[Joint House and Senate Hearing, 115 Congress]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 115-294

                BREAKING THROUGH THE REGULATORY BARRIER:
             WHAT RED TAPE MEANS FOR THE INNOVATION ECONOMY

=======================================================================

                                HEARING

                               BEFORE THE
                               
                        JOINT ECONOMIC COMMITTEE
                     CONGRESS OF THE UNITED STATES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 22, 2018

                               __________

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                        JOINT ECONOMIC COMMITTEE

    [Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]

HOUSE OF REPRESENTATIVES             SENATE
Erik Paulsen, Minnesota, Chairman    Mike Lee, Utah, Vice Chairman
David Schweikert, Arizona            Tom Cotton, Arkansas
Barbara Comstock, Virginia           Ben Sasse, Nebraska
Darin LaHood, Illinois               Rob Portman, Ohio
Francis Rooney, Florida              Ted Cruz, Texas
Karen Handel, Georgia                Bill Cassidy, M.D., Louisiana
Carolyn B. Maloney, New York         Martin Heinrich, New Mexico, 
John Delaney, Maryland                   Ranking
Alma S. Adams, Ph.D., North          Amy Klobuchar, Minnesota
    Carolina                         Gary C. Peters, Michigan
Donald S. Beyer, Jr., Virginia       Margaret Wood Hassan, New 
                                         Hampshire

                   Colin Brainard, Executive Director
             Kimberly S. Corbin, Democratic Staff Director
                            
                            
                            
                            C O N T E N T S

                              ----------                              

                     Opening Statements of Members

Hon. Erik Paulsen, Chairman, a U.S. Representative from Minnesota     1
Hon. Martin Heinrich, Ranking Member, a U.S. Senator from New 
  Mexico.........................................................     2

                               Witnesses

Mr. Scott W. Brinkman, Secretary of Governor Bevin's Executive 
  Cabinet, Frankfort, KY.........................................     5
Dr. Joseph Kennedy, Senior Fellow, Information Technology and 
  Innovation Foundation, Washington, DC..........................     7
Mr. Christopher Koopman, Senior Director, Center for Growth and 
  Opportunity, Utah State University, Logan, UT, and Senior 
  Affiliated Scholar, Mercatus Center, George Mason University, 
  Arlington, VA..................................................     8
Ms. Jessica Milano, Former Deputy Assistant Secretary for Small 
  Business, Community Development, and Housing Policy, U.S. 
  Department of Treasury, Board Member, Small Business Majority, 
  Washington, DC.................................................    10

                       Submissions for the Record

Prepared statement of Hon. Erik Paulsen, Chairman, a U.S. 
  Representative from Minnesota..................................    28
Prepared statement of Hon. Martin Heinrich, Ranking Member, a 
  U.S. Senator from New Mexico...................................    28
Prepared statement of Mr. Scott W. Brinkman, Secretary of 
  Governor Bevin's Executive Cabinet, Frankfort, KY..............    29
Prepared statement of Dr. Joseph Kennedy, Senior Fellow, 
  Information Technology and Innovation Foundation, Washington, 
  DC.............................................................    32
Prepared statement of Mr. Christopher Koopman, Senior Director, 
  Center for Growth and Opportunity, Utah State University, 
  Logan, UT, and Senior Affiliated Scholar, Mercatus Center, 
  George Mason University, Arlington, VA.........................    35
Prepared statement of Ms. Jessica Milano, Former Deputy Assistant 
  Secretary for Small Business, Community Development, and 
  Housing Policy, U.S. Department of Treasury, Board Member, 
  Small Business Majority, Washington, DC........................    61
Article titled ``Trump White House quietly issues report 
  vindicating Obama regulations'' submitted by Representative 
  Maloney........................................................    68

 
                    BREAKING THROUGH THE REGULATORY
                  BARRIER: WHAT RED TAPE MEANS FOR THE
                           INNOVATION ECONOMY

                              ----------                              


                         TUESDAY, MAY 22, 2018

                    United States Congress,
                          Joint Economic Committee,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 2:30 p.m., in Room 
1100, Longworth House Office Building, the Honorable Erik 
Paulsen, Chairman, presiding.
    Representatives present: Paulsen, Maloney, Schweikert, 
Handel, Adams, Delaney, and Beyer.
    Senators present: Heinrich, Lee, Hassan, and Klobuchar.
    Staff present: Theodore Boll, Colin Brainard, Kim Corbin, 
Connie Foster, Colleen Healy, Beila Leboeuf, Matt Kando, and 
Rohan Shetty.

   OPENING STATEMENT OF HON. ERIK PAULSEN, CHAIRMAN, A U.S. 
                 REPRESENTATIVE FROM MINNESOTA

    Chairman Paulsen. I call this hearing to order.
    Good afternoon, and welcome to today's hearing on 
``Breaking Through the Regulatory Barrier: What Red Tape Means 
for the Innovation Economy.''
    Bloomberg recently reported that the U.S. dropped out of 
the top 10 in the 2018 Bloomberg Innovation Index for the first 
time in 6 years. We were at 9, and now we are at number 11.
    Such news is a call to action. America's tradition of 
invention has been at the heart of our economic strength. As 
lawmakers, we must recognize that the only way forward is to 
place our trust in the American people and to get out of the 
way.
    The private sector knows all too well how needless red tape 
imposes costs on businesses, increases prices for consumers, 
and reduces consumer choice. For innovation, however, the 
impact can be worse. In Washington, regulators can put an idea 
to death before it is ever even tried, foreclosing a future of 
opportunity and progress.
    We should know better. Americans enjoy a better quality of 
life today than decades ago, thanks to technological 
innovation. U.S. leadership in the world has been based largely 
on technological prowess, and for it to continue, our 
regulations must foster innovation rather than inhibit it.
    We will hear examples from our witnesses today of 
regulation hindering advances and, perhaps worse, even driving 
it away to other countries.
    And not all regulation is bad. After all, some is important 
for giving job creators necessary guidance and stability in 
their work. And when done well, sound regulation can make up 
for where markets fail to appreciate important public benefits 
or costs.
    And that is why we are holding this hearing. How should we 
approach regulations so that it is as dynamic as America's 
tinkerers and inventors? In other words, how can we stop 
hurting and start helping more?
    Our regulation should always serve the public interest, 
with minimum collateral damage to the economy. Where 
innovations are concerned, regulators shouldn't slam the door 
in the face of new ideas. Our economy and, in particular, the 
American people themselves should be given the opportunity to 
integrate these innovations in their lives. An advance that can 
improve lives and raise productivity generally leads to higher 
wages, and many Americans are in dire need of that kind of 
prosperity.
    After all, technological progress is what ultimately brings 
us better living standards. And it makes little sense to thwart 
promising innovations that can make our lives easier, improve 
our health, provide new products and services, and then help 
the United States' firms compete internationally.
    Consider that the majority of startup firms are in the tech 
sector. We should encourage the dynamism that contributed to 
the economy. If we fail to make improvements, fast-moving 
technology will be moving offshore even faster.
    And as we will hear today, sound regulation is aware of and 
anticipates technological change. I like the concept of 
permissionless innovation. Our inventors and entrepreneurs 
should not have to ask for permission to make things better.
    The U.S. technological edge and competitive advantage in a 
variety of sectors is narrowing and, to some extent, through 
unforced, self-inflicted regulatory wounds. I am keenly 
interested to hear what our expert witnesses have to say today, 
especially on how we might improve our regulatory regime.
    Before I introduce the witnesses, though, I would like to 
recognize Ranking Member Senator Heinrich for his opening 
statement.
    [The prepared statement of Chairman Paulsen appears in the 
Submissions for the Record on page 28.]

 OPENING STATEMENT OF HON. MARTIN HEINRICH, RANKING MEMBER, A 
                  U.S. SENATOR FROM NEW MEXICO

    Senator Heinrich. Thank you, Mr. Chairman. I am pleased 
that we are again looking at the question of how to accelerate 
the pace of innovation.
    We come at this issue from different perspectives. My 
Republican colleagues seem to believe that only regulations are 
holding back innovation. Yet dialing back the clock on rules 
designed to protect consumers doesn't help small businesses 
innovate and grow.
    Small firms, like small cities and towns, need fair rules 
of play. They need rules that give consumers and entrepreneurs 
a fair shake and rules that help improve access to capital.
    When I talk with small businesses across New Mexico, the 
thing they are most concerned about is limited access to 
capital. That is why I asked Ms. Milano to testify today about 
the difficulties that small firms encounter gaining access to 
capital to launch and to grow their businesses. I believe her 
testimony will shed additional light on this important issue.
    What is slowing innovation are barriers to capital and 
misguided tax policies. Let's start with taxes.
    Republicans just passed a tax law that lavishes huge tax 
benefits on large corporations. At the same time, the new law 
makes the Tax Code more complex for small firms.
    Corporations are using their tax savings to buy back their 
stock, not to invest in plants or workers. So far, companies 
have announced more than $400 billion in share buybacks, 
including $100 billion from one company alone. Those buybacks 
will do little to boost worker wages or to spur innovation.
    Instead, we should be focused on supporting the next 
generation of companies, ensuring that those who want to start 
or expand a business have the tools and the access to capital 
that they need.
    New businesses are the lifeblood of the economy. They drive 
innovation, they drive productivity, and they drive jobs. Yet 
new business formation has been declining for decades.
    And the startups we do see are increasingly concentrated 
geographically. Half of the increase in business establishments 
between 2010 and 2014 was in 20 counties. Fully 60 percent of 
counties saw a net decline in establishments during this 
period.
    Increasingly, banks are unwilling to take the risk on small 
loans that have high fixed costs and lower profit margins. More 
than half of small businesses seek loans of less than $100,000. 
Yet those loans have fallen from 33 percent of bank lending in 
2008 to 22 percent in 2016.
    While it is hard for many small firms to access the funds 
that they need to start or grow their businesses, it is 
especially challenging for women-owned and minority-owned 
firms. These firms have less wealth to draw from to launch 
their businesses and also face higher borrowing costs.
    Community Development Financial Institutions, or CDFIs, 
help to fill the void, often making loans to those who can't 
get them from commercial banks. Yet the Trump administration 
has proposed effectively eliminating the Treasury Department's 
CDFI Fund.
    We have to tackle the access-to-capital challenge from all 
sides. And it starts with encouraging venture funds to identify 
and support promising startups beyond the urban hub on the 
coasts. SBA's Small Business Investment Company Early Stage 
Initiative helps to broaden the base of venture funding 
nationally.
    We need to support small-business lending through SBA's 
capital programs, the CDFI Fund, and other channels. And we 
need to work toward greater lending transparency in the private 
sector.
    A growing number of online lenders are using technology and 
access to data to attempt to fill gaps in small-business 
lending, but we need to ensure that these loans are safe. We 
should look at the financial protections we extend to consumers 
as a blueprint for how we can and should protect small-business 
borrowers using these new financial products.
    While access to capital is critical, there are other 
factors that are important to enabling innovation. These 
include Federally funded research and development and access to 
quality K-12 education and affordable postsecondary options. 
Investing in human capital, while promoting greater access to 
financial capital, will enable the United States to continue to 
lead in the 21st-century economy.
    And I am very much looking forward to the testimony from 
all of today's witnesses.
    Thank you, Mr. Chairman.
    [The prepared statement of Senator Heinrich appears in the 
Submissions for the Record on page 28.]
    Chairman Paulsen. Thank you, Senator Heinrich.
    Before we introduce the witnesses, let me just welcome a 
lot of students who are here today from the Close Up program.
    Thanks for joining us here and watching our hearing.
    We will start with Mr. Brinkman, who is the Secretary of 
the Executive Cabinet in Kentucky Governor Bevin's 
administration. In this capacity, he oversees the various 
cabinets and is responsible for implementing the Governor's 
policies and programs. He is also currently serving as Acting 
Secretary for the Cabinet for Health and Family Services.
    Previously, Mr. Brinkman represented the 32nd legislative 
district in eastern Jefferson County in the Kentucky House of 
Representatives from 2001 to 2010. Mr. Brinkman practiced law 
in Louisville for 35 years, specializing in corporate, real 
estate, and public finance law. He was a member of the Health 
and Welfare Committee during his entire tenure in the House of 
Representatives, as well as a member of the Appropriations and 
Revenue Committee during his last 8 years as a State 
representative.
    Dr. Kennedy is a Senior Fellow at the Information 
Technology and Innovation Foundation. For almost three decades, 
he has provided legal and economic advice to senior officials 
in the public and private sector on public policies involving 
technology, competitiveness, and the social contract.
    Dr. Kennedy previously served as the Chief Economist for 
the U.S. Department of Commerce. He has held numerous other 
positions in government, serving on committees in both houses 
of Congress and in the executive branch. He also was a Senior 
Economist on the Joint Economic Committee.
    So welcome back, Dr. Kennedy.
    Dr. Kennedy has a Law Degree and a Master's Degree in 
Agriculture and Applied Economics from the University of 
Minnesota and a Ph.D. in Economics from George Washington 
University.
    Mr. Koopman is a Senior Director of Strategy and Research 
at the Center for Growth and Opportunity at Utah State 
University. He is also a Senior Affiliated Scholar at the 
Mercatus Center at George Mason University, where he has also 
taught in both the Economics Department and at the George Mason 
University School of Law.
    His research specializes in regulation, competition, and 
innovation, with a particular focus on public choice and the 
economics of government favoritism. Mr. Koopman earned his J.D. 
from Ave Maria University and his LLM in Law and Economics at 
George Mason University.
    Ms. Milano, who is with us today, is a V.P. and Director of 
ESG investment research at Calvert Research and Management.
    Before joining Calvert, she served as the Deputy Assistant 
Secretary for Small Business, Community Development, and 
Housing Policy at the U.S. Department of the Treasury. And 
prior to joining the Department of the Treasury, Jessica served 
as Senior Advisor to the Administrator at the U.S. Small 
Business Administration.
    Ms. Milano also holds an M.A. in Applied Economics from 
Johns Hopkins University and received her B.S. in Government 
from the London School of Economics.
    Thank you all for joining us today.
    And, with that, Mr. Brinkman, you are recognized for 5 
minutes.

