Michael Mandel on Innovation, Growth and the Regulatory State

by: Rortybomb

Michael Mandel responds to a previous post I wrote:

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

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

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

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

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

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

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

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

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

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

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

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

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

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