Regulation Strangling Innovation: Planes, Trains, and Hyperloop | Jeb Kinnison
Let’s start by looking at some examples of innovation delayed and strangled by overly-cautious regulation, a problem especially prevalent where agencies are charged with protecting lives. The outcome of a mistake in approving something which turns out to be deadly is an immediate and sharp punishment for the regulators, while delay, increasing costs, and overly cautious blocking of a valuable new product directly hurts only those promoting it — the people who might have benefitted from the innovation tend to be unaware of what they have lost when it’s turned down, an effect also seen with housing, where local residents veto new development but the people who might have wanted to live in the new development get little say.
I have two good examples: the delay of the Valkyrie Co50, a sexy and innovative airplane that has $50 million in advance orders but can’t get timely approval because it is too innovative; and Titan Pharmaceutical’s Probuphine, a lifesaving implantable form of the anti-opioid-addiction drug buprenorphine.
The Valkyrie Co50 is faster and safer than existing light planes:
The Valkyrie Co50 can fly at up to 260 knots (roughly 299 MPH), significantly faster than other single-engine aircraft, which typically cruise at a max of roughly 242 knots. The plane stands at 30 feet long and 10 feet high, with a wingspan of 30 feet. Its unusual design, forward stabilizer and rear-positioned engine promised an usually smooth ride with, even in low altitudes, little-to-no-chance of a stall. According to Cobalt, 30% of fatal aircraft accidents are in low altitude stalls, a claim supported by the Air Safety Institute’s 2012 general aviation accidents study.
The company quickly racked up a reported $50 million in orders for a $749,000 aircraft that won’t arrive until 2017, if Cobalt and its customers are lucky. The hold-up? FAA Type Certificate process, which Cobalt describes as long, cumbersome and expensive…. The French entrepreneur and pilot understands the need for certification, “because it’s good for the safety of everyone,” but he contends that the process is needlessly slowing down the industry and increasing costs.
For example, when Loury was designing his planes, he found a $30 fuel valve — one that’s typically used in tractors — would work in the Valkyrie. However, according to Loury, when sold as a certified aviation part, the same valve costs $3,000.[1]
This is the same paperwork and certification problem that results in ballooning Defense Dept. costs, like $2,000 for an aluminum sleeve that would normally cost $10[2] and cost overruns for every major weapons system in the past few decades. The Israelis pioneered cheap, reliable drones for surveillance and warfare, but the US DoD versions cost orders of magnitude more because they have to be designed and built by defense contractors under bureaucratic bidding rules and without cheaper off-the-shelf parts.
The Valkyrie is beautiful:
Cobalt Valkyrie X – Photo: Cobalt
…But the new plane can’t be sold for commercial use without FAA approval, and the requirements are more time-consuming and costly because the plane is so innovative.
Regulators can’t keep up with what the aircraft designers are doing, said Loury, and, worse, the FAA continues to add new regulations — usually in response to air disasters.
Loury contends that, on Cobalt’s end, especially for things they cannot test in the air like a “ground vibration survey,” it takes “six months of work and thousands of dollars for one [certification] paragraph.”
The company is already selling an experimental version which is less regulated, but is barred from commercial use. Just getting its application ready requires years of expensive tests. The FAA notes that they cannot be faulted for delay because they have not received an application for the plane yet, but:
It’s true, Cobalt is still working its way through satisfying all the regulations before they submit their application to the FAA.
When Cobalt does finally submit the Valkyrie Co50 for certification, the FAA could grant it in three years, but it might also take four or more years. It’s a question everyone asks Loury. He really doesn’t have an answer. “I keep pushing because we have no reference…in how long it takes.”
And this is a well-capitalized company which can afford to wait out the lengthy approval process while being unable to sell their plane in the larger market. How many small companies might have accelerated development of new planes if they didn’t face a regulatory buzz saw and years of delay before being allowed to sell?
It’s often asked why we don’t have the flying cars and jetpacks envisioned in the 1960s of Tomorrowland:[3] the answer is that regulators and tort lawyers made it so slow and costly to innovate in the transportation sector that the rate of innovation has declined precipitously since 1970. As Glenn Reynolds writes:
1970 marks what scholars of administrative law (like me) call the “regulatory explosion.” Although government expanded a lot during the New Deal under FDR, it wasn’t until 1970, under Richard Nixon, that we saw an explosion of new-type regulations that directly burdened people and progress: The Clean Air Act, the Clean Water Act, National Environmental Policy Act, the founding of Occupation Safety and Health Administration, the creation of the Environmental Protection Agency, etc. — all things that would have made the most hard-boiled New Dealer blanch.