   STATEMENT OF MR. SCOTT W. BRINKMAN, SECRETARY OF GOVERNOR 
            BEVIN'S EXECUTIVE CABINET, FRANKFORT, KY

    Mr. Brinkman. Thank you, Chairman Paulsen, Vice Chairman 
Lee, Ranking Member Heinrich, and members of the committee, for 
affording me this opportunity to discuss Governor Bevin's Red 
Tape Reduction Initiative.
    Governor Bevin campaigned for Governor in 2015 on the theme 
that it is all about jobs, which, at its core, means creating a 
more inviting environment to attract both human and financial 
capital.
    To assist Kentucky in satisfying its financial obligations, 
Governor Bevin made the conscious decision to use every tool 
available to the administration to grow Kentucky's economic 
base and, thus, increase the flow of tax receipts into the 
State coffers.
    Although there are many aspects of job creation, a key 
component of that effort is regulatory relief. And one of the 
first undertakings of the administration was the formulation 
and implementation of its Red Tape Reduction Initiative.
    As part of this initiative, every cabinet and agency within 
the executive branch has been directed to review every 
regulation promulgated by it over the years and make one of the 
following determinations:
    First, completely repeal the regulation, as its original 
purpose is no longer relevant.
    Second, amend the regulation to conform it to a Federal 
counterpart. This effort includes eliminating inconsistent 
definitions and standards, with the goal that the State 
regulation should never be more burdensome than the Federal 
counterpart unless circumstances unique to Kentucky require a 
stricter standard.
    Third, amend and modernize the regulation to make it 
clearer and simpler to understand by those subject to the 
regulation, and also make it easier to update the regulation in 
the future.
    Fourth, combine the regulation with other regulations to 
include a single subject matter, such as fees or applications, 
in one regulation for ease of review by those subject to it.
    Finally, leave the regulation as it is currently written.
    The goal of the administration is to reduce by one-third 
the number of restrictions on businesses and individuals in 
Kentucky. In 1975, there were four volumes of regulations in 
effect in Kentucky. That number had grown to 14 volumes when 
Governor Bevin took office.
    Through the end of 2017, of the approximately 4,700 
separate regulations on the books at the outset of the 
administration, 2,220 regulations have been reviewed, 372 
regulations have been repealed, 327 regulations have been 
amended, 157 regulations have been targeted for repeal, and 433 
regulations have been targeted for amendment.
    The initiative has the support of business groups, trade 
associations, chambers of commerce, and other organizations 
across Kentucky.
    There are several lessons to be learned from Kentucky's Red 
Tape Reduction Initiative.
    First, the Governor must own the initiative in every 
aspect, and it helps to have a tangible symbol associated with 
the endeavor. In the case of Kentucky, we created the lapel pin 
that I am wearing today, and Governor Bevin and his top 
officials wear this pin each and every day.
    Further, Governor Bevin speaks out regularly regarding the 
importance of the Red Tape Reduction Initiative to individuals 
and groups throughout Kentucky. As a result of the Governor's 
leadership, there is growing awareness of the initiative every 
day throughout the Commonwealth.
    Second, it is important to create a website that is 
interactive with the public and allows for individuals to post 
recommendations on the repeal or amendment of regulations. 
Kentucky's Red Tape Reduction Initiative website is 
RedTapeReduction.com.
    Kentuckians have submitted scores of thoughtful ideas on 
how to reduce unnecessary regulations that drive up the cost of 
conducting business and create inefficiencies without 
contributing to public health or public safety.
    Finally, the effort of the cabinets and other agencies must 
be sustained on a regular basis. Our cabinets and other 
agencies regularly review and re-review existing regulations to 
ensure that the goals of the Red Tape Reduction Initiative are 
being met. This is a thoughtful and deliberative process that 
never ends.
    We are also in the process of digitizing and modernizing 
the manner in which we draft and promulgate regulations.
    The purpose of the Red Tape Reduction Initiative also 
includes helping to foster technological and engineering 
innovation. Governor Bevin's vision is for Kentucky to be the 
center for engineering and manufacturing excellence in America.
    This is already happening. Toyota Motor Manufacturing 
Kentucky, Inc., which has its largest assembly plant located in 
Georgetown, Kentucky, announced last year that it is investing 
approximately $1.33 billion to retool its facility in 
Georgetown to incorporate the Toyota New Global Architecture, 
which represents an entirely new manner in which Toyota 
designs, engineers, and manufactures its vehicles.
    Braidy Industries will soon break ground on a $1.3 billion 
high-tech, fully integrated aluminum rolling mill at a location 
in northeast Kentucky, which will be the first new aluminum 
mill in the United States in over 30 years. It will incorporate 
technological advances in aluminum materials science that were 
developed by a team at the Massachusetts Institute of 
Technology.
    Finally, Amazon announced last year that it will invest 
$1.49 billion at the Cincinnati/Northern Kentucky Airport, 
located in Boone County, Kentucky, to create its innovative, 
state-of-the-art global cargo hub.
    These are just a few examples of the innovation that is 
occurring regularly in the Commonwealth of Kentucky.
    Thank you, Mr. Chairman and members of the committee.
    [The prepared statement of Mr. Brinkman appears in the 
Submissions for the Record on page 29.]
    Chairman Paulsen. Thank you.
    And, Dr. Kennedy, you are recognized for 5 minutes.

  STATEMENT OF DR. JOSEPH KENNEDY, SENIOR FELLOW, INFORMATION 
      TECHNOLOGY AND INNOVATION FOUNDATION, WASHINGTON, DC

    Dr. Kennedy. Thank you.
    Chairman Paulsen, Ranking Member Heinrich, and members of 
the committee, thank you for inviting me to be here today.
    The task of regulating the economy is a necessary but very 
difficult problem. Congress and regulators need to view it from 
a dynamic viewpoint: develop rules that encourage firms to 
discover new ways to achieve social goals as efficiently as 
possible.
    Regulation is most justified when it addresses market 
imperfections. Rules that use market tools like price signals 
and information to fix problems are most likely to encourage 
innovation. So is regulation that gives companies clear, long-
term, and achievable goals.
    ITIF believes that better regulation can not only remove 
artificial barriers to innovation, it can actually increase 
innovation by changing market rules to reward those companies 
that develop more effective, cheaper ways of attaining 
important goals.
    Intelligent rules can increase the amount of competition in 
a market. They can lower the barrier for new innovations. Smart 
rulemaking can increase the amount of information that 
customers have about different products, while unwise ones can 
reduce buyers' incentives to make wise choices.
    Rules that favor incumbents can raise entry barriers, while 
reforms that improve market structure can significantly 
increase productivity by speeding the use of existing 
innovations.
    Regulators can help this process by following a set of 
general principles.
    First, embrace innovation. Regulators should assume 
technology will continue to advance. Rules should not only 
anticipate innovation, they should encourage it.
    Second, embrace transparency. Congress, regulated entities, 
and the general public should have a clearer view into the 
decisionmaking process of regulators, including any evidence or 
studies that they use to back their conclusions.
    Third, place more trust in the consumer. Given sufficient 
information, consumers can be their own most effective 
advocates. Firms that violate the public's trust often pay a 
heavy price in terms of profits and market share.
    Fourth, place more emphasis on reducing the cost of 
overregulation. Regulators should actively seek input from 
industry and major stakeholders on ways to reduce the cost of 
compliance without affecting public goals.
    Fifth, every major rule should undergo some level of public 
cost-benefit analysis in which the agency clearly explains why 
and how a rule will increase social welfare. To the extent 
possible, this analysis should be backed by quantitative 
studies.
    Sixth, regulators should focus on competitiveness effects. 
We increasingly live in a global economy in which domestic 
firms have to compete not just for foreign markets but also for 
those here at home.
    Congress can further this effort by enacting legislation 
that does four things.
    The first is to encourage interagency cooperation to 
undertake a comprehensive study of the global competitive 
environment faced by specific U.S. industries, including a 
review of the regulatory environment that they face.
    Second, direct the Office of Management and Budget to 
evaluate the effect of major rules on innovation within the 
regulated industry.
    Third, update legislation in ways that give agencies more 
guidance and revoke obsolete rulemaking authority. Also hold 
more frequent oversight hearings to discuss regulatory 
approaches with the agencies.
    And, finally, ensure that regulators have enough resources 
to attract the best people and to acquire a deep understanding 
of the industry they are regulating.
    I believe that these suggestions can be implemented rather 
easily, provided the necessary leadership exists. If enacted, 
they will have a noticeable effect on the quality of 
regulation.
    Thank you very much.
    [The prepared statement of Dr. Kennedy appears in the 
Submissions for the Record on page 32.]
    Chairman Paulsen. Thank you.
    Mr. Koopman, welcome, and you are recognized for 5 minutes.

