Barriers to innovations crush U.S. entrepreneurship

New York Times contributor Thomas B. Edsall reported April 1 that more US business have closed than opened during the past three years for the first time since data were first collected more than thirty years ago. ” An extensive body of evidence shows that the public focus on the success of high-tech companies like Apple and Google masks an overall downward trend in key measures of business vitality,” Edsall writes. This is a devastating indictment of US policy. It’s as bad as Edsall thinks, and a good deal worse again: America’s high-tech companies have turned into patent trolls run by lawyers rather than engineers.

 

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Part of the problem is politics. Edsall reports:

James Bessen, a lecturer at the Boston University School of Law and former C.E.O. of the software company Bestinfo, argues that companies and lobbyists protecting their own self-interest have become a major force undermining business creativity and growth.

In a January 2015 Foreign Affairs article, “The Anti-Innovators: How Special Interests Undermine Entrepreneurship,” Bessen writes that the Department of Defense, which in the past had fostered innovation, has more recently adopted procurement policies “that benefit traditional defense contractors while shutting out start-ups.”

The reason “for the shift is simple: large defense contractors have the money and influence to secure lucrative government contracts,” according to Bessen. In fact, “the pure quantity of cash has skyrocketed. Since 1990, the defense industry has contributed more than $200 million to political campaigns, and in 2012 alone, it spent roughly $132 million on more than 900 lobbyists.” Over the past 10 years, from 2005 to 2015, the defense industry spent $1.319 billion on lobbying.

bessen has a good point. There’s also a mass of new regulations, licenses, and other obstacles to entrepreneurship that discourage small business formation. But it’s not just the lobbyists. It’s the lawyers that are suppressing US innovation.

Most of all, though, is a fundamental change in the American technology sector. During the tech boom of the late 1990s, tech stocks displayed volatility roughly double that of the S&p 500 Index, just what one would expect from a disruptive and innovative sector.

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After the 2008 crisis, though, technology sector volatility converged on overall index volatility. The sector ceased to be risky. And it ceased to be risky because the patent trolls who run the big tech companies make it impossible for a start-up to challenge them. What used to be disruptive technology companies are stable consumer franchises with a risk profile more like Proctor and Gamble than the innovators of the 1990s.

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