Stimulating the US economy with more than money

The U.S. and governments around the world are considering all the ways to stimulate the economy in the face of COVID-19. While direct infusions of cash, loans and other incentives are critical to keeping business and workers afloat right now, the Trump administration and Congress have another opportunity that could power the American economy far longer than funding alone. And better yet, it is not costly for taxpayers.

I am talking about innovative regulation. This includes regulations for new technologies which help not only our economy, but our way of life.

Regulation may not be sexy, but the rules we create to enforce laws carry a massive economic cost. Estimates are that federal regulations alone cost $2 trillion annually. Not only is that comparable in cost to the recently passed stimulus bill, but it’s also equivalent to 10 percent of total U.S. GDP.

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What we need now are the right kind of regulations for innovative technologies. If we apply an “old” regulatory model to a “new” technology, we won’t accrue the benefits of the innovation to society nor will we right-size the regulation, leading to more cost to enforce and to comply with the rules. We will end up sapping innovation that can help us advance economically – something that could not be more important today or more vital to long-term U.S. competitiveness.

A far better approach would be to craft regulations that are both effective and efficient from the start.

As Congress considers new stimulus measures over the coming weeks and months, it should think ahead and encourage innovation in regulation. Doing so will especially help small businesses, the No. 1 driver of U.S. economic growth and the sector that is among the hardest hit by COVID-19.

Other leading economies, such as Japan and the United Kingdom, are showing us one way to incubate innovation. Dubbed the “regulatory sandbox,” their approach provides a test ground for developing regulation that keeps up with the fast pace of innovation. This creates a space for incumbents and challengers to test social introduction of new technologies and/or business models at the edge – or even outside of the existing regulatory framework.

The regulatory sandbox encourages demonstrations and data gathering, and it involves tech innovators and the regulators in the process. They learn from each other and understand what the data tells them before developing regulation. This leads to smarter regulation that can be implemented faster and is better for society.

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These testing grounds have been especially relevant in the fintech world, where there was a growing need to develop regulatory frameworks for emerging business models. The first regulatory sandbox was launched in 2015 in the U.K.

As advanced technologies like artificial intelligence, “big data,” and the internet of things (IoT) increasingly merge with humans' physical life, some governments have used the regulatory sandbox approach not only in fintech, but for other emerging sectors as well.

Japan entered the regulatory sandbox in 2018 to create an environment where businesses could conduct proof of concept and pilot testing for new technologies and business models that are not covered by existing regulations. The “sandbox” is not limited to any particular sector. It is designed to encourage innovation broadly; any company, including foreign companies, can apply and take part.

One notable and prescient project that the government of Japan tackled: online medical examinations for influenza. This effort – started before any of us had heard of the novel coronavirus – considered whether an online flu exam would be an effective measure against pandemic influenza. It led the government to encourage those who believe they had the flu to take an online medical examination using a diagnosis kit. Calling this innovation regulation makes it sound wonky, but the result is simple -- an example of a new approach to innovation that delivers a profound benefit to society.

The coronavirus is a good reminder that we need to find opportunity in crisis. We can start being more innovative and encouraging more innovation today. Regulation innovation would not only support economic growth from the tech sector, but it would also make new federal regulations smarter and more streamlined right from the beginning, something that will benefit the entire economy for decades. It’s time for Congress to find the value of playing in the regulatory sandbox.

Jo Ann Barefoot is founder and CEO of the Alliance for Innovative Regulation, a senior fellow emerita at Harvard and former U.S. Deputy Comptroller of the Currency.