Mandel: Washington Should Hit Regulatory Pause to Rebuild Economy

Posted December 6, 2010 at 10:06am

Now that the midterm elections are 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 is illogical 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.

The communications, higher education and bioscience sectors have emerged as leading innovators and demonstrated impressive forward momentum, despite the downturn. The leading edge of the communications sector — including Internet companies such as Google and Facebook, wireless providers such as Verizon and AT&T, online retailers such as Amazon.com and custom computer programming firms such as apps developers — added 50,000 new net domestic jobs since 2007. The number of U.S. life scientists, the heart of the biosciences sector, has risen by roughly 45,000 over the past two years. And as distance learning and educational technology remake higher education, employment in private-sector colleges and junior colleges, including both nonprofits and for-profits, is up by roughly 100,000 since 2007.

In my opinion, the communications, higher education and bioscience sectors are capable of driving the next economic boom. But only if we don’t throw extra regulations on them right now, while the economy is still weak.

Countercyclical regulatory policy is not the same as deregulation. As a temporary measure, it does not force either Democrats or Republicans to permanently retreat on their core values. Like countercyclical monetary and fiscal policy, countercyclical regulatory policy is designed to provide a short-run stimulus that can be reversed when the economy improves — the equivalent of a temporary cut in interest rates or a temporary investment tax credit.

And, if necessary, regulators and Congress can step back in with new rules or legislation to take care of abuses when the economy is on an upswing.

The main rule of countercyclical regulatory policy is “do no harm.” Washington should take a temporary pause from imposing potentially inhibitory regulations on innovative and growing domestic sectors as long as the unemployment rate is stuck at high levels. This is nothing more or less than common sense. If good jobs are a top national priority, why impose an extra burden on those innovative industries that are actually generating good jobs in the U.S.?

Indeed, a new proposal just announced by the Federal Communications Commission to end a fight over Internet regulation suggests that some policymakers may be making the connection. The new order, to be released in full later this month, sounds as if it will reject extremely onerous regulations proposed by some advocates. If so, that will enable the communications sector of the economy to move forward with investment that supports economic growth.

This appears to be in contrast with a recent pattern of “procyclical regulatory policy” — adding lots of rules and regulations during periods of economic weakness. For example, the 2002 Sarbanes-Oxley legislation addressed high-profile abuses at Enron, WorldCom, dot-coms and the tech sector in general. While important reforms, the timing was questionable, since they added to corporate costs at a time when domestic employment was still falling.

This time, in the middle of the worst recession in 75 years, the Obama administration used its political capital to pass financial and health care reforms. These pieces of legislation, in my opinion, were essential and long overdue. It’s clear in retrospect that the subprime-lending mess could have been avoided by tighter controls on the financial sector. And reforming health care to bring more people into the system is a necessary step toward solving our long-term health care finance problems. We should not rewrite or retreat from either health care or financial reform.

However, the administration then followed up with major regulatory initiatives in other areas, including a proposal by the FCC to apply the arcane rules of land-line phones to broadband, and the Department of Education’s continuing process of imposing new rules on for-profit colleges and other postsecondary institutions that train students for a particular occupation, the so-called “gainful employment” regulations.

Any of the individual proposed regulations may have virtues and problems, but the timing of targeting growing and innovative industries in the middle of a downturn is simply a mistake. That’s not the road to economic success.

Michael Mandel is former chief economist at BusinessWeek. He is currently senior fellow at the Progressive Policy Institute, and editor-in-chief of Visible Economy LLC, a new venture dedicated to bridging the gap between news and education.