Innovators v Goliath

The authors of this article claim that the battle over SOPA and PIPA comes down to conflict between companies whose interests are served by innovating, and those who seek to preserve the status quo. They argue that the companies that pushing the bills are attempting to stifle the free market by muzzling innovation, and using political connections to do it:

SOPA and PIPA are prime examples of big companies trying to do everything they can to stop new competitors from innovating. They're also examples of how lobbying in the United States has become one of the most effective ways of limiting this sort of competition.

. . . If you take a look at many of the largest backers of SOPA or PIPA — the Business of Software Alliance, Comcast, Electronic Arts, Ford, L'Oreal, Scholastic, Sony, Disney — you'll see that they represent a wide range of businesses. Some are technology companies, some are content companies, some are historic innovators, and some are not. But one characteristic is the same across all of SOPA's supporters — they all have an interest in preserving the status quo. If there is meaningful innovation by startups in content creation and delivery, the supporters of SOPA and PIPA are poised to lose.

Even for those SOPA supporters that are historic innovators, their organizations focus on improving products in the pursuit of profit. They innovate to increase prices and limit production cost. Even when new models and technologies give rise to huge businesses, these incumbent firms reject meaningful innovation.

On the other side of the debate, you'll see a few the most successful companies in recent history. Wikipedia. Google. Twitter. Zynga. What these firms have in common is they have upended entire industries — and many are still in the process of doing so. Each of these businesses has roots in embracing new technologies and building models to deliver value to customers at the lowest cost. They're fighting this legislation because they're aware it will tip the finely tuned balance of creative destruction against startups and very much in favor of companies unwilling to embrace change.

So Congress is dealing with a conflict between business interests - which is what it was designed to do from the beginning. Its not uncommon for business who normally promote market competition to use their political power to place restrictions on it in order to preserve their status. The authors are concerned about what this means for future American competitiveness:

SOPA is a legislative attempt by big companies with vested interests to protect their downside. And unfortunately, these companies have conscripted Congress to help them. What's worse is that even though limiting start-up innovation might help big content in the short run, it's not going to do them in favors in the long run. Nor is going to do America any favors. In the midst of one of the worst recessions in living memory, passage of legislation like this is just going to result in innovators moving to geographies where the regulatory environment is more favorable. Start-ups will be less competitive in the United States and we'll have effectively disabled one of the few remaining growth engines of the economy.

Obama to Seek to Regulate Derivatives

To continue the post below, Obama is also pushing to expand (though it might be more appropriate to say update) financial regulations by applying them to derivatives:

Marking its first major effort to overhaul financial regulation, the Obama administration will seek new authority to supervise the virtually unregulated complex financial instruments, known as derivatives, that were a major cause of the market crisis, Congressional aides and others who have been briefed on the decision said Wednesday.



The administration will ask Congress to approve legislation that would impose a new government oversight structure for the instruments, which Warren Buffett once called “weapons of mass destruction.”

In a two-page letter to Congressional leaders, Treasury Secretary Timothy F. Geithner asked for the swift approval of a measure that would require many kinds of derivative instruments, including credit default swaps, to be traded on exchanges and subject to tighter regulation. Derivatives can take many forms, but in total there are trillions of dollars’ worth exchanging hands every day around the globe.

Again this marks a significant shift in the role government plays in the economy, one that is more suspicious of business activities that the Bush Administration thought should be allowed to happen without oversight. As with anti trust policy, the more you trust the market, the less regulation you want, the less you trust it, the more.

- Comments by Gary Becker.
- Wikipedia entry on Financial Regulation.
- A History of Financial Regulation.

FM 1960 and Unregulated Growth

Houston is famous for its free market approach to growth, but a recent study by the Urban Land Institute suggests that narrow market decisions may be the reason for recent declines in property values and the general quality of life around FM 1960 north of town. From the Chron:

Thirty-five years ago it was one of the Houston area's most desirable destinations, offering spacious houses, good public schools and freedom from the noise and crowds of urban life.

But age has not been kind to the FM 1960 corridor in northwest Harris County, where vacant strip centers and declining home prices are among concerns that have prompted a community group to organize a revitalization campaign.

The problems affecting Houston's aging suburban communities drew the attention of a panel of national experts from the Urban Land Institute, a nonprofit real estate organization, who studied the Houston region's unique growth patterns earlier this year.

