Mandel Responds on Innovation, Growth and the Regulatory State.

Michael Mandel responds to a previous post I wrote:

This morning, Paul Krugman makes an oblique reference to my November post “The Age of Regulation Started Ten Years Ago”. He writes:

Have you heard the one about how there’s been an explosion in the number of federal regulators? Mike Konczal of the Roosevelt Institute looked into the numbers behind that claim, and it turns out that almost all of those additional “regulators” work for the Department of Homeland Security, protecting us against terrorists.

Yes, protecting us against terrorists, for sure, and doing a good job…but in the process making it more difficult for foreign business execs, scientists, and engineers to enter the country…and slowing down air travel…and  forcingtelecom companies to open up holes in their systems….and forth.

I’m not arguing that these actions  are or are not necessary. But many of the mandates created by  Homeland Security are de facto regulations that have imposed an enormous economic burden on the country over the past ten years.

Finally, let me quote what Mike Konczal actually wrote, in response to my piece (my emphasis added)

The Bush-era brought you a regulatory state of militarized borders, drug wars, strategically weakened financial regulatory bodies for convenient regulatory shopping, and aggressive use of patents to shut down competition. This is not the regulatory state I fight for.

Bottom line: The economy doesn’t care whether regulations were passed by Republicans or Democrats.  An over-regulated country is not going to be innovative, whether the regulations are red or blue.

An important point about Mandel’s paper, Reviving Jobs and Innovation, which argues “Don’t add new regulations on innovative and growing sectors during economic downturns…But despite the weakness in financial regulation, it’s a mistake to view the post-2000 years as an era of untrammeled free-market capitalism. In fact, the evidence suggests that 2000–2007, under the Bush Administration, was actually a period of rising government influence over the economy.”

There’s a slight increase in the regulatory state when you exclude Homeland Security – on the order of 0.002% of the labor force.  But we pointed out in our response that there wasn’t a general increase in regulators across the board during the past 10 years – the increases were in very specific places, and it is important to look at each.  Mandel’s paper assume an across the board increase or implies an increase in something like the “Department of Barbers”, killing small-scale innovation.   But the places that put on regulators are markets that need regulators.

The FDA added workers. So did the Drug Enforcement Administration, as did the Nuclear Regulatory Commission.  The Patent and Trademark Office, which went from 6,128 employees to 10,098 employees.

Do we think we’ll get “more innovation” in the nuclear energy field if we slash the Nuclear Regulatory Commission and go hard laissez-faire nuclear power markets?  Or does the government have a responsibility in regulating nuclear power plants and putting on staff to investigate expanding the field, which has been a major discussion in the past 10 years?

The FDA added workers, no doubt to keep up with our slow channels for approving drugs.  Notice, by adding regulators we can get drugs approved and to market faster – regulators lead to innovation.  Unless we want to destroy the FDA, at which point I need to abandon this blog so I can get to my bathtub and start making “Rortybomb’s Miracle Cure for Baldness, Cancer and Depression” (fine print:  does not actually cure any of those things, may cause blindness).

I assumed the increase in the Patents and Trademark Office employees was the result of corporations doing their best to rent-seek off old patents, but a smart commenter encouraged me to think it’s the opposite.  It is a PTO’s employees’ job to yell “STOP!” when they think there is a bad patent, and if I am worried about an increase in nonsense patents that restrict innovation then increasing the number of these regulators is essential because the default is to accept patents.

Think about that – more regulators means more innovations and less rent-seeking.    But to do that we need to really expand what we think of when it comes to what regulations does and the role the government plays in innovation.

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6 Responses to Mandel Responds on Innovation, Growth and the Regulatory State.

  1. The nuclear power example is important. One should remember that mind that nuclear power is only possible because the US government insures it. Leaving “innovation etc etc” to the market means NO nuclear power.

    The example also blurs the line between what the government is and what the private sector is. Does Mandel think its a detriment to the capitalist system for, say Lloyd’s of London or Jupiter insurance hire more people to inspect BP facilities more closely? Not that BP is going to tell its subsidiary Jupiter to inspect things more closely.

  2. Ariel says:

    Government regulation in support of innovation is actually nothing new. In the 1840s and 1850s advances in agricultural chemistry made it possible to produce superphosphates and other artificial fertilizers for the first time. However, the best uses for such new fertilizers were not well understood and, at the same time, the public suspected that manufacturers often adulterated their products. Each of these circumstances presented a barrier to the adoption of this valuable new technology and thus slowed market growth.

    As a result, in the US, agricultural reformers demanded that the government subsidize the founding of agricultural colleges where scientists could advance knowledge of fertilizer application and effectively regulate the market by chemically analyzing commercial fertilizers and publishing the results. In 1858 Senator Justin Morrill introduced the bill that, when passed in 1862, would create the land-grant colleges, which were originally thought of as primarily agricultural colleges. In his speech, Morrill argued two things. First, Americans needed “a careful, exact, and systematized registration of experiments—such as can be made at thoroughly scientific institutions, and such as will not be made elsewhere.” Second, with such institutions in place, Morrill promised that new agricultural technologies would not be able to generate enthusiasm “until they have received the sanction of a body less sanguine than the vendors of a patent” (quotes from Congressional Globe, 35th Congress, 1st Session, p. 1694). The idea behind this kind of scientific vetting of new technologies was not to hamper manufacturers, but to give the consuming public (farmers, in this case) the confidence to consume.

  3. Dollared says:

    Wow. Completely agree about more regulators means less rent-seeking.

    I think of two ways the US economy is very different now compared to the 1970s:

    1. Far more industry consolidation. Very large business organizations with few competitors can get much, much higher returns from investments in government influence. And of course, they are oligopolists or monopolists, so they already have little incentive to innovate, compete, or invest in their stakeholders other than their internal management and a few most influential shareholders.

    2. On top of that, with manufacturing being exported, look at what is left: the dominant economic players in the US are all rent seekers, with the possible exception of high-tech. Cell carriers, other telecoms, cable providers and broadcast networks, large banks, utilities, defense and homeland security, the entire health sector, including both providers and insurance companies, all are rent-seekers whose primary method of boosting profits is favorable regulation that gives them greater pricing power. Simply put, the percentage of the aggregate market cap of the US that is directly dependent on government-granted pricing power is already at an all time high, and when health care reform is fully implemented, it will almost certainly be more than 50% of non-governmental GDP.

    Andrew Bossie, nice example of nuclear. Monopoly pricing power, and a government guarantee against casualty losses. Nice work if you can get it, but it matches up with ATT’s ability to control cell charges, Wellpoint’s guaranteed 15% profit even after health care reform is implemented (remember – these large health insurers were once all Blue Cross NON profits?), cable’s protections against competition on broadband, etc., etc.

    We are no longer a functioning economy.

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