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Why Is Funding the Future So Hard?

9 Feb

Funding the future has been a difficult task in Washington. Historically, the Federal government spends resources on important things like education, basic research, and infrastructure. These investments, in some form or the other, serve as conduits for economic growth. Miles Kimball from the University of Michigan and Noah Smith from Stony Brook University have put-forth a not-so-radical idea that would help solve this problem: treat government investments differently from other kinds of government spending through a separate capital budget. Expenditures in the capital budget would be marked as “investment in the future” along with an established set of criteria:

1) If experts agree that an expenditure will raise future tax revenue by increasing GDP, then it belongs in the capital budget. If it can pay for itself out of extra tax revenue in the future then it should be 100% on the capital budget.

2) Even if an expenditure will not raise future tax revenue, it can count as a capital expenditure if it is a one-time expenditure—that is, if it makes sense to have a surge in spending followed by a much lower maintenance level of spending in that area.

Government funding brought a network of interstates, expansion of ports, and rail lines that improved the flow of commerce throughout the United States. Funding of basic research allowed for the discovery of the Internet, GPS, and basic compounds that served as the foundation for important medical breakthroughs. Kimball and Smith’s policy proposal could be accompanied by test cases of how government contracts can be improved and streamlined, establish requirements for hiring the long-term unemployed, and develop a data-driven analysis that can better assess outcomes of government spending.

There is a more important reason why Kimball and Smith’s policy proposal matters: the reality that Congress has cut non-defense discretionary spending by $1.5 trillion over the past 10 years. Check out a chart from the Center on Budget and Policy Priorities:

Screen Shot 2014-02-07 at 1.05.17 PM

The concept of capital investment for public goods is an important discussion to have. Government plays an important role in the private sector economy to supply these basic investments. In the past decade, there has a been a major squeeze on these resources. This comes as America’s infrastructure receives dismal ratings and the capital investment necessary to overcome this shortfall is sizable. The reality is that, as a nation, we are spending much more on the present than the future.

The New York Times’ David Leonhardt, in his Kindle bookHere’s the Deal, probes this important topic:

“Does the country have the right balance of spending on the present and spending on the future? It’s hard to argue that the future is faring particularly well right now. Not only are we leaving future generations, in all likelihood, with large debts to pay. We also don’t seem to be bequeathing them the maximum means to pay those debts.”

And New York Times’ columnist David Brooks has echoed similar thoughts:

“The future has no lobby, so there are inexorable pressures favoring present consumption over future investment. The crucial point is not whether a dollar is spent publicly or privately; it’s whether it is spent on the present or future.”

Kimball and Smith’s proposal of the separate capital budget is directly aligned with both the perspectives of Leonhardt and Brooks (hardly ideological soulmates). Otherwise, these investments in future stock require more creativity. And that’s why the Obama Administration’s plans for ConnectED is such a huge deal. ConnectED will have funding commitments totaling nearly $3 billion in investments in the future. First, the Federal Communications Commission (FCC) announced a $2 billion commitment over the next two years to provide high-speed broadband Internet access to 15,000 schools and 20 million students. These efforts will connect 99 percent of students to high-speed Internet. Beyond the funding through the FCC, the Obama administration worked with major technology and telecommunications companies including Apple, AT&T, Autodesk, Microsoft, O’Reilly Media, Sprint, and Verizon have committed more than $750 million in direct funds and in-kind product contributions directly to classrooms.

These efforts are a welcome step in making broadband a public good, much in the same way that highways and runways are. We have a seriously flawed and short-sighted approach to funding basic programs that the government invested in throughout history. There are absolutely viable policy alternatives that can appease both Democrats and Republicans to make these efforts work.

More Thoughts on Patent Reform & Building a Pro-Innovation Economy

30 Apr

I wrote about the introduction of the SHIELD Act a few weeks ago and the pressing need for further reform of the U.S. patent system. The bill from Rep. Peter DeFazio (D-OR) and Rep. Jason Chaffetz (R-UT) won’t see the House take action with immigration reform and restructuring of the tax code coming down the pike, but support for the bill is gaining steam. Presently, the Federal Trade Commission (FTC) and Department of Justice (DOJ) are taking public comments on the issue of patent trolls. Groklaw highlights one of the more compelling briefs from Barnes & Noble that sheds light on just how abusive patent trolls are on companies:

The patent system is broken. Barnes & Noble alone has been sued by “non practicing entities”—a/k/a patent trolls—well over twenty-five times and received an additional twenty-plus patent claims in the last five years. The claimants do not have products and are not competitors. They assert claims for the sole purpose of extorting money. Companies like Barnes & Noble have to choose between paying extortionate ransoms and settling the claim, or fighting in a judicial system ill equipped to handle baseless patent claims at costs that frequently reach millions of dollars.

