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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