issue: Regulatory Reform

Are Lobbying Expenditures Really Leveling Off?

Posted on by The Progressive Policy Institute

Roll Call is reporting today that annual Washington lobbying expenditures dipped slightly in 2010, marking the first time since expenditure data became public in 1996 that the amount of money has not increased. The decline was small: from $3.6 billion to $3.5 billion (according to CQ MoneyLine). But it’s worth asking: does this mark some kind of leveling off of lobbying in Washington?

Some background: there has been a remarkable increase in lobbying expenditures since 1998, when a mere $1.44 billion was spent on lobbying. More organizations have come to Washington, and in particular more companies are spending more money on lobbying. OpenSecrets.org has the history, and there’s been roughly a steady 7 percent annual increase in lobbying since 1998.

If there truly is leveling off, it would be a remarkable development. But I’m skeptical.

One possibility is that more reports will be trickling in late, and this early report will turn out to be an underestimate.

A more likely possibility is that the reporting is inaccurate. Organizations and companies may be reporting less lobbying in response to the Obama administration lobbying rules, which create all kinds of hurdles for former lobbyists who want to serve in the administration. In 2008, OpenSecrets counted 14,214 registered lobbyists; in 2010, it counted just 12,484 – a decline of 12 percent.

There is good reason to believe that a lot of lobbyists have increasingly decided it was better not to register, or even just slightly adjust their portfolios and work schedules so that they technically didn’t meet the definition of a “lobbyist” under the Lobbying Disclosure Act. The Senate Office of Public Records, which keeps track of these registrations and reports, is perpetually understaffed and not well-equipped to go after anybody.

If this is the case, it’s a shame, because it means that by unnecessarily demonizing lobbyists, the Obama lobbying rules may have actually made the practice of lobbying less transparent by encouraging fewer lobbyists to register and publicly file reports.

Of course, it’s also possible that with the passage of heath care and financial reform, as well as the breakdown of climate legislation, the big lobbying dogs have less reason to be active, and with two years of gridlock ahead, it’s possible some interests realize nothing is going to get through, so why waste the money? But both health care and financial reform have major agency rulemakings ahead, and gridlock may actually require more lobbying grease.

Still, if it is a leveling off, I suspect it’s only a temporary one. As I argued in my Ph.D. dissertation on the growth of corporate lobbying (which accounts for about two-thirds of all lobbying expenditures), “More and more companies are discovering that Washington matters to their business, and those who do are sticking around and increasing their political capacities. As a result, corporate lobbying activity is likely to continue to expand for the foreseeable future, with large corporations playing an increasingly central role in the formulation of national policies.”

There’s simply too much at stake, and still for many large corporations, the amount of money they spend on lobbying is still a rounding error on their annual budgets (and much less than they spend on advertising or R&D). Rather, I suspect more and more companies will continue to realize that the reality is they can’t afford not to be lobbying.

Making Sense of the State of the Union

Posted on by The Progressive Policy Institute

For those of you out there still trying to make sense of the President’s State of the Union address, we at PPI have spent the whole day thinking about it.

Here are our insights:

  • Lee Drutman gave the speech a B+ for including some version of 8 of PPI’s 10 big ideas for Getting America Moving Again. He also assessed the impact the speech and the agenda it laid out could have on Obama’s 2012 chances.
  • Michael Mandel praised Obama for spending time on innovation, regulation, and jobs, but argued that in all three cases, he got his priorities upside down.
  • Jim Arkedis explained how foreign policy served as an underpinning for the address.
  • Ed Kilgore assessed the Republican response as little more than preaching to the choir on the limited idea of limiting government.
  • Mike Signer discussed the power of pronouncements.

Grading the State of The Union: A Solid B+

Posted on by The Progressive Policy Institute

Last week, the Progressive Policy Institute released a Memo to President Obama, which contained 10 Big Ideas for Getting America Moving Again. How did the President’s speech match up to our recommendations?

Overall, he did quite well. Eight of our ten ideas were largely consonant with proposals included in the address, and the future-oriented rhetoric echoes the language in our memo. We also appreciate his willingness to look to both sides of the aisle to find solutions.

However, we were disappointed that he did not discuss the sluggish housing market, and that he did offer any ideas to address the roots of the partisan rancor in Washington.

Our overall grade: B+

Here’s a proposal-by-proposal scorecard:

 

1. Removing Obstacles to Growth: A Regulatory Improvement Commission

 

We proposed: A periodic review process conducted by a Regulatory Improvement Commission, modeled loosely on the BRAC Commissions for military base closures.

The President said: “To reduce barriers to growth and investment, I’ve ordered a review of government regulations.”

Analysis: The President clearly understands that we need to prune obsolete and ineffective regulations and stimulate economic innovation and entrepreneurship. But agency self-review is inadequate.

Grade: A-

2. Internal National Building: A National Infrastructure Bank

 

We proposed: Smart, innovative financing solutions that enable us to restore the backbone of our economy. A well-structured National Infrastructure Bank can play this role by leveraging public dollars with the participation of private-sector investors.

The President said: “The third step in winning the future is rebuilding America.  To attract new businesses to our shores, we need the fastest, most reliable ways to move people, goods, and information — from high-speed rail to high-speed Internet.”