 STATEMENT OF MR. CHRISTOPHER KOOPMAN, SENIOR DIRECTOR, CENTER 
 FOR GROWTH AND OPPORTUNITY, UTAH STATE UNIVERSITY, LOGAN, UT, 
 AND SENIOR AFFILIATED SCHOLAR, MERCATUS CENTER, GEORGE MASON 
                   UNIVERSITY, ARLINGTON, VA

    Mr. Koopman. Thank you, Chairman Paulsen, Ranking Member 
Heinrich, and members of the committee, for holding this 
important hearing today.
    I want to make three points in my testimony.
    First, the growth of the commercial internet was the direct 
results of a culture of permissionless innovation, which 
allowed it to create the massive gains in consumer welfare we 
have witnessed over the past 30 years.
    Second, the continued growth of this sector is being 
stifled by outdated regulatory approaches that are driving 
innovators to pursue better regulatory climates overseas.
    And, third, we can reclaim this culture of permissionless 
innovation through a few simple reforms.
    As an open platform, the internet has allowed entrepreneurs 
to try new business models and offer new services without first 
seeking the approval of regulators. This is no accident. 
Bipartisan efforts in the 1990s made it the official policy of 
the United States. This guaranteed a platform with little prior 
restraint on the commercial activities undertaken on the 
internet. When harms and failures did occur, we addressed them 
in an ex post manner.
    However, as more industries have been disrupted by 
technology companies, this culture of permissionless innovation 
has been met with a permission-based, proscriptive regulatory 
approach.
    The cost of these regulatory approaches at both the State 
and local level are being felt more acutely today and by more 
people by the simple fact that it is easier than ever to jump 
into regulated industries. Within a few clicks, one can offer 
tax and legal advice to anyone, connect with a doctor thousands 
of miles away, chat with a therapist, or find a mover.
    Moreover, as entrepreneurs have brought these pre-internet 
practices into the internet age, they are encountering 
regulatory environments where smartphones, computers, and 
internets were never thought of when they were created.
    One stark example of this that comes to mind is the recent 
response by the Federal Aviation Administration to flight-
sharing platforms. For decades, general aviation pilots and 
passengers were able to connect with one another via physical 
corkboards in airports all across the country. In 2013, a 
company called Flytenow created a platform that turned these 
physical corkboards into a digital app.
    This could have revolutionized the way we travel. And, 
within a few years, the app itself had 25,000 users--pilots and 
passengers--connecting with one another to share flights all 
across the country.
    However, current FAA regulations and guidelines on flight-
sharing arrangements never contemplated the use of the 
internet. And, as a result, the FAA relied on 30-year-old 
guidance documents to declare pilots using the platform to be 
common carriers. This meant pilots without commercial 
certification were operating illegally. They could continue to 
connect with passengers using the physical corkboards, but 
using the app to arrange the same flight was illegal.
    Discouraging this type of innovation in the United States 
doesn't necessarily mean this innovation will not occur. Rather 
than fighting with regulators, innovators will simply go where 
they are welcome. This is what my colleague Adam Thierer refers 
to as ``innovation arbitrage.''
    While flight-sharing platforms have been grounded in the 
United States, they have taken off in Europe. A European 
version of Flytenow hosts 150,000 users, 10,000 licensed pilots 
in France, Germany, the United Kingdom, and they are expanding 
across the entire continent.
    Now, why is that? Instead of viewing them as a threat, 
European regulators recognized these platforms were simply 
extending existing practices. They reformed existing 
regulations, and they actively worked with the platforms to 
promote safety.
    This is but one example. Innovators working on commercial 
drones, driverless cars, flying cars, and the sharing economy 
are all finding more hospitable homes outside the regulatory 
purview of the United States.
    Now, ultimately, to ensure that we remain a leader in the 
innovation economy, we must embrace the culture of 
permissionless innovation that fueled the internet's 
unprecedented growth over the past 30 years and all of the 
economic benefits that it has generated.
    To do so, we must balance important regulatory goals--
safety and consumer protection--with a tolerance for mistakes, 
failures, and learning so that innovation can continue to move 
us forward. Doing so requires a technological freedom not found 
in many of our current regulatory approaches. It requires a 
humility to admit that we do not know what the future will look 
like, and it requires a willingness to admit when our 
approaches have outlived their usefulness.
    By shoring up boundaries of regulatory agencies and 
requiring agencies to take clear, concise, and consistent 
approaches toward regulating new technology, Congress can 
ensure a foundation for simple rules in our fast-changing, 
complex world.
    There will always be serious and legitimate concerns that 
make it tempting to require innovators to seek approval before 
they proceed. And while this may address many of these 
concerns, it is done at the expense of continued innovation and 
economic growth. And we should all be mindful of the effects 
that decisions made today will have on tomorrow's innovators 
and entrepreneurs.
    Again, I thank the committee for the interest in and 
attention to these issues, as well as the opportunity to 
testify, and I will welcome any questions you may have. Thank 
you.
    [The prepared statement of Mr. Koopman appears in the 
Submissions for the Record on page 35.]
    Chairman Paulsen. Thank you.
    And, Ms. Milano, you are recognized for 5 minutes.

   STATEMENT OF MS. JESSICA MILANO, FORMER DEPUTY ASSISTANT 
   SECRETARY FOR SMALL BUSINESS, COMMUNITY DEVELOPMENT, AND 
HOUSING POLICY, U.S. DEPARTMENT OF TREASURY, AND BOARD MEMBER, 
            SMALL BUSINESS MAJORITY, WASHINGTON, DC

