INSIGHTS: REGULATIONS THAT ENABLE INNOVATION
By Guest Columnist David Black:
Technology Partner, Oak HC/FT Partners.
Reprinted with permission from The Black Liszt Blog
Regulations that enable innovation? How can that be?? Don’t regulations inhibit or even prevent innovation?
Yes they do. Wouldn’t it be nice if there were a way to write regulations that enabled innovation? Well, there is a way to do it! It’s actually easier to write regulations that enable innovation than the usual way. There are fewer of them. They’re easier to understand, and easier to keep up to date. They’re more effective at regulating what you could reasonably want to regulate, while at the same time keeping the door open for inventive people to find better ways to get things done, while still conforming to the regulations.
So why isn’t this the standard way of writing regulations? Inertia. Lack of understanding. Fear. Bureaucratic intransigence. The usual reasons.
Regulations that Enable Innovation
Practically all regulations tell you, in varying levels of detail, tending to the excruciating, How you’re supposed to do the regulated thing. The more detail, the less innovation.
By sharp contrast, regulations that enable innovation tell you What you’re supposed to do or avoid doing. The less said about how to reach the goal, the wider the door for innovation.
Suppose the point of a regulation was to make sure you got to work on time. Typical how-type regulations would tell you exactly when to leave your apartment and exactly what streets and avenues to walk until you got to the office. It would allow for red lights. The regulations would have to change to allow for construction and other changes. If you deviated from the prescribed route or used a different method of transportation, you’d be in violation.
What-type regulations for the same thing are simple: dude, get to the office on time! How? You figure it out, it’s your problem! But it’s also your opportunity for learning and evolution. You could try walking, and try different routes. You could try the bus and subway. Taxi and Uber. Different ones under different circumstances. So long as you got to work on time, you’d meet the regulation!
For more detail on What vs. How, see this.
If this sounds crazy to you, you should realize that there is a whole, vast area of our legal system that works in just this way: the criminal law. See this for more.
I wouldn’t be advocating for change if how-type regulations worked. They usually don’t get the job done. They prevent innovation. Worse, when you satisfy all the regulations, you’re under the illusion that things are fine. Except that they’re usually not. The ongoing cyber-security disasters we have experienced are prime examples of this.
Cutting down the number of regulations
Lots of people complain about regulations. Some people want to reduce their number. For good reason! Have a look at this to see the scale of regulations.
I hope it’s now clear that reducing the number of How-type regulations won’t make a big difference. It may even make things worse. It’s better to replace a whole pile of How-type regulations with a couple of simple, goal-oriented What-type regulations.
An example of regulatory innovation prevention
The rhetoric of regulations and licensing is that they protect us poor, innocent consumers from the awful products and services that would be inflicted on us in their absence. The reality is that they are a massive effort that increases the costs of everyone already providing a product or service, while putting up huge barriers to competition from fast, light-footed innovators who have figured out a better way to do things. Regulation, certification and licensing do almost nothing to protect consumers, but are remarkably effective incumbent protection programs.
While this dynamic plays out in many industries, nowhere is it more harmful to our health and well-being as it is in healthcare.
The FDA is supposed to protect our health. It’s even what they say they do
One of the many ways they do this is by heavily regulating the software that goes into all medically-related devices.
The right way, the What-type way of regulating that software, would be like a criminal law:
Your software has to perform all its intended functions in a timely and effective way, without error. When updates are made, no errors or other problems should be introduced.
Now that’s just a first draft. But I bet the final goal-oriented “regulation” wouldn’t be too far from this.
This simple regulation states what everyone really wants: the software should do what it’s supposed to do. Period.
The FDA does the opposite of simple and effective. It tells you exactly how you’re supposed to develop software, and in gruesome detail. Here’s the overview of the regulation:
The sections are listed on the left. Each explodes into many sub-sections, some of which are further divided. Each one is long, detailed and brooks no variation (or innovation). On the right in the image above, you see just some of the bibliography, the many underlying documents you’d better get and understand if you’re going to be in regulatory compliance.