Analysis: Making infrastructure one of five sections of the speech gave it real prominence. But the President needs to do more than just propose “that we redouble those efforts.”   He needs to lay out a mechanism to do that rationally, and to identify clear funding for it. A National Infrastucture Bank could accomplish that.

Grade: A-

3. A Way to Pay for High-Speed Rail

We proposed: Restructuring the Highway Trust Fund into a Surface Transportation Trust Fund that recaptures its original mission—to build and maintain an efficient national transportation network—and updates that mission to reflect 21st-century priorities, including upgrades to our passenger and freight rail systems.

The President said: “Within 25 years, our goal is to give 80 percent of Americans access to high-speed rail. “

Analysis: We applaud the President’s full-throated commitment to high-speed rail. However, he’s going to need to figure out a way to pay for it. We suggest he read Mark Reutter’s excellent memo on how to finance high-speed rail.

Grade: A-

4. Restoring Fiscal Discipline in Washington

 

We proposed: Restoring fiscal discipline in Washington by trimming the $1.1 trillion in outdated tax expenditures, capping domestic spending (including defense), eliminating supplemental defense budgets, and slowing mandatory expenditures by reducing benefits for affluent retirees.

The President said: “Starting this year, we freeze annual domestic spending for the next five years… we cut excessive spending wherever we find it –- in domestic spending, defense spending, health care spending, and spending through tax breaks and loopholes… we should also find a bipartisan solution to strengthen Social Security for future generations…we simply can’t afford a permanent extension of the tax cuts for the wealthiest 2 percent of Americans.”

Analysis: The President clearly gets the seriousness of the looming debt crisis, but understands the difference between smart cuts and needed investments. But he could have come out more strongly in favor the Fiscal Commission’s work, and he only paid lip service to entitlements.

Grade: B+

5. Setting National Targets: A Balanced Energy Portfolio

We proposed: A national Balanced Energy Portfolio with a target fuel mix allocated into thirds by 2040: one third of our electricity generated by renewable resources, one third by nuclear power, and one third from traditional fossil fuels.

The President said: “By 2035, 80 percent of America’s electricity will come from clean energy sources.  Some folks want wind and solar.  Others want nuclear, clean coal and natural gas.  To meet this goal, we will need them all — and I urge Democrats and Republicans to work together to make it happen.”

Analysis: The President is thinking big, but also recognizing that nuclear and natural gas need to be part of any energy mix.

Grade: A

6. Greening the Pentagon: An Energy Security Innovation Fund

We proposed: An Energy Security Innovation Fund, housed in the Pentagon, to help companies bridge the gap. Such a fund would leverage public dollars with private money to support research and deployment of the most promising green products.

The President said: “We’re telling America’s scientists and engineers that if they assemble teams of the best minds in their fields, and focus on the hardest problems in clean energy, we’ll fund the Apollo projects of our time.”

Analysis: The next clean energy breakthrough is going to require support from the government. But Obaa should look beyond the Department of Energy and recognize that the military can be a fertile source of innovation, too.

Grade: A-

7. Bringing Public Education into the 21st Century

We proposed: To radically transform public education by growing charter schools, ending teacher tenure as we know it, spurring a network of “Innovation Zones”, and creating a “Digital Teacher Corps”.

The President said: “Our schools share this responsibility.  When a child walks into a classroom, it should be a place of high expectations and high performance.  But too many schools don’t meet this test.”

Analysis: Education is clearly the key to our ability to “win the future,” and the President understands this. We support his Race to the Top program and the call for more bright young people to go into education. But we also hope he thinks more creatively about radical new ideas for 21st century education, embracing the possibilities of charter schools, digital education, and “innovation zones.”

Grade: A-

8. Lifting Housing Markets: One Million Homeowner Vouchers

We proposed: An innovative way to jump-start the housing market would be for the federal government to provide a million vouchers that allow low-income renters to become homeowners.

The President said: (Nothing)

Analysis: Surprisingly, the President failed to mention the sluggish housing market, which many economists believe is one of the leading factors holding back an economic recovery.

Grade: F

9. Align Innovation and Immigration

We proposed: Aligning innovation and immigration by providing a citizenship path for foreign students with advanced technical degrees and illegal immigrants’ children who are interested in national service.

The President said: “I strongly believe that we should take on, once and for all, the issue of illegal immigration… I know that debate will be difficult.  I know it will take time.  But tonight, let’s agree to make that effort.  And let’s stop expelling talented, responsible young people who could be staffing our research labs or starting a new business, who could be further enriching this nation. “

Analysis: The President deserves points for having the courage to bring up immigration reform. But he clearly gets it: our global competitiveness depends on continuing to be a magnet for the world’s best and brightest.

Grade: A

10. Taking Power from Special Interests: A Fair Way to Finance Elections

We proposed: A hybrid Fair Elections system introduced by Sen. Dick Durbin (D-Ill.) to allow federal candidates to choose to run for office without relying on large contributions by using federal money to match small donations.

The President said: (Nothing)

Analysis: Campaign finance reform is not on the agenda, and the President does not seem particularly interested in putting it there. This is too bad. A great way to break the partisan rancor in Washington would be change the way politicians get elected to office. As long as congressional campaigns are privately funded, and as long as the big donations come primarily from ideologues and special interests, pragmatic candidates are going to have a tough time raising the resources they need to get started, and a difficult time winning in all-important low-turnout primaries.

