Less Washington, More Start-Ups: A New National Innovation Strategy

Seven ideas for a national innovation strategy that asks Washington to butt out

Thumbnail image for 250 lightbubldieseldemon.png President Obama used his State of the Union address to announce a "Sputnik moment" for U.S. innovation. Here at The Atlantic, we asked experts to help us understand what states get innovation right and what innovation looks like. Here's something a little different: Seven ideas for a national innovation strategy that asks Washington to butt out.

1. Stop penalizing investments in start-ups. Some twenty years ago, virtually all private venture capital funding was directed into U.S.-based companies, but now more than half of such funding flows to foreign firms. What changed? Our federal government enacted policies making it less favorable for investment, while other countries encouraged investments. Our corporate tax rates became the second highest among developed countries, diminishing the returns to investors. The Sarbanes-Oxley law imposed new costs on business. Exiting investments became more difficult as going public became less desirable. Sarbanes-Oxley imposes relatively large costs on small public companies. More, public companies are catnip for plaintiffs' lawyers seeing quick and lucrative returns after any sudden change in share price. To encourage new investment, we need to modify Sarbanes-Oxley, restore integrity and rationality in our legal system, and lower corporate tax rates.

2. Direct any public funding of start-ups by private investors, not by government bureaucrats. Government employees generally are not at all qualified to make risky business investment decisions. Moreover, as shown in the failed 2009 stimulus package, government decisions invariably direct spending based on political impact criteria. I do not advocate any government spending of this type, but if politicians require taxpayer funding of start-ups, all specific investment decisions should be made by private venture capitalists with proven track records who would be required to share in the investment, risks, and rewards of their decisions. Government at most might prescribe targeted technologies. Interestingly, Josh Lerner, another Harvard business professor, argues that even government programs to stimulate bank lending are not relevant to start-ups, because entrepreneurial ventures cannot afford the financial burden of paying interest on loans.

3. Take easy unionization off the entrepreneurial table. As risk takers, entrepreneurs must have the ability to make fast decisions about what their companies do and how they do it. Unions inherently slow down and often inhibit fast action. This is exacerbated by proposals such as "card check" that allow sudden unionization without confidential balloting and that allow government arbitrators to set working conditions as well as work rules that drive entrepreneurs to seek more business-friendly host countries and take potential jobs with them. The Obama Administration's policies requiring unionized or "prevailing wage" government contractors add costs and reduce business incentives for struggling entrepreneurs. Closing off large government contracts to entrepreneurs would have had dire consequences in most of the wars the U.S. has fought.

Regrettably, until unions recognize that workers' interests, as with the nation's interests, lie with greater innovation and entrepreneurship, they represent a formidable barrier to those goals.

4. Let any company fail, whether large, small, or entrepreneurial. At its best, the free enterprise system is impartially rational in allocating investment, rewarding smart innovation, and promoting economic growth and job creation. Unfortunately, when political calculations intrude, outcomes are usually disastrous. The most recent major examples are the financial bailouts of GM and Chrysler, which not only wasted billions in taxpayer funds but were primarily motivated by an unprecedented gift to the pro-administration unions which suddenly were lifted ahead of the line of private creditors.

Billions of dollars in debt, Ford is further burdened by competing against Chrysler and GM, especially since the government wiped out their massive debts. This means Ford must pay several hundred million dollars in annual interest on its debt, while GM and Chrysler have little reason to invest.

Despite this, Ford stands as one of the most innovative and transformational companies of our era. It has shifted from a car company to a technology company. With a Ford F-150, a small business owner working construction can use an onboard computer, track tools, maintain supplies, and build efficiently.

Ford is one company that has not only innovated; it has also captured America's sense of fairness. Many Americans, disgusted at the car bailouts but wanting to buy an American company car, have turned to Ford and are thrilled by what they see.

For this reason, we have eagerly invited Ford CEO Alan Mulally to give the keynote address at International CES three times. Before Ford, Mulally headed Boeing, and many scoffed when a non-car executive was chosen to lead Ford. A board's selection of a CEO is its most important task, and the Ford Board proved innovative by thinking outside the Detroit box. Mulally is not only an affable and articulate leader, but his vision for Ford, his refusal to seek a bailout, and his shift of Ford to a technology company have proved to be a winning strategy. By the summer 2010, Ford revenues were up 30 percent from the same period a year ago.25

Another less-noticed consequence of the GM and Chrysler bailout was the unprecedented executive branch intervention into the process of bankruptcy and creditor rights. It may seem inconsequential, but those who lent Chrysler and General Motors billions of dollars, secured by a claim on the U.S. assets, were thrown overboard in favor of unions who essentially took ownership of these companies thanks to the Obama Administration's intervention. Nothing in the law gave the unions a more senior claim, but the White House intervention rushed through a bankruptcy reorganization, which gave the union rights and ownership over bondholders that had no principled basis in law and instead reeked of political payback for union support.

There is seldom a good reason for government preventing a business failure, and the default policy should be to let the free market work its will.

5. Make economics, business, and entrepreneurism studies compulsory in school curricula. At one time, reading, writing, and arithmetic marked the education of our populace. Over time, we added valuable requirements in subjects like history and geography. But over the last several decades, the education pendulum has swung toward subjects that have a tenuous relationship to good education and citizenship. As long as taxpayers are funding education at any level, we must educate our future generations about the true nature of their economic futures. They need to learn that private business, fact-based investing, innovation, and entrepreneurism will determine their own standards of living and the economic and political health of our country. Illiteracy in basic economics and entrepreneurism is a certain recipe for national failure.

6. Ensure that business tax rates are transparent and predictable. Uncertainty paralyzes decision-making in every realm of human activity. In our current political environment, business tax rates are being driven by ideological, not economically rational, considerations. As a result, entrepreneurs, their potential investors, and their potential customers all hesitate to make commitments. Although I hate to say so, even assured and measurable increases in marginal tax rates can be preferable compare to total uncertainty. It is another penalty that we suffer from when politics and ideology are directing our national policies.

7. Change tax laws to favor investment over debt. Our nation has been hurt as existing businesses employing millions of Americans have been bought and decimated by leveraged investment fund firms. These firms borrow heavily to purchase the going concerns, taking advantage of favorable income-tax-deductibility treatment of debt, and so turn a quick profit by firing workers, siphoning cash from the company, and letting it go under or trying to resell it quickly. A shift away from the tax advantage for debt would end many of these corporate dismemberments and job killers, and potentially promote additional investment for growth. If tax laws cannot be changed to favor investment, they should at minimum be neutral between them. In sum, privately funded, entrepreneurial, technology-driven companies are the key to our nation's economic growth, increased standard of living, and full employment. Government never has been and never will be capable of rationally growing our economy and jobs. Its primary role should be to promote policies that enable the private sector to prosper and realize our ever-changing economic potential. I don't believe in censorship, but I am tempted to forbid the falsehood that government can ever create any jobs other than government jobs. Moreover, government is also inherently driven by short-term, temporary, economic band aids. Just recently, former business school dean and Secretary of Labor and State George Schultz was joined by an elite group of scholars to critique the economically destructive tax-and-spending policies of the federal government. Among their wise policy recommendations, they point out that "long-lasting economic policies based on a long-term strategy work; temporary policies don't."26 I heartily endorse their opinions.


Excerpt: The Comeback: How Innovation Will Restore the American Dream. By Gary Shapiro, president and CEO of the Consumer Electronics Association. Published by Beaufort Books.