I get asked fairly often now by people in the
US government what policy changes I would make to “fix innovation and drive
economic growth” [1][2] (for some reason, it’s almost always that exact
phrase).
Innovation is obviously important—the US has
long been the world’s best exporter of new ideas, and it’d be disastrously bad
if that were no longer the case. Also, I don’t think our society will
work very well without economic growth, and innovation is what will
drive growth from where we are now. While it’s true that people are
better off in absolute sense than they were a few hundred years ago, most of us
are more sensitive to our wealth increasing over short time-scales (i.e. life
getting better every year) than how fortunate we are relative to people who
lived a long time ago. [3] Democracy works well in a society with lots of
growth, but not a no-growth (i.e. zero-sum) society. Very low growth and a democracy are a very bad
combination.
So here is my answer:
1) Fix education. We have to fix education in this country. Yes, it
will take a long time to have an effect on output, but that’s not an excuse for
continuing not to take serious action. We currently spend about 4% of the
federal budget on education. The problems with education are well-documented—teachers
make far too little, it’s too difficult to fire bad teachers, some cultures
don’t value education, etc. Many of these are easy to fix—pay teachers a
lot more in exchange for a change in the tenure rules, for example—and some
issues (like cultural ones) are probably going to be very difficult to fix.
Without good education (including continuing
education and re-training for older people), we will never have equality of
opportunity. And we will never have enough innovators.
I think it’s most important to fix the broken
parts of the current system, but also to decide we need to spend more money on education.
One bright spot is that most of the world now
has Internet access at least some of the time and there are truly remarkable
resources available online to learn pretty much anything anyone could want.
It amazes me that I can become relatively proficient on any subject I want, for
free, from a $50 smartphone nearly anywhere in the world. There is
probably a way to combine online education with real-world mentorship,
activity, and group interaction in a way that makes the cost of quality
education far lower than it is today.
Spending money on education, unlike most
government spending, actually has an ROI—every dollar we spend on it ought to
return more dollars in the future. This is the sort of budget item that
people should be able to agree on. As I
wrote in the above-linked post, we will likely need both entitlement spending reductions
and revenue increases to make the budget work.
2) Invest in basic research
and development. Government
spending on R&D keeps decreasing. There are certain things that
companies are really good at doing; basic research is usually not one of
them. If the government wants more innovation, then it should stop
cutting the amount of money it spends producing it. I think current policy is off by something
like an order of magnitude here.
Like education, this is in the category of an
“investment”, not an “expense”.
3) Reform immigration. If talented people want to come start companies or
develop new technologies in the US, we should let them. Turning them away—willfully
sending promising new companies to other countries—seems terribly
shortsighted. This will have an immediate positive effect on innovation
and GDP growth. Aside from the obvious
and well-documented economic benefits (for high-skilled workers especially, but
for immigration more generally), it’s a matter of justice—I don’t think I
deserve special rights because I happened to be born here, and I think it’s
unfair to discriminate on country of birth. Other than Native Americans,
all of our families are fairly recent immigrants.
We need reasonable limits, of course, but our current limits are
not the answer. On our current path, in the not-very-distant future, we
will be begging the people we are currently turning away to come and create
value in the US.
Many people say we don’t need immigration
reform because people can work remotely. While remote working works well
for a lot of companies, and I expect it to continue to work better as time goes
on, it doesn’t work well for all companies (for example, it would not work for
YC), and it shouldn’t be the only option. It also sends money and
competency out of our economy. The common answer of “let the US companies
open overseas offices” always sounds to me like “further slow US economic
growth and long-term viability”.
Companies in the Bay Area already largely hire from elsewhere in
country—companies are desperate for talented people, and there aren’t enough
here to go around. Even with this, tech wages keep going up, and good
people who already live in the Bay Area keep getting jobs.
4) Cheaper
housing. This is not a problem
everywhere in the US, but it is in a lot of places. The cost of housing
in SF and the Bay Area in general is horrific. There just isn’t enough housing
here, and so it’s really expensive (obviously, many people make the rational
decision not to live here). Expensive housing drives up the cost of
everything else, and a lower cost of living gives people more flexibility
(which will hopefully lead to more innovation) and more disposable income
(which will hopefully stimulate economic growth).
Homeowners generally vote and want to preserve
their property value; non-homeowners generally vote less often. So
efforts to build more housing, or make housing less attractive as an
investment, usually fail when they go to a vote. For example, a recent proposal to allow more
house building in SF failed with an atrociously low voter turnout.
In general, I think policy should discourage
speculation on real estate and encourage housing to be as inexpensive as
possible. I think most people would do better owning assets that drive
growth anyway.
