Jan 3, 2020

Looking Back at the Five Most Significant Obstacles to Tech Innovation in 2019

The year was characterized by a "techlash" that threatens our innovation culture
Krista Mitchell Staff Writer

The tech sector took a beating from politicians and pundits in 2019, and this “techlash” shows few signs of stopping in the new year. Lawmakers on the federal, state, and local levels have proposed a variety of new regulatory restrictions aimed at constraining the technology sector. An unfortunate result of these controls may be to stymie the hands-off regulatory culture of permissionless innovation that has fueled America’s rise as a technological leader. Five proposals stand out as particular threats to the culture of entrepreneurship in technology.

1.     The Feud over Data Privacy in Europe and the United States

The debate over data privacy regulation reignited in 2019 over the fallout from the 2018 implementation of the European Union’s (EU) General Data Protection Regulation (GDPR) in the midst of high-profile social media data scandals. Now, over a year after the GDPR became law, its impact is more apparent.

Mercatus scholar Jennifer Huddleston commented at The Hill in May on what GDPR’s first year said about the effectiveness of data privacy legislation:

The cost of compliance with complicated data regulations is not cheap, and as a result, some companies may choose to leave the market rather than comply. According to a PwC survey, more than 40 percent of companies surveyed, including American companies with a data presence in the EU, spent over $10 million preparing to comply with GDPR. From video game sellers to various news outlets including the Los Angeles Times, some companies found the costs too high to continue doing business in Europe, and removed themselves from the EU.

Meanwhile, instead of learning from Europe’s costly experience with GDPR, many US states are considering or have already passed their own regulatory data controls. The California Consumer Privacy Act (CCPA), which took effect at the beginning of 2020, is the most impactful and noteworthy of these new laws. Like GDPR, these strong data controls will likely generate significant compliance costs and possible internet fragmentation.

State data legislation threatens to affect Americans beyond state borders and even balkanize the US internet experience.  Are these state data privacy laws constitutionally sound? Huddleston and Ian Adams of TechFreedom address this problem in recent research

Free speech protections are one potential constitutional challenge to state data laws. Writing for Mercatus, Huddleston noted,

Courts have ruled that First Amendment speech guarantees, while not absolute, require governments that limit speech to show they have a compelling interest in doing so—a very high standard to meet. In this case, any new data protection regulations—whether federal, state, or local—could place content-based restrictions on free expression.

Huddleston and Adams point out that state data laws may additionally run afoul of the US Constitution’s dormant commerce clause, which gives the federal government the authority to regulate interstate commerce. These state laws may also violate the Constitution’s supremacy clause, which generally prioritizes federal over state laws.    

A few data privacy proposals have been introduced at the federal level, but it is unclear whether these will be a priority for Congress in 2020. As new state laws like the CCPA go into effect, perhaps Congress or the judiciary will feel more obligated to respond. 

2.     Political Leaders Panic over Automation and Digital Platforms

Some tech critics speak louder than others in the debate over permissionless innovation. In 2019, Senator Josh Hawley (R-MO) and New York City Mayor Bill de Blasio (D) in particular took center stage.

In a September essay for Wired, Mayor de Blasio proposed two radical ideas to address automation. First, he called for a new federal agency, the Federal Automation and Worker Protection Agency (FAWPA), to “oversee automation and safeguard jobs and communities.” It would “create a permitting process for any company seeking to increase automation that would displace workers. Approval of those plans would be conditioned on protecting workers; if their jobs are eliminated through automation, the company would be required to offer their workers new jobs with equal pay, or a severance package in line with their tenure at the company.”

Second, de Blasio proposed a “robot tax” on large companies that “eliminate jobs through increased automation and fail to provide adequate replacement jobs.” Those firms would be “required to pay five years of payroll taxes up front for each employee eliminated.” That revenue would be channeled to new infrastructure projects or jobs in healthcare and green energy. “Displaced workers would be guaranteed new jobs created in these fields at comparable salaries,” he said.

Commenting on the proposals in a regular column for the American Institute for Economic Research, Mercatus scholar Adam Thierer argued that both of de Blasio’s ideas were good candidates for the “Worst Regulation Ever” prize. Thierer was particularly critical of Mayor de Blasio’s proposed permitting process for firms that want to automate, saying it “would be one of the most far-reaching and destructive regulations in American history,” Thierer wrote. He called it “essentially a political veto over workplace innovations at nearly every business in America. The result would be a de-facto ban on productivity improvements across all professions.” Thierer added that he fears that de Blasio’s call for “radical regulation of robotics in the name of protecting workers” could move partisan politics farther toward the fringe by inspiring other leaders to concoct anti-innovation agendas.