    Ms. Milano. I would like to thank Chairman Paulsen, Ranking 
Member Heinrich, Vice Chairman Lee and all of the distinguished 
members of the committee for inviting me to testify today. I am 
honored to be here to talk about my experience supporting safe 
and affordable access to credit for America's small businesses 
and entrepreneurs.
    Small businesses are one of our country's greatest sources 
of innovation. All of our most successful innovators, from 
Apple to Amazon, started small. Their meteoric growth was not 
inhibited by regulation but could have been without access to 
capital needed to grow and scale their business.
    In my testimony today, I wish to discuss three important 
points.
    First, most small-business owners believe some regulation 
is needed in a modern economy. While no one likes red tape and 
filling out paperwork, most Americans can appreciate that some 
regulation is needed to promote fairness and competition.
    In fact, according to a new poll released today by Small 
Business Majority, three out of four small-business owners 
disagree that we should get rid of all regulations on business 
and think that some regulations are important to protect small 
businesses from unfair competition. What is more, an 
overwhelming majority of 82 percent agree their business can 
live with some regulation if it is fair, manageable, and 
reasonable.
    Second, many small-business owners rank access to capital 
as a bigger concern than regulation. While our capital markets 
work well for most established, large, and midsize businesses, 
many small, early stage, rural, minority-owned, and women-owned 
businesses often struggle to find financing and consistently 
rank access to capital as a bigger concern than regulation.
    Even more concerning, a growing number of financing 
products are being offered to these businesses by financial 
firms not subject to the same regulation and oversight as 
banks. According to another Small Business Majority poll, while 
small-business owners felt that online lending opened up new 
sources of credit, 8 in 10 reported they were in favor of 
regulating online lenders to ensure that interest rates and 
fees were clearly disclosed to borrowers.
    And this brings me to my final point: Smart policy can 
promote safe and affordable credit and encourage innovation. 
Transparency is critical to promoting market competition, which 
should ultimately provide small-business borrowers better 
products at better prices. But to ensure a level playing field 
among financing providers, disclosure requirements should apply 
equally to all small-business financing products, regardless of 
whether the provider is a bank, credit card, merchant cash 
advance, online marketplace lender, payments processor, or any 
new companies yet to emerge.
    While transparency would make credit safer and more 
affordable, there will still be some businesses that will need 
help qualifying for a loan or accessing critical early stage 
capital. I would like to highlight one of the very successful 
and innovative public-private programs I had the privilege of 
working on during my time at Treasury as a model for Federal 
support for innovation and entrepreneurship.
    The State Small Business Credit Initiative was funded with 
a one-time authorization of $1.5 billion through the Small 
Business Jobs Act of 2010. It was a new program and a true 
experiment, born of the need to jump-start small-business 
lending and investment during the financial crisis.
    The program worked by allowing states to set up their own 
small-business support programs targeted to local economic 
needs. It was so flexible there were only two requirements: 
States had to establish at least one from a list of five 
possible credit or equity programs; and states had to provide a 
plan for leveraging $10 of new private-sector small-business 
financing for every $1 of SSBCI funds.
    Unlike other Federal programs, it was not a one-size-fits-
all approach. Some communities chose to target micro-
businesses, while others targeted manufacturers or high-tech 
companies. In total, SSBCI funded 154 State programs, over 80 
of them new, and dedicated $1 billion to lending programs and 
$400 million to venture capital programs supporting early stage 
businesses.
    From 2011 to 2016, the last year data was available, SSBCI 
supported over $10.7 billion in new lending or investments, and 
it was estimated to have created or retained over 240,000 jobs.
    In total, it supported $2.5 billion in financing for small 
manufacturers; $1.5 billion for women- and minority-owned 
firms; $4 billion to early stage businesses with high growth 
potential; and, even more remarkable, with no Federal 
requirement to do so, over 42 percent of SSBCI loans or 
investments were made to businesses in low- to moderate-income 
communities.
    SSBCI illustrates the power of leverage, a little bit of 
Federal support partnered with State and private-sector 
resources, and the power of flexibility to drive innovation and 
inclusive economic growth. We need more smart policy like 
SSBCI, and I recommended to the committee, if you are 
considering policy to support innovation and small businesses, 
you should consider reauthorizing SSBCI in some form.
    Thank you.
    [The prepared statement of Ms. Milano appears in the 
Submissions for the Record on page 61.]
    Chairman Paulsen. Thanks, Ms. Milano.
    And we will start our questions now.
    Maybe just to begin, you referenced the article earlier, 
the Bloomberg article, where the United States has now fallen 
out of the top 10 in innovation. And, obviously there is a 
concern there, but I think what was even more concerning in the 
article was the prediction that some have also made about that 
trend is going to get worse rather than get better.
    So my question is--and I will just start with you, Mr. 
Koopman--how do regulators allow for a culture where it is okay 
for innovators to be doing their thing? And you referenced the 
internet, for instance, the FAA and some of the flight-sharing 
components from an app.
    And when is regulation necessary? How do we ensure that it 
is tailored and it is not going to be immediately outdated?
    And what are some examples of what other major trading 
partners or other allies and economies around the world are 
doing to orient themselves on regulatory change as a 
competitiveness argument?
    Mr. Koopman. Thank you very much for the question.
    I think the most important thing regulatory agencies can do 
to embrace a culture of permissionless innovation, first and 
foremost, is to sort of separate the idea of harm from fear.
    I think, especially in the emerging tech space, very often 
every new innovation is followed by, you know, techno panics, 
if you can call them that, where people think the latest 
technology will ruin the world or make people less safe or harm 
us in some way.
    And those fears may be legitimate, and it requires the 
agency to do one of two things: to step in and say, we don't 
have enough information at this point to make that decision; or 
to say, yes, there is clearly tangible, irreversible, 
catastrophic harm, and it is time to narrowly tailor a 
regulation to ensure that that harm doesn't come to pass.
    I think the most important thing an agency can do is to 
base regulatory decisions around actual harm as opposed to the 
fear of harm.
    And I think the perfect example of this is flight-sharing, 
as I mentioned before. The FAA is a safety agency at the end of 
the day. And their concerns about flight-sharing, general 
aviation pilots using an app to connect with passengers, was 
one of safety.
    At the same time, you have this European example where the 
European Aviation Safety Administration has embraced this and 
said, there is no clear harm, and we will play an active role 
in setting up norms and practices and procedures within the 
industry to ensure that the feared harm never comes to pass.
    I think that is one perfect example of this. You see this 
also in drones, another emerging technology, where you have 
companies--Google X, for example, built most of their 
technology in the United States, and a lot of their testing 
initially was done in Australia, because the Australian 
regulators had embraced the idea that you can fly a drone over 
someone else's head without hurting them, while it was still, 
you know, very much a heavily regulated industry in the United 
States.
    I think those are two examples of where trading partners 
are taking a posture toward permissionless innovation and you 
are seeing U.S.-born ideas and U.S. innovations going overseas.
    Chairman Paulsen. Dr. Kennedy, maybe you can add, too. 
Drones, driverless cars--I mean, maybe you can expand on that.
    Dr. Kennedy. Sure. Yeah, I recently came out with a report 
last year, I think, on the automation that is occurring in the 
freight transportation industry. You know, whether it is trains 
or freight trucks or drones or even airlines, every industry is 
automating. The technology is advancing quite rapidly.
    And I think the best thing that the regulators can do is, 
one, take some responsibility for the competitiveness of the 
industry internationally and say, in addition to guaranteeing 
public safety, we also have to make sure that this industry can 
continue to compete strongly in global markets, and then work 
with the agency to try and identify, you know, the true public 
safety issues that are involved in moving to greater automation 
and find ways to get around those.
    I think, you know, usually once we identify the legitimate 
concerns or dangers of the technology, we can find ways to get 
around it. I think, in the past, if you look at the history of 
technology, there has always been a tendency to fear the 
technology and to want to put a brake on it until you 
understand everything that could possibly go wrong. And if 
something goes wrong, nobody wants to take the responsibility 
to say, yeah, I authorized that because I thought it was worth 
the risk, I thought the benefit of the technology in the long 
term was worth, you know, a couple accidents.
    You know, all technologies have to work through problems, 
but eventually we get there. Eventually we come out with 
solutions that, you know, make substantial contributions to the 
way we live.
    Chairman Paulsen. Thank you.
    Dr. Kennedy. And the regulator has to accept that as a 
challenge.
    Chairman Paulsen. Senator Heinrich, you are recognized for 
5 minutes.
    Senator Heinrich. Ms. Milano, banks are more reluctant 
these days to make loans to small businesses, both citing high 
costs and low profits. And, as a result, borrowers are 
oftentimes looking to new sources of capital, including 
FinTech, that operate, in some cases, without real oversight.
    What are some of your concerns about turning to FinTech 
lenders in this environment, particularly online lenders?
    Ms. Milano. Thank you for the question, Senator Heinrich.
    I think that small-business lending, particularly small-
dollar loans under $100,000, which are what the vast majority 
of small businesses seek, have high fixed transaction costs and 
underwriting costs relative to revenue generation potential for 
community banks. And we have seen a decline in community 
banks'--less than $10 billion in assets--share of that lending 
and more of a movement toward credit card products and emerging 
online FinTech providers that are sort of credit-scoring 
businesses online and underwriting loans that way.
    And I think one of the concerns online is that it is buyer 
beware for small businesses. You know, I am on the board of 
directors of Small Business Majority. They do polling of small 
businesses. They are a national advocacy organization that has 
55,000 small-business members nationwide. And what we have seen 
is that there is not a lot of transparency about the prices, 
the interest rates, the fees associated with these products. 
And there is a real desire for an extension of common 
disclosures that would basically level the playing field and 
provide transparency to the market.
    Senator Heinrich. That gets to the heart of an issue with 
regard to access to capital. How do we do a better job? We have 
these different platforms. We have credit cards, we have 
FinTech, we have community banks, we have big banks, we have 
credit unions. How do we do a better job of treating everyone 
equally and transparently in that regulatory environment?
    Ms. Milano. Right. I don't think you regulate the entity; I 
think you regulate the activity. And you basically say, whether 
it is a loan or a credit product, there are certain key pieces 
of information that consumers or borrowers need to have, and 
that is the interest rate, any fees--and there is more about 
this in my paper--and the payment terms and things like that.
    And this is information that, if it is available, borrowers 
will actually be able to shop and compare prices across credit 
providers and know what is a better deal and what is not for 
them. And nobody really in the market should be threatened by 
that, because that is just promoting better products at better 
prices and fairer competition.
    Senator Heinrich. I think one of the challenges is we all 
live in a world where there is a historical inertia. And so we 
sometimes set things up to, by default, regulate the entities 
based on, you know, what box you check, as opposed to 
regulating the activity.
    Dr. Kennedy, there has been a big focus today on the 
importance of deregulation and less focus on how, as you do 
that, you make sure that you are doing it in a responsible way. 
And I thought you were very measured and balanced in your 
testimony today.
    No one likes red tape; that is obvious. But it has been my 
experience that my constituents like to breathe clean air and 
they prefer that when they drink water it is clean water. When 
my mother worked in a factory, she was more than happy to sign 
up for long hours and hard work, but she didn't sign up for 
carpal tunnel syndrome.
    In designing regulations, how do we make sure that we 
consider both the costs and the benefits? And how do we ensure, 
once again, those issues of transparency and level playing 
field across platforms?
    Dr. Kennedy. Two or three things that I think especially on 
the big level are important.
    One is, I think the regulator has to--it has to measure 
potential benefits and harms over technology in a clear way. 
Some of the environmental issues are sometimes the hardest 
because they are difficult to quantify--the benefits of clean 
air or clean water or better worker safety.
    But I think it is Congress' job to set a level for what is 
safe, and then it is the regulator's job to try and achieve 
that level but try and achieve it in the most efficient ways.
    And, a lot of times, regulators have used command and 
control methods or dictated the use of a certain technology, 
and that can sometimes work when the technology is there and 
you just want to--it will let you achieve the level you want 
and you never want to do better.
    But we should accept as a goal, or adopt as a goal, that we 
want to do better and better and better and better over time. 
We want cleaner and cleaner air. We want better and better 
worker safety. And for there, I think you measure the results. 
You measure air quality; you measure the number of sick days. 
And you try and find a way to reward companies that do better 
over time. And you invite in and even help develop technology 
that would get you improved performance.
    Senator Heinrich. Thank you.
    Chairman Paulsen. Thank you.
    Senator Lee, you are recognized for 5 minutes.
    Senator Lee. Thank you, Mr. Chairman.
    And thanks to all of you for being here. I appreciate the 
insight and expertise each of you brings to this committee.
    Mr. Koopman, you have previously written about how local 
land use restrictions end up having an impact on hardworking 
Americans by restricting the supply of housing and, in the end, 
raising prices.
    The local zoning laws, in many instances, have an impact on 
development, and they end up discouraging economic innovation. 
This problem is compounded in a State like mine, where there is 
a whole lot of land that is owned by the Federal Government. At 
present, the Federal Government owns about two-thirds of the 
land in the State of Utah.
    And so, without considering the impact of State and local 
laws restricting land use--we have those too, but on top of 
