Episode 75: Getting the Regulators Out of the Way of Innovation

Michael Schaus

Free to Offend Episode 75 | Guests: Rees Empey, Libertas Institute

Innovation is the key to economic prosperity. Unfortunately, regulatory frameworks that were written decades ago are often at odds with creative new ideas – stymying the innovation we need for continued economic growth.

Rees Empey with the Libertas Institute joined the program to talk about a new regulatory framework that rewards and encourages innovation, “Regulatory Sandboxes.” In fact, these sandboxes are already being used in various industries throughout the nation – and have shown a surprising amount of bipartisan support in both red and blue states.

Read the Transcript

Rees Empey: But the some of these startups, they don’t have money to hire high caliber lobbyists to go change the rules or regulations for them or to break the law and just, you know, sue the government. They just don’t have that sort of capital.

Michael Schaus: This is Free to Offend. I’m your host, Michael Schaus. Innovation is the key to progress, right? Especially economic growth. Innovation is a critical component of that. Businesses and industries need to be able to innovate and change the way that they do things. And that in turn makes them more productive. It makes it better for us as consumers, and it tends to create some jobs and hopefully some economic prosperity.

Unfortunately, what’s holding back a lot of innovation is not the lack of new ideas. And it’s not the lack of entrepreneurs or people that want to go out there and take a chance to do something new. Instead, it’s regulatory barriers. It’s rules that were written for industries that 100 years ago, or 150 years ago, or even just a couple of decades ago.

You think about how much the world has changed and how much it has transformed in just say, the last 20 years. A lot of the regulations that we have in place from a few decades ago, are holding back innovation in a variety of different industries.
And so, I’m very happy to welcome our guest, Reese Empey. He’s with the Libertas Institute, and they’ve been talking about something called a regulatory sandbox. And this was a big, big deal a couple years ago in Utah. And I know, Arizona has played around with this. In fact, there seem to be a handful of jurisdictions, not just states, but also municipalities that are looking at this idea of creating regulatory sandboxes as a way to spur innovation.

So, Reese, thank you so much for joining us, I really appreciate it. Start off with kind of the elevator pitch. What do you mean when you are talking about a regulatory sandbox? What is that?

Rees Empey: A regulatory sandbox enables innovators, businesses, both big and small, old, and new, to try to work with regulators and legislators in trialing new products, services and business models while receiving a temporary waiver of regulations incompatible or applicable to their ideas.

So, let’s say I have a creative way to collect payments at my food truck business. Banking regulations that are 50-60 plus years old wouldn’t apply to something, you know, like Venmo, very neatly, or even Acorn, which strives to teach folks how to invest and save their money.

In other words, this creates a dynamic regulatory reform process that invites the business community to the table to highlight regulation standing in their way of innovating, and it in turn chisels away and updates and reforms the state’s regulatory code, to better welcome the innovations of tomorrow.

Michael Schaus: So basically, what it does is it gives you the ability if you are a business or an industry and entire industry, maybe it gives you the ability to approach the state and say, “Hey, look, here are the current regulations that are making our new idea or this new innovation, you know, unworkable.”

You kind of get a waiver for those particular regulations. You get to tweak them or something, and under the eye of the regulators, you get to try something new that otherwise, if we were talking about the more traditional regulatory method, you might have to sit there for years trying to change regulations so that way, you could allow something like Venmo. Is that kind of the idea?

Rees Empey: Absolutely. And this allows these innovators, you know, this can be used for the older, bigger, more successful, you know, I guess you’d call them incumbents in the industries to trial new things. But some of these startups, they don’t have money to hire high caliber lobbyists to go change the rules or regulations for them, or to break the law and just, you know, sue the government into oblivion. They just don’t have that sort of capital.

And, although you know, this can be applied to existing industries, in a way, this is future proofing the state to be welcoming and accepting of industries we haven’t thought of yet. You know, a few decades ago, the internet wasn’t as big, you know. No one ever could have seen what would have happened. Or, you know, cell phones that we’re using every day or so.

