What States and Cities Do Right to Promote Innovation

Federalism and Tech Policy

This is the first installment in a three-part series on federalism and technology. 

At a federal level, the pacing problem (where technology moves faster than public policy) is rapidly accelerating as innovation outpaces most regulatory and legislative mechanisms.

The lack of federal action related to disruptive technology has allowed states to fill the gap and experiment with different governance mechanisms for new and disruptive technologies. In short, states are positioning themselves as the place to be for innovative entrepreneurs. Over the coming weeks, I will explore what state actions regarding tech policy make sense, the areas where the tradeoffs of such policies must be considered but can likely be mitigated or avoided, and the areas where state actions related to tech policy are clearly damaging or constitutionally suspect.

The federal government has been increasingly unable to act when it comes to technology. As Adam Thierer, Ryan Hagemann, and I describe in our forthcoming law review article, the use of “soft law” by government agencies has been one solution to develop a framework of policies governing technologies. However, states have also stepped up to develop regulatory frameworks that allow innovators to test (and sometimes fail with) new ideas and technologies.

States Are Nimble

In some ways, it would be easier and more efficient to deal with a single regulatory scheme, but this approach comes with tradeoffs as well. Not only are state and local governments more connected directly to their constituents than their federal counterparts, but they also tend to be more adaptable and competitive with one another. As a result, as Matt Mitchell points out, they are less likely to be captured by special interests and more likely to be able to respond to unique situational needs. For new technologies that often must overcome existing industries seeking to keep them out and for whom their consumers are often there biggest advocates, this makes it far more likely that a compromise can be reached such that innovators have a chance to try.

With less bureaucracy to enact policies, local governments are able to more quickly react to new products and incorporate them into new or existing structures. State and local governments are also more able to allow experiments and risk and other governments can learn from the results—as opposed to a sudden, often stagnant, national policy that may or may not work.

States are often able to act more quickly with innovation promoting regulations than the federal government either through legislation or through administrative or regulatory action. For example, Pennsylvania has been able to quickly establish a framework to allow for autonomous vehicles through guidance from the state’s Department of Transportation (DoT). This particular framework has also engaged in many of the soft law techniques occurring at the federal level by acting through an administrative agency rather than waiting on legislation. Pennsylvania’s DoT guidance on autonomous vehicles signals a willingness to cooperate with innovators in a way that will provide them the necessary certainty to test and develop their products while also providing the state with reasonable information and oversight of who, what, and where.

In other states, including Virginia and Arizona, governors have issued executive orders to allow for autonomous vehicle testing. This executive action is even quicker than the regulatory process. State legislatures have also shown themselves to be fairly adept in addressing, and in many cases embracing, the forthcoming emergence of the autonomous vehicle.  Twenty-nine states have enacted some form of legislation related to the issue.

States Are Laboratories

Of course, the content and method of state laws or regulations have varied significantly, but this variety may be an advantage.  As Justice Louis Brandeis once wrote, "A state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country." Since then, proponents of federalism have argued that these “laboratories of democracy” provide a unique advantage to test different governance mechanisms and allow trends and best practices to emerge from the experiences of other states.

We have already seen many such experiments.  Arizona, in particular, has clearly signaled its willingness to become the laboratory. Primarily through a series of executive orders, Arizona has signaled its willingness to work with innovators in a variety of emerging technology sectors, including autonomous vehicles and FinTech. Being the first to try a new policy certainly has both advantages and risks (much like entrepreneurship and innovation more generally); however, the hope is that the success of states like Arizona encourages more states to adopt similar innovator-friendly policies resulting in even more innovation. As my colleague Adam Thierer has pointed out, some relatively straightforward policy changes could make a state much friendlier to innovation without creating the patchwork policies that create barriers to innovation between states.

As more states compete to create an innovator friendly marketplace of ideas, their competition will ideally bring about market-preserving federalism. As Professor Barry Weingast described it, market-preserving federalism occurs when competition between governments discourages rent-seeking behavior by firms and increases overall prosperity. As more states embrace innovation-friendly policies, market-preserving federalism may give innovators a variety of choices about where and how to deploy new technologies. For example, cities have responded with a variety of regulatory reactions to the launch of dockless electric scooters.

Some of these have sought to embrace innovation more than others. However, as cities clamor for more and different transportation options, new entrants to the market may seek to work with cities like Memphis and Atlanta that have shown a willingness to consider and welcome innovative transportation options. Cities and states may also seek to specialize by focusing on innovation in certain areas, such as transportation or advanced medical technology, by providing regulatory sandboxes for innovators.

By developing diverse legislative and regulatory options, market-preserving federalism ultimately offers consumers more options. Technology rarely stays within strict borders, but states and consumers benefit from the overall increase in innovation that arises when states seek to promote entrepreneurship within and beyond their borders. Additionally, small-scale tests allow innovators to show a new technology’s success or limit the impact of its failures. Of course, as will be discussed in later sections of this series, many of these advantages can become disadvantages when policy seeks to cage rather than release innovation.

Photo credit: EUGENE GARCIA/EPA-EFE/Shutterstock