that, in Utah, we also have this restriction that says that 
there is only about one-third of the land that can ever be 
developed for anything--for housing, for recreational purposes, 
for grazing, and so forth. And so, unlike people in many 
states, people in Utah are limited by both State and local land 
use restrictions and also the Federal overlay that comes with 
Federal public land.
    Can you just tell me about how this strikes you, about the 
relationship you see between land use restrictions at the State 
and local level on the one hand and the Federal Government on 
the other hand and how they have an impact on the availability 
of housing and the pricing of housing?
    Mr. Koopman. Thank you very much for the question. And I 
think this goes to a point that Ranking Member Heinrich 
mentioned before, that 20 counties, I think he said, had an 
overwhelming majority of these startup and innovation 
activities.
    And I think that goes to the heart of the point. You think 
of San Francisco, the Bay Area, for example. There is all of 
this economic activity occurring, and yet it is far too 
expensive for people who could pursue the jobs being created by 
many of those companies to move there because land use 
regulations quite simply make it too expensive to move there. 
And geographic mobility is very much a chief component to 
income mobility. Being able to move to where work is is an 
important part of getting the work, is being there and showing 
up and having the job.
    So the restrictions, the inability to develop land locally, 
be it from a Federal restriction, a State restriction, or a 
local restriction, is a chief barrier, in many instances, to 
people finding meaningful work and opportunity. Because you do, 
again, end up with this mismatch where you have a supply 
restriction, regulation either at the Federal, State, or local 
level that says you cannot build a house here, but you have a 
high demand for jobs. Holding the supply constant, the demand 
increases; you will see the prices go up and up and up.
    This is something we have experienced here in D.C., as more 
and more people come to D.C. You see this in the Bay Area. You 
see this in Salt Lake City and elsewhere. As jobs continue to 
be needed in a particular area, a big part of that is having 
housing available.
    Senator Lee. Are there policies we could pursue, through 
legislation or otherwise, that would help alleviate this 
burden?
    Mr. Koopman. Oh, certainly. At a State and local level, 
there are many things that policymakers could do to take 
positive steps toward unleashing the supply of housing.
    Senator Lee. What about Congress? Do you think there are 
things Congress could do to impact at least the Federal role, 
the role the Federal Government might have in public land 
states, for example?
    Mr. Koopman. Oh, certainly. And I have to say, I just moved 
to Utah a week and a half ago, and I am very much----
    Senator Lee. We are so pleased to have you there. You have 
moved to Utah at a very good time of year.
    Mr. Koopman. Yeah, it is been beautiful. Don't tell my wife 
about the snow.
    But we have just moved to Utah, and I can't speak 
specifically to the issues of public lands, but definitely 
seeing there are vast amounts of the West owned by the Federal 
Government that could be put to beneficial use in various ways. 
This isn't returning it to the states or privatizing it, but 
the Federal Government taking a more active role in allowing 
for multiple uses on public lands could certainly go a long way 
toward some of these housing affordability issues in the long 
term.
    Senator Lee. And, to be clear, you are not talking here 
about national parks, about wilderness areas. Most of the land 
that is public in Utah doesn't fit into any of those 
categories; it is just garden-variety land, right?
    Mr. Koopman. Correct. I am not saying shut down parks. I am 
not saying anything like that. What I am saying is, in land 
that is held by the Federal Government and isn't being put to 
use currently, that is an opportunity for Congress to look and 
say, can it be put to better or different use.
    Senator Lee. Thank you very much, Mr. Koopman.
    Chairman Paulsen. Thank you.
    Mrs. Maloney, you are recognized for 5 minutes.
    Representative Maloney. Thank you, Mr. Chairman and Mr. 
Ranking Member, for holding this hearing. I view innovation as 
one of the key elements of the success of our country. This is 
an important hearing.
    But, of course, regulations--we don't want so few of them 
that we have things like the 2008 economic downturn that, 
before this committee, one economist after another said it 
could have been prevented with good regulations and good 
oversight, could have prevented the catastrophe that resulted 
in over $15 trillion lost in household wealth, 9 million jobs, 
8 million homes--just a devastating downturn that could have 
been prevented.
    Part of the reforms was the Credit Card Bill of Rights. It 
was a bill that I authored, and, 9 years ago today, President 
Obama signed it into law. And some of the protections of this 
law, to name a few, were that it prevented companies from 
applying payments to balances with the lowest rate before 
balances with the highest rate; banned fees from being upped 
without the customer's knowledge or consent; said they had to 
really do what they said. If they said that an interest rate 
was a certain interest rate for a year or 2 years or 3 or 
whatever, they had to keep their word.
    So it made many things--they banned the practice of raising 
rates after purchases had already been made. I heard stories 
where they were told the rate was one thing; the next day they 
bought a car, then the next day they raised the rate to 21 
percent and kept them in poverty and never-ending debt.
    So I would like to ask all of you, would you call these 
regulations, some of which I just mentioned for the credit card 
industry, unnecessary red tape?
    Ms. Milano, yes or no?
    Ms. Milano. No.
    Representative Maloney. Would you?
    Just go down the line. These credit card abuses that I 
outlined, would you consider it red tape or relevant and 
necessary?
    By the way, three different reports said this bill saved 
consumers over $12 billion--billion--a year, keeping their 
money in their own pockets, not going for unfair, unnecessary 
fees.
    Well, I will just take one answer since--you think it is--
do you have a response?
    Mr. Koopman. Yeah. I am not a----
    Representative Maloney. Okay.
    Mr. Koopman [continuing]. Financial markets----
    Representative Maloney. Okay.
    Mr. Koopman [continuing]. Expert, but, no, it doesn't----
    Representative Maloney. Well, then let me just go on.
    Well, personally, I am just making a point that there are 
some regulations that literally save pain and suffering and 
literally save consumers and help the vitality and investment 
in our economy.
    Mr. Koopman, last month, the Office of Management and 
Budget released a report which estimates the cost versus the 
benefits of Federal legislation and agency compliance. You are 
an expert on regulation. I assume that you are familiar with 
the report. Yes or no? Are you familiar with the report?
    Mr. Koopman. I have not read that report, no.
    Representative Maloney. You haven't read it?
    Has anyone read it?
    Ms. Milano. Yes, I read it.
    Representative Maloney. You read it. Okay. Can you tell me, 
in the most basic way, the findings of that report?
    Ms. Milano. Yes. It is a report OMB produces annually and 
has done so for the last 10 years. And at a very basic level, 
the most recent report, which was released under the Trump 
administration, showed that the estimated benefits of 
government regulations amounted to $287 billion to $911 
billion, versus cost estimates of $78 billion to $115 billion. 
So, at a minimum, benefits outweighed costs two to one.
    Representative Maloney. Well, I would like to follow up 
with another question for you. In your testimony, you argue 
that overregulation likely is not the primary restraint on 
small-business formation and innovation. You argue that access 
to capital is a primary barrier.
    And I would like to go a step further and ask you if you 
could provide some insight on small-business formation at the 
ground level. Let's say that I want to open up a small hardware 
store or a restaurant. Could you just make a comment on that?
    Ms. Milano. Sure. The vast majority of businesses in this 
country--76 percent have receipts less than $100,000. They are 
very small businesses.
    And the first place you start, if you want to open up a 
hardware store or move from a food truck into a restaurant, is 
with the need for credit. And, a lot of times, it is with 
personal credit or, home equity. And then the next step up is 
to try to go to a bank and get a small-business loan or to turn 
to an online lender or to use a business credit card, since you 
mentioned the CARD Act, which excluded business credit cards.
    And oftentimes there isn't an easy way to compare and 
price-shop those products, because there are no disclosure 
requirements around the fees and the interest rates that are 
being charged for those products.
    Representative Maloney. My time has expired. I yield back.
    Chairman Paulsen. Thank you.
    Representative Schweikert, you are recognized for 5 
minutes.
    Representative Schweikert. Thank you, Mr. Chairman.
    Can I ask for a bit of a thought experiment for all of us, 
our friends on the left and those of us here on the right and 
our panel.
    Okay. Regulation. What is its basic purpose in our society? 
Is it to keep us safe, keep us healthy?
    Are we comfortable with that as part of the thought 
experiment?
    So, in many ways, if you actually look at much of our 
regulatory model, it is as if we are still in 1938. Let's fill 
up file cabinets full of paperwork that will document that we 
intend to do certain things, and if we do something wrong, we 
have documentation to say you screwed up and to penalize you.
    A good example, as was just brought up by the woman from 
New York, is 2008. If you actually read the literature--and I 
have stacks of it on my nightstand--it turns out we had a 
crisis of information. No one knew what was in these 
securitizations because we didn't have information. You could 
not see what was the impairments within the securitization of 
the MBS. It turns out information was the solution in that 
regulatory environment.
    I am sometimes enraged, the fact that this isn't the 
ultimate regulator. In air quality, we now have technology--I 
can attach something to my phone that will do hydrocarbons, 
PM10s. If I could have a few thousand of those moving through 
my community, I would catch bad actors instantly, instead of 
having someone fill up a file cabinet and a couple of years 
later I will find out they screwed up because they didn't meet 
their certification, and we will have documentation we are 
suing them, but instead of moving to a--you know, crowd-
sourced.
    As you talk about access to capital, we passed the JOBS Act 
a few years ago. It took how many years to basically have the 
SEC screw up crowd-funding? How about crowd-lending? How about 
Reg A, Reg A+, the roadshow, all the things we were doing to 
try to create egalitarian access to capital? And, in many ways, 
it was the very regulators who screwed up the access to those 
things instead of moving to an information base that if you 
wanted to crowd-lend something, give me enough information, and 
the lending of the information becomes the regulator.
    In many ways--I am sorry, I know I am going on a bit, but I 
am frustrated because it is as if we are still here trying to 
find a better way to allow Blockbuster Video to have a 
drivethrough instead of the revolution of the fact I go home, I 
hit a button, and now my movies and entertainment are streamed 
to me. We are defending a model that is decades out of date 
technology-wise.
    And, Mr. Koopman, you are the only one who has actually 
said anything that provides me hope. How do I help my brothers 
and sisters and all the rest of us in this thought experiment 
understand the power of information is the ultimate regulatory 
box because it identifies the sinners?
    Mr. Koopman. I think the best way to--just to add a 
concrete example to your thought experiment. I use this with my 
students in our Economics of Regulation class that I have 
taught for the past couple years at George Mason. And that is, 
when you are taking your family out to dinner and you want to 
know a good restaurant, where do you turn? In most cities, 
there are city health inspectors that are making sure that the 
restaurants are clean, they are not serving bad food, they are 
not making people sick. But at the end of the day, most of the 
information we get and most of the information we use about who 
we deal with is coming from places like Yelp.
    I mean, this is the way that technology acts as a 
regulator, by breaking down information asymmetry and giving 
more information to consumers, that they can police bad actors 
within an industry by saying, ``We will not work with you 
anymore.'' You could think of the delete Uber campaign. The 
#deleteUber campaign is a perfect example of this, of making it 
clear to a company that consumers, as regulators, will not deal 
with things that they don't like.
    Representative Schweikert. Okay.
    Dr. Kennedy, you had something, and I will beg you to go 
really fast.
    Dr. Kennedy. Yeah. Nobody is questioning that regulations, 
on whole, benefit the economy. But there are many regulations 
that don't benefit the economy, and I think most of the 
regulations that Congress struck down using the CRA were good 
examples of that----
    Representative Schweikert. Well--and I am so sorry. I am 
going to interrupt you.
    Dr. Kennedy. Okay.
    Representative Schweikert. I will make you an argument 
that, if I want to have telemedicine, I need to break down 
layers and layers and layers of regulation, whether it be my 
State licensing boards, the way we compensate, the way we say 
the algorithm that may be talking to my wearable has to be a 
medical device under certain regulation.
    I can make you an argument that the most elegant thing we 
could do with the Securities and Exchange Commission is have 
trades and those things run on rails, where the algorithm and 
the regulator can see it live and see if someone is cheating, 
breaking the rules, and you catch it instantly, instead of a 
quarter later someone files a piece of paper and we find 
something on the piece of paper and we go back in time.
    How do you embrace technology so regulation of protecting 
the public and our health and safety is live instead of a 
paperwork process of filling up file cabinets?
    And, with that, I yield back.
    Chairman Paulsen. Thank you.
    Senator Hassan, you are recognized for 5 minutes.
    Senator Hassan. Oh, thank you very much, Mr. Chair.
    And thank you to our panelists for being here, for your 
expertise and your hard work.
    And I was just listening to Representative Schweikert and 
thinking that I am not sure we are debating, really, regulation 
good or regulation bad as absolutes. What we are really trying 
to do is, how do you do it well?
    In my State, to have access to telemedicine, before you 
have the iPhone, you need broadband and you need connectivity 
and you need help investing in that. And that is something that 
it has been very hard to get the government to do, to turn 
around and say, we are in a new digital age and we have to 
actually invest in the kind of technology that would give our 
regulators the access to the tools they need to modernize.
    And so, you know, I think that is an important touchstone. 
You can't just, in government, wave a magic wand and suddenly 
have the tools that you need to catch up to the digital age. 
And I think we are way behind in investing in that.
    I am also right with Senator Heinrich in saying nobody 
loves red tape but all of us, I think--and you have all agreed 
in some way--appreciate that regulation helps the quality of 
life we all enjoy.
    In my family's case, my son has an implanted pump that 
helps his spasticity from cerebral palsy be relaxed. I want to 
know that the baclofen pump that was implanted in my son is a 
safe medical device. And we need regulation to establish the 
parameters.
    We also know, to Ms. Milano's point, that, in order to 
