Airport Security and Innovation

Here’s a guest post on airport security and innovation from Basil Papadales, an innovation expert who has served as an R&D manager in government and industry. Basil writes:

As the Thanksgiving airport crunch approaches, the news media is reporting increasing airline passenger frustration with newly instituted airport security measures that include full-body scanners and rather thorough security pat-downs. Politicians have framed the issue as privacy versus security, suggesting that Americans who are against scanners and pat-downs are pro-terrorism.

But these are not the only two choices, if we are willing to reframe the issue as one of innovation—not government  innovation,  but   private sector innovation on a grand scale. One possibility is an X-Prize-like competition where a significant cash prize is awarded for the best solution suggested in the next 90 days. Another possibility is an open innovation (or crowdsourced) project, where people can contribute ideas to achieve a common goal. NASA and the Defense Advanced Research Projects Agency (DARPA) have recently begun these kinds of projects. There are certainly other possibilities that exploit America’s innovative strengths.

Skeptics might ask if the private sector finds a workable solution, can industry quickly ramp up for mass production? Shouldn’t we at least try? What a wonderful way to put more Americans to work in high tech jobs.

A more important question is: would TSA accept it? The Washington Post just reported that scientists offered a solution to this problem in 2006 and were turned down by TSA. Despite the best intentions of the leadership in Department of Homeland Security and TSA, the reality is these are big bureaucracies—the kind of organizations that typically don’t encourage and embrace innovation. Maybe the White House and Congress could help with that.

This holiday season we will suffer with long lines and intrusive security measures. But if we encourage innovation, maybe it will be our last.

TSA and the Obama-Bush approach to regulation

The public debate about intrusive TSA screening continues the Obama-Bush pattern of imposing an increasing burden of regulation on a staggering economy: 

*Why, precisely, would you want to make air travel more unpleasant and time-consuming at a time when disposable income is falling????*

 Disposable income per person, in real terms,  is at its lowest level since March,  and the TSA is coming in with a massive wallop.  Oh, yes, there are good reasons…but there are always good reasons for new regulations 

Each new regulation is like throwing a small rock in a stream. One rock, two rocks, ten rocks don’t make much of a difference–but with enough rocks,  you can stop the stream from flowing.

I ran this chart a few days ago, but it’s worth running again.

FCC’s Nutty Policy Move

The current word is that the FCC will vote on net neutrality regulations sometime before Christmas. But does the Obama Administration really want to start 2011 with a fight over telecom?

As I’ve consistently said, there are theoretical arguments for and against net neutrality. But the timing is just horrible, for two reasons.

First, it’s really a dumb move to monkey with the vibrant and growing communications sector when the rest of the economy is so weak. It’s as if you have two cars–one running, one in the repair shop–and you decide it’s a good time to rebuild the transmission of the car that actually works because you hear a few squeaks.

Second, the Obama Administration’s cardinal achievement so far is healthcare reform. Flawed as it is, Obamacare represents an absolutely essential step forward. The Administration should be concentrating its effort on defending healthcare reform rather than  looking for new industries to regulate.

 

 

Red tape strangling innovation

A great op-ed in today’s Washington Post entitled “Strangling innovation and job creation with red tape”. Morris Panner writes:

As a Democrat whose politics are undeniably liberal on social issues, I lamented the outcome of the midterm elections…..

…..We are creating so much regulation – over tax policy, health care, financial activity – that smart people have figured out that they can get rich faster and more easily by manipulating rules on behalf of existing corporations than by creating net new activity and wealth. Gamesmanship pays better than entrepreneurship.

….And the Obama administration’s new regulatory initiatives make this considerably worse in subtle ways.

The two largest pieces of legislation enacted in the past two years – health care and financial reform – are very vague. Take the new Consumer Financial Protection Bureau. It has a broad mandate to protect us from financial abuse, but when it comes to the actual implementation, the Brookings Institution wrote that unelected regulators will decide “almost everything” about how the organization works.

This is highly dangerous to innovation, which depends on clear and transparent rules. The more complexity, the more incumbents are favored. They have the capital to participate in complicated regulatory proceedings. They can hire high-priced lobbyists to present facts in a light most favorable to them. The more incumbents are favored, the harder it is for new companies to gain traction.

There’s a lot more good stuff here.

Technology Transfer and Countercyclical Regulatory Policy

Will technology transfer to China turn out to be a bad deal for some U.S., Japan, and European companies? Today’s article in the WSJ on high-speed rail raises some interesting questions.

QINGDAO, China—When the Japanese and European companies that pioneered high-speed rail agreed to build trains for China, they thought they’d be getting access to a booming new market, billions of dollars worth of contracts and the cachet of creating the most ambitious rapid rail system in history.

What they didn’t count on was having to compete with Chinese firms who adapted their technology and turned it against them just a few years later.