B&N is asserting that the trolls’ litigation free-for-all is something akin to “death by a thousand cuts”. The company is spending tens of millions defending against a tidal wave of litigation and enduring a litany of claims that are without merit. While there are rules permitting groups to seek sanctions and recover attorneys’ fees, these awards are almost always limited to more extreme cases. These tens of millions spend on legal fees could be spent on developing new products, marketing, and other operating expenditures. Further, Mike Masnick at TechDirt highlights a key section of the brief stating that the abusive practice of the trolls directly violates the original intent of patents in the Constitution whose purpose is to promote the progress of useful arts.  B&N contends that since the legal rights afforded to the patent is not used in manner set forth by the Constitution, then it should be seen as unconstitutional:

The Patent and Copyright Clause grants Congress the power “[t]o…promote the Progress of Science and useful Arts,” not science fiction and litigious arts. (Article 1, Section 8, Clause 8 (emphasis added)). But the current system allows trolls to pursue fantastic allegations—claims that would be laughed out of the room in actual scientific or technical circles—in endless litigation that taxes and taxes true innovators while making no meaningful contribution to society.

The B&N filing is worth a read for anyone interested in fixing our innovation system over the long-haul. Further food for thought on the innovation front, the Mercatus Center’s Jerry Brito had George Mason University’s Professor Alex Tabarrok on his ‘Surprisingly Free’ podcast to talk about Tabarrok’s book, Launching the Innovation Renaissance: A New Path to Bring Smart Ideas to Market Fast, and his ideas on how to fix our innovation system.  Tabarrok discusses America’s declining growth rate in total factor productivity, what this means for the future of innovation, and what can be done to improve our long-term economic prospects:

According to Tabarrok, patents, which were designed to promote the progress of science and the useful arts, have instead become weapons in a war for competitive advantage with innovation as collateral damage. College, once a foundation for innovation, has been oversold. And regulations, passed with the best of intentions, have spread like kudzu and now impede progress to everyone’s detriment. Tabarrok outs forth simple reforms in each of these areas and also explains the role immigration plays in innovation and national productivity.

The future of the American innovative economy could be decided in 2013. Passing immigration reform, restructuring the tax code that encourages investment in innovation, the adoption of crowdfunding rules,  and stopping abusive lawsuits that tax our tech companies are four very huge steps towards that reality.

Immigration Reform 2013: A Huge Opportunity to Grow the Economy

30 Apr

The Senate plans to begin mark up on the overhauling the maze that is the American immigration system on May 9. Our immigration system is in dire need of modernization and the 844 page bill [PDF] introduced by the so-called “Gang of Eight” is not lacking in motivation (read a summary here). The Washington Post calls the bill “the most ambitious overhaul of the nation’s immigration system in three decades.” The Senate appears to have majority support for the bill, with some claiming the legislation will sail through the chamber with 70 votes.

All roads for the legislation lead to the uncertain fate when it meets the GOP-controlled House. However, the bill does have key support from Rep. Paul Ryan (R-Wisc.). Rep. Ryan, like many others, makes the argument that reforming immigration is pro-growth economic policy and for the betterment of our long-term prosperity. And he’s right. Modernizing the American system of immigration is as close to a “free lunch” as any public policy issue. The evidence and data supporting comprehensive immigration reform is overwhelmingly positive.

Economic Benefits of Reform:

Immigrant populations will increase the size of economic opportunity by creating new businesses and expanding the scope and quantity of economic production. These activities translate to positive affects on the broader economy. When reform was first introduced in 2007, the Congressional Budget Office analyzed President George W. Bush’s proposed immigration overhaul. The CBO, as Ezra Klein notes, found that modernizing the system would increase federal revenue by $48 billion while costing only $23 billion in increased public services — before even considering the broader economic benefits. There is general consensus across the ideological spectrum that the economic benefits to immigration reform will be a boon for the U.S. economy.

Factoring in broader economic benefits, research from the left-leaning Center for American Progress finds reform would add $109 billion additional tax revenue, create 121,000 jobs due to increased consumer spending, and add $832 billion in U.S. GDP over 10-years. Further, an analysis from the right-leaning American Action Forum illustrates that benchmark immigration reform would raise the pace of economic growth by nearly a percentage point over the near term, raise GDP per capita by over $1,500 and reduce the cumulative federal deficit by over $2.5 trillion. Think tanks compete with numbers and ideas. Finding two on as far on the opposite side of the spectrum as Center for American Progress and American Action Forum in agreement on an issue is a rare occurrence. The data and facts supporting immigration reform simply do not lie.

Contributions of High-Skilled Immigrants & Entrepreneurs:

Numerous studies on entrepreneurship among high-skilled immigrants compliment these findings as well. High-skilled immigrants have provided one of America’s greatest competitive advantages and a consistent source of innovative mojo for our economy. Immigrant entrepreneurs have brought us Chobani, Intel, Google, Yahoo, and others. An analysis of U.S. Fortune 500 companies shows that 40% were started by immigrants or the children of immigrants.

Immigrants have displayed entrepreneurship rates above that of the native born population. Vivek Wadhwa, et al. found that immigrants make up just 12% of the U.S. population yet have started 52% of Silicon Valley’s technology companies, while contributing more than 25% of U.S. global patents. Additional research shows that for every 100 additional foreign-born workers in STEM (science, technology, engineering, mathematics) jobs created 262 additional jobs for native U.S. workers. Nationwide, companies with at least one foreign-born founder employed roughly 560,000 workers and generated $63 billion in sales in 2012 [PDF].