Grade: F

Conclusion:

Overall, it was a great speech. It laid out the problems that we face as a nation, and provided a vision of an America that invests smartly in the future, building infrastructure, providing educational opportunities, and remaining a magnet for the best and brightest in the world, and all in a way that could move us past partisan divides.

State of the Union: Obama Gets Innovation Upside-Down

Posted on by The Progressive Policy Institute

In his State of the Union speech, President Obama spent a lot of time on innovation, regulation, and jobs–that’s good. Unfortunately, in all three cases he got his priorities upside down.

Let’s start with innovation.  I counted how many words the President devoted to different areas of innovation.

  • 2 words for biomedical research, the area where the U.S. is far ahead of the rest of the world.
  • 68 words devoted to extolling the job-creating virtues of space travel and NASA, an agency which currently has no mission unless it gets a lot more money.
  • 113 words for  high-speed-wireless broadband, a worthy goal.
  • 361 words in favor clean energy, a technology where the U.S. has little competitive advantage over the rest of the world.

In other words, Obama spent his time lauding our least competitive areas of innovation, while giving the back of his hand to biomedical research, the area where we have the clear global advantage.

If you think I’m exaggerating, take a look at these two charts.  When it comes to life sciences, the U.S. is way ahead. U.S. companies account for 44% of   R&D spending by life sciences companies around the world in 2010, according to etimates by Battelle/R&DMagazine.  And U.S. government support for health research is unsurpassed, accounting for 70% of  global public sector funding.

On the other hand, the U.S. support for  energy research is mediocre, at best. U.S. companies account for only 25% of global energy R&D spending by businesses.  And in 2008, before Obama took over, the U.S. government funding for energy R&D accounted for only 20% of the global public sector spending on energy R&D.  That’s pitiful.

Here’s what a recent R&DMagazine piece says about U.S. energy R&D:

the level of R&D spending in the U.S. energy sector is small in absolute terms and as a percent of revenue (0.3%) when compared with other sectors. For example, the total amount of private sector investment in all forms of energy research in our portfolio would likely amount to little more than half of the leading life science R&D investor, Merck, or the leading software/IT R&D investor, Microsoft, both of which invested more than $8.4 billion in R&D in 2009.

Mr. President, every time you talk about clean energy creating jobs, you are placing your bet on the wrong horse.  Communications and biosciences are the best bets we have in the near-term.

Now we come to regulation. I’m afraid once again the President started out right, and ended upside-down. He began by explaining how he would get rid of rules that imposed an unnecessary burden (29 words). But then he spends triple the time ( 102 words) defending his administration’s regulatory efforts.  He should have stopped while he was ahead.

Finally, we come to jobs, which were spread through the whole speech. This is my ‘soft’ count of how many times the word ‘jobs’ were mentioned in connection  with various areas of the economy (your count may differ)

  • IT-1
  • Space-1
  • Clean energy –2
  • Education–3
  • Infrastructure –2
  • Exports–4

Exports got the most mentions as a source of jobs—-but no mention of imports, and no mention of the fact that our trade deficit in advanced technology products hit an all-time record in November, going into double digits for the first time.  The reason? Imports of advanced technology products have surged, while exports are basically flat.  Before worrying about exports, we should worry about recapturing some of the jobs lost to imports.

This piece is cross-posted at Mandel on Innovation and Growth

The Right Growth Formula

Posted on by The Progressive Policy Institute

The specter of economic decline is haunting America. President Obama seeks to banish it by making jobs and U.S. competitiveness the centerpiece of his State of the Union report to Congress tomorrow. This sets the stage for a critical contest between dueling theories about how America can get its economic mojo back.

Over the weekend, Republicans flooded the media with preemptive strikes against Obama’s expected calls for boosting public investment to spur growth. “With all due respect to our Democratic friends, any time they want to spend, they call it investment, so I think you will hear the president talk about investing a lot Tuesday night,” GOP Senate leader Mitch McConnell told “Fox News Sunday.” “This is not a time to be looking at pumping up government spending in very many areas.”

True to form, Republicans have a very simple theory for rekindling jobs and growth: Cut federal spending. That’s why they’ve tapped their leading fiscal hawk, House Budget Committee Chairman Paul Ryan, to respond to Obama’s speech. And Rep. Michele Bachmann will offer an unofficial, “Tea Party” riposte to the President online.

Now, I’m all for fiscal discipline. I’ve chided progressives for posing a false choice between deficit reduction and economic growth. Restoring fiscal stability is an essential ingredient of any credible plan for robust growth.

But cutting spending by itself won’t help us rebuild our infrastructure (which is the foundation for productivity), strengthen our comparative advantage in science and technological innovation, or produce a highly skilled workforce. As virtually all serious economists recognize, these are tasks for government.

Yet today’s Republicans are so besotted by anti-government populism that you can’t even count on them to be good capitalists anymore. Perhaps conservative think tanks should organize seminars to reacquaint House Republicans with Adam Smith, whose defense of laissez faire economics did not blind him to government’s responsibility to supply public goods like roads, ports and education. As he wrote in the Wealth of Nations:

The third and last duty of the [government] is that of erecting or maintaining those public institutions and those public works, which, although they may be in the highest degree advantageous to a great society, are, however, of such a nature, that the profit could not repay the expense to any individual or small number of individuals, and which it therefore cannot be expected that any individual or small number of individuals should erect or maintain.