Mayor de Blasio wasn’t the only political leader to propose radical limitations on innovation. Throughout the year, Sen. Hawley submitted a few bills in Congress targeting internet platform liability protections, data disclosure practices, online advertising, and “addictive features” of social media. About Sen. Hawley’s crusade against innovation, Thierer noted in a statement,

To the extent Sen. Hawley and other critics are upset that innovation in other physical sectors has lagged behind the digital world, that might have something to do with the fact that the former continues to suffer under the weight of decades worth of archaic, productivity-killing red tape. Regulatory accumulation has become a chronic problem created by Congress's broad delegation of regulatory authority to the administrative state. The administrative state has grown so large—and largely unaccountable to Congress—that it is now referred to as the Fourth Branch of American government. 

The Internet and digital technology sector was blessed to be born free of this.

Sen. Hawley doesn't have much to say about these burdens when talking about how to make America more innovative. Instead, he seems to prefer the “tear it all down and start over” approach. In other words, burn the village in order to save it.

Fueling a panic against technological innovation may seem like good chatter, but lawmakers must consider the cumulative costs of regulation on local businesses and innovators. Ironically, the rules resulting from moral crusades often hurt smaller start-ups that can’t always afford to comply with various mandates and only end up empowering the large players that so inflamed passions in the first place. 

3.     Antitrust Busts Its Way into the Tech Sector

This year, antitrust scrutiny of big tech cropped up on the federal and state levels in a big way.  Attorneys general from 47 states announced investigations into Facebook, and 50 states and territories led by Texas are looking into Google. Amazon is facing a probe from the Federal Trade Commission and the European Union. Meanwhile, Google and Twitter are being investigated by the Department of Justice, and Congress is looking into digital markets.

Critics of large tech companies often talk about them as monopolies. But what is a monopoly? According to Jennifer Huddleston and Adam Thierer, a business becomes an unlawful monopoly when it “acquires or maintains its market power with practices that undermine competition in a way that ultimately harms consumers (the case against Standard Oil was decided on predatory pricing practices that resulted in it controlling over 90 percent of the American oil refining business, which allowed it to raise prices).”

The challenge for antitrust enforcers will be to determine whether “big tech” fits this definition of a monopoly and what the impact of breaking up firms would be. In a testimony to the US House Committee on the Judiciary, Subcommittee on Antitrust, Commercial, and Administrative Law, Huddleston urged lawmakers to keep tech industry dynamics in mind when considering antitrust as a tool:

Technological innovation is dynamic, making the market and competitors in that market difficult to define. I argue in my latest testimony that this dynamism in the tech industry makes it hard to use traditional antitrust tools. Additionally, there is no guarantee that breaking up technology giants would resolve other tech-related concerns, including data privacy. It might even exacerbate these concerns. As technology continues to evolve and change, sometimes the best competition comes from unexpected sources. Competitors to Facebook, Google, and others will likely emerge, and the focus in these debates should remain on consumer welfare rather than policy concerns for which antitrust is not appropriate.

Using Facebook as a test case, Thierer and Huddleston considered the difficulties with classifying the platform as a monopoly:

It is hard to see how Facebook can be considered a monopoly or essential facility when so many people do not need or use its service. While many Americans do use the site, 30 percent of people aren’t on Facebook at all. Meanwhile, according to Pew Research, younger users are deleting Facebook or using other platforms such as Snapchat and YouTube. Even if every American was on Facebook, it is hard to argue that it is a life-essential utility on par with water or electricity that one would be unable to survive without.

Competitors are already driving down Facebook’s share of the social media market without the need for antitrust. Eventually, this natural competition could render the company irrelevant before antitrust investigations have even concluded, as was the case with previously “unassailable” giants like Yahoo and Myspace

And before trying break up these companies, politicians and others should consider the impact. As Mercatus general director Tyler Cowen notes, many tech platforms give consumers access to their main products without charge. These companies use their advertising revenues to develop new fields and markets, like artificial intelligence and driverless vehicles. Instead of trying to squeeze existing markets, many instead seem to be creating new ones. 

4.     California Challenges the Gig Economy with AB-5

In September, California Governor Gavin Newsom (D) signed Assembly Bill 5 (AB-5) into law, which reclassifies certain sharing economy contractors as full employees. Although this law was passed with the intention of helping gig economy workers, it may actually do them much more harm than good.