Think innovation just comes at such a quick pace. And government oftentimes struggles to keep pace with it, or to even understand it. So, this allows for, like these real examples to come in, so that states can better understand it and create smart regulation, as well as an act smart deregulation to just constantly be evolving with the times.

Michael Schaus: Well, this is one of the things that, you know, we talk a lot about when we’re talking about economic freedom, and we’re talking about free markets and stuff. The risks that we run into all the time is regulatory capture, where you got these big industries that say, “Hey, let’s go ahead and we’ll go ahead and support a bunch of regulations on our industry, because it makes it harder for the little guys to start up innovative alternatives.”

But this sounds like a really good way to kind of future proof yourself against that type of regulatory capture by giving some sort of a mechanism for people to say, “Hey, let’s try something differently for a little while.”

Have you seen that play out anywhere across the state where they’ve adopted some of these? I know, off the air, we were talking about Arizona has got universal sandbox, Utah has got a universal sandbox. And I’m sure that there are kind of industry specific examples of this throughout the United States. You know, what are some of the success stories that you’ve seen so far?

Rees Empey: Yeah. So, this is still fairly early in the United States side of things. This started back in 2014 in the United Kingdom, which targeted financial technologies, or FinTech, which deals with mostly blockchain and crypto type issues. Blockchain is a digital ledger, of course.

But then, you know, several other countries such as Singapore, Australia, Japan, began implementing sandboxes their own while expanding it beyond FinTech to other industries.

Stateside, in 2018, Arizona passed the country’s first sandbox, which also targeted FinTech. The next year, something similar started to happen. States such as Wyoming, I believe Nevada, as was passed the following year, all the way up into present day Connecticut and Mississippi where this concept has been expanded outside of FinTech to look at insurance or look at agriculture or energy.

In Utah, we have an education sandbox to try and spur this innovation in public education where teachers or school districts can apply for this innovative curriculum, receive a stipend, and then innovate in the classroom. Most people traditionally think of FinTech, but this can apply to any industry under the sun.

Michael Schaus: Well, you mentioned education, and that, you know, is one of the areas that was kind of on my list to talk about, because it seems like there’d be such a good opportunity there.

One of the one of the challenges in Nevada is it has got one of the worst public-school systems, apparently, according to, you know, academic outcomes and what have you. And one thing that has been consistently talked about in this state is breaking up some of the bigger school districts into smaller districts so that way, they got more autonomy and stuff.

In reading about the regulatory sandbox, it strikes me as well, this is, you know, another way to approach some of that. I know, we always talked about school choice and stuff, but also just within a sector, such as education, saying, “Alright, we’re going to create the sandbox that allows more people to try to do things in a different way.”

But where do you think the biggest opposition comes from? Or is there a whole lot of opposition? Is it just that it’s a new idea, and people don’t quite understand it yet? Is that the only reason why it’s not all over the place already here in the United States?

Rees Empey: So, I’d say one of the biggest hurdles with this is education is just educating stakeholders, you know. Folks, hear sandbox, and they think of something they have in their backyard, or they grew up with, you know, playing in the sand. And I mean, it’s kind of the same thing, in essence of that.

But at the same time, you know, we’ve heard pushback from regulators that think the sky is going to fall, this is going to become the wild west of deregulation, or even some of the incumbents in the industry.

And what I say is, you know, these businesses in the sandbox, if anything, are under more of a watchful eye than outside of the sandbox, because they’re they apply to the sandbox, and they are constantly working with this regulator reporting, saying, “Hey, you know, I’ve got X amount of consumers engaging with my product, things are going well.”
And, you know, as a result, smart decisions can be made about those regulations that were waived. In other words, do we need them in the first place? Or could they use some reform or even repeal?