In a report being presented today, the experts call on local leaders to use transportation funds to guide growth into compact, interconnected urban centers, rather than isolated subdivisions sprawling across the region's dwindling open spaces.

The Houston-Galveston Area Council, which allocates billions of dollars in federal transportation funds, should support projects that reflect the vision supported by almost all local leaders the authors interviewed during their Houston visit in February, the report says.

This vision includes connecting growth centers through roads, rails and trail; promoting walkable neighborhoods where people live close to where they work and shop; and encouraging voluntary, market-based standards for high-quality developments.

The FM 1960 corridor, in contrast, reflects what happens when developers throw up subdivisions wherever they can make a deal to buy land served by a county road, said Roger Galatas, the chief executive of a real estate consulting business. Galatas is also a board member of the nonprofit Center for Houston's Future, which commissioned the Urban Land Institute report.

The area's design, common to many American suburbs, is characterized by residential neighborhoods full of dead-end streets and cul-de-sacs to discourage cut-through traffic, forcing residents to use the adjacent thoroughfare even for short trips to a shop or a restaurant.

"At one time, that was the place to move to," Galatas said. "But as more developments occurred that were not connected to each other, they built rather ugly retail centers that took advantage of the traffic and created more traffic. People started moving away, and you've got declining home values, empty retail centers and a declining tax base. The only thing still functioning is a very wide strip of concrete called FM 1960."

. . .

In addition, rising gasoline prices and growing frustration with long commutes to distant jobs is leading more developers and builders to realize that a different approach would benefit their bottom line as well as community needs, leaders of the effort said.

"I think we are beginning to see enlightened self-interest take hold in the business community," said Jason L. Stuart, executive director of the ULI's Houston chapter, in a meeting Wednesday with the Houston Chronicle editorial board.

Harris County Judge Ed Emmett said he sees some merit in the idea of using transportation funding to guide growth. But some decisions will always have to be reactive rather than proactive, since people decide where to live based on school quality and other factors besides just transportation, Emmett said.

Joshua Sanders, executive director of Houstonians for Responsible Growth, a real estate group formed last year to limit local regulations on development, said the Houston region's traditional approach has worked well.

"We believe that the market should determine growth with government supporting consumer demand — not the other way around," Sanders said.

The ULI report is sprinkled with favorable references to the Houston area's low cost of living and its traditional preference for market-based rather than government-imposed solutions to land-use problems.

But this approach, the authors say, has limits, and Houston's leaders can't assume that the economic conditions so favorable to its energy-based economy now will continue indefinitely.

Once again, it seems like a leading factor in a change in mentality is the pocketbook, specifically the cost of a gallon of gasoline.

re-de-reg?

In local news applicable to our upcoming coverage in 2302-4 on economic policymaking, the chron has a story covering recent criticisms by Houston mayor Bill White and State Representative Sylvester Turner about the consequences of electricity deregulation in the state for poor people specifically, and the state as a whole in general.

Promises of assistance for poor consumers who tend to live in older, less efficient homes has yet to materialize and the state now has per kilowatt electricity rates higher than the national average.

At one point the state regulated the electricity market and traded monopoly rights for loss of industry control over prices charged to consumers. Free market proponents argued that these arrangements stifled innovation by locking in existing technology. Change and innovation only occur in a competitive market. Competition also lead to lower prices because consumers will choose to buy electricity from producers who provide the best service at the lowest price.

Critics argue that this has not occurred in Texas. White is quoted in the story sating that we now have two monopolies in an unregulated market. He does not go on to say that price fixing is now occurring, but its a possibility that Adam Smith raised. In his Wealth of Nations, which argued for the virtues of unregulated markets, he cautioned that businessmen cannot met with each other without out talking about price fixing.

Expect other critics to be less cautious.

For more info on electricity deregulation click the following:

- an overview of the politics in opensecrets.org.
- a critical appraisal of recent proposals in California by the Mies Institute.
- criticism by Public Citizen.
- the home page of Texas Electricity Choice.
- a wikipedia entry on deregulation in Texas.

It worth noting that the forum was hosted by ACORN (the Association of Community Organizations for Reform Now) a non-profit group which advocates for the poor. The fight over regulating electricity is a good illustration of the interest group conflict. Industry groups vs. community groups.