Cost Claims Overstated:

Opponents of reform are leading with claims that costs of the system would be too prohibitive on government programs. The Heritage Foundation, who played a key role in derailing the 2007 effort, is close to releasing a reprise of its costs analysis of the reform. These numbers will certainly serve as the basis for the rallying cry against reform for the opposition. But here’s the problem: Heritage’s 2007 cost analysis relied on a severely flawed methodology producing grossly exaggerated costs to federal taxpayers and significantly undercounting economic contributions. The Cato Institute’s Alex Nowrasteh offers 11 reasons why the Heritage’s analysis is severely flawed. The release of the Heritage analysis is expected to be heavily scrutinized.

Embracing the Next American Economy:

The introduction of comprehensive immigration reform ensures that legacy will endure for our next American economy. The quantitative research and data supporting the case for overhaul is overwhelmingly positive. America has achieved greatness due to the diversity and talents of our population. The American legal system that encourages risk and a culture of innovation are what makes America great. We need the keep the door open to individuals to ensure that continues.

This article first appeared on PolicyMic.

Quick Fix: FastCompany’s United States of Innovation

15 Apr

FastCompany just released a fantastic new analytical series ranking innovation across 50 states and the District using factors such as entrepreneurial activity, start-up rates, new firm creation, and funding for new companies. The project also features viewpoints from local entrepreneurs across the country to tell us why Florida is excelling, what West Virginia and Oklahoma are doing to catch-up, and the start-up surprises in Alaska. There are also perspectives on entrepreneurial density in the city and in the prairie.

Here’s how they did it:

“We crunched the numbers, beginning by assessing the Bureau of Labor Statistics’ launch rate of all private-sector businesses, as well as the Kauffman Index of Entrepreneurial Activity’s percentage of people who are starting new businesses and how that percentage changed over time. Then, to see the health of young firms in particular, we tallied the percentage of jobs contributed by those less than three years old and how that percentage changed over the past five years. To analyze the self-described startup community, we incorporated the health and growth rate of Startup America members and a tally of AngelList and Fundable members.”

 The overall rankings for the states (and a District) for innovation:

1 // Florida 2 // Texas 3 // Maryland 4 // Arizona 5 // Alaska 6 // California 7 // Colorado 8 // New York 9 // New Jersey 10 // Washington, D.C. 11 // Nevada 12 // Connecticut 13 // Georgia 14 // Delaware 15 // New Hampshire 16 // Missouri 17 // Rhode Island 18 // Utah 19 // South Carolina 20 // Kentucky 21 // Vermont 22 // South Dakota 23 // Wyoming 24 // North Carolina 25 // Montana 26 // Washington 27 // Idaho 28 // Virginia 29 // Hawaii 30 // Maine 31 // New Mexico 32 // Wisconsin 33 // North Dakota 34 // Oregon 35 // Ohio 36 // Indiana 37 // Arkansas 38 // Illinois 39 // Michigan 40 // Tennessee 41 // Massachusetts 42 // Nebraska 43 // Pennsylvania 44 // Alabama 45 // Iowa 46 // Minnesota 47 // Kansas 48 // Louisiana 49 // Mississippi 50 // Oklahoma 51 // West Virginia

Stay tuned for a longer analysis of FastCompany’s project later in the week.

Can We Stop the ‘Trolling’ of the American Innovation System?

12 Apr

This American Life ran a provocative program in 2011, ‘When Patents Attack!’, that brought the parasitic practice of ‘non-practicing entities’ (NPEs) or patent trolls into mainstream awareness. These activities have become a scourge on innovative companies, particularly in the technology sector. Newegg and Twitter have fought successfully against the trolls, and Rackspace is fighting back. But the problem of “patent privateering” is a serious threat to the livelihood of tech companies and the future of start-up community in America. Continue reading

JOBS Act One Year Later: Think Long-Game

4 Apr

Last year, Congress and the President worked together (collective gasp!) to pass the Jumpstart Our Business Startups Act (JOBS Act) with much fanfare. Lots of organizations were behind the push for the legislation including the Kauffman Foundation, AOL co-founder and Revolution CEO Steve Case, and the tech community. The goal of the law to was to drive support for startup funding by allowing individuals to become investors through crowdfunding platforms and foster small business growth by easing federal regulations for IPOs. Kudos to Congress and the White House for being somewhat up on the innovation and new ways of doing business in the tech space. However, the promises of the bill have failed to meet lofty expectations of many.

One-year later, the herd of IPOs from fresh, new startups have yet to appear, crowdfunding rules have failed to be finalized by the Securities and Exchange Commission (SEC), many funding platforms are jumping through regulatory hoops, and some are wondering what the hoopla was all about. Since enacting the law, IPOs of companies aided by the legislation are likely to fall 21%, from 80 to 63 in 2012, according to Jay Ritter, University of Florida professor who tracks IPOs. House Republicans have chastised the SEC for failing to move forward on quickly on rules. So, what gives? Continue reading