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How Corruption Is Strangling U.S. Innovation
HBR Blogs ^ | December 7, 2012 | James Allworth

Posted on 12/07/2012 12:30:53 PM PST by AZLiberty

If there's been one topic that has entirely dominated the post-election landscape, it's the fiscal cliff. Will taxes be raised? Which programs will be cut? Who will blink first in negotiations? For all the talk of the fiscal cliff, however, I believe the US is facing a much more serious problem, one that has simply not been talked about at all: corruption. But this isn't the overt, "bartering of government favors in return for private kickbacks" corruption. Instead, this type of corruption has actually been legalized. And it is strangling both US competitiveness, and the ability for US firms to innovate.

The corruption to which I am referring is the phenomenon of money in politics.

Lawrence Lessig's Republic, Lost, details many of the distortions that occur as a result of all the money sloshing around in the political system: how elected representatives are being forced to spend an ever-increasing amount of their time chasing donors for funds, for example, as opposed to chasing citizens for votes. Former congressman and CIA director Leon Panetta described it as "legalized bribery"; something which has just "become part of the culture of how this place operates."

But of all the negative impacts this phenomenon has had, it's the devastating impact it has on US competitiveness that should be most concerning.

One of the prime drivers of economic growth inside America over the past century has been disruptive innovation; yet the phenomenon that Lessig describes is increasingly being used by large incumbent firms as a mechanism to stave off the process. Given how hard it can be to survive a disruptive challenge, and how effective lobbying has proven in stopping it, it's no wonder that incumbent first take this route so often.

The process by which firms do this is rarely overt, and usually couched in the language of regulation. When it involves nascent disruptors running headlong in to regulation that protects the incumbents, then the innovators are painted as "cutting corners." Conversely, when new regulation makes sense in order to foster innovation and disruption, but it doesn't suit the interests of the incumbents, then that regulation will often be characterized by incumbents as "stifling red tape." It seems to be happening more and more frequently, across sectors:

Automotive. A good friend who has been working in one of the US's new electric auto companies described how the regulation governing selling cars was being used by NADA (the National Automobile Dealers Association, one of the largest industry and lobby groups in the country) to make the new entrants' lives very difficult. NADA, for instance, recently sued Tesla for running "company-owned dealerships" in Massachusetts and also in New York because the law states that it's illegal for a factory to own a dealership. (To give you some sense of how ridiculous this is, the equivalent in the tech world would be Best Buy suing Apple for launching its own retail stores).

And this is but one of many such ridiculous regulations that new entrants must contend with; another example is legislation in Indiana that requires dealerships to be a minimum of 1,300 square feet, and be able to house at least 10 vehicles of the type that the dealer is selling. This might make sense for GM and Ford, but for small, innovative manufacturers like Tesla and Fisker that only have a very few number of models and who want to locate in high-traffic areas (not suburban strip-malls) to expose consumers to their products, it's stifling.

But short of a massive lobbying budget, don't expect anything to change — and especially not if it goes against the interests of an incumbent organization that's contributing millions of dollars to candidates.

Intellectual Property. When Walt Disney penned Steamboat Willie — the first cartoon with Mickey Mouse in it — copyright lengths were substantially shorter than they are now (but still enough such that it gave encouragement to Walt to create his famous character). And yet somehow, it seems that every time that Mickey is about to enter the public domain, congress has passed a bill to extend the length of copyright. Congress has paid no heed to research or calls for reform; the only thing that matters to determining the appropriate length of copyright is how old Mickey is. Rather than create an incentive to innovate and develop new characters, the present system has created the perverse situation where it makes more sense for Big Content to make campaign contributions to extend protection their old work.

It's not just copyright, either — the same mentality has been driving draconian legislation such as SOPA and PIPA.

And finally, if you were in any doubt how deep inside the political system the system of contributions have allowed incumbents to insert their hands, take a look at what happened when the Republican Study Committee released a paper pointing out some of the problems with current copyright regime. The debate was stifled within 24 hours. And just for good measure, Rep Marsha Blackburn, whose district abuts Nashville and who received more money from the music industry than any other Republican congressional candidate, apparently had the author of the study, Derek Khanna, fired. Sure, debate around policy is important, but it's clearly not as important as raising campaign funds.