Within a decade or so, Washington was transformed from a sleepy backwater (mocked by John F. Kennedy for its “Southern efficiency and Northern charm”) to a city full of fancy restaurants and expensive houses, a trend that has only continued in the decades since. The explosion of regulations led to an explosion of people to lobby the regulators, and lobbyists need nice restaurants and fancy houses.
Maybe it’s just a coincidence that progress suddenly slowed down, but I don’t think so. Indeed, the Obama administration’s brilliantly successful policy for promoting private spaceflight ventures (basically one of benign neglect) can be seen as evidence that we can actually get the kind of progress we used to get, when we regulate lightly, like we used to. Who knows, if we regulated pharmaceuticals like we did in the early 1960s, perhaps we’d get as many major new drugs as we got in the 1960s. (“The time for a new drug candidate to gain approval in the United States rose from less than eight years in the 1960s to nearly 13 years by the 1990s,” notes Hanlon.)[4]
US-based light plane manufacturers boomed in the 1970s, but were nearly driven out of business by litigation and insurance costs between 1980 and 1993:
Following the recession in the early 1970s, production rates began to increase very rapidly, from 7,466 units in 1971 to 17,000 in 1977 – an increase of more than 125 percent in six years. Production in recent years is a trickle when compared to the heyday of general aviation. The numbers are compelling: Since reaching a peak of 17,811 shipments of light aircraft in 1979, U.S. production plummeted to 811 units in 1993, a decline of 95.5 percent. Other measures of general aviation activity in the United States are equally dismal. The number of private pilots fell 32.1 percent, from a high of 357,500 in 1980 to 288,078 in 1993. In 1980, there were twenty-nine U.S. manufacturers of piston aircraft and fifteen foreign producers. Today, there are sixteen U.S. and twenty-nine foreign manufacturers.
American manufacturers historically supplied most of the world’s general aviation aircraft and exported about 20 to 30 percent of the general aviation aircraft produced here. However, the nation lost this important contribution to its trade balance. Imports of general aviation aircraft, which include commuter airliners, exceeded the value of general aviation exports for the first time in 1981. By 1988, the trade deficit in general aviation aircraft soared to $700 million. The volume of exports plummeted from 3,395 units in 1979 to 440 in 1986. American aircraft accounted for a full 100 percent of the single engine piston aircraft sold in the U.S. in 1980. Today, American aircraft account for less than 70 percent. It is important to remember that this apparent surge in foreign competition is more an artifact of dramatically lower domestic production of single-engine aircraft, not a sign that the foreign firms were capturing sales that would otherwise go to American manufacturers hampered by product liability claims.
[5]
To revive the industry in the US, laws were passed at both state and Federal levels[6] to limit airplane manufacturer liability. Light planes manufactured in other countries had taken most of the market, since they faced much lower regulatory and legal costs. North Dakota tried to bring the industry back to its state in 1995:
The North Dakotans propose something new: an agreement before the accident, rather than a fight after it. The root of the problem, they maintain, is the ascendancy of torts over contract law. In the small-airplane market, for example, the buyer and the seller rarely hammer out their financial risks in a contract. Instead, the manufacturer, fearing suits, buys enormous liability insurance, then charges the buyer for it indirectly by marking up the price of the plane, often doubling it. These high prices, manufacturers say, have driven 20 of 26 small-aircraft manufacturers from the business in the past 20 years.[7]
These liability-limiting laws did help bring some light plane makers back to the US, but much of the industry was permanently lost. The US had dominated small plane manufacturing until the cost crisis, but today is a small player, and has lost even mid-sized airplane manufacturing to Canada’s Bombardier and Brazil’s Embraer. Legal and regulatory overhead tore down the big advantage of US firms — and once lost, the network of expert workers and subcontractors cannot be rebuilt easily.
Credit: Wikimedia
Note the zooming cost of airplanes beginning in the late 1970s, and the weak recovery in numbers shipped after liability-limiting laws were passed in 1994. What had been a booming market was strangled by rising costs — anyone planning to build a flying car could read the tea leaves; they would never get a foothold as a mass-market product like ground cars given the multiplying costs.