As PPI maintains in Getting America Moving Again, a new Memo to President Obama, it will take both more public investment and more dynamic markets to reinvigorate our economy. We need to boost spending on research and commercialization of new inventions. We also need to boost spending on modernizing the nation’s transport and energy infrastructure – for example, by building high speed rails and smart grids that can accommodate clean energy generation. This can and must be done within a new framework for restoring fiscal stability that cuts tax expenditures, caps spending on defense and domestic programs, and most importantly, slows the unsustainable growth of the big entitlement programs.

At the same time, we also need to revamp archaic tax and regulatory policies that dampen incentives for economic innovation and entrepreneurial risk-taking. To that end we have proposed a base-closing style commission charged with culling the accumulation over time of burdensome rules and regulation.

In truth, neither party’s economic orthodoxies are equal to the challenge facing our country. That’s why President Obama needs to challenge both sides tomorrow to unite behind a bold plan for a national economic resurgence.

The History of Retrospective Regulatory Review

Posted on by The Progressive Policy Institute

As part of President Obama’s executive order on “Improving Regulation and Regulatory Review,” he called for agencies to conduct ”Retrospective Analyses of Existing Rules,” and to “modify, streamline, expand, or repeal” the ones that are ”outmoded, ineffective, insufficient, or excessively burdensome.”

Definitely moving in the right direction….but the key is how to implement this requirement in a way that works. Unfortunately, the track record of agencies performing such mandatory retrospective analyses on their own rules is not dissimilar to the results of doctors conducting surgery on themselves.

I quote from a 2007 GAO report entitled ”Reexamining Regulations: Opportunities Exist to Improve Effectiveness and Transparency of Retrospective Reviews.”

Every president since President Carter has directed agencies to evaluate or reconsider existing regulations. For example, President Carter’s Executive Order 12044 required agencies to periodically review existing rules; one charge of President Reagan’s task force on regulatory relief was to recommend changes to existing regulations; President George H.W. Bush instructed agencies to identify existing regulations to eliminate unnecessary regulatory burden; and President Clinton, under section 5 of Executive Order 12866, required agencies to develop a program to “periodically review” existing significant regulations.17 In 2001, 2002, and 2004, the administration of President George W. Bush asked the public to suggest reforms of existing regulations.

For the mandatory reviews completed within our time frame, the most common result was a decision by the agency that no changes were needed to the regulation. There was a general consensus among officials across the agencies that the reviews were sometimes useful, even if no subsequent actions resulted, because they helped to confirm that existing regulations were working as intended.

Our limited review of agency summaries and reports on completed retrospective reviews revealed that agencies’ reviews more often attempted to assess the effectiveness of their implementation of the regulation rather than the effectiveness of the regulation in achieving its goal.

Agencies reported that the most critical barrier to their ability to conduct reviews was the difficulty in devoting the time and staff resources required for reviews while also carrying out other mission activities.

Most agencies’ officials reported that they lack the information and data needed to conduct reviews. Officials reported that a major data barrier to conducting effective reviews is the lack of baseline data for assessing regulations that they promulgated many years ago. Because of this lack of data, agencies are unable to accurately measure the progress or true effect of those regulations.

Agencies and nonfederal parties also considered PRA [Paperwork Reduction Act–MM] requirements to be a potential limiting factor in agencies’ ability to collect sufficient data to assess their regulations. For example, EPA officials reported that obtaining data was one of the biggest challenges the Office of Water faced in conducting its reviews of the effluent guideline and pretreatment standard under the Clean Water Act, and that as a result the Office of Water was hindered or unable to perform some analyses. According to the officials, while EPA has the authority to collect such data, the PRA requirements and associated information collection review approval process take more time to complete than the Office of Water’s mandated schedule for annual reviews of the effluent guideline and pretreatment standard allows.

This last one is especially fun, and shows up over and over again in the literature on retrospective regulatory review. Basically, the OMB has to review and approve data collection by the government, which means that collecting data to prove that a regulation doesn’t work requires more paperwork.

This piece is cross-posted at Mandel on Innovation and Growth

Photo Credit: hashmil

Obama Endorses Innovation as Regulatory Principle

Posted on by The Progressive Policy Institute

Today President Obama took a big step towards improving the federal regulatory process. In particular, he came out with an executive order that addresses two of my big concerns: The cumulative effect of regulations, and bringing innovation as a key goal in the regulatory process.

Sec. 3.  Integration and Innovation.  Some sectors and industries face a significant number of regulatory requirements, some of which may be redundant, inconsistent, or overlapping.  Greater coordination across agencies could reduce these requirements, thus reducing costs and simplifying and harmonizing rules.  In developing regulatory actions and identifying appropriate approaches, each agency shall attempt to promote such coordination, simplification, and harmonization.  Each agency shall also seek to identify, as appropriate, means to achieve regulatory goals that are designed to promote innovation.

This is very important.  Up to this point, innovation has just not been part of the regulatory assessment process at all. Similarly, the cumulative impact of regulation has not been taken into account at all. I applaud the Obama Administration for this change.

However, the Obama initiative doesn’t go far enough to set out the principle of countercyclical regulatory policy–that is, stressing the importance of encouraging  growing and innovating industries during this period of economic weakness, and only regulating if necessary.