ensure fairness and competition, we have to sometimes evolve as 
an industry evolves. And that is why I think it was important 
and right that the Senate just voted to reinstate net 
neutrality. Because, without that level playing field, small 
and emerging internet companies can't compete with the big guys 
and people can't have access to the internet on a fair and even 
playing field that would help them start that new business.
    So I think it is a subtle conversation we need to be 
having, and I am very appreciative of the work you are all 
doing to help us do that.
    Ms. Milano, I did want to turn to the issue that you have 
raised about what you are hearing from small businesses, 
because it is what I hear too, that it is really hard for them 
to establish or expand because of limitations on access to 
capital.
    So, in particular, what are some of the ways that we can 
encourage capital to be invested in diverse geographic areas 
and rural communities and not just places like Silicon Valley 
and New York?
    Ms. Milano. That is a great question, Ms. Hassan, and thank 
you for asking it.
    I think, first off, you have introduced a bill, the ROI 
Act, to relieve student debt so that more young entrepreneurs 
and innovators can get started on starting their businesses and 
helping to grow small businesses in their communities. And I 
think that is really important.
    I think, secondly, for so many small businesses, 
particularly in rural areas, they will need the support of 
programs like CDFIs. And I oversaw the CDFI program. CDFIs are 
very special institutions which serve low-income communities 
and help with business counseling and technical support and all 
the wraparound activities that help rural businesses get ready 
to really grow with the capital they are provided. And we need 
more support for CDFIs and for Small Business Administration 
programs.
    Senator Hassan. Well, thank you.
    And thanks for mentioning my bill, because I was going to 
ask you about that too. We are seeing a big drop-off in young 
people starting businesses, in part because of the kind of 
student debt they have. And so the idea behind the bill is 
simply to allow people who start businesses, especially in 
distressed areas, to have a break on their student debt.
    I thank you very much for your testimony.
    Thank you all for being here.
    I will yield the rest of my time.
    Chairman Paulsen. Thank you.
    Representative Handel, you are recognized for 5 minutes.
    Representative Handel. Thank you, Mr. Chairman.
    And thank you to all of you for being here today. I 
appreciate your comments.
    Chairman Paulsen had referenced earlier the Bloomberg 
Innovation Index, saying that the U.S. had sort of ceded its 
top-10 role. Yet, in the 1970s and 1980s, we were arguably the 
most prolific global innovators. And I would just be curious 
what you think is different from then versus now in terms of 
that regulatory climate.
    I will start with Mr. Koopman and then Dr. Kennedy.
    Mr. Koopman. So I think that when you look at, let's say, 
the last 30 years and the growth of commercial activity on the 
internet of the last 30 years, this goes to Congress and a 
nonpartisan agreement that the internet would be a place of 
permissionless innovation. I think that is where you see the 
growth in the last 30 years, why you see a slowdown--total 
factor productivity in the United States has been declining for 
10 years in other sectors, and you see this difference.
    And I think what we are recognizing now in the decline in 
innovation in the United States is one where, as tech has grown 
off the internet and into the world where all of us are 
interacting with it every day, technology is now interacting 
with 30-, 40-, 50-, sometimes 80-year-old regulations that have 
more or less, you know, put its gangbusters growth to a halt.
    Representative Handel. Dr. Kennedy.
    Dr. Kennedy. I think that one of the things that happened 
over the last couple of decades is we had a couple of financial 
crises, caused in part by some bad actors, and in each time we 
passed massive financial rules to make sure nobody ever made 
that mistake again. And what it did is it created a whole layer 
of cost on top of the system that slowed down IPOs, that caused 
companies to withhold credit or not be so interested in giving 
credit to small businesses because of the high fixed costs.
    I think we have sort of--we have also lost some of our 
confidence about the future. I mean, I think the U.S. is going 
to be the most productive country in the world over the next 20 
years. I really believe that. We have a lot of problems, but we 
have far more strengths than problems, and we are better placed 
than Europe or China or Russia. And yet you look around the 
country, and you don't see that optimism, you don't see that 
dynamism, except in certain places----
    Representative Handel. I don't know, I am feeling pretty 
optimistic, with 4.1-percent growth compared to what we had 
before, thanks to the Tax Cuts and Jobs Act.
    Dr. Kennedy. Well, I hope it continues, but----
    Representative Handel. And I just have a little bit of 
time, so let me----
    Dr. Kennedy. Certainly.
    Representative Handel [continuing]. Just jump in here.
    I think there is no question that we have an 
extraordinarily static regulatory climate and, to your point, 
Mr. Koopman, just the layering, layering, layering of decades 
and decades of regulatory rules. But it is a herculean effort 
to start to unwind that.
    What can we do to really practically go in--certainly, to 
your point, Dr. Kennedy, cost-benefit analysis going forward. 
Do we need to go in and have a sunset rule on major regulations 
that inject some process so that we don't let it build up for 
80 years?
    Dr. Kennedy and then Mr. Koopman.
    Dr. Kennedy. Two things.
    One is I think Congress needs to revisit rules on a regular 
basis and see if the rules it has written that govern the 
agency make sense. And when you revoke a rule, my understanding 
is you revoke the regulations that were authorized by the rule.
    Another thing is I think we ought to look at some 
industries like construction and healthcare and education and 
say, why haven't we gotten productivity there? And why don't we 
focus on driving down the cost, improving the quality of higher 
education or healthcare?
    And how can we restructure the rules of the markets? You 
know, by giving consumers more choice, by making them more 
responsible for their actions, by reducing regulations, say, on 
a medical app. I mean, I think there are lots of ways that, 
when you get in the weeds, you can find specific rules that you 
can get bipartisan support on and that will make a noticeable 
difference.
    Representative Handel. So, in other words, for Congress to 
be more proactive in being dynamic about looking at the 
climate----
    Dr. Kennedy. I think that would help.
    Representative Handel [continuing]. Versus static on our 
side.
    My time is up. Thank you so much.
    I yield back, Mr. Chairman.
    Chairman Paulsen. Thank you.
    And, Dr. Adams, you are recognized for 5 minutes.
    Representative Adams. Thank you, Mr. Chairman.
    And I thank you all for your testimony today.
    My question is for Ms. Milano.
    First of all, let me just say I believe that we must ensure 
greater access and more options for entrepreneurs to obtain 
responsible capital by providing small businesses, particularly 
minority businesses, with increased opportunities to 
participate in Small Business Administration programs.
    HBCUs--that is Historically Black Colleges and 
Universities--provide education and training to a large share 
of our Nation's African-American population. In particular, 
HBCUs prepare many individuals to embark on small-business 
ventures. Yet, too often, HBCU students and alumni are left out 
of the small-business training equation.
    My question: Do you think it would be helpful for the SBA 
to conduct a specific outreach campaign to HBCUs? And would 
targeted SBA outreach increase the likelihood that minority-
owned small businesses succeed?
    Ms. Milano. Great question. And thank you. It is a really, 
really important issue.
    There is a paper that I cite in my report that Center for 
American Progress did that shows that small-business ownership 
and entrepreneurship is a really, really important wealth-
building tool for minority communities, African Americans in 
particular. African-American families that own their own small 
business have $52,000 in total household wealth, compared to 
$7,000 for non-business-owning families.
    And so it is a really, really important tool to help 
minority communities move up the economic ladder and have 
access to the middle class.
    And I think that one of the ways that you get there is with 
the support of programs like SBA and more entrepreneurship 
mentoring programs and outreach programs that help show folks 
what is possible and how to get from step A to step B.
    So, yes, I think it would be very helpful if SBA, through 
their entrepreneurship programs, through SCORE and the Small 
Business Development Centers, coordinated and did more direct 
outreach to Historically Black Colleges and Universities. They 
are operating on a shoestring budget these days, so I don't 
know how likely that is to happen anytime soon, but it would be 
wonderful if it could.
    Representative Adams. Okay.
    So the specific steps that you might recommend--you 
mentioned SCORE or the others--that SBA might take in order to 
fully engage these communities?
    Ms. Milano. Well, I think that there are a couple of steps 
they could take.
    One would be to do more direct outreach, as you mentioned, 
actually go out to schools and try to do more events on campus 
and attract more people to come and learn about the resources 
of the SBA.
    In addition, business owners need capital to get their 
business started. So the SBA Microloan Program is very 
important to these communities. And funding that program, 
continuing that program would be very helpful in terms of 
helping these communities access capital.
    Representative Adams. Thank you.
    Since the hearing today is about the innovation economy, 
what would you think would have a greater impact on innovation 
growth, spending $1.6 trillion on tax cuts or $1.6 trillion in 
research and development?
    Ms. Milano. Well, I would say $1.6 trillion on research and 
development. But, you know, the vast majority of businesses--I 
have said this three or four times now--76 percent have 
receipts, annual receipts, of $100,000 or less. They are not 
benefiting from the tax cuts. So anything that would help them 
access capital or would increase our country's overall 
contribution to R&D would be a better use of resources.
    Representative Adams. Thank you very much.
    Mr. Chair, I yield back.
    Chairman Paulsen. Thank you.
    Mr. Beyer, you are recognized for 5 minutes.
    Representative Beyer. Mr. Chairman, thank you very much.
    Dr. Kennedy, I have served in the Virginia senate for 8 
years and noticed that virtually every business legislation we 
passed there was to restrict entry to the businesses we were 
already in. It was in restraint of trade.
    And yet we find that, while there is so much consolidation 
in so many different industries right now, that many are 
encouraging regulatory policies that are designed to foster 
competition, to restrict consolidation, to restrain the 
crowding out of possible new entrants.
    How do you see the role of regulatory policy in actually 
maintaining market competition?
    Dr. Kennedy. Well, I think that too often we get into the 
habit of thinking that big is bad and small is good. And I 
think the president of ITIF just came out with a recent book 
that basically challenges that premise and points out that in 
many industries there are scales of economy, there are network 
effects where prices go down the bigger industries get and the 
more sales they make. He also points out that large companies 
spend more on R&D. They pay their workers more.
    And so I don't think we should look at the size of a 
company when we develop a policy. Instead, we should be sort of 
size-neutral. And we should say, what rules do we really want 
to govern in this industry?
    And I think when we do that and we look at some of the 
promises of technology, we can find a lot of ways that we can 
promote high productivity. Like, one is encouraging 
telemedicine. I mean, that right there would make a big 
difference in driving down prices and increasing quality and 
access.
    Representative Beyer. Let me move on, because I know you 
have written on this in the past, but wouldn't you think that 
implementing a carbon tax to fund the latest tax reform would 
have made a lot more sense than creating the largest legislated 
deficit in history?
    Dr. Kennedy. I wrote a paper advocating that the carbon tax 
be used to pay for part of the tax bill.
    Representative Beyer. Sort of the classic case of letting 
the market achieve the goal of lower carbon emissions rather 
than doing it through regulation.
    Dr. Kennedy. I think a carbon tax is a much better way--and 
I think most economists would agree--of approaching the goal of 
getting carbon emissions down.
    I wrote also that corporate tax reform was very important 
to our economy, especially in globally competitive industries, 
where our companies are competing against companies that have 
tax rates 10 percentage points or more lower.
    Representative Beyer. Yeah. Let me move on. Thank you, 
Doctor.
    Ms. Milano, in all your--you have a small-business 
background, but you didn't mention anything about deregulation 
of the banking sector in your testimony. And yet you talked 
about the scarcity of capital for small businesses.
    Do you see the regulatory environment at all as a primary 
impediment to small businesses in seeking to raise capital? Is 
there a connection between the two?
    Ms. Milano. I personally don't think so. I mean, I think 
that what is happening, particularly in the small-dollar loan 
market for small-business loans under $100,000, it is a 
profitability issue. For community banks, these are high-cost 
loans to acquire, service, and underwrite, relative to revenue 
generation potential, and so you are just seeing banks do less 
of them.
    And the decline predates Dodd-Frank and predates the 
recession. Chicago Fed did a paper using flow-of-funds data 
that showed, from 1997 to 2015, there was a drop from 82 
percent to 29 percent of small-business loans under $100,000 
being done by community banks.
    So I don't see it as a regulatory issue. Also if you look 
at the numbers that the FDIC just put out today, there was a 
record $65 billion net income, reported by banks. And so I 
don't see how regulation is hurting bank lending.
    Representative Beyer. Thank you.
    Mr. Koopman, you talked about Yelp and taking your kids to 
dinner. We use Yelp all the time and things like it. But we 
also assume that the health department has made sure that the 
food is okay, you know, that we are not going to get poisoned 
afterward. You need both, both the regulations that the 
restaurants are healthy, clean, and safe, and then what is the 
good restaurant using Yelp.
    Mr. Koopman. Oh, certainly. And, actually, I think there 
was a recent story, maybe a year ago, that health inspectors in 
New York were actually choosing which--in New York City, that 
is--were choosing which restaurants to inspect based on Yelp 
reviews.
    So I think there is a role for regulators to be better 
informed with this information, as well as members of the 
industry, be it consumers or producers, to make sure everyone 
is playing their proper role in allowing for the next Yelp, or 
whatever that is, to continue to provide more tools to both 
consumers, producers, and regulators to make better, more 
efficient decisions in the marketplace.
    Representative Beyer. Thank you very much.
    Mr. Chairman, I yield back.
    Chairman Paulsen. Thank you, Representative Beyer.
    And just to wrap up, I want to thank everyone for taking 
the time to testify and be here today. We appreciate your time 
before the committee.
    And just to remind everyone, also, if members wish to 
submit questions for the record--I know we will have some--the 
hearing record will remain open for 5 business days.
    Chairman Paulsen. And, with that, the committee is 
adjourned.
    [Whereupon, at 3:47 p.m., the committee was adjourned.]