And what I say to some of the opposition, you know, more of the incumbents in the industry that don’t like this, that say, “This is just for the little guy, or this is just for the new players,” like, that’s just not true. You know, if a company has been around for 60 years, and they have something innovative, they want to try, they can, and they could use a sandbox, then this is their shot.
I’ve also heard you know, some of these bigger companies coming up and buying some of these startups to use their technologies in their companies because it just streamlines the whole thing, some of these innovations.

Michael Schaus: Is there any concern over cronyism or corruption or something in terms of, okay, we’ve got a supposed it’s sandbox but we’re not really going to let anybody play in it. We’re going to let our preferred industry actors or something, maybe take some liberties with some of these regulations, but kind of hold everybody else down a little bit. Is there a risk of that type of cronyism?

Rees Empey: I definitely see where that concern comes from. And my response to that is transparency. You know, on Utah’s universal sandbox webpage, we have authorized entities, the ones currently operating in the sandbox, as well as applications that are pending review. So that you know, the public, anyone can view this. This is who is applying this as who’s in.

And also, on top of that, most of the sandboxes across the country are required to give a report of some sort to the state legislature, which then opens it up to more public scrutiny.

On top of that, in many of the sandbox bills, you know, if business X is admitted, and they want to receive a waiver, and they’re in, you know, a particular industry, the sandbox, part of their job is to serve as a liaison and go to some of the other players and similar and say, “Hey, you know, this is available to you, you can apply, you can receive a waiver as well.” And, you know, if they want a waiver of the same regulation that just kind of expedite the whole thing.

Michael Schaus: Okay, so in theory, you’d be able to, you know, whether you’re talking about an activist watchdog group, or a journalist or even just regular citizen, you’d be able to kind of keep an eye on it and say, “Oh, hey, wait, this is something that that raises some alarm bells or something.”

Rees Empey: Yeah. Or even the legislature. They’re the ones funding it, you know. If something shady is going on, the legislature has a role in it as well. For example, on in Utah’s universal sandbox, there’s an advisory committee with folks from various business clusters, the agencies, and then the legislature itself. So, plenty of eyes on what’s coming in and out of the sandbox in most states.

Michael Schaus: I know Utah is kind of like this. I know, a lot of the purplish states. I mean, for example, Colorado is like this, Nevada is very much like this, where the state is so incredibly diverse, depending on where you are in the state. Yeah, I mean, Las Vegas is very different than Elko, for example. It strikes me that this would also be a real benefit for states that have such diversity, whether it’s, you know, big cities and small cities, because it allows regulators a little bit more flexibility to say, okay, yeah, we can try something new for these companies in a different part of the state or servicing different communities. It gives you a little bit more freedom to handle a very diverse state, which we have a lot of out here in the western United States.

Rees Empey: I definitely think that’s part of it. I haven’t heard much of that conversation in like Utah, or Arizona, but Wyoming is one that has brought it up where, “Hey, we don’t need to just focus like this.” You know, stuffs already happening in Cheyenne, one of the biggest urban centers in the state.

But this also opens up the opportunity for folks out on the farms. Like this can implicate agriculture. Like what could a farmer do? Or, you know, new creative ways to irrigate that’s more water efficient, something we struggle with out in the west, you know. We’re running out of water.

So, I think that definitely plays a role in some states. I haven’t heard it as much in Arizona.

Michael Schaus: Yeah, I think it’s something I would like us to explore a little bit more, especially being in states like Nevada and Arizona and New Mexico and what have you. We’re unique. We tend to be a very big diverse states with a lot of open area in the middle there, which is fantastic if you enjoy hiking. But it makes it very difficult to come up with a one size fits all regulatory frameworks for the entire state. And this, this, I think, would allow a little bit more flexibility in that sense.

You know, obviously, we’ve talked about FinTech. FinTech was kind of a big one, you know, where it started in the UK. What are some of the other sectors that you see it really focused on? Education, energy?