In addition, at the Progressive Policy Institute, we’ve been working on a proposal for  a Regulatory Improvement Commission. The RIC,  modeled on the BRAC commission, will provide a transparent and systematic process for identifying regulations that can be improved or pruned, while  maintaining important social values. Stay tuned.

This piece is cross-posted at Mandel on Innovation and Growth

Where Regulation Did and Did Not Intensify, 2000-2010

Posted on by The Progressive Policy Institute

As Republicans go on the attack about excessive regulation under the Obama Administration, it’s worth noting two things. First, the regulatory state started growing under President George Bush, as I showed in my posts The Age of Regulation Started Ten Years Ago and Homeland Security and the Regulatory Burden.  Homeland Security accounts for roughly 90% of the increase in federal regulatory employment over the past ten years.

The second point is that the growth of regulation over the past ten years has been quite uneven, even outside of Homeland Security. Take a look at the chart below.

You can see that workplace and the environment has lagged in terms of regulatory employment. Just something to keep in mind.  Some of the big gainers were the FDA, the SEC, and the NRC.

This piece is cross-posted at Mandel on Innovation and Growth

Too Soon to Tell About FCC Rules

Posted on by The Progressive Policy Institute

I had hoped to write a simple post giving thumbs up or down to yesterday’s FCC ‘net neutrality’ rule-making. Alas, I can’t, yet.

Let me explain. I judge their actions by applying the principle of countercyclical regulatory policy: In recessions, the government should refrain from imposing heavy-handed regulations on innovative, growing sectors. The goal is to keep the communications innovation ecosystem growing and healthy.

From that perspective, the three basic rules that the FCC approved are fine: Transparency, no blocking of legitimate websites, and no “unreasonable discrimination” by wired broadband.

The key here is the transparency provision, which gets little attention. If we look back at the wreckage of the financial boom and bust of the 2000s, the big problem was not financial innovation. Rather, the big mistake made by the financial regulators was not pushing for more information about the decisions being made by Wall Street. That would have enabled regulators to put up a stop sign before things got out of hand.

Learning from that bad example, an intelligently-enforced transparency provision for broadband providers—requiring them to release “accurate information regarding the network management practices, performance, and commercial terms of its broadband Internet access services”—would go an awfully long way to deterring abusive practices without interfering with innovation.

If the FCC had just stopped with its three rules, we could be heading for the best of all possible worlds …where the communications innovation ecosystem keeps growing, the providers earn enough profits to allow them to keep investing, but where transparency helps encourage them to be good stewards and not to be too greedy.

But not content to leave well enough alone, the FCC appears to have added a lot of extra verbiage to the order that muddies the waters,  to the point where I can’t even figure out what they are trying to achieve. I say ‘appears’ because all we have so far is excerpts from the text, rather than the full text itself.

If regulators can’t make rules that are clear and straightforward, it’s a sign they shouldn’t be doing it. I wait eagerly for the actual text of the order.

This piece is cross-posted at Mandel on Innovation and Growth

Senator Warner’s Smart Thinking on Red Tape

Posted on by The Progressive Policy Institute

With Congress about to enact a massive new tax package that may be the last attempt we make at any kind of fiscal stimulus anytime soon, what other approaches should we be looking to for the long-term changes we need to regain our economic vitality?

In this morning’s Post, Senator Mark Warner offers an answer that makes a lot of sense in the cash-strapped, post-stimulus world we find ourselves in: cutting regulatory red tape to invigorate the private sector.  Citing both the enormous compliance costs for businesses as well as the chilling effects regulation can have on  investment and innovation, Senator Warner outlines his legislative proposal for a “regulatory pay-as-you-go” system to curb the steady increase in regulatory burdens on our economy.

Senator Warner’s proposal, which he discussed at PPI’s infrastructure forum in September, is similar to the “one-in, one-out” approach recently adopted in Britain, requiring agencies imposing new regulations to identify existing regulations with the same amount of economic impact to be eliminated.  The idea is that if we are serious about wanting to let the private sector drive economic growth through new investment and innovation, we should at least try to hold the level of regulatory burden constant, rather than expanding it without any effort whatsoever to revisit potentially outdated or poorly designed rules already in place.

PPI has argued for the same idea that our regulatory system needs to be more responsive to the needs of the economy, most notably in recent policy memos by Michael Mandel, who has proposed his own approach of countercyclical regulatory policy.  Like Warner, Mandel suggests that one of the best ways we can encourage job growth and revive our economy is to recognize that government is generally better at choking off innovation than it is at actively promoting it, so the best thing we can do is to be cautious in imposing new rules on the innovative ecosystems in our economy, like the communications sector, that are the best sources of new growth.

Senator Warner is right to model his legislation on the steps taken in the U.K., but the trick is coupling good ideas with the right political leadership to force a cultural shift in the way we think about regulating the private sector.  As Warner points out, British reforms have been years in the making, and they are the product of institutional changes based on improving collaboration and input from business to craft policies that would make Britain more globally competitive.  This effort has crystallized in the last year under the coalition government led by Prime Minister David Cameron, whose dedication to bringing a “new economic dynamism” to his country offer a pretty good lesson in leadership for President Obama to study while he writes his State of the Union speech for January.