Here’s a diagram that gives an overview of what is required:
Here are the section headings from the software planning part of the document:
As this makes clear, you’d better not write a line of software until you’ve spent boatloads of time and effort in planning — exactly what people do when they build buildings using steel and poured concrete, but exactly the opposite of the iterative approach that is the standard among fast-paced, innovative organizations. I mean little upstarts with a high failure rate, like Google, for example.
If the FDA were serious about their stated mission, “protecting and promoting your health,” they would immediately blow up IEC 62304 and the who-knows-how-many-other mountains of how-type regulations they oh-so-lovingly promulgate and enforce, and replace them with simple goal-type, what-type “regulations.” It would unleash a torrent of health-promoting innovation and open the lobbyist-loving incumbents to much-needed competition. To the benefit of nearly everyone, except a bunch of progress-preventing bureaucrats employed both by the government and by their corporate “homies.”
We need regulations. The last thing any of us wants is for corporations to build crappy equipment that doesn’t work or deliver services that deceive or hurt us. There are bad and incompetent people in the world, and without appropriate regulations that are vigorously enforced, we’d be worse off. And in extreme cases, dead when we could be thriving.
Which is why it is so upsetting that major organizations like the FDA keeping waddling along, crowing about what a great job they’re doing, when it’s just not true.
I wish it were just the FDA. Most major sectors of society that are supposed to be protected by regulations are instead hobbled by incumbent-protecting, innovation-killing, ineffective how-type regulations.
The path to regulation that is both effective and enables innovation is clear. Let’s do it!!!
ON THE ECONOMY: 2017 JDA PREDICTIONS
By John Dunham:
Managing Partner, John Dunham & Associates
Greetings, my friends. We are all interested in the future, for that is where you and I are going to spend the rest of our lives. So began one of the great cult movie classics of all time, Ed Wood’s Plan 9 From Outer Space. The narrator of the film was a former radio announcer known as the Amazing Criswell. Criswell was famous for his bizarre predictions including a claim that the earth would be struck by a ray from space that would cause all metal to adopt the qualities of rubber, leading to horrific accidents at amusement parks. He also suggested that the end of the planet would happen on August 18, 1999. While Criswell never claimed to be a real psychic, and his bizarre prognostications were for entertainment only, many of those who make forecasts are not always so humble.
In our final Monthly Manifesto of the year we examine the predictions that were made through 2016. As usual, the year was full of incorrect predictions. Let’s start with the Presidential election – nearly every pundit and prognosticator predicted that former Senator and Secretary of State Hillary Clinton would now be the President Elect. In fact, while hundreds of talking heads and polls said a Clinton victory was in the bag, only the LA Times, Allan Lichtman, a professor at American University, and Geda The Chinese Monkey predicted the Trump victory. Actually, people who live in the upper Midwest like Michael Moore and nearly every lobbyist that I work with, predicted the Trump win, which says something about getting out of Washington and New York.
But the Trump win was not the only thing that forecasters got wrong. Some things are remarkably hard to predict. For example, who would have forecast my alma mater (Colorado) winning the Pac 12 South back in September, or the Chicago Cubs first World Series title since 1908. But one would think that people who made their living forecasting would be a bit better. Currently, the S&P 500 is sitting at about 2260, up by 10 percent since the beginning of the year. At that time forecasters for Societe Generale, BMO Capital Markets, Goldman Sachs, Morgan Stanley, Citibank, Oppenheimer, RBC, and most others all predicted a flat to slightly declining stock market for 2016. At the beginning of the year, Moody’s forecast oil prices to be $43 a barrel from Brent Crude. Today, Brent is at $55 a barrel about 30 percent above that forecast, and by the way, the price has been above $43 since March of 2016. The Brexit vote was supposed to lead to a collapse in the UK economy; however, that country’s growth pattern has barely budged.
On other fronts, psychic Tony Morris predicted world peace for 2016 (wow that was a reach) while psychic Sidney Friedman claimed that Melissa Rivers would get engaged and new evidence in the Marylin Monroe case would point to murder (wrong on both counts but you have to give Friedman credit for predicting the Cubs win). And to that point, Back to the Future 2 was darn close in making prediction about the Cubs (it was just a year off).