Rees Empey: Yeah, so FinTech was definitely the leading one, you know, the very first one. And we followed a very similar trajectory here in the United States that the UK did.

Michael Schaus: Which kind of makes sense because it’s such an innovative sector. They’re clearly trying to do things that are outside of our, you know, traditional mold, so to speak.

Rees Empey: Yeah. And I mean, what, what better industry to say, hey, we never thought of this so many years ago. FinTech

Insurance is probably the number two biggest industry highlighted. In 2019, after Arizona passed their FinTech in 2018, Kentucky and Vermont came in and passed the country’s first two insurance sandboxes, followed by North Carolina, Utah, and South Dakota. So, I’d say that’s a close second at this point.

Some of the industries that have surprised me, you know, when I was working with some folks in Mississippi, and they said, how can we apply this to agriculture and energy? I said, “That’s awesome. Like you can.” Any state regulations or rules standing in the way, like think outside of the sandbox box.
Connecticut has now implemented. It’s crazy to see a bill in red Mississippi, an energy sandbox, and then a state is blue is Connecticut implementing a very similar sandbox in an attempt to lower rates of costs for the energy, as well as update their grid at the same time.

Some of the other industries that have been floated, Arizona has a property technology sandbox. To be honest with you, I’m not really sure what it is. Health care has been another one, Virginia had a bill last year. Wyoming has a medical digital innovations devices sandbox, which I’m not really sure what that one is either, but someone told me.

Michael Schaus: I think I know about that one, like the telehealth and stuff like that.

Rees Empey: I think smart devices?

Michael Schaus: Yeah, yeah. That’s the thing, the potential there to apply it to so many different industries. Because I’m thinking specifically about like telehealth and what have you. That was something we’ve talked about in Nevada, in the past, because a lot of the healthcare rules were written for a time when people had to go see their family doctor. And obviously, that’s not the healthcare environment in which we live in currently.

So, giving the freedom to, you know, update some of those regulations, as people are innovating and finding new ways to do things is huge, and it would have a real huge impact on people’s lives.

Rees Empey: Agreed. And, you know, during the COVID-19 pandemic, we saw states and the federal government waving regulations. The sky didn’t fall, but it sure got, you know, products to the market a lot quicker. And I think health really gained a big bump during COVID-19, when, you know, folks didn’t leave their house, they’d rather just call their doctor.

And, you know, I think innovation also helps not just the urban folks, but the rural folks. The sky’s the limit. And I guess one more industry to plug, Utah currently has a bill, and it’s for a drone sandbox, and has, you know, just a lot of potential room for growth for cool innovations, you know. Packages being delivered by drone, or, you know. I’m a big hiker myself, as you mentioned. That’s why I grew up in Missouri and I live out in the west. Now, it’s a big reason. You know, this would be the federal government, of course, but I mean, think about the implications for search and rescue missions if the National Park Service or the Forest Service could deploy drones rather than a squad of rangers.

Michael Schaus: Well, and unfortunately, as is the case with most of commercial life here in the United States, the regulation trend has been going the wrong way when it comes to things like drones. You know, I remember years ago, starting and getting interested in landscape photography and everything. You could just grab a drone go out somewhere, throw it up there, take pictures, and boy, those days are certainly gone.

But, you know, seeing traditionally the kind of one-way ratchet of government where we get more and more restrictive regulations, having some sort of mechanism that apparently is popular among blue states and red states, that kind of put an end to that one way ratchet is a promising idea.

Rees Empey: And you know, the regulatory sandbox is a way to sinless innovation. Rather than say we haven’t thought of this, or, you know, it’s against the rules we wrote 60 years ago, no, say, “Hey, come trial this in a controlled environment, so that we can understand it better as a state, and then craft smart regulation around it,” rather than just saying, “Oh, we thought of everything. No, you can’t come in. That’s not the next big thing.”

