Regulatory review and innovation

On Tuesday, President Obama signed Executive Order 13563 on Improving Regulation and Regulatory Review. This Executive Order could be a big step forward in our goal of harnessing the power of intangible assets for economic prosperity. But only if we recognize the opportunity and act on it.
Much has been made about whether this is a move back to deregulation or a bone thrown to business. I tend to agree with Bob Litan’s analysis in the New York Times:

“It’s more of a talking point than a policy,” said Robert E. Litan, the vice president for research and policy at the Kauffman Foundation, who oversees academic research relating to entrepreneurship.
“Even if you find a rule you don’t like, and they probably will, then they’re going to have to go through rule-making and then it’s going to take a year or two or longer,” Mr. Litan added. “And then somebody will sue them; if it’s not another industry it will be a consumer interest group or a Republican interest group.”
He recalled that one of Ronald Reagan’s first acts as president was to win repeal of a requirement for auto airbags that car-makers had fought. The insurance industry sued, arguing that the bags would save lives and medical costs, and ultimately won in the Supreme Court.

So, it is not a simply question of more or less regulation. The issue is what the regulation does and how does it accomplish that goal. The Executive Order sets out a process for regulatory review. There is a long history of Presidential orders dealing with the regulation process. This Executive Order puts the Obama Administration’s stamp on that process.
But here is the interesting twist. The very first sentence of Section 1 of the Executive Order (General Principles of Regulation) states that a goal of regulation is “promoting economic growth, innovation, competitiveness, and job creation.” Section 3 contains this provision: “Each agency shall also seek to identify, as appropriate, means to achieve regulatory goals that are designed to promote innovation.” In other words, regulations should be pro-innovation. Of course, that leaves open the question of whether all innovation is beneficial — as the experience of the last decade of financial innovation might throw into doubt.
Changing existing regulation to allow for certain activities is one way of promoting innovation. For example, as I have noted before, the Small Business Administration’s regulations on the rules are unclear as to whether intangible assets can be used as collateral. The regulations could be changed to development specific underwriting standards for intangibles, especially intellectual property.
So rather than simply have someone scrub regulations on a cost-benefit basis, let me suggest an additional (and complementary approach). Existing regulations should be reviewed with a eye towards how they can be modified to help foster investment in and utilization of intangible assets. The SBA lending regulations would be a perfect place to start. Next would be regulations governing how the federal government uses its own intangible assets. And that stupid rule that bars Industrial Development Bonds from being used to finance facilities for the production of intangibles such as software or biotech research (although that may also require legislation).
I believe that such active use of regulations to foster intangible assets captures the spirit and the letter of the Executive Order. It would move the US toward more sustained economic growth in the I-Cubed Economy.


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