This is a very important story. The economics of technology transfer, in my opinion, is the hidden engine for the global economy.  When technology–knowledge capital–is transferred by a U.S., European, or Japanese company to a lower-cost Chinese supplier, what happens? The immediate effect:  China  becomes more productive and richer by the value of that knowledge capital. This is to China’s credit, incidentally, since absorbing technology transfers is not an easy task. (I plan to do an estimate of the size of the technology transfer pretty soon).

You can think of the technology transfer as implicit payment for cheap imports. U.S, European, and Japanese companies transfer knowledge capital to Chinese suppliers, and get back low-cost goods and services in return.

But to make technology transfer a win-win game for everyone in the long-term,  three things have to happen next. First,  Chinese firms must  improve on the transferred technology,  in order to  boost productivity globally.

Second, U.S., European, and Japanese firms must  switch some of their resources from production to research, development, and design, and create the next generation of innovative products.  That’s the Apple strategy, and it’s worked well for them.

Third,  U.S., Japanese, and European firms must slow down the rate of technology transfer, especially on cutting-edge technologies and key technologies for the defense industrial base. Successful innovation is risky business, and shouldn’t be given away so easily.

How can government help? That’s where countercyclical regulatory policy comes in. The U.S. is at a crossroads right now. The job market is weak and innovation is lagging. At this crucial moment,  we should be doing everything we can to encourage the domestic sectors that are already innovating and growing. That includes communications, biosciences, and higher education.

Encouraging innovation and growth, however, does not translate into “adding more regulations.”  In this downturn, Congress and the Obama Administration must show that they actually are willing to put jobs and innovation first over short-term regulatory objectives.  That’s the way we can both create jobs in the short-run and find a long-term path for the future.

 

The Age of Regulation Started Ten Years Ago

By a simple measure, the Age of Regulation began 10 years ago.  As part of my paper on countercyclical regulatory policy, I looked at an interesting measure of regulatory burden: The number of employees in federal regulatory agencies as a share of  the number of employees in the private sector.  Think of this as the regulatory dependency ratio–the number of regulators per private sector worker.*

You can see in the graph below that this regulatory burden indicator stayed within a fairly narrow range between the mid-1960s and 2000. In particular, it fell through most of the Clinton years.

But in the aftermath of 9/11, all of a sudden there was a surge in federal regulatory employment to historic levels, relative to the size of the private sector.  Most  of that jump was from an increase in security-related regulation–Homeland Security, TSA, and similar.  As anyone who flies knows,  the increase in security has done exactly what regulation usually does–slows down business and increases costs in exchange for some non-economic goal. In this case, the non-economic goal was straightforward and successful–stopping another terrorist attack on American soil.

My guess is that most Americans still think that the increase in security-related regulation was worthwhile.  Hell, I like knowing that there’s not a bomb on my plane.

But I think that we have to acknowledge the possibility that the  weakness in U.S. economy over the past decade, and especially the innovation shortfall, was related to the growth in regulatory burden. And it maybe that under these circumstances, countercyclical regulatory policy is precisely the right way to kickstart the economy.

One final note: The growth in federal regulatory jobs is driven, in large part, by TSA and Homeland Security. But these agencies are not the only part of the federal regulatory sector that has grown faster than the private sector, as it turns out.   The chart below shows the ratio of non-Homeland Security federal regulatory employees to private sector employment rose from 2000 to the recession year 2009.  Over that stretch, FTE employment fell in the private sector.  Meanwhile, notable regulatory agencies such as the SEC and the FTC gained workers.  

In my view, these numbers make th case for countercyclical regulatory policy more compelling.

* For the federal regulatory employment figures, I used the appendix data from “A Decade of Growth in the Regulators’ Budget:Years 2010 and 2011” by Susan Dudley and Melinda Warren. I also did spot checksof several departments to make sure that the published figures agreed relatively well with the Dudley/Warren data (which they did).

Reviving Jobs and Innovation:Countercyclical regulatory policy

My new paper on “Reviving Jobs and Innovation: The Role of Countercyclical Regulatory Policy” was just released by the Progressive Policy Institute.

A short summary: 

Now that the midterm election is over, will the Republican House, the Democratic Senate and the White House agree on a policy for stimulating the economy and creating jobs for Americans?  

If Washington is willing to think beyond conventional policies, there is a surprising option for stimulus–one  that could be acceptable to both parties and appropriate to today’s innovation-driven economy.  I call it ‘countercyclical regulatory policy’.  The idea is simple:  To achieve sustained job growth, we should do everything we can to encourage those innovative, dynamic and emergent sectors of the economy that are currently producing jobs.

Countercyclical regulatory policy is an essential part of showing that both Democrats and Republicans are serious about jobs and growth for Americans.  Politically and economically it becomes untenable to say we support innovation and jobs, and then proceed to impose onerous new regulations on precisely those domestic industries that are the top performers.

Read the whole paper here.