In his excellent speech in October, Cameron laid out an actual strategy (!) for growth that included fiscal discipline, increased investments in human capital and infrastructure, a renewed focus on exports and competitive advantage, and an effort to encourage new companies and innovation to drive growth.  Putting aside differences of opinion some may have about Cameron’s fiscal austerity, one thing this speech does offer that Warner and Mandel can both love, and that White House advisors can learn from, is Cameron’s attitude about government regulation:

Successful, high-growth economies are like ecosystems –they are organic, evolve through trial and error and depend on millions, billions, of individual preferences, choices and relationships. Governments can expect to intelligently design all this as much they can expect to intelligently design the Great Barrier Reef.  But what they can do is create an environment in which businesses are confident enough to invest. . . . If we are to get back to strong growth, these profits need to turn into productive investment – and my message to you today is that we are providing the stability for that investment.

PPI strongly supports Senator Warner’s pay-as-you-go proposal as a long overdue approach to modernizing our regulatory system.  Both Warner’s proposal and Mandel’s countercyclical regulatory approach are helpful starting points for a discussion about how to make institutional changes that create a consistent method of scrubbing stale and ineffective regulations out of the system to make way for new rules better tailored to today’s economy.

PPI has supported a number of structural reform proposals to our regulatory system, like creating a review board that periodically submits a list of regulations for repeal to Congress for an up-or-down vote, much like the BRAC base-closure process.  We have also recommended that OMB conduct “innovation impact studies” for new agency rules to measure the regulatory footprint imposed on innovative ecosystems in the economy, the same way we conduct environmental impact studies.  OMB’s Office of Information and Regulatory Affairs (OIRA) would be a natural fit to take charge of such an effort, not only because of its institutional competence in reviewing agency rules, but also because its current Administrator, Cass Sunstein, could seek advice from his friend and co-author of Nudge, Richard Thaler, who serves as a lead advisor to the British government in its regulatory reform efforts.

As usual, Warner brings an invaluable perspective and fresh thinking to the Senate, and Democrats would be smart to showcase his creative thinking the same way Republicans thrust younger members like Paul Ryan into the spotlight.

Senator Warner is right to propose this regulatory PAYGO legislation as a means to boost our economy when our other options for doing so effectively are starting to run thin.  Pointing across the pond for an example of smart reform policy is also dead-on, but perhaps he should also point President Obama to David Cameron’s October speech as an example of smart, strategic leadership.

Tip-Toeing Around The Elephant: US Mitigation And The COP

Posted on by The Progressive Policy Institute

The US was in an awkward position in Cancun. The administration clearly wanted to show leadership, but it was hamstrung by an inability to deliver legislation with any tangible commitments. Since that seemed unlikely to change in the new Congress, US negotiators were left playing defense on the key issue — mitigation.

This makes movement in other areas (such as finance and forests) difficult, though that is in part due to US insistence on parallel, rather than serial, treatment of issues.

The result was sometimes bizarre diplomatic displays by the US, such as Energy Secretary Steven Chu’s address — essentially a remedial crash course in climate science. Secretary Chu did not take questions, one suspects because it would have been difficult to answer the obvious one — how does the US plan to meet the President’s 17%-cuts-by-2020 goal articulated last year?

Difficult, but not impossible. The awkward position in which US officials find themselves and the effects it has on US credibility and capability make the administration’s continued avoidance of serious public discussion of EPA carbon regulations puzzling. Research at RFF and elsewhere indicates that EPA regulations, either on the books already or likely in the near future, could achieve emissions reductions in the range of the President’s goal.

I’ve studied these regulations over the past year or so, and I’ve been repeatedly surprised by their likely impact. Vehicle fuel economy standards, new power plant permitting rules, and whatever the agency decides to do for existing sources can each make a significant emissions impact. Perhaps more interestingly, coming EPA regulations ostensibly aimed at other pollutants could have a big impact on carbon by pushing a substantial portion of coal plants into retirement, and replacing them with cleaner technology.

It’s not clear why the US administration and negotiators didn’t trumpeting these regulations as evidence of a commitment to cut emissions. It’s possible it is felt that a regulatory approach won’t be understood or taken seriously by the international community, but EPA regulations are far from the only complex issue on the table (just ask your local climate finance expert for a quick summary if you suspect otherwise). And other countries are undoubtedly familiar with a regulatory approach — for many it is their preferred domestic environmental policy. One thing is certain, though — the best way to ensure that the international community (and the American public) fails to understand or appreciate the EPA’s capabilities is for the administration and its negotiators to refuse to explain them.

Another possibility is that the administration worries that hyping EPA’s powers is politically dangerous. The agency is more effective, this argument goes, if it can operate quietly and at its own pace. To put it more directly, to speak of regulation is to destroy it — perhaps because Congress would respond by seeking to cripple the agency.

But the President should not forget that his party still controls the Senate, and that he still wields the veto pen. Even if the President resigned himself to giving up EPA powers (or delaying them) as part of a compromise, it would surely be in his interest to say how strong these powers are, thus increasing their value in any bargain.

Moreover, the argument that regulatory emissions cuts are more effective if kept quiet contradicts what is arguably the central dogma of US foreign climate policy — that US action is valuable not for its small contribution to global goals, but as a tool for unlocking negotiations and prompting action elsewhere. If US negotiators can’t or won’t talk about the best policy tool the US currently has, they can’t do their jobs. This makes the long term likelihood of a meaningful international agreement much smaller.