                       SUBMISSIONS FOR THE RECORD
                       
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    I call this hearing to order.
    Good afternoon and welcome to today's hearing on ``Breaking Through 
The Regulatory Barrier: What Red Tape Means For The Innovation 
Economy''
    Bloomberg recently reported that the U.S. dropped out of the top 10 
in the 2018 Bloomberg Innovation Index for the first time in six years.
    We were at 9, and now we are at 11.
    Such news is a call to action. America's tradition of invention has 
been at the heart of our economic strength.
    As lawmakers, we must recognize that the only way forward is to 
place our trust in the American people, and to get out of the way.
    The private sector knows all too well how needless red tape imposes 
costs on businesses, increases prices for consumers, and reduces 
consumer choice.
    For innovation, however, the impact can be worse.
    In Washington, regulators can put an idea to death before it is 
ever tried, foreclosing a future of opportunity and progress.
    We should know better. Americans enjoy a better quality of life 
today than decades ago, thanks to technological innovation.
    U.S. leadership in the world has been based largely on 
technological prowess, and for it to continue, our regulations must 
foster innovation rather than inhibit it.
    We will hear examples from our witnesses today of regulation 
hindering advances and, perhaps worse, even driving it away to other 
countries.
    Not all regulation is bad. After all, some is important for giving 
job creators necessary guidance and stability in their work. When done 
well, sound regulation can make up for where markets fail to appreciate 
important public benefits or costs.
    That's why we're holding this hearing: How should we approach 
regulation so that it's as dynamic as America's tinkerers and 
inventors? In other words, how can we stop hurting, and start helping?
    Our regulations should always serve the public interest with 
minimum collateral damage to the economy. Where innovations are 
concerned, regulators shouldn't slam the door in the face of new ideas.
    Our economy--in particular, the American people themselves--should 
be given the opportunity to integrate these innovations in their lives.
    An advance that can improve lives and raise productivity generally 
leads to higher wages--and many Americans are in dire need of that kind 
of prosperity.
    After all, technological progress is what ultimately brings us 
better living standards.
    It makes little sense to thwart promising innovations that can make 
our lives easier, improve our health, provide new products and 
services, and help U.S. firms compete internationally.
    Consider that the majority of start-up firms are in the tech 
sector. We should encourage the dynamism they contribute to the 
economy.
    If we fail to make improvements, fast-moving technology will be 
moving offshore even faster.
    As we will hear today, sound regulation is aware of and anticipates 
technological change.
    I like the concept of ``permissionless'' innovation. Our inventors 
and entrepreneurs should not have to ask for permission to make things 
better.
    The U.S. technological edge and competitive advantage in a variety 
of sectors is narrowing, and to some extent through unforced, self-
inflicted regulatory wounds.
    I am keenly interested to hear what our expert witnesses have to 
say today, especially how we might improve our regulatory regimes.
    Before I introduce the witnesses, I now recognize our Ranking 
Member, Senator Heinrich, for his opening statement.
                               __________
                               
   Prepared Statement of Hon. Martin Heinrich, Ranking Member, Joint 
                           Economic Committee
    Mr. Chairman, I'm pleased that we are again looking at the question 
of how to accelerate the pace of innovation.
    We come at this issue from different perspectives. My Republican 
colleagues seem to believe that regulations are holding back 
innovation.
    Yet, dialing back the clock on rules designed to protect consumers 
doesn't help small businesses innovate and grow.
    Small firms, like small cities and towns, need fair rules of play. 
They need rules that give consumers and entrepreneurs a fair shake.
    And rules that help improve access to capital.
    When I talk with small businesses across New Mexico, the thing they 
are most concerned about is limited access to capital.
    That's why I asked Ms. Milano to testify today about the 
difficulties small firms encounter gaining access to capital to launch 
and grow their businesses.
    I believe her testimony will shed additional light on this 
important issue.
    What's slowing innovation are barriers to capital and misguided tax 
policies.
    Let's start with taxes. Republicans just passed a tax law that 
lavishes huge tax benefits on large corporations. At the same time, the 
new law makes the tax code more complex for small firms.
    Corporations are using their tax savings to buy back their stock, 
not to invest in plants or workers. So far, companies have announced 
more than $400 billion in share buybacks, including $100 billion from 
one company alone.
    Those buybacks will do little to boost worker wages or spur 
innovation.
    Instead, we should be focused on supporting the next generation of 
companies, ensuring that those who want to start or expand a business 
have the tools and access to capital they need.
    New businesses are the lifeblood of the economy. They drive 
innovation, productivity, and jobs. Yet, new business formation has 
been declining for decades.
    And the startups we do see are increasingly concentrated 
geographically. Half of the increase in business establishments between 
2010 and 2014 was in 20 counties.
    Fully sixty percent of counties saw a net decline in establishments 
during this period.
    Increasingly, banks are unwilling to take the risk on small loans 
that have high fixed costs and lower profit margins.
    More than half of small businesses seek loans of less than 
$100,000. Yet, these loans have fallen from 33 percent of bank lending 
in 2008 to 22 percent in 2016.
    While it's hard for many small firms to access the funds they need 
to start or grow their businesses, it's especially challenging for 
women-owned and minority-owned firms.
    These firms have less wealth to draw from to launch their 
businesses and also face higher borrowing costs.
    Community Development Financial Institutions (or CDFIs) help to 
fill the void, often making loans to those who can't get them from 
commercial banks.
    Yet, the Trump administration has proposed effectively eliminating 
the Treasury Department's CDFI Fund.
    We've got to tackle the access to capital challenge from all sides.
    It starts with encouraging venture funds to identify and support 
promising startups beyond the urban hubs on the coasts. SBA's Small 
Business Investment Company Early Stage Initiative helps to broaden the 
base of venture funding nationally.
    We need to support small business lending through SBA's capital 
programs, the CDFI Fund, and other channels.
    And we need to work toward greater lending transparency in the 
private sector.
    A growing number of online lenders are using technology and access 
to data to attempt to fill gaps in small business lending.
    But, we need to ensure these loans are safe.
    We should look to the financial protections we extend to consumers 
as a good blueprint for how we can and should protect small business 
borrowers using these new financial products.
    While access to capital is critical, there are other factors that 
are important to enabling innovation. These include federally funded 
R&D and access to quality K-12 education and affordable post-secondary 
options.
    Investing in human capital while promoting greater access to 
financial capital will enable the United States to continue to lead in 
the 21st Century economy.
    I look forward to our witnesses' testimony.
                               __________
                               
  Prepared statement of Mr. Scott W. Brinkman, Secretary of Governor 
                       Bevin's Executive Cabinet
    Thank you Chairman Paulsen, Ranking Member Heinrich, and Members of 
the Committee for affording me this opportunity to discuss Governor 
Bevin's Red Tape Reduction Initiative. Let me first offer some 
perspective for this effort. Upon Governor Bevin assuming office on 
December 8, 2015, Kentucky's unemployment rate was 5.3% and its 
workforce participation rate was 47th in the Nation. Kentucky also has 
approximately $60 billion dollars of unfunded pension liabilities with 
respect to its public sector pension systems. The prior administration 
also expanded Medicaid by executive action without a plan to pay for 
the State's share of the cost of providing Medicaid benefits to the 
expansion population. Further, the prior administration estimated that 
the expansion population would approximate less than 200,000 
Kentuckians. Today, the expansion population includes almost 500,000 
Kentuckians. Finally, Kentucky has one of the highest incarceration 
rates in the Nation, driven in large part by the opioid epidemic which 
has affected my State particularly hard. Consequently, our corrections 
budget has exploded exponentially, as has the number of children in our 
foster care system. These challenges, coupled with the constitutional 
and statutory obligations imposed upon the executive and legislative 
branches, such as the obligation to fund public education and to 
protect the public and the environment, have created tremendous 
challenges in managing our biennial budget. In short, Kentucky faces a 
long and difficult road in getting its financial house in order.
    Governor Bevin campaigned on the theme that it is all about jobs, 
which at its core means creating a more inviting environment to attract 
both human and financial capital. To assist Kentucky in satisfying its 
financial obligations, Governor Bevin made the conscious decision to 
use every tool available to the administration to grow Kentucky's 
economic base and thus increase the flow of tax receipts into the State 
coffers. Although there are many aspects to job creation, a key 
component of that effort is regulatory relief, and one of the first 
undertakings of the administration was the formulation and 
implementation of its Red Tape Reduction Initiative. As part of this 
Initiative, every Cabinet and agency within the executive branch has 
been directed to review every regulation promulgated by it over the 
years and make one of the following determinations:

      Completely repeal the regulation as its original purpose 
is no longer relevant.
      Amend the regulation to conform it to a Federal 
counterpart. This effort includes eliminating inconsistent definitions 
and standards with the goal that the State regulation should never be 
more burdensome than the Federal counterpart unless circumstances 
unique to Kentucky require a stricter standard.
      Amend and modernize the regulation to make it clearer and 
simpler to understand by those subject to the regulation and also make 
it easier to update in the future.
      Combine the regulation with other regulations to include 
a single subject matter, such as fees or applications, in one 
regulation for ease of review by those subject to it.
      Leave the regulation as it is currently written.

    The goal of the administration is to reduce by one-third the number 
of restrictions on businesses and individuals in Kentucky. In 1975, 
there were four volumes of regulations in effect in Kentucky. That 
number had grown to 14 volumes when Governor Bevin took office. Through 
the end of 2017, of the approximately 4,700 separate regulations on the 
books at the outset of the administration, 2,220 regulations have been 
reviewed, 372 regulations have been repealed, 327 regulations have been 
amended, 157 regulations have been targeted for repeal, and 433 
regulations have been targeted for amendment. The Initiative has the 
support of business groups, trade associations, chambers of commerce, 
and other organizations across Kentucky.
    Several examples of the regulations that have been repealed or 
amended and how such effort affects Kentuckians include the following:

      We have eliminated a regulation that required a boxing or 
wrestling match to cease at the slightest hint of bleeding by a 
participant, which precluded Kentucky from hosting boxing, wrestling or 
martial arts events. Kentucky is now hosting such events which helps 
drive tourism and adds to local economies.
      We have eliminated a rule that required a certain amount 
of cast iron piping in buildings above a certain height, which added 
dramatically to the cost of construction or renovation of buildings in 
our largest cities as cast iron pipe is much more expensive than PVC 
piping. PVC piping is a recognized safe component in both international 
and domestic building codes.
      We have modernized and made it easier for military 
personnel to obtain commercial driver's license.

