‘Sandbox’ Everything

This op-ed was recently featured in RealClear Policy.

For government to work effectively, it must keep pace with changing circumstances. If the COVID-19 pandemic has taught us anything, it’s the importance of having the ability to adapt in the face of rapidly evolving events and public needs. Unfortunately, the crisis has illustrated how inept many government institutions are in this regard. An expansive thicket of complicated, overly burdensome laws and regulations has greatly inhibited our ability to quickly and effectively respond to the coronavirus outbreak.

From the Food and Drug Administration and the Centers for Disease Control and Prevention to state and local governments, we’ve seen a widespread failure in the resiliency of our public institutions. While many of the more cumbersome laws and regulations eventually gave way under the pressure of necessity, the process took much longer and was far more costly than necessary. Why? Because there wasn’t actually a process in place to begin with.

Our system is built around solidifying existing rules and restrictions, not shedding them when they become counter-productive. Failure is too often rewarded with bigger budgets and more bureaucracy, without any serious consideration of how to make government work better going forward. We begin to see just how dangerously rigid and woefully ill-equipped our system is when an existential crisis like the COVID-19 pandemic rears its ugly head. We may be fully aware of the need to adapt in the face of these pressing circumstances, but without actual procedures in place, adapting is much easier said than done.

So, how do we ensure that our laws and regulations are flexible enough to deal with the ever-increasing uncertainty of modern society without becoming so flexible that the exceptions begin to swallow the rule? How do we create institutions that properly balance rigidity with adaptability?

One potential way to do so is through an innovative new administrative tool known as a “regulatory sandbox.” Regulatory sandboxes are closed testing environments where firms can experiment with innovative new products, services, and business models for a limited period of time, under some form of modified regulatory environment. Sandboxes are a type of entrepreneurial administration meant to allow for greater regulatory experimentation and policy flexibility to see what works best. These sandboxes have been most common in the area of financial services, but other industries and regulators across the various sectors are starting to adopt them as well.

A recent example can be found in Utah, where the state’s Supreme Court established a first-in-the-nation legal services sandbox. The court correctly recognized that change and innovation were necessary for the largely lethargic industry. That sandbox aims to allow for non-lawyers to play an increased role in the process, as well as allowing for a different ownership structure of legal firms, all as part of the effort to expand access to legal services for Utahns. But the reality is that innovation can happen anywhere at any time. As such, every sector should consider implementing procedures that make it easier for innovative products and services to come to market.

Another option that more ambitious states could pursue would be to create an industry-agnostic sandbox, or essentially a sandbox for everything.

Rather than trying to target particular industries and creating multiple sandboxes in a piecemeal fashion — unintentionally picking winners and losers in the process — the state could create a specific office within its administration to act as a liaison between the appropriate regulators who have jurisdictional authority over the issue at hand and those businesses or individuals seeking regulatory relief.

A “sandbox for everything” could allow agencies to take a more nuanced approach to regulation rather than trying to fit a square peg in a round hole. Additionally, businesses will be empowered and encouraged to innovate, without the fear of being shut down or given a “red light” from the get-go. This approach would necessitate transparency from participating firms to ensure that consumers are informed to the greatest extent feasible and should be structured with built-in requirements to ensure that consumers are properly protected from potential harm. Participating in the regulatory sandbox program does not — and should not — prevent the company from being held liable for any legitimate harm that its products cause to consumers.

The reality is that there’s a broad swath of burdensome regulations currently in existence, but regulators often lack the necessary information or incentives to determine which regulations are obsolete or increase costs relative to benefits. A sandbox could serve as a powerful tool, establishing a process by which regulators can actively access which regulations should be kept, modified to adopt a less-restrictive approach, or removed altogether. All of this is likely to result in a myriad of benefits for consumers in the form of lower prices, higher quality goods and services, and increased innovation.

Regulatory sandboxes — whether they’re industry-specific or generalized in nature — would go a long way in achieving more proactive and meaningful regulatory reform and creating a system with the flexibility necessary to adapt in the face of rapidly changing circumstances. In doing so, states can make significant strides in removing countless barriers to entrepreneurialism and empower states to react more quickly the next time a crisis emerges.

James Czerniawski is the tech and innovation policy analyst at Libertas Institute. Trace Mitchell is a research associate and Adam Thierer is a senior research fellow, both with the Mercatus Center at George Mason University.