EPA regulation is not the first, best option for US climate policy; it is above all likely to be more costly over the long run than a pricing mechanism. But neither this admission, nor the fact that EPA regulations are legally required, are good reasons not to forcefully and frequently articulate their emissions benefits. Perhaps we as a country should be embarrassed that we cannot adopt a national climate policy that more closely approaches the ideal in terms of both costs and benefits. But the administration should not let any embarrassment about what the country cannot currently do prevent them from talking about what it can.

As my colleague Dallas Burtraw pointed out in his talk here this week, US credibility on climate requires that the administration be a lot bolder — not by making new commitments that it lacks the domestic powers to back up, but simply by publicly, loudly, and clearly saying what it can and will do with the tools it already has.

This article is cross-posted at Weathervane

In Praise of Comprehensive Tax Reform

Posted on by The Progressive Policy Institute

The current debate over the tax-cut compromise hammered out by President Obama and Republicans in Congress raises the obvious question: If the bill passes (and that’s certainly not a sure bet at this point, as left and right harden their positions), what will happen in 2012?

Today’s New York Times offers an answer:

…Mr. Obama has directed his economic team and Treasury Department analysts to review options for closing loopholes and simplifying income taxes for corporations and individuals, though the study of the corporate tax system is farther along, officials said.

The objective is to rid the code of its complex buildup of deductions, credits and exemptions, thereby broadening the base of taxes collected and allowing for lower rates — much like a bipartisan majority on Mr. Obama’s debt-reduction commission recommended last week in its final blueprint for reducing the debt through 2020.

If this is indeed the plan that is forming, it’s good news. There has been a steady drumbeat of support in the Washington wonkosphere for comprehensive tax reform. It’s a no-brainer, really: simplifying the tax code by eliminating the thicket of deductions, exceptions, and loopholes that has come to overwhelm our system will allow government to lower rates even as revenues stay the same.

An Obama Administration push for tax reform also gives it a powerful political weapon approaching the 2012 elections. The message would be: “Forget the Bush tax cuts – they’re expiring. In their place is the Obama tax reform plan.” Though claiming reform is “the only way Obama can win in 2012” might be a little hyperbolic, William Galston is right to say that such a pivot “would enable him to move back on offense and to become the transformative leader he clearly wants to be.”

What should comprehensive tax reform look like? The administration and the Hill could do worse than start with the Wyden-Gregg tax reform plan, which would leave the tax code with three brackets (15, 25, and 35 percent), impose a flat corporate tax rate of 24 percent, and triple the standard deduction, while eliminating a whole host of loopholes and deductions. The plan is expected to cut the average taxpayer’s and corporation’s tax burden while keeping revenue steady.

Next year marks the 25th anniversary of the Tax Reform Act of 1986, a landmark achievement. The massive bill simplified the code and lowered rates, and won bipartisan support. (Here is yet another deflation of the Tea Party’s mythical Reagan: Wouldn’t you know it, Reagan worked with the other party and reached compromise.) The sprawling lawn that is the tax code has been left alone since then, and it is now overgrown. An Obama campaign to simplify the tax code is not the only good policy—it’s good politics.

Genachowski Walks the Tricky Path

Posted on by The Progressive Policy Institute

FCC Chairman Julius Genachowski should be given a measured round of applause for his proposed “rules of the road” for Internet openness. Genachowski addressed the core issues including a basic no-blocking rule and giving telecom providers the right to “reasonable network management.”  And he did so without putting an excessively heavy new regulatory burden on the communications sector.

The truth is, the FCC is walking a tricky path. The broad communications sector that the agency oversees, long-maligned, has turned into a crown jewel in today’s domestic economy—vibrant and dynamic. Yet the FCC has come under pressure to impose strict net neutrality rules—a nutty move that would have been the equivalent of doing invasive surgery on a healthy patient.

Instead, Genachowski and the FCC are following the basic principle of countercyclical regulatory policy — the government should stay away from imposing onerous new regulations on growing and innovative sectors such as communications while the economy is still sluggish.

Between now and the December 21st meeting of the Commission, Genachowski needs to make sure that his rules of the road stay as ‘minimally invasive’ as possible.  Attempts to broaden them, no matter how well-meaning, will have the effect of putting the communications sector on notice that any commercial negotiation, technical decision, or investment strategy could be second-guessed by regulators—not the best way to have rapid innovation or job creation.

Reviving Jobs and Innovation: The Role of Countercyclical Regulatory Policy – Part I

Posted on by The Progressive Policy Institute

Since the Great Depression, the tools of choice for fighting economic downturns have been countercyclical monetary policy and countercyclical fiscal policy. That is, when the economy slowed, economists would recommend cutting interest rates, reducing taxes, and boosting government spending to pump up demand. And for 75 years, those policy measures were enough.

But in the aftermath of the financial crisis, we seem to have almost exhausted the limits of monetary and fiscal policy to create jobs. The Federal Reserve has pushed interest rates down to near zero, although it appears ready to try another round of quantitative easing.

Meanwhile, the federal budget deficit hit $1.3 trillion in fiscal year 2010. In the aftermath of the midterm election victories of candidates who ran against federal spending, it seems politically unlikely that there will be another round of fiscal stimulus.

Under the circumstances, it may be time to try something new: Countercyclical regulatory policy. That means following a very simple rule: Don’t add new regulations on innovative and growing sectors during economic downturns.