    There are several lessons to be learned from Kentucky's Red Tape 
Reduction Initiative. First, the governor or, in the case of the 
Federal Government, the President, must own the initiative in every 
aspect, and it helps to have a tangible symbol associated with the 
endeavor. In the case of Kentucky, we created the lapel pin that I am 
wearing today, and Governor Bevin and his top officials wear this pin 
every day. Further, Governor Bevin speaks out regularly regarding the 
importance of the Red Tape Reduction Initiative to individuals and 
groups throughout Kentucky. As a result of the Governor's leadership, 
there is growing awareness of the Initiative every day throughout the 
Commonwealth.
    Second, it is important to create a website that is interactive 
with the public and allows for individuals to post recommendations on 
the repeal or amendment of regulations. Kentucky's Red Tape Reduction 
Initiative website is http://redtapereduction.com. Kentuckians have 
submitted scores of thoughtful ideas on how to reduce unnecessary 
regulations that drive up the cost of conducting business and create 
inefficiencies without contributing to public health or public safety.
    Finally, the effort of the Cabinets and other agencies must be 
sustained on a regular basis. Our Cabinets and other agencies regularly 
review and re-review existing regulations to ensure that the goals of 
the Red Tape Reduction Initiative are being met. This is a thoughtful 
and deliberative process that never ends. We are also in the process of 
digitizing and modernizing the manner in which we draft and promulgate 
regulations.
    The administration has also undertaken efforts to modernize and 
simplify the issuance and renewal of licenses and permits, with the 
goal to enable Kentuckians to either commence the conduct of business 
or to continue the conduct of business with the least amount of 
bureaucratic friction. Our Department of Housing, Buildings and 
Construction used to take 55 days to review building plans. That 
process now takes 5 days unless there are exceptional circumstances 
that require a slightly longer review period. Kentucky is also working 
to enable most applications, licenses, and permits to be processed 
online through the internet.
    The purpose of the Red Tape Reduction Initiative also includes 
helping to foster technological and engineering innovation. Governor 
Bevin's vision is for Kentucky to be the center for engineering and 
manufacturing excellence in America. This is already happening. Toyota 
Motor Manufacturing, Kentucky, Inc., which has its largest assembly 
plant located in Georgetown, Kentucky, announced last year that it is 
investing approximately $1.33 billion to re-tool its facility in 
Georgetown to incorporate the Toyota New Global Architecture, which 
represents an entirely new manner in which Toyota designs, engineers, 
and manufactures its vehicles. Braidy Industries will soon break ground 
on a $1.3 billion high-tech, fully integrated aluminum rolling mill at 
a location in northeast Kentucky, which will be the first new aluminum 
mill in the United States in over 30 years. It will incorporate 
technological advances in aluminum materials science that were 
developed by a team at the Massachusetts Institute of Technology. 
Finally, Amazon announced last year that it will invest $1.49 billion 
at the Cincinnati and Northern Kentucky airport located in Boone 
County, Kentucky, to create its state-of-the art global cargo hub.
    The Kentucky General Assembly has joined the Bevin administration 
in reducing the regulatory burden on Kentucky businesses and 
individuals through the passage of important legislation during the 
last two sessions of the legislature. For example, the Kentucky General 
Assembly has institutionalized the continuous review of the efficacy of 
regulations through the passage of House Bill 50 during its 2017 
session. This legislation mandates that every regulation shall expire 
seven years from the effective date of its promulgation unless extended 
by the applicable State agency. Although the process to continue the 
effectiveness of a regulation is simple, the legislation does require 
that every regulation be re-examined every seven years to determine 
whether it should remain in effect, should be amended, or should be 
repealed. House Bill 50 should have the laudatory effect of avoiding 
the accumulation of outdated regulations that no longer serve a useful 
purpose and simply clutter up the Kentucky Administrative Regulations.
    During the legislative session just concluded, the General Assembly 
passed HB 314, which allows the Secretary of the Labor Cabinet to 
suspend, delay, or alter enforcement of a promulgated occupational 
safety and health administrative regulation if the Federal Government 
has suspended, delayed, or enjoined the corresponding Federal 
regulation or has suspended, delayed, enjoined, or altered the 
enforcement thereof. The General Assembly also just enacted legislation 
that simplifies the ability of veterans to obtain licenses to operate a 
business or profession. Kentucky is the home to both Fort Knox and Fort 
Campbell, which contribute enormously to Kentucky's economy. The 
ability to enable veterans concluding their service at either military 
installation to continue to live in Kentucky makes strong economic 
sense, and Governor Bevin continuously challenges his leadership to 
make Kentucky the most veteran friendly State in the Nation.
    The General Assembly also eliminated and modernized the licenses 
required to operate various health care facilities through the passage 
of House Bill 444. This legislation aligns our health care regulatory 
regime with modern medicine.
    In conclusion, the administration's efforts to simplify the ability 
of Kentuckians to conduct business are paying valuable dividends. As of 
last month, Kentucky's unemployment rate is 4%, which is the lowest it 
has been since 1976 when this statistic began to be determined, and its 
workforce participation rate is trending towards 40th in the Nation. 
Kentucky also realized during the month of April of this year the 
highest amount of monthly tax receipts in its history, driven largely 
by corporate and individual income tax receipts. Also as of last month, 
there were 1,970,801 Kentuckians in the workforce, which is the highest 
number of employed Kentuckians in the history of the Commonwealth. 
Kentucky attracted $9.2 billion of announced direct investment in the 
State in 2017, which is a record amount for any year, and approximately 
$14 billion since Governor Bevin took office, representing the creation 
of almost 40,000 jobs. There are many factors contributing to this 
success, including the enactment of smart and innovative legislation. 
Certainly, Kentucky has also benefited from improving national and 
global economies. However, it is the firm belief of the governor that 
the implementation of the Red Tape Reduction Initiative, and the 
exposure that it has received, has contributed in large part to the 
growing perception that Kentucky is an attractive State in which to 
conduct business.
                               __________
                               
 Prepared statement of Dr. Joseph Kennedy, Senior Fellow, Information 
                  Technology and Innovation Foundation
    Chairman Paulsen, Ranking Member Heinrich, and Members of the 
Committee, thank you for inviting me to be here today. I am Joe 
Kennedy, Senior Fellow with the Information Technology and Innovation 
Foundation. A recent study by the University of Pennsylvania ranked 
ITIF as the world's leading think tank on science and technology 
policy. The Foundation focuses on developing better policy to promote 
innovation, increase competitiveness, and improve productivity.
    The task of regulating the economy is a necessary, but very 
difficult, problem. Congress and regulators need to view the problem 
from a dynamic viewpoint: develop rules that encourage firms to 
discover new ways to achieve social goals as efficiently as possible. 
Regulation is most justified when it addresses market imperfections. 
Rules that use market tools like price signals and information to fix 
the problem are most likely to do a better job of encouraging 
innovation than command and control, technology-specific rules. So is 
regulation that gives companies clear long-term and achievable goals.
    The Information Technology and Innovation Foundation has written 
widely on the need for regulatory reform, both in general and as 
applied to specific sectors. Some of the sectors we have examined 
include automation of the transportation industry, telecommunications, 
agricultural biotechology, and pharmaceuticals. In addition, we have 
focused extensively on regulations affecting the internet, including 
privacy and cybersecurity.
    Our study of the freight transportation industry showed that 
railroads, freight trucks, drones, and even airplanes are making rapid 
advancements in automation.\1\ Although many problems still need to be 
worked out, this technology promises to reduce transportation costs and 
save lives. Regulators should find ways to speed its development while 
still protecting public safety. At the same time, because each of these 
industries competes with the others, regulators also need to make sure 
that regulations do not cause one industry to fall behind others in 
introducing valuable technology.
---------------------------------------------------------------------------
    \1\ Joseph V. Kennedy, ``How Regulatory Reform Can Advance 
Automation in the Freight Transportation Sector'' (Information 
Technology and Innovation Foundation, June 2017), https://itif.org/
publications/2017/06/12/how-regulatory-reform-can-advance-automation-
freight-transportation-sector.
---------------------------------------------------------------------------
    Another ITIF report examined the likely impact of the European 
Union's new General Data Protection Regulation and concluded that it 
would harm the EU's ability to compete in the development of artificial 
intelligence.\2\ By unnecessarily creating barriers to the use of even 
de-identified data and threatening disproportionate fines, the new 
rules will likely deter companies from developing or using algorithms 
in member countries.
---------------------------------------------------------------------------
    \2\ Nick Wallace and Daniel Castro, ``The Impact of the EU's New 
Data Protection Regulation on AI (Center for Data Innovation'' March 
2018), http://www2.datainnovation.org/2018-impact-gdpr-ai.pdf.
---------------------------------------------------------------------------
    An ITIF literature review of the impact of regulation on innovation 
in several industries concluded that regulations can either inhibit 
innovation or encourage it, depending upon how they are written. Good 
rules tend to increase the amount of public information, reduce 
uncertainty about future regulation, and set goals but allow 
flexibility in achieving them.\3\ A forthcoming ITIF review of the 
literature on environmental regulation and innovation arrives at 
similar conclusions about when and how regulation can actually spur 
companies to innovate faster. Among these are that regulators need a 
sophisticated understanding of the industry, they should set ambitious 
long-term goals but use performance standards to achieve them, and they 
should worry about effects on competitiveness.
---------------------------------------------------------------------------
    \3\ Luke Stewart, ``The Impact of Regulation on Innovation in the 
United States: A Cross-Industry Literature Review'' (Information 
Technology and Innovation Foundation, June 2010, http://www.itif.org/
files/2011-impact-regulation-innovation.pdf.
---------------------------------------------------------------------------
    ITIF believes that better regulation is needed and, compared to 
existing regulation, can improve innovation. Intelligent rules can 
increase the amount of competition in a market. Reforms that improve 
market competition, possibly by reducing barriers to entry, increasing 
the flow of information, or allowing new approaches to comply with 
existing regulations, can significantly increase productivity by 
speeding the adoption of existing innovations.
    Regulators can support innovation by following a set of general 
principles:\4\
---------------------------------------------------------------------------
    \4\ Joseph V. Kennedy, ``Reforming Regulation to Drive 
International Competitiveness'' (Information Technology and Innovation 
Foundation, March 2015), https://itif.org/publications/2015/03/16/
reforming-regulation-drive-international-competitiveness.

        1. Anticipate innovation. Regulators should assume technology 
        will continue to advance. Rules should not only anticipate 
        innovation: they should encourage it.
        2. Embrace transparency. Congress, regulated entities, and the 
        general public should have a clear view into the decision 
        making process of regulators, including any evidence or studies 
        they use to back their conclusions.
        3. Place more trust in the consumer. Given sufficient 
        information, consumers can often be their own most effective 
        advocates. Firms that violate the public's trust often pay a 
        heavy price in terms of profits and market share.
        4. Place more emphasis on reducing the cost of over-regulation. 
        Regulators should actively seek input from industry and major 
        stakeholders on ways to reduce the cost of compliance without 
        affecting public goals.
        5. Every major rule should undergo some level of public cost/
        benefit analysis in which the agency clearly explains why and 
        how a rule will increase social welfare. To the extent 
        possible, this analysis should be backed by quantitative 
        studies.
        6. Regulators should focus on competitiveness effects. We 
        increasingly live in a global economy in which firms in traded 
        industries have to compete not just for foreign markets but 
        also those here at home. Overly rigid regulations in these 
        industries can reduce U.S. competitive advantage.

    Congress can further this effort by enacting legislation that does 
four things:

        1. Encourage interagency cooperation to undertake a 
        comprehensive study of the competitive environment facing 
        specific industries, including a review of their regulatory 
        structure. The United States has already lost competitiveness 
        in a number of traded industries, and its strength in others is 
        being challenged by other countries. The Federal Government 
        needs to undertake a careful examination of every major traded 
        industry to assess its strengths and weaknesses and then 
        develop a strategy for improving its competitiveness. A key 
        part of this effort should be a review of Federal regulations 
        governing its performance.
        2. Direct the Office of Management and Budget to evaluate the 
        effect of major rules on innovation within the regulated 
        industry. Regulatory agencies often fail to consider how a 
        major rule will affect innovation. The Office of Management and 
        Budget already reviews major rules for substance and 
        consistency. OMB should develop an expertise in innovation and 
        then apply this knowledge to agency rules to ensure that they 
        encourage rather than impede innovation.
        3. Update legislation in ways that give agencies more guidance 
        and revoke obsolete rulemaking authority. Also hold more 
        frequent oversight hearings to discuss regulatory approaches 
        with the agency. Congress can help in this effort by viewing 
        major statutes with a fresh eye. In the process of updating old 
        statutes to reflect modern times, Congress can revoke the 
        authorization for many rules and require the agency to issue 
        new ones. Congress should also try to give agencies more 
        guidance about its intentions when delegating rulemaking 
        authority. More frequent oversight hearings on specific rules 
        and policy issues are the best way to ensure that agencies can 
        justify the impact of prospective rules.
        4. Ensure that regulators have enough resources to attract the 
        best people and acquire a deep understanding of the industry. 
        Agencies need to attract and keep experts in an industry. They 
        also need to be able to keep up with how new innovations will 
        affect a certain sector. Agencies also need the ability to 
        restructure their personnel to reflect changes to the industry.

    These suggestions can be implemented rather easily, provided the 
necessary leadership exists. If enacted they will have a noticeable 
positive effect on the quality of regulation.

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