Progress Report: Revisiting “Rules of the Road” for a New Economy

By / 5.4.2010

I know you’re not supposed to tout your own work on blogs, but for this, my inaugural post for Progressive Fix, I can’t resist.

When PPI established its New Economy Task Force 11 years ago, its first product was a pamphlet entitled “Rules of the Road: Governing Principles for the New Economy.” In Internet time, 11 years is a lifetime. But that short but powerful statement still holds up — and, I would argue, is just as relevant today as it was in 1999. This seems as good a time as any to revisit what we said and take stock of how far — or not — we’ve come.

The pamphlet started off with this statement:

The U.S. economy has undergone a profound structural transformation in the last decade and a half. The information technology revolution has expanded well beyond the cutting-edge high-tech sector. It has shaken the very foundations of the old industrial and occupational order, redefined the rules of entrepreneurship and competition, and created an increasingly global marketplace for a myriad of new goods and services.

I would venture to say that it’s even truer today than when we first wrote it. The introduction went on to state:

Yet while economic reality is fundamentally changing, much of our public policy framework remains rooted in the past. This mismatch between public policy and economic reality is not sustainable. … On one side of the political spectrum, policymakers advocate across-the-board tax cuts, a dramatically reduced role for government, and elimination of social regulations. … On the other side of the political spectrum, policymakers advocate increased spending on top-down social programs geared toward income redistribution, coupled with a focus on command-and-control regulation through bureaucratic institutions, ignoring just how entrepreneurial, fast moving, and flexible our economy has become. Furthermore, resistance from both ends of the political spectrum to open trade, global integration, and technological and organizational change threatens to slow the economic changes that hold great potential to yield higher standards of living for American workers

After 11 years, while some progress has been made, all too often policy-makers still view economic and technology challenges through either of these lenses. And those resistant to change, whether groups advocating for strict regulations on “network neutrality” and “Internet privacy,” or restrictions on globalization and trade, continue to be active, if not more so.

How Far Have We Traveled?

The guide offered 10 key rules to policy-makers to encourage an innovation-driven economy. How have we done on those prescriptions? Let’s go down the list:

Rule #1: Spur Innovation to Raise Living Standards

….Because innovation and change are disruptive, they tend to spark strong political demands to insulate affected segments of the economy and slow down economic change. Such demands, while understandable, inherently deny opportunities to less politically powerful interests in the guise of “protecting” those with clout. As a result, to effectively promote growth in the New Economy, government must facilitate, rather than resist, the processes of economic change and modernization as these changes create new opportunities and increased incomes for all Americans.

Unfortunately, the urge to protect the status quo is powerful, as Washington still shows little appetite for upsetting it by enabling or promoting innovation.

Rule #2: Expand the Winners’ Circle

Ensuring that the benefits of innovation and change are spread broadly will require that all Americans, including those not yet engaged in or benefitting from the New Economy, have access to the tools and resources they need to get ahead and stay ahead.

We’ve made some progress here, not the least of which was expanding health care coverage to more Americans (though the effects of reform won’t be felt for years). But more needs to be done, particularly in areas like unemployment insurance reform and better access to lifelong learning.

Rule #3: Invest in Knowledge and Skills

To spur innovation and equip citizens to win in the New Economy, government should invest more in the knowledge infrastructure of the 21st century: world class education, training and life-long learning, science, technology, technology standards, and other intangible public goods. These are the essential drivers of economic progress today.

Not many in Washington would disagree. But it’s a different matter altogether to muster the political will to increase investments in these areas, particularly when it means cutting old economy spending, such as agricultural subsidies.

Rule #4: Grow the Net

The Internet is a critical component of the emerging digital economy. …The information technology revolution is transforming virtually all industries and is central to increased economic efficiency and productivity, higher standards of living, and greater personal empowerment.

Governments must avoid policies and regulations that would inhibit the growth of the Internet or slow progress by protecting business interests threatened by the digitization of the economy. Policymakers should craft a legal and regulatory framework that supports the widespread growth of the Internet and high-speed “broadband” telecommunications, in such areas as taxation, encryption, privacy, digital signatures, telecommunications regulation, and industry regulation (in banking, insurance, and securities, for example).

In some ways Washington has embraced this message. The inclusion of billions of dollars for support for the smart grid, health IT and broadband in the stimulus package was a key step in the right direction. On the other hand, the growing interest in regulating the Internet — such as overly restrictive net neutrality and privacy regulations — suggests that we have gone in the wrong direction.

Rule #5: Let Markets Set Prices

In the old economy, government often regulated prices when national markets were dominated by oligopolies or monopolies. In those cases, the economic costs of government intervention were manageable, and sometimes necessary. But in the new, more competitive global economy, distorted prices are much more likely lead to economically inefficient decisions by consumers and producers and to unfair, politically driven resource allocation. Therefore, in the absence of clear market failures, markets, not governments, should set prices of privately provided goods and services.

