Although technological advances have the potential to increase automation in many industries, regulations often prevent companies from capitalizing on these opportunities, in part because regulators often place a lower priority than they should on productivity and innovation.

Intelligent regulatory reform can remove barriers to innovation and significantly increase economic growth. Unfortunately, regulatory reform is much more difficult to accomplish than other major initiatives, such as tax or health-care reform, because change requires a detailed knowledge of the forces shaping each individual industry. The Transportation Sector offers a good case study of these opportunities and challenges. In industries such as railroads, trucking, and commercial drones, regulators are struggling with rapid advances in automation that promise significant safety and efficiency benefits to society. Examining how different regulators have encouraged or hindered this automation offers important lessons for other sectors.

The big picture is that regulatory reform offers tremendous potential benefits in a number of sectors, because bad regulation often imposes unnecessary costs without producing corresponding social benefits. In highly innovative industries, these costs can slow or even stop the introduction of productivity-enhancing technology. But, perhaps even more important, wise regulation can actually speed valuable innovations by reducing uncertainty, strengthening market incentives to improve performance, and easing public acceptance of new technology. Market innovations bring many benefits, but they also affect important public goals, such as safety and the environment. While it is always important to regulate wisely, it is especially important in highly innovative sectors. Regulators have to find the right balance between encouraging unproven, but promising, technologies and protecting the public interest.

The complexity and interdependence of modern economies often demands some degree of regulation, because markets failures, lack of competition, and imperfect knowledge can allow some parties to take advantage of others. As a result, regulatory action touches virtually every sector of American society. However, the specifics of regulation are governed by many statutes and agencies, making central decision-making very difficult. The Administrative Procedures Act makes it difficult to impose new regulations by requiring agencies to build a public record supporting any new rules and engage in an extended process of public notification, comment, and agency response to proposed decisions; however, the same requirements slow the process of revising or removing old regulations, even if they are clearly outdated. Perhaps the greatest barrier to reform, however, is that sensible regulation requires a detailed knowledge of all the major forces influencing a particular industry or market, as well as a clearly articulated vision of what the market should look like, not only now but far into the future.

It is also important for regulators to be consistent, especially when different industries compete with each other. Industries that face more onerous regulation will have a tougher time competing against less regulated ones, distorting competition. The challenge is especially acute when each industry is regulated by a different agency. It is even more difficult when each industry is facing different technological challenges and opportunities.The freight transportation sector is a good example of the challenges modern regulators face. Industries such as trucking, airlines, railroads, and, in the future, drones all compete against each other in the delivery of physical goods across land. At the same time, they all cooperate with each other to coordinate hand-offs and minimize the total cost of delivery. Each industry is also struggling to integrate new technology. In particular, technology is allowing for a much greater degree of automation in each industry. Done right, such automation could increase productivity, reduce accidents, ease labor shortages, and reduce pollution. Interestingly, trains, aircraft, and trucks are each subject to a different regulator, allowing for a comparison of different approaches to the common problem.

This paper reviews how federal regulation of the transportation sector has changed over the last 50 years. It then offers a set of six principles that should guide regulators as they approach their task.

With regard to safety or any other variable, regulators should try to classify issues into a two-by-two matrix according to, first, whether regulatory goals such as safety are prominent or not and, second, whether or not the industry is experiencing rapid innovation. Efficient regulation is especially important in cases where regulatory goals are prominent and the potential for innovation is high. The report closes with a brief comparison of how each transportation regulator has handled automation technology.

The premise of this report is that automation technology offers significant benefits to society in the form of lower costs, greater safety, reduced fuel use and emissions, and faster delivery times. Regulators should assume that much greater automation is not only inevitable due to technological improvements, but it is also desirable. The challenge is to aid its development in a way that protects safety.

Figure 1: Innovation and Safety Matrix for Regulation in the Transportation Sector