When in reality, I mean, if you and I knew what the next big thing was, we wouldn’t be here talking right now. We’d be out in the garage somewhere starting up our business.

Michael Schaus: Yeah. Scraping together some money to invest in the next Apple or something.

Oh, one more time, where can people go if they want to keep track of what’s going on with regulatory sandboxes?

Rees Empey: Yes, we have an interactive map on our website at libertas.org/outreach/sandbox

Michael Schaus: Perfect. Thank you so much. We really appreciate you taking the time.

Rees Empey: Hey, thank you for having me.

Michael Schaus: You know, once again, this is kind of the strange, weird, unexpected benefit of the absolute chaos and unconstitutional absurdity of the COVID era. Because one of the things that we saw during the COVID era was that both Democrats and Republicans, progressives and conservatives, libertarians, and even some socialists, were looking around saying, “Wow, a lot of these regulations don’t make sense right now.”

And as a result, they started waving a bunch of regulations. I mean, I think specifically about, you know, my home state of Colorado, one of the things that was going on in Colorado that was really interesting, was they started talking about, hey, everything is shut down. Maybe we should allow delivery drivers to deliver alcohol. You know, that was something I had not seen that in Nevada. And so all of a sudden, the pandemic.

We saw elsewhere, throughout the nation where people started loosening up rules and regulations that were making life unnecessarily difficult. And one of the nice things about that was when we started go back to normal, a lot of folks said, “Well, wait a minute, do we really have to put those regulations back in place? You know, life is kind of nice, that now sitting in some apartment or hotel in Denver, you can just go ahead get on your phone and have alcohol and food delivered right to you.” I mean, that’s, that’s pleasant. It’s very nice. Consumers like that.

And then from that era of kind of accidental deregulation in some ways, I think that we’re seeing kind of a broader, more bipartisan approach toward the regulatory framework.
You know, as a libertarian, I get accused all the time of just hating all regulations and all circumstances, and I just want it to be the absolute Wild West. And well, that’s not entirely untrue. I am definitely anti-regulation in general. Generally speaking, my impulses don’t regulate it.

But that being said, the regulatory sandbox allows a mechanism that can spur the type of organic deregulation that’s not going to terrify the people who otherwise are kind of nanny state bureaucrats. Because they can say, “Oh, look, you want to do something different, here’s your permission slip to do something different, and we’re going to watch you.”

And then when the sky doesn’t fall, it’s really difficult to put that genie back in the bottle. It’s really difficult to give people the flexibility to start doing something in a new way, and then say, oh, never mind, we’re going to shut all that down.

So, if you view the government as kind of a one-way ratchet when it comes to regulation, something like the regulatory sandbox, whether it’s in one industry, or like what they have in Utah, where it’s a universal regulatory sandbox, it’s a very promising idea. And it’s something that conservatives and free market folks should definitely get on board with.

It’s something that libertarians should very much embrace, because look, let’s face it, as much as all of us would like to just take a black marker to the book of regulations that exists for government and just start blacking everything out. That’s just not going to happen.

There are too many powerful interests that enjoy the regulatory framework that’s currently in place. And those interests are everything from government itself to big businesses. All across the spectrum, there are vested interest in keeping things complicated for the average small business or innovator or entrepreneur.

And so, getting some sort of a release valve that allows them to start doing things in a new way is to me a very powerful way to kind of stem that regulatory culture that we currently have in government.

Hey, be sure to visit Nevadapolicy.org/podcast and you can not only sign up to make sure that you get these podcasts right in your inbox anytime we publish new one, but you can also reach out to us there and let us know if there are any guests or topics that you think we ought to cover. Again, that’s Nevada policy.org/podcast. Thank you so much for listening. This has been Free to Offend.

Free to Offend can also be heard on Amazon and iTunes.

 Free to Offend:
A podcast that radically defends free speech by regularly practicing it.

Produced by Nevada Policy Research Institute,
featuring Nevada Policy’s Michael Schaus.