It’s still hard for many policy-makers to embrace this rule, but it’s as valid today as it was a decade ago.

Rule #6: Open Regulated Markets to Competition

Economists have long acknowledged that competition keeps prices down. The New Economy creates another critical reason for competition: competition drives innovation, and ultimately provides the greatest benefits to consumers and citizens. Of course, government must continue to provide common-sense health, safety, and environmental regulations. However, government should move away from regulating economic competition among firms and instead promote competition … Through minimalist, yet consistent rules, public policy should also ensure that consumers have the information they need to make educated choices and provide a backstop to protect consumers and citizens from abuse in markets.

Like rule # 5, it’s hard for some policy-makers to resist intervention to regulate competition. We see it most clearly in telecommunications, where some still argue that more government-enforced competition is needed.

Rule #7: Let Competing Technologies Compete

Technological innovation has now become central to addressing a wide range of public policy goals, including better health care, environmental protection, a renewed defense base, improved education and training, and reinvented government. For example, technology provides doctors and patients with state-of- the-art health information systems that improve the quality of care. Similarly, new generations of cleaner technologies can dramatically reduce pollution generated by industrial processes. … We should look for technology-enabled solutions to public problems, but not so that today’s winners are frozen in place at the expense of tomorrow’s innovators.

Amen. While government does need to target technology areas (e.g., clean energy, IT, robotics, etc.), it shouldn’t pick specific technologies within those sectors.

Rule #8: Empower People With Information

In the old economy, information was a scarce resource to which few outside of large corporations and governments had access. In the New Economy, constant innovations in ever-lower-cost information technologies have enabled increasingly ubiquitous access to information, giving individuals greater power to make informed choices. Governments should encourage and take advantage of this trend to address a broad array of public policy questions by ensuring that all Americans have the information they need as consumers and citizens.

Progress on this front: The recently announced National Broadband Plan, for example, takes a number of important steps in this direction.

Rule #9:Demand High-Performance Government

Government should become as fast, responsive, and flexible as the economy and society with which it interacts. The new model of governing should be decentralized, non-bureaucratic, catalytic, results-oriented, and empowering. …

When designing solutions to compelling public concerns, such as reducing industrial pollution or delivering world-class public education, government should hold organizations and individuals accountable for meeting goals, while allowing them flexibility to achieve those goals. In many cases, industry self-regulation can achieve public policy goals in ways that are more flexible and cost effective than traditional command-and-control regulation, while also enabling technological innovation.

Procedurally, governments should use information technologies to fundamentally reengineer government and provide a wide array of services through digital electronic means to increase efficiency, cut costs, and improve service. Digitizing government is the next step in re-engineering government.

Washington may give lip service to #9, but when the rubber hits the road, much is still the same. Perhaps the main area of progress is using IT to transform government, but even here a great deal remains to be done.

Rule #10: Replace Bureaucracies With Networks

In the old economy, bureaucracy was how we addressed many major public policy problems. In the New Economy, we must rely on a host of new public-private partnerships and alliances.

Rather than acting as the sole funder and manager of bureaucratic programs, New Economy governments need to co-invest and collaborate with other organizations — networks of companies, universities, non-profit community organizations, churches, and other civic organizations — to achieve a wide range of public policy goals.

Yet public policy has only begun to explore the potential of bottom-up, decentralized networks assuming the lead role in solving pressing societal problems. Government needs to co-invest in these efforts and foster continuous learning through the sharing of best- practice lessons. Most importantly, the collaborative network model requires government to relax its often overly rigid bureaucratic program controls and instead rely on incentives, information sharing, competition, and accountability to achieve policy goals.

Of the 10 rules, this last one may be the hardest for policy-makers to embrace. The legacy of government bureaucracy and “programs” as the solution to our problems — rather than government-enabled networks — is so deeply held that new approaches are not even considered in many cases.

More than a decade since we first published these rules, it’s clear that many of our prescriptions remain unheeded. Whether or not you embrace the term “New Economy” is not the point. The U.S. economy is fundamentally different than it was two decades ago. To pretend that it hasn’t changed, and to continue ignoring the shifting landscape, will consign us to economic stagnation. That rules of the road issued in 1999 remain relevant today underscores just how little progress was made in the 2000s, and how much work needs to be done to fully bring America into the 21st century.  Policy makers and stakeholders from across the political spectrum need to move beyond the talking points from another generation and embrace policies based on today’s realities.

The views expressed here do not necessarily reflect those of the Progressive Policy Institute.