.All of this suggests that we should all be wary of predictions, and particularly with the computer models that all of us rely on to make them. As economist John Kenneth Galbraith has been quoted as saying, “There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.” With this in mind, how did JDA do in its predictions for 2016?
Our general prediction was that the US economy would enter a recession at the end of the year was off, and this lead to a number of our forecasts for other indicators being out of line. We are still the only forecaster in the Bloomberg survey that is forecasting a recession (see a recent article about us being at bottom of the forecast in the Financial Times). Over the last four quarters the economy did grow at a remarkably slow 1.6 percent on an annual basis. Not quite a recession, but well below our forecast of just 0.5 percent. This is reflective in the consumer spending numbers which at 4.5 percent growth year over year, are well above our 1.9 percent forecast. Our CPI forecast of 1.24 percent growth in inflation was below the 1.7 percent actual, but then again we believed that the recession would have begun by now. It is remarkably hard to forecast exactly when an indicator will turn, and as one of the best forecasters that I have ever worked with once told me, the difference between zero and negative zero is mighty small. So while we are not technically in recession, growth in real terms occurred though the 2001 recession as well. We never forecast that the coming recession would be large since there is not a whole lot of readjustment that needs to occur in an economy that is growing at such a slow rate.
On the other hand, we called the Federal Funds rate at 0.75 by the 4th quarter, and were almost spot on for our interest rate forecasts. Our unemployment rate forecast of 5.2 percent averaged over the year was not far off of the actual 4.9 percent. So in a general sense I call this a draw and as a tough grader give myself a C+.
As the Financial Times points out, I am way out on a limb with the prediction (that by the way I made in May of 2015) that the US economy would be in recession by now. I am, however, sticking to this. As our October Monthly Manifesto pointed out, key indicators are still pointing toward recession. And there is no outside factor – including the election of Mr. Trump – that is strong enough to counter the normal machinery of the economy. The longest period of expansion was 10 years, and we are already at 90 months in the current expansion. We have clearly topped out, and the slow plodding growth of the current recovery was based almost solely on government spending and non-productive health care price increases. If we are not currently in a recession, we are surely close to one.
Based on this, what do we foresee for 2017?
Let’s start with GDP. In spite of the recent 25 basis point increase in the Federal Funds Rate which should be a predictor of an increase in the demand for money, the current recovery has actually tracked in much the same was as every other post war recovery except that it has been less robust. As I stated before, the indicators are still pointing toward recession, and our latest forecast now has this happening in the 2nd quarter, with rapidly decreasing growth in the 4th quarter of this year and 1st quarter of 2017. A slow recovery does not suggest a lengthy recession, and there is simply nothing on the horizon that would suggest that we are not following a normal business cycle.
Our forecast for a coming recession comes in concert with continued slow growth in much of the world economy. Political crisis and bad economic policies in Europe, along with continued problems with debt in most of the rest of the world economy will preclude the major economies experiencing any significant growth in 2016. The biggest growth drivers will probably be in Latin America as the major economies of Brazil and Argentina begin to recover from long experiments with socialism.
It looks like employment has peaked, and while wages began to rise at the end of 2016, poor productivity will keep them from growing rapidly, particularly if we are correct and the economic cycle has peaked. Consumer spending should weaken. Unfortunately, there is also nothing on the horizon to suggest that the changes in the American regulatory and welfare structure will lead more people to work in the short term, even if the new President eliminates every rule created by an executive order. Deregulation and tax reform will be a slow process, and will not factor into productivity growth in a major way in 2017. In addition, states – particularly the large industrial states like California, New York and Illinois are controlled by so-called “progressive” state and local governments that will continue to legislate an anti-business and anti-growth agenda.
We expect to see the Federal Reserve continue to slowly raise the Federal Funds Rate, but demand for money – particularly for new investment activity will continue to be soft, as businesses and investors take a “wait and see” approach regarding the new Administration’s economic policies. So higher overnight rates will not be fully reflected in market rates. That said, we should begin to see a normalization in rates away from the absurdly low levels of the last decade.
Based on these general findings, most recent forecasts for 2017 are presented in the following chart.
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