[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
__________
Printed for the use of the Joint Economic Committee
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
30-424 WASHINGTON : 2018
-----------------------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Publishing Office,
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center,
U.S. Government Publishing Office. Phone 202-512-1800, or 866-512-1800 (toll-free).
E-mail, [email protected].
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
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
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.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
[all]