In the Bay Area specifically, I think policy
should target an aggressive increase in the housing supply in the next 5 years
and undo many of the regulations currently preventing this.
5) Reduce regulation. I think some regulation is a good thing. In certain areas
(like development of AI) I’d like to see a lot more of it. But I think it
often goes too far—for example, an average of $2.5B and 10 years to bring a new
drug to market strikes me as problematic.
Many of the companies I know that are innovating in the physical
world struggle with regulatory challenges. And they’re starting to
leave. The biggest problem, usually, is that they just can’t get clarity
out of the massive and slow government bureaucracy. In 2014, 4
companies that I work with chose to at least partially leave the US for more
friendly regulatory environments (3 for regulatory violation or uncertainty,
and 1 for concern about export restrictions). Many more kept their
headquarters here but chose somewhere else as their initial market (including,
for example, nearly all medical device companies, but also drone companies,
nuclear fission companies, pharmaceutical companies, bitcoin companies, etc etc
etc).
This is not good. We live in a global
society now, and not all countries are as backward about immigration as we are.
If our best and brightest want to go start companies elsewhere, they will do
so. [4]
I think one interesting way to solve this
would be with incentives. Right now, as
I understand it, regulators mostly get “career advancement” by saying “no” to
things. Though it would take a lot of
careful thought, it might produce good results if regulators were compensated
with some version of equity in what they regulate.
Again, I think some regulation is definitely
good. But the current situation is stifling innovation.
6) Make
being a public company not be so terrible.
This point is related to the one above.
I’d hate to run a public company.
Public companies end up with a bunch of short-term stockholders who
simultaneously criticize you for missing earnings by a penny this quarter and
not making enough long-term investments.
Most companies stop innovating when they go
public, because they need very predictable revenue and expenses.
In an ideal world, CEOs would ignore this sort
of pressure and make long-term bets. But
the inanity on CNBC is distracting in all sorts of ways—for example, it’s
always surprising to me how much employees react to what they hear about their
company on the news.
I’ve seen CEOs do the wrong thing because they
were scared of how “the market might react” if they do the right thing. It’s a rare CEO (such as Zuckerberg, Page,
Cook, and Bezos) who can stand up to public market investors and make the sort
of bets that will produce long term innovation and growth at the expense of
short term profits.
There are a lot of changes I’d make to improve
the situation. One easy one is that I’d
pay public company directors in all stock and not let them sell it for 5
years. That will produce a focus on real
growth (in the current situation, making $200k a year for four days of work
leads to directors focusing on preserving their own jobs).
Another is that I’d encourage exchanges that
don’t trade every millisecond. Liquidity
is a good thing; I personally don’t see the value in the level of “fluidity”
that we have. It’s distracting to the
companies and sucks up an enormous amount of human attention (one of the things
I like about investing in startups is that I only have to think about the price
once every 18 months or so). If I had to
take a company public, I’d love to only have my shares priced and traded once
every month of quarter.
A third change would be something to incent
people to hold shares for long periods of time.
One way to do this would be charge a decent-sized fee on every share
traded (and have the fee go to the company); another would be a graduated tax
rate that goes from something like 80% for day trades down to 10% for shares
held for 5 years.
Another thing the government could do is just
make it much easier to stay private for a long time, though this would have
undesirable side effects (especially around increasing wealth inequality).
7) Target a real GDP growth
rate. You build what you measure. If
the government wants more growth, set a target and focus everyone on hitting
it.
GDP is not a perfect metric, especially as the software revolution drives cost of goods gets driven lower and lower. What we really need is a measurement of “total quality of life”. This will be tough to figure out, but it’s probably worth the time to invent some framework and then measure ourselves against it
There are obviously a lot of other policy changes I think we should make, but on the topics of growth and innovation, these 7 points are what I think are most important. And I’m confident that if we don’t take action here, we are going to regret it.
[1] Incidentally, innovation does not always
drive job growth, even when it drives GDP growth. The industrial
revolution was something of an anomaly in this regard. I’ll write more
about what this means later.
[2] There are a bunch of other policy changes
I would make—for example, I’d increase the minimum wage to something like $15
an hour—that are important and somewhat related to this goal but not directly
related enough to include here.
[3] While access to knowledge, healthcare,
food, water, etc. for people in developed countries is far better now than any
time in history, extreme inequality still feels unfair (I’ll save my social
rant for another time, but I think the level of extreme poverty that still
exists in the world is absolutely atrocious.
Traveling around the developing world is an incredible wake-up call.)
[4] Sometimes the government people ask “Would
you ever move YC out of the US?” with nervous laughter? I really like it
here and I sure hope we don’t, but never say never.
