The newest threat to innovation in the U.S. is the increasingly local technology regulations. Small start-ups are increasingly have to work with dozens (and often hundreds) of regulators — and that means they will have to raise much more capital and slow their offerings to market.
It is now the fashion for individual states (and often counties and cities) to each institute their own and wildly different types of regulation on technology companies. The immense technology giants have the resources to deal with regulatory minutiae (in fact, they welcome the complex regulations because it further entrenches their power).
It is not regulation, per se, that hurts innovation. It is competing (and often contradictory regulation) that impedes regulation.
Historically, most technology has traditionally been regulated at a federal level.
But many markets outside of technology (from auto sales to car insurance) have been regulated by states … and some even by cities (think of zoning laws, rent controls, sales tax, and more).
For instance, markets like insurance have traditionally been regulated at the state level; those 50 insurance regulators make innovation very difficult because firms essentially have to create 50 different products — one for each state. In addition, insurance firms have to spend a large part of their time lobbying legislatures and worrying about upcoming elections that could be a systemic risk to their business. The productivity growth for insurance therefore is much lower than one would expect with software.
The same is true for cable companies, which were regulated at the city level and have to operate in thousands of different jurisdictions (some overlapping) within the U.S. This makes serving customers very difficult and is one of the reasons cable companies have had historically low customer satisfaction and low Net Promoter Scores.
Another thing that comes with regulation is corruption — especially at the state and local level. Many cities and states have endemic corruption problems because so much is riding on creating a law that benefits one company (or industry) over another. That type of corruption is much less likely at a federal level because the stakes are bigger and thus is much more scrutinized.
The internet is a fresh landscape where productivity growth is accelerating — partially due to the fact that most of the regulations have been federal. The tempo attracts smarter people who want to work on harder problems and not be curtailed by bureaucracy.
One core set of rules allows tech companies to innovate fast and make it so they do not have to spend all their time lobbying states and municipalities. Until recently, most tech companies did not have to worry about the rules that plagued more regulated markets like those of insurance or telecommunications. Great companies like Microsoft, Intel, Oracle, Salesforce, Facebook, Google, Netflix, and more were regulated mostly at the federal level and could move rapidly. Indeed, they had to think about regulation and be careful about it (the Justice Department’s famous beef with Microsoft in the 1990s) and had to understand it as they entered new national markets (which is the original reason that a company like Softbank exists).
A Resurgence of Local Control
In the last few years, we have seen a core interest in local control, regulations, and more. This is going to significantly slow efforts of tech companies as greater regulation enters the playing field.
The most obvious examples of where this is true are companies dealing with the world of atoms like food delivery, Uber / Lyft, Airbnb, and scooters among others. These companies have to deal with matters ad-hoc, city-by-city and they could have difficulties even moving between city lines. For instance, you can see a scenario whereby San Francisco and Oakland have such different rules that it makes it impossible for a company like Uber to operate in both (which reduces utility for an Oakland resident working in San Francisco). Dealing in the physical world requires a bedrock that allows companies to operate between areas. Without it, business essentially becomes impossible.
The political left has found the 10th Amendment
Ten years ago, the main proponents of the 10th Amendment to the U.S. Constitution were the political right. “States Rights” advocates used to be popular primarily with conservatives who were concerned with federal (and judiciary) overreach. They promoted the idea of states rights and heavier local control.
Recently, however, the political left has taken up the States Rights, even branching into the city rights mantra with gusto. This is partially due to the fact that the left has not been in Federal power for 3 years, resulting in many left-leaning cities and states creating their own policies that govern tech companies.
One interesting area is privacy. One would think that privacy should be governed nationally (especially since it is so easy for data to cross state lines). But we have many local entities passing their own privacy initiatives. California recently passed the California Consumer Privacy Act as did the state of Vermont; now we have states and cities passing their own privacy legislation, which are potentially in conflict with each other.
For instance, a left-leaning state (like Massachusetts) could pass a “right to be forgotten” legislation (similar to the GDPR statute in the EU) and a right-leaning state, like Texas, could pass a free-speech statute which makes it illegal to take down information that is in the public interest. These two statutes would be in conflict and any tech firm operating in both states (which is pretty much all of them) would have trouble complying. And what happens with someone traveling from Austin to Boston? What jurisdiction are they regulated in?
Privacy is just one area where this matters.
Remember when California signed on to the Paris Accords for global warming? States are starting to flex their own sovereignty, first by having their own foreign policy. This could be in direct conflict with national foreign policy as the current President aims to leave the Paris Accords. Of course, if you are an environmentalist, you may be happy that California is taking a leadership position. But you can also imagine a states-rights argument going the other way (where a state decides have higher emissions than EPA guidelines). Nobody knows the second order consequences from these decisions.
Some cities are even wading into immigration policy. Immigration has traditionally been one of the core federal government functions. But today many cities call themselves Sanctuary Cities (this includes San Francisco, Los Angeles, Boulder, Hartford, St. Petersburg, Atlanta, New Orleans, Boston, Detroit, New York City, Seattle, and more). These cities are specifically saying they will not comply with federal immigration rules and will not enforce them. Some of these cities claim they will not even share information with the Federal Government in the middle of a terrorist attack.
Again, you might like the idea of sanctuary cities because you believe the U.S. should have more lenient immigration policy. But this does set up a precedent of cities in the future having a MORE restrictive immigration policy than the federal government. Imagine a scenario where your company moves its office to the next town over and finds out it needs to fire two star immigrant engineers because they are not allowed to work in that city. This increasingly seems like our future and not simply a fantasy copied from a Black Mirror episode.
The right has been fighting for States rights for five decades but now its greatest champion (certainly since 2016) is the left: and this could have lasting long-term consequences for innovation and even our society. We could see a scenario where the 3100 counties in America all have very different governing rules.
Of course, the 10th Amendment has a lot of benefits. It lets different states experiment with various topics of interest (education models, workforce laws, health care, etc.) and exhibit different values that pertain to their own citizens. The values of Idaho are very different than those of Rhode Island. But when I want to get a second opinion on a lab test results, do I really care if the doctor is registered in Massachusetts or Oregon?
Local regulations are better for large incumbents.
Massive companies can deal with large regulatory burdens and conflicting rules. They also can pay for lobbyists to change rules that operate within their narrow use-cases, basically regulatory capture. Little innovators can get stifled pretty quickly in a world where every municipality could conceivably have their own rules. To bring back phenomenal growth dispersed across the country, we first need to curtail the myriad ways in which big companies are harnessing the power of states rights for their own benefits.
Summation: The newest threat to innovation in the U.S. is the increasingly local technology regulations.