Lessons from ’96: Free innovators from regulatory shackles

In the early 1990s, 2-percent GDP growth was the norm, just as it is today. The unemployment rate hovered around 7 percent, productivity remained stagnant and policymakers were beginning to think that this might just be the new norm. Then, in 1996, something miraculous happened.

The mid-1990s marked a drastic turning point in the economic conditions of the United States, culminating in an unprecedented acceleration in innovation. The great innovations of the 1990s were driven by the information technology (IT) revolution, with the contribution of computer technology, communications equipment, the internet and IT software.

{mosads}IT, as a general purpose technology (GPT) had a broad-based industry effect that fostered interrelated innovations in all sectors of the economy. The result of the IT revolution was a drastic uptick in productivity and annual growth rates of 3 to 4 percent; the kinds of figures the current administration dreams of achieving.

It is easily forgotten, or perhaps unknown, that prior to the early 1990s, it was considered unlawful to use the internet for commercial purposes — the “internet of things” was very heavily regulated. The explosion of innovation did not, therefore, happen by chance in the 1990s.

In 1996, the Clinton administration passed the Telecommunications Act, avoiding regulating the internet like communications and media technologies and allowing for open commercialization. The Telecom Act included a provision known as Section 230, which allowed for the free flow of commerce and online speech that led to today’s internet of things.

The great expansions in economic activity resulting from the IT revolution are in great part driven by the freedom to experiment and innovate unhindered. An environment of unrestrained innovation is fundamental for an economy’s innovative and productive potential.

The great acceleration in innovation in the 18th and 19th centuries that represents the foundations of the modern economy were only possible because of an environment of increasingly unrestrained innovation. Our future economic growth depends then, in great part, on the approach we take toward future innovations, whether precautionary or permissionless.

With the rise of artificial intelligence and robotics, the debate on the impact of technology on employment has been rekindled. Last year, Harvard professor Calestous Juma published a book concerning innovations, transformative technologies and the growing opposition to such change.

“Innovation and Its Enemies: Why People Resist New Technology,” assesses how perceptions of lost employment, identity and power drive impediment to innovation and describes the widening gap between the pace of technological advancement and slow rate at which society adjusts.

The study concludes that in many cases, objections and social responses to innovation result from intuitive responses and vested interests.

It is these intuitive fears of change and opposition by vested interests that has been key to driving legislative change at the regulatory level since the onset of the New Deal era, with increasingly calamitous economic results.

This isn’t simply a U.S. phenomenon either, just last week in the U.K., the London mayor announced plans to ban the ridesharing app Uber from the city. This ban shows the world that London is closed to innovative companies that bring choice to consumers and work opportunities to those who need them.

This move is a perfect example of state apparatus being utilized by industry cartels, in this case the London taxi drivers, to constrain innovation.

Federal regulations, executed poorly, have been shown to stifle creativity and learning and limit opportunities for innovation-fueled growth. There have been several studies conducted on the effects of regulation on growth in recent years, with several sets of regulation data in cross-sections and panels of countries.

Nearly all of these studies find that regulation has adverse effects on economic activity; the effect on total factor productivity (TFP) is particularly significant. A study published in 2013 investigating the relationship between federal regulation and macroeconomic performance found that regulations added since 1949 have reduced the aggregate growth rate on average by about two percentage points.

Further, the study concludes that annual output in 2005 was about 28 percent of what it would have been had regulation remained at its 1949 level. These findings are largely in line with the results obtained from other cross-section and panel studies.

Going forward, productivity growth similar to the 1973-95 pace is a very reasonable expectation. Much like the IT revolution of the 1990s, there could be another unexpected productivity breakthrough. This is especially likely when observing the innovative potential of artificial intelligence, robotics, driverless cars and 3D printing, to name a few.

Unfortunately, regulators and government agencies are already exploring new regulations and restraints for such transformative technologies. If we continue to over-regulate and constrain the innovative potential of these life-altering technologies, then perhaps it is perfectly plausible to suggest that China or India will instead fill the void in becoming the centers of frontier research.

Jack Salmon is a Washington, D.C.-based researcher focused on federal fiscal policy. Salmon holds an M.A. in political economy with specializations in macroeconomics and comparative economic analysis from King’s College London.