The US should embrace regulatory sandboxing

More and more states are experimenting with regulatory sandboxes to spur innovation.  As the concept of hands-off proving grounds for small businesses and startups takes off, states should lean into the movement, implementing hands-off regulatory policies in more markets. 

The greatest barrier to a business breaking into the market is undoubtedly the extensive regulation and red tape that strangles all parts of American enterprise.  The U.S. Chamber Foundation found that the burden of federal economic regulation on small manufacturers (which make up 99.7% of all U.S. companies and nearly half of private-sector workers) paid "$11,700 per year per employee in regulatory costs.  These costs added up to a total of over $40 billion per year. 

The past half-century has seen a dramatic increase in regulation.  Today, around 3,000-4,000 regulatory rules are finalized and enforced every single year.

Enter the concept of a "regulatory sandbox," in which the government extends temporary relaxations on regulations for small businesses within specific industries to promote innovation.  The idea is that relaxing regulations for a period of time would provide small businesses and emerging industries a competitive edge over the more developed businesses, thus incentivizing new businesses to innovate and enter the market.

Only ten states have introduced these regulatory sandboxes so far, and of those ten, most are defined to very specific industries and are not implemented to their fullest extent.  The majority sprouting in the United States is focused solely on the financial technology sector (commonly referred to as FinTech). 

Imagine the growth and innovation we could unleash if sandboxes were implemented throughout the entire market.  It would mean an even playing field for businesses in both existing and emerging markets.  It would spark a new age of innovation. 

Critics argue that there is an increased risk of allowing a deregulated market to flourish for new innovations, with major publications like the Financial Times suggesting that regulatory sandboxes open up the floodgates for governments to compete for the "lightest touch" approach possible.  It's even been suggested that this causes a worrying influx of new "risky" investments that are designed purely to attract business.

Like any market, information on whether or not a product is successful can be found only by participating in that market.  Should "risky" small businesses fail in a regulatory sandbox, it's a non-issue.  By removing the regulations that place an immense burden on small businesses, the initial buy-in and financial risk would be much lower.  A necessary function of the market is to allow businesses to thrive and to fail so that the information about what is and isn't a good investment can be discovered.

The formula of regulatory sandboxes has already been played out over decades on a much larger scale to unimaginable success.  Two states, with little cultural or political similarity, but the same geographic and resource constraints, have managed to be the hub for business and innovation through implementing a statewide "sandbox."

Whilst not explicitly regulatory sandboxes, Hong Kong and Singapore have both taken the same concept of drawing in business with low regulatory burdens (and taxes) in order to substantially grow their economies.  With no agriculture or natural resources, these two city-states needed to rely on having a competitive edge to survive long-term.  Neither was known for business nor were they particularly wealthy prior to decreasing the burden for small businesses to set up and experiment within their borders. 

Yet today, Singapore and Hong Kong consistently outclass other countries in Asia and the rest of the world, with similar policies of concessional tax rates for low earning startups, smaller taxable income, and low regulatory requirements for operating and owning businesses. 

If it can work in Singapore and Hong Kong, why not in Utah, Arizona, or the rest of the states? 

It is no surprise that American entrepreneurship, including its car, financial, and rail industries, blossomed in an era of low regulation.  Interference by all levels of government serves only to stagnate markets as regulatory burdens increase.

It's time to embrace that fact in full.  Increasing the scope of regulatory sandboxes and proliferating them throughout the United States would also open the floodgates for an unrealized amount of business and commerce to flourish.  Enabling small businesses enables lower- and middle-class citizens to reach for success.

Damon Miles is a business law graduate from Curtin University, Mannkal Economic Education Foundation Alumnus, and Young Voices Contributor based out of Perth, Western Australia.  He is currently completing his Juris Doctorate at the University of Western Australia.

Image: Pix4Free.

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