Now central planners dream of a continent-spanning high speed rail network, and in California money is being spent at a rapid clip to build 1960s transport today, a multi-billion-dollar line from nowhere to nowhere that doesn’t in any way meet the goals of the project California voters approved and will cost hundreds of dollars per ticket sold in additional operating subsidies. The fantasies of Europhile statists who fail to understand how big the US is compared to Europe, where such lines can make financial sense, result in bizarre proposals like this one:
US High Speed Rail System – proposed by Alfred Twu
I created this US High Speed Rail Map as a composite of several proposed maps from 2009, when government agencies and advocacy groups were talking big about rebuilding America’s train system.
Having worked on getting California’s high speed rail approved in the 2008 elections, I’ve long sung the economic and environmental benefits of fast trains.
This latest map comes more from the heart. It speaks more to bridging regional and urban-rural divides than about reducing airport congestion or even creating jobs, although it would likely do that as well.
Instead of detailing construction phases and service speeds, I took a little artistic license and chose colors and linked lines to celebrate America’s many distinct but interwoven regional cultures.[8]
So festive! How about a line to Yellowstone, wouldn’t that be great?—This romantic Progressive choo-choo dream, free of any tedious thoughts of engineering and economics, would shackle the US to a costly, inconvenient, backward-looking rail system when an updated FAA, with better GPS and more sophisticated air traffic control systems, would allow air passenger service that is faster, cheaper, and serves all destinations. Because the FAA is a hidebound government agency, though, innovation has been slow and costly, and air traffic is held down by antiquated software, scheduling issues and TSA hassles.
This particular accounting-challenged dreamer bills the total cost of his entire system at $40 billion per year for 30 years — that’s $1.2 trillion. Meanwhile, the slightly-less-deluded dreamers of Jerry Brown’s California high speed rail project — which will never be built from LA to SF as originally proposed unless helicopter money starts raining down on Sacramento — have budgeted $64 billion. Soon we’ll be talking about spending real money….
The Economist recently reviewed the California project (“Taxpayers could pay dearly for California’s high-speed-train dreams,” Mar 27th 2016):
The suit brought by Kings County Board of Supervisors and two Central Valley farmers accused the rail authority of violating restrictions imposed by a ballot held in November 2008 (Proposition 1A) that approved a $9.95 billion bond issue to help pay for the high-speed railway. Voters were told at the time that the project would cost no more than $33 billion, with the federal government stumping up $3.2 billion and private investors chipping in the balance. So far, such private investors have been conspicuous by their absence.
According to the Proposition 1A Bond Act, the high-speed rail project has to be financially viable; trains have to operate (without subsidy) every five minutes in either direction during the day; and funds for each segment of the route need to be identified before work on the leg in question can commence. Above all, trains have to make the 520-mile (840-km) journey between the Los Angeles basin and the San Francisco in two hours and 40 minutes, reaching speeds of 220 mph (350 kph). As for ridership, the rail authority reckoned some 65m to 96m passengers per year would be travelling the route by 2020. The basic fare was to be $55 one way.
That was all pie in the sky, a way of selling the deal to voters in 2008. A review in 2011 put ridership at a more realistic 30m passengers a year, with an end-to-end ticket price of $89. Meanwhile, the overall cost of the project had soared to $98 billion. And instead of going into service by the end of the decade, the high-speed railway would not be ready until 2033.
The uproar that ensued prompted a shakeup along with some hurried rethinking. The cost was subsequently pegged at around $68 billion for the first phase of the network, with an opening date in 2029 — almost a decade later than originally promised…. The draft 2016 business plan has now trimmed the cost of the first phase to $64 billion.
While private funds have shown little interest, at least the project’s finances are no longer quite as gloomy as they were a year or so ago. Jerry Brown, California’s govenor and a stalwart supporter of the high-speed train, strong-armed the legislature in Sacramento into allocating it 25% of the state’s annual “cap and trade” proceeds from auctioning off carbon credits to big polluters, which are currently worth around $1 billion a year. As a result, the rail authority has now identified the $21 billion required for building the project’s initial leg (San Jose to the Central Valley). It still needs a further $43 billion before it can start work on extending the line north to San Francisco and south towards Los Angeles.
With the rail authority’s finances resolved for the time being, opponents have focused instead on the project’s legal requirement to cover the distance between Los Angeles and San Francisco in two hours and 40 minutes. The rail authority claims (optimistically) that such a time remains doable, though cost-saving measures have forced the high-speed train to share tracks with slower-moving freight and commuter services in the Los Angeles basin and the Bay Area.
What also remains in doubt is just how many people will actually ride the high-speed network. In revising its revenue model, the rail authority has incorporated findings from surveys on rider preferences, along with forecasts of California’s likely population, housing and employment growth. The data were then crunched using Monte Carlo simulations to minimise the risks of being wrong. