The Good Side of Federal Regulations

Job killers or innovation generators? Regulations can promote innovation and entrepreneurship.

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David Brodwin is a cofounder and board member of American Sustainable Business Council.

The U.S. Senate will soon consider a trio of bills passed by the House that aim to gut the federal rule-making process. These bills (the Regulatory Accountability Act, Regulations from the Executive in Need of Scrutiny, and Regulatory Flexibility Improvements Act of 2011) aim to sharply curtail federal rule-making capacity, under the rationale that regulations prevent businesses from growing and creating jobs.

The reality is far more complex. Some regulations are poorly designed or implemented. Many, though, promote business and job growth by accelerating the pace of innovation and productivity, and hastening the shift from old, outmoded technologies and business practices to newer, better alternatives. Such regulations need to be supported and even extended. As has been argued by leading business experts for years, thoughtful regulation can reduce waste, boost output, and even create jobs. Here are three ways how:

[See a collection of political cartoons on the economy.]

1. Escaping the Dead Hand of Companies Past

Since the first steam engines hauled coal out of England's mines, a ceaseless cycle of new technologies and ideas have captured the public imagination, spurred the economy, and added to the public good.

New technologies provided the starting point for many great companies—but all too often these companies failed to change or get out of the way when their time passed. This too is centuries old: railroads attempted to limit the rise of the automobile. AT&T tried to disconnect discount long distance carriers like Sprint and MCI, and IBM sought to pull the plug on upstarts that offered cheaper and better printers and disk drives.

Powerful companies that lead industries, or "incumbents" as they are known, protect themselves with a wide range of strategies based on their market power and their ability to influence legislation. They seek to extend their profitability and market dominance long after the sun has begun to set on the innovations they pioneered. They win federal favors like agricultural subsidies or special tax treatment for oil fields. They win protections against competition by fanning fears of technology-driven disaster or rampant piracy.

These strategies stunt innovation. They damage the ability of small companies with great ideas to secure funding and bring concepts to market. For example, the technology for a wireless phone with third party applications could have been brought to market long before Apple's iPhone; however the nation's largest wireless networks did not want to open their networks to new devices and systems.

[Read: FCC Should Allow Verizon, AT&T a Fair Bid for Wireless Spectrum]

2. Paving the Way for the Future

Regulation plays a crucial role in clearing the dead underbrush of last years' technology and allowing new start-ups to flourish. We need regulations that restrain dominant companies from exerting undue influence, and at the same time we need to eliminate regulations that prop up and sustain outdated companies and technologies.

For instance, we must preserve net neutrality. Net neutrality is hated by the largest cable and phone companies because it prevents them from hindering challengers like Facebook, Twitter, and YouTube. But these newer companies offer services that consumers love and advertisers want to pay for. Have you ever found yourself forced to use a search engine or E-mail provider or navigation system that came bundled with your phone but is not your first choice? This will be the "new normal" across the Internet if we lose net neutrality.

Similarly, our economic future depends upon affordable renewable energy sources—but some utilities make it hard for new energy producers to plug into the grid. It's not as convenient for utilities to buy power from sources that fluctuate over the course of the day, and the utilities deserve a fair return for the extra work involved, but utilities should not be empowered to stop or slow the development of such a critical technology.

[Read the U.S. News debate: Should the Government Invest in Green Energy?]

At the same time, we need to dismantle rules and regulations that may no longer make sense. Why should the government reward big agricultural corporations not to plant when the family farm is all but obsolete and food prices rise faster than inflation? Why should Medicare be forbidden from negotiating the prices of drugs, when soaring healthcare costs are bleeding the federal budget and jeopardizing the retirement security of all Americans?

Some regulations need to be fine-tuned to meet the needs of the times and strike the right balance between growth and protection. For example, the regulations that govern how companies can raise money were designed to strike a balance between promoting growth and preventing fraud. But in today's highly connected era where reputations are more transparent, we can update regulations to allow for micro-lending and crowd-funding. These new approaches can help new companies grow while continuing to protect the public from crooks and schemers.

3. Keeping Our Options Open

The world is rarely simple, and we should be suspicious of those who claim it is. Yes, some regulations don't do what we need them to, and these need to be fixed. But many regulations serve to free us from the past and open up our society to profound and life-changing transformations. We need to preserve the ability of government to enact sensible safeguards that promote and foster innovation.

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