Under the new law, which took effect at the beginning of this year, companies are required to provide health insurance, overtime pay, and other employee-specific benefits (like unemployment insurance) to many workers who had previously been employed as contractors. This change threatens the flexible arrangements that attracted workers and companies to the “independent contractor” model while limiting the options for those who may turn to contract work to earn a little extra money. The law also will raise costs for employers and, in turn, raise the prices of many goods and services for consumers.

According to Mercatus researchers Michael Farren and Trace Mitchell, smaller companies and startups will be most severely harmed by the changes, creating a substantial barrier to entry in the market. They noted in a recent piece,

The long-run effect of AB-5 and similar regulations will likely make it harder for smaller firms and future startups to challenge these predominant players, and that means there will be less motivation to develop the new and better services that would attract (and benefit) customers in the future. In fact, it would be better if California went in the opposite direction and considered getting rid of employment classifications altogether. A more open regulatory environment may help quell the state’s out-migration of businesses and encourage the next tech industry unicorn to choose California as its home.

In many ways, the problems with AB-5 are similar to those with recent laws that have raised the minimum wage. These rules may be intended to help working-class employees, but in raising the costs of employing entry-level labor, the regulations actually leave this group with fewer options. Ultimately, it will be these vulnerable employees, and not the firms who employed them, who are the most harmed.

On Monday, Uber and Postmates joined two drivers in a lawsuit against the state of California over whether the law violates the constitutional doctrines of equal protection and due process. In the meantime, many freelance workers in California may be left adrift with few employment options while the legal implications are worked out.

5.     Protests from Policymakers against Libra and Currency Reform

Last year, Facebook announced it would create a private cryptocurrency called Libra. Unsurprisingly, as soon as Facebook and its initial Libra Association partners announced the digital currency system, policymakers pounced. As soon as it became clear that the association was going to have a tough time getting this project off the ground, notable business partners, including PayPal and e-Bay, decided to pull their support.

According to an analysis by Andrea O’Sullivan, the cryptocurrency proposed by Facebook is different than others like Bitcoin in that it is a “permissioned” system rather than “permissionless.” This means that the Libra Association will run the network and approve all money transfers. Bitcoin, in contrast, allows anyone anywhere in the world to run the network and validate transactions without discrimination.

This permissioned system invites unique regulatory questions, such as how Facebook will incorporate anti–money laundering regulations and how it will manage privacy.

Despite these possible design problems, it is unfortunate that lawmakers can hold such hostile positions against cryptocurrency innovation even before the systems are implemented. In a piece at The Bridge, O’Sullivan argued,

Working with Congress does not appear to generate much goodwill. From the start, Facebook has touted its intentions to work with lawmakers so that the Libra network will pass regulatory muster. In fact, its general white paper boasts that Libra will not only be compliant, it will “[innovate] on compliance and regulatory fronts to improve the effectiveness of anti-money laundering” and other existing rules—it wants to be super-compliant.

Even though the company welcomed the feedback of Congress, Facebook did not receive any eased positions from lawmakers. Instead, Rep. Maxine Waters, who chairs the House Financial Services Committee, advised the company to halt all development of the cryptocurrency until approved by Congress, and Sen. Sherrod Brown, the ranking member of the Senate Banking Committee, said “Facebook is dangerous.”

O’Sullivan warns that this antagonism may backfire:

The subtext here is that American lawmakers risk losing doubly. First, a hostile posture to innovation may scare entrepreneurship from taking root in US soil. What’s worse, the innovations that do spring forth elsewhere may not harbor the values and norms of the US. Lawmakers are chasing away possible allies at their own peril.

Policymakers should consider how their rhetoric and behavior will influence innovation. Otherwise, entrepreneurs of all kinds could look elsewhere to share valuable ideas and breakthroughs.  

Here’s to hoping this year will be better

Permissionless innovation has made America a leader in technology. That’s why policymakers need to be careful when assessing perceived problems in the tech sector.  When lawmakers and regulators impose new restrictions on the industry, innovative companies will pay a high price. But at the end of the day, consumers will likely feel the greatest impact of new restrictions in the form of more limited choices at higher costs.

It is easy to see problems, and always tempting to want to “fix” them. However, it is much harder to appreciate the many subtle and not-so-subtle benefits that technological innovation has wrought—benefits that average consumers may take for granted but that have become very important parts of their lives. As the country moves into a new year and a new decade, policymakers must keep these benefits at the forefronts of their minds along with costs as they consider new rules that will affect America’s ability to innovate.

 

 

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