September 15, 2015, 01:00 pm

Regulations stifle innovation

By Derek Khanna

The modern car was invented in Britain, but was commercialized in the United States. Upon the emergence of this new technology, England enacted the Red Flag Act that required three people at all times to operate the vehicle, 1) a driver, 2) a person to fuel up the vehicle, 3) someone to stand in front of the car and waive a red flag. They were concerned that cars would hurt people, and implemented 2 MPH limit in urban areas. Over time speed limits would increase to 12 MPH by the turn of the century, but much of the commercialization of vehicles already shifted to the United States. A young Henry Ford began building cars in 1896.

Henry Ford would launch Ford in 1903, in a country which didn’t have the Red Flag Act or it’s subsequent laws. In fact, most states had no speed limits at all. When Ford launched the Model T, it could travel at up to 45 MPH, a speed well above the legal limit in Britain. Who would want a Model T that could only travel at 20 MPH? Other car manufacturers would follow, General Motors, Chrysler etc. -- the rest is history. But this is more than a story of the emergence of the modern car – it’s a story of where innovation comes from.

The horse-less carriage was disruptive, and made powerful enemies of the horse and buggy industry. The number of horses in the United States declined from 21.5 million in 1915, to 6 million in 1949, and 2 million in the early 1950’s. And the horse-less carriage was an easy target, the technology was still being developed and had more than it’s fair share of problems. The advocates for the Red Flag Act in Britain weren’t wrong, cars were dangerous, today they are the leading cause of accidental deaths in the United States.

Launching a car company was tough, there were high capital costs, it involved largely untested technology, cars were inherently dangerous, consumers were used to the horse-buggy, gasoline was not always readily available, and cars were expensive. But Ford didn’t have to worry about ridiculous regulations by the horse and buggy industry to stifle the emergence of the car; those in the United Kingdom did.

Today United States rules, regulations and laws are just as problematic as the Red Flag Act.

For example, over the past year, the cost of a home DNA test for active proteins has dropped well below $1,000. Analysts had predicted this as the tipping point when the home DNA test market would be expanding rapidly. At a price point approaching $100, every American should have their DNA sequenced once in their lifetimes. At $100-$1000, have you been offered the ability to have your DNA tested and analyzed?

In 2010, Pathway Genomics was about to launch its saliva test kit at all Walgreen stores, when the FDA sent a letter one day before informing them that their test had not been approved. Subsequently, Walgreens would drop the program. The FDA’s Reign of Terror was just beginning: on June 2010, the FDA sent cease and desist letters to all direct to consumer genomic companies, including Navigenics, Decide, Pathway Genomics and 23 and Me. Only 23 and Me continued in defiance, charging $99 and providing gene variant reports for over 250 medical conditions and DNA medication interactions or thirty drugs.

But in 2013 the FDA effectively banned 23andMe from providing analytics services for its DNA tests, and with that draconian action, government regulators put a brake on an entire industry, shifting significant investment abroad.

In its letter to 23andMe, the FDA referred to concerns about the way women would react to information that they have the BRCA2 gene giving them a high predisposition to breast cancer. The FDA’s letter was stark, “Failure to take adequate corrective action may result in regulatory action. . . these actions include, but are not limited to, seizure, injunction, and civil money penalties.” The FDA wrote that “serious concerns are raised if test results are not adequately understood by patients.” Specifically direct to consumer models may inspire people to “self-manage” their care.

Entrepreneurs logically interpreted this action against a well-funded startup as a sign that this sector of the economy is simply not open for innovation.  23 and Me was founded by Sergey Brin’s wife, Susan Wojcicki, with over $50 million in capital and a large legal team. Venture capitalists thought if a $50 million start-up with Google money, and a robust legal team, couldn’t survive in the DNA testing market because of the FDA, then no one can.

This is how regulations can kill an industry.

Economic growth flourishes when policies promote permissionless innovation, allowing a Henry Ford, Steve Jobs, Bill Gates or Mark Zuckerberg to launch their business without permission from either the government or incumbent companies in the field. Laws like the Red Flag Act stifle growth. It’s not a coincidence that we have seen rapid and dynamic growth with internet-based start-ups, launching Twitter, Instagram, Google, Myspace, Reddit and Facebook were launched with the click of a mouse, and hard work, without requiring permission from the government or an incumbent company.

If we copy this playbook from internet-based start-ups, and expand the sectors of the economy open to permission-less innovation (by removing silly laws like the Red Flag Act), we will see dynamic growth in the economy.

Khanna is co-author of Lincoln Lab's new report "Lobbying for the Future."