 

The goal: To encourage innovation and job creation by temporarily abstaining from additional regulation on innovative sectors, and perhaps even temporarily abating some existing regulations on innovative sectors (what I call innovation ecosystems).

The keyword here, of course, is ‘temporarily.’ Like countercyclical monetary and fiscal policy, countercyclical regulatory policy is designed to provide a short-run stimulus to the economy by making decisions that can be reversed when the economy improves—the equivalent of a temporary investment tax credit. In other words, countercyclical regulatory policy is not the same as deregulation. It presupposes that regulators stay alert and take care of abuses.

Read the entire memo

The case for “smart regulation”

Posted on by The Progressive Policy Institute

Michael Mandel has an op-ed explaining his plan for “smart regulation” up over at CNN.com today.

Mandel starts by noting that the one sector of the economy where there has been real growth of late is the digital communications sector. And given how hard new jobs are to come by in this current economy, Mandel figures we ought to keep growth going where we can by limiting the temptation to write too many new rules in the telecom sector:

What’s needed from regulators now is some creativity and humility – in the form of “countercyclical regulatory policy.” This gives innovators a bit of breathing space at the start of an economic recovery, but sets the stage to tighten regulations later on if excesses develop.

For example, Mandel argues that now is not the time for any new net neutrality rules:

For that reason, I suggest a two-year pause in new broadband regulation, keeping the current balance among the different players, which seems to be generating growth. At the same time, the knowledge that the regulator remains on duty, ready to intervene, would provide an essential check.

However, Mandel is clear that counter-cyclical regulation is not the equivalent of no regulation:

This approach does not mean regulators can go to sleep nor does it mean they can raise the flag of laissez-faire. What’s needed is the nuanced judgment of sentries posted at a tense border spot. With watchful eyes, regulators must practice thoughtful restraint that allows space for job leaders to innovate and hire, while remaining ready to aggressively confront violations of law or abuses of consumer rights if they take place.

It’s a compelling argument, and if you still want to learn more after reading the op-ed, you’ll definitely want to read Mandel’s recently released PPI Policy Memo, “The Coming Communications Boom? Jobs, Innovation and Countercyclical Regulatory Policy.”

Myths and Realities of Regulatory Uncertainty

Posted on by The Progressive Policy Institute

Ezra Klein joined others this week in mocking the “uncertainty” rhetoric that Republicans and some business leaders have been parroting to argue for lower taxes and lighter regulation.  As Stan Collander, Brad DeLong, and Ezra himself have all done an excellent job of arguing, there is plenty of reason for ridicule.  Most of the talk about businesses being paralyzed by uncertainty over taxes and regulations is little more than politically-driven spin.

The problem I have with Ezra’s post this week is that he chose the wrong example to pick on.  He points to Derek Thompson’s  interview with Eric Spiegel, CEO of Siemens USA, who complains about the uncertainty his company faces in the wake of the failure to pass an energy bill in Congress.  Thompson and Klein both equate this position with the less policy-specific confusion and outrage Republicans are attributing to the business community at large.   Thompson sums it up with this broad conclusion:

It’s another piece of evidence that “government should remove uncertainty” is a euphemism for “government should enact the laws that make me profitable.” For some companies, “make me profitable” might mean simply slashing taxes on income and capital gains, cutting public spending and getting out of the way. For other companies like Siemens, it means government getting in the way. It means putting a new tax on carbon, giving tax money to companies building wind blades, and adding new regulations for renewables.

In this case, there is more to it than that.  The kind of uncertainty problems that Spiegel describes are actually legitimate, at least in part.  The energy industry has been holding its breath for years waiting for the EPA and Congress to decide what they are going to do about regulating carbon emissions.  With the energy bill now faded into legislative limbo, it looks like the industry will not get the resolution it needs anytime soon, which means billions of dollars worth of investment will be trapped in limbo as well.  The uncertainty is so real that several people in the industry have privately told me that they almost don’t care what Congress chooses to do with carbon pricing, as long as it does something, so they can stop waiting and start building.   Or as another energy CEO put it recently, “There’s a lot of capital sitting on the sidelines just waiting for more regulatory clarity.”

It’s worth differentiating the energy industry’s need for long-term clarity in climate policy from the standard fear and loathing Republicans are promoting.  Here’s why.  A lot of the decisions energy companies need to make are binary choices that change dramatically depending on the policy assumptions: whether a new plant should be coal or natural gas, whether a new wind farm is viable without tax incentives, whether a new nuclear plant could be approved and running within ten years.  It’s hard to make economically rational decisions when the outcomes are so dependent on unresolved political questions.  This is fundamentally different from arguments that companies are afraid to hire new workers this quarter due to taxes or health care regulations.

There is no shortage of unsupportable statements about uncertainty that belong to the realm of political fiction.  Rep. Boehner’s latest call for a moratorium on new regulations certainly qualifies, blaming the “uncertainty that’s being created by the Democrats’ agenda” for leaving every employer and investor in America “frozen” with fear.   That kind of rhetoric is obviously exaggerated, and it should either be refuted or ignored altogether.

However, we should not allow Republicans crying wolf to drown out the voices that have legitimate gripes about regulatory uncertainties that Congress needs to address.  And we should be careful not to confuse the two for each other when we hear them pleading their case.