proceeds from a competitive bidding system could be directed toward border security. This approach would not encourage illegal immigration since it would only change the visa system for immigrants who apply to enter the United States legally.
In 2015, the GOP majority could reject the Senate’s comprehensive immigration approach and repudiate the president’s amnesty order, and instead promote its own proposal that would provide the private sector with the high-skilled labor it needs while keeping the overall immigration cap the same, increasing border security, and not granting amnesty to immigrants who arrive here illegally. A Republican effort to expand high-skilled immigration would not only benefit the private sector, it would be an adroit political move for the future of the party.
TACKLING THE FDA
While the GOP pursues repealing and replacing Obamacare, its replacement must include substantive reforms to the Food and Drug Administration, which is sending drug development costs soaring while stifling emerging technologies. Fixing healthcare requires tackling the FDA.
For example, the cost of a home DNA test for active proteins has dropped below $1,000, so the home DNA test market should be expanding rapidly. Home diagnostics testing holds significant promise for preventive medicine, which could save the federal government billions of dollars in entitlement spending. But in 2013 the FDA effectively banned 23andMe from providing home diagnostic services for its DNA tests, and with that draconian action government regulators put a brake on an entire industry, shifting significant investment abroad. Entrepreneurs interpreted this action against a well-funded startup as a sign that this sector of the economy is not open for innovation.
In its letter to 23andMe, the FDA referred to concerns about the way women would react to information that they have a gene giving them a high predisposition to breast cancer. If given the correct information, people will make smart decisions about their own health without needing a bureaucrat to protect them from learning about their own DNA.
Many other aspects of FDA regulation are baffling. Eyeglasses used to require a prescription, but in the 1990s the FDA relaxed its rules, which has led to dynamic competition online for high-quality, prescription-strength lenses that now cost as little as $8.99. But contact lenses still require a prescription — unless they are colored contact lenses, that is. This rule needlessly stifles competition and is a big reason why contact lenses remain expensive. The cost of individual regulations may seem small, but average people pay the cumulative cost of all the regulations created by the government.
LOWERING BARRIERS TO ENTRY
Every year, thousands of people start businesses. They begin with a vision, a dream, an idea of what can be. They are skeptical of the status quo. They are needed to sustain American ingenuity and innovation. Thankfully there is no shortage of dreamers willing to take big risks and run with their ideas.
Today, starting a company has never been easier, thanks to the Internet and modern technology. Barriers to entry for innovators have reached a point where nearly any 18- to 25-year-old with a good idea and some basic Web coding ability can create the next Facebook, Twitter or Instagram. “Permissionless innovation,” a term sometimes credited to Vint Cerf, co-creator of the Internet, allows people to make their idea become a reality. Anyone with a good idea can code a website, launch it on the Internet and succeed or fail without receiving permission from a government bureaucrat and without hiring a lawyer to ensure compliance with regulations. The product of this environment is dynamic competition.
Republicans should seek to expand sectors of the economy that foster permissionless innovation. If they do, the economic implications will be significant.
But today, instead of an environment of permissionless innovation, in many fields innovation is limited to large, well-financed companies that can afford the most expensive lobbyists and legal counsel. This “innovation tax” includes the costs necessary to comply with mandates, regulations, court rulings, and other burdens imposed by government. Most new market participants can't afford expensive lobbyists and legal counsel, meaning this innovation tax can stop entrepreneurs dead in their tracks.
Real regulatory reform must start in Congress with annual hearings where entrepreneurs and venture capitalists can testify about which sectors of the economy are open to innovation and which are closed by regulation.
While the GOP says the right things on regulatory policy, in practice Republican-leaning states are responsible for some of the worst cronyism: Texas, Arizona and New Jersey use the force of law to ban Tesla Motors from selling cars directly to consumers, protecting dealerships and drastically increasing the cost of every vehicle sold. New car services such as Uber, Lyft and Sidecar face regulatory challenges wherever the incumbent taxicab industry tries to keep its monopoly intact to avoid competition.
ON THE HORIZON
New regulations on the horizon promise to stifle innovation before it gets the chance to take off.
Decentralized digital currencies such as Bitcoin could disrupt many sectors of the economy. Some technologists believe the impact of cryptocurrencies may be nearly as profound as HTML was for the World Wide Web, yet New York regulators are seeking to make digital currencies subject to onerous controls.
Forty-eight states and the District of Columbia require money-transmitter licenses, which can cost companies as much as $500,000 per state and take up to five years to obtain. These state licenses are seriously stifling innovation (and all but New Mexico’s apply to Bitcoin). Legislation to pre-empt state laws by creating a national standard for money transmission would jump-start innovation in this sector.
Driverless cars will transform our physical world and may become one of the most significant inventions of the 21st century — Morgan Stanley estimates that autonomous vehicles will lead to $5.6 trillion in global savings — but significant legal and regulatory burdens could stifle their deployment. The biggest challenge for driverless cars may not be technological, but legal.
A Republican Congress needs to oversee regulations with a skeptical eye, thinking always of economic growth, and then create forward-leaning legislative policies to foster innovation, not uncertainty.
Derek Khanna is listed on Forbes' 30 Under 30 for Law and Policy. He was a staffer with the House Republican Study Committee and an aide to Massachusetts Sen. Scott Brown and an X-Lab fellow.