Accommodation and Transport. This space features two new hot disruptors: Airbnb and Uber. Each, in their own way, threaten very big and very powerful incumbents. Each of them have built businesses that productively deploy resources that otherwise would go to waste — spare bedrooms and vehicles, respectively. Each have customers that love their service. And each have run head-first into regulation that just so happens to benefit incumbents.

Uber has probably had it worse, trying to fight against the entrenched taxi cab oligopolies. Matthew Daus, the president of the International Association of Transportation Regulators, recently tried to paint Uber as being a bad corporate citizen by pointing to what happened when Hurricane Sandy hit NYC: the prices paid to drivers (not to Uber) went up as a result of supply and demand. Daus called this "unfair pricing." There is an argument to be made that Uber could have better communicated its surge pricing strategy, but the basic idea behind what happened — supply and demand determine prices — is the cornerstone of a capitalist market. Uber wasn't gouging customers; it was ensuring supply of cars for customers who needed transport in a city that had otherwise shut down.

After using this example to establish it as a "rogue app," Daus and his organization proposed a new set of regulations: among them, rules that prevents luxury car services from using GPS services to meter the precise time and distance of a trip; rules to prevent customers from making a booking if they want to leave sooner than 30 minutes; and rules to prevent drivers from accepting electronic hails. All in the interests of "protecting consumers," apparently.

Telecom. Most folks in the US would be familiar with Netflix. It's a web-based movie service, and relative to a lot of players in the space, a disruptively innovative one. This fact hasn't gone unnoticed by the cable providers, who are feeling the pinch from "cord cutters" who are looking for more affordable options — like Netflix. How to combat this if you're a big cable company? Well, one way of ensuring that Netflix's streaming video service is much less attractive than continuing to subscribe to cable TV is by treating Netflix internet traffic as a second class citizen. So that's what's happening. For example: let's say you're a Comcast subscriber. If you watch Saturday Night Live using Netflix, it counts towards your download limit. Watch that very same show using the very same internet connection, but use Comcast's Xfinity app instead — and now, suddenly, the download limit doesn't count. As Time Magazine pointed out: "You either make the playing field as level as possible, or establish a precedent whereby a highway's proprietors, with their own vested traffic interests, control who pays at the toll booth and who doesn't."

Netflix. Uber. Airbnb. Tesla. Fisker. Most economies would kill to have a set of innovators such as these. And yet at every turn, these companies are running headlong into regulation (or lack thereof) that seems designed to benefit incumbents like NADA and Comcast — regulation that, for some strange reason, policy makers seem extremely reticent to change if it results in upsetting incumbents. Daniel Sperling, a professor at the University of California Davis, and director of its Institute of Transportation Studies summed it up when speaking to the New York Times about Uber: "Transportation has been one of the least innovative sectors in our society. When I look at these new mobility companies coming, where they're using information and communication technology, at a very high level it's long overdue and should be embraced with open arms."

And yet, that's not what's happening at all. If anything, it's the opposite.

Any guesses as to why?


TOPICS: Business/Economy; Extended News
KEYWORDS: airbnb; bribery; captive; captiveregulation; corruption; cronysocialism; fisker; innovation; legalizedbribery; netflix; regulation; tesla
Example: patent and copyright law is determined by lobbyists, not the interests of consumers.
1 posted on 12/07/2012 12:30:57 PM PST by AZLiberty
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To: AZLiberty
"The process by which firms do this is rarely overt, and usually couched in the language of regulation."

The money quote. This is captive regulation - law usurping liberty. Democracy (AKA mob rule) versus a Republic (unalienable rights).

2 posted on 12/07/2012 12:46:01 PM PST by uncommonsense (Conservatives believe what they see; Liberals see what they believe.)
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To: AZLiberty
Former congressman and CIA director Leon Panetta described it as "legalized bribery"; something which has just "become part of the culture of how this place operates."

He is right, of course.

Somebody once pointed out that when legislation determines buying and selling, the first commodity to be bought will be legislators.

The solution is not to pass new laws regulating political contributions by business, it is to get the government out of business.

3 posted on 12/07/2012 12:50:29 PM PST by Sherman Logan
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To: Sherman Logan

Foreign oil money was behind a recent article on the risks of fracking. Obama’s foreign friends and the solar “industry” (aka rent-seeking mob) are undoubtedly lobbying to prevent fracking from having a big impact. We’ll see if Obama manages to screw up the oil-based pot-of-gold he’s sitting on.


4 posted on 12/07/2012 1:12:21 PM PST by AZLiberty (No tag today.)
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To: Sherman Logan
"The solution is not to pass new laws regulating political contributions by business, it is to get the government out of business. "

This is a general platitude. I think corporations should be *prohibited* from political contributions. Let's add unions to that list too as well as organizations that accept and recieve government money.

5 posted on 12/07/2012 1:13:47 PM PST by Usagi_yo
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To: AZLiberty

I’m sure liberals and enviros would love to derail fracking.

But I don’t think it’s gonna work.

If nothing else, the way to bring oil prices down in the USA is to bring them down worldwide. This depends not on the amount of oil produced here, but on the relationship between global supply and demand.

Fracking in China, Brazil or Australia is just as effective at reducing US oil price as fracking in North Dakota. And Obama can’t stop them.


6 posted on 12/07/2012 1:15:42 PM PST by Sherman Logan
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To: Usagi_yo

You have it upside down.
There would be no incentive for corps and unions to give money to politicians if the politicians were prohibited from using their power to benefit or punish corps or unions.


7 posted on 12/07/2012 1:18:44 PM PST by MrB (The difference between a Humanist and a Satanist - the latter admits whom he's working for)
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To: Usagi_yo

Sometimes platitudes become just that because they are true.

Here’s the problem. If the most important factor in whether your business is allowed to succeed or not is a decision by Congress or an agency, don’t you think you’d want some input on what that decision is? And if a law is passed to make your corporation unable to donate to campaigns, don’t you think you’d find some way to influence the process anyway?

Part of the problem here is that this government/business relationship is always portrayed as bribery. The innocent legislator was just minding his own business when he was overwhelmed by the temptation to accept money from the evil influence-seeking corporation.

Well, a lot of the time, possibly most of the time, it’s more like extortion.

“Nice business you’ve got here. It would be a shame if regulations made it difficult or impossible for you to continue to be profitable. BTW, would you like to contribute to my campaign for rel-election?”


8 posted on 12/07/2012 1:22:26 PM PST by Sherman Logan
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To: Sherman Logan; MrB

This is how I see it.

The politicians are invariably drawn to the *money*. The *money* becomes the argument or voice, not the truth or the benefits. Even if the politican deftly balances the *money* with the *interests* the decisions or policies are skewed or tainted by money.

If you take away that money, then the decisions and policies become wholly based on the issues.

The money is just too much of an influence and we cannot trust even the honest politicians to not be influenced by it.


9 posted on 12/07/2012 1:40:55 PM PST by Usagi_yo
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To: Usagi_yo
I quite agree. I just don't see how money can be removed from politics as long as influence with the government is the most important factor in whether a business succeeds or indeed survives. The solution is not to pass new regulations. It's to remove the incentive to influence the government.
10 posted on 12/07/2012 2:03:00 PM PST by Sherman Logan
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To: AZLiberty
Again, I advocate all FReepers getting and reading Luigi Zingales' A Capitalism for the People. Sarah Palin approvingly quoted Zingales' distinction between pro-business and pro-market (to his surprise and delight) before Zingales wrote his own popular treatment of his ideas.

Zingales isn't as hard on the rent-seeking that prompts copyright and patent maximalism as a thoroughgoing embrace of his ideas would suggest -- I think mostly because his area is finance.

11 posted on 12/07/2012 2:25:44 PM PST by The_Reader_David (And when they behead your own people in the wars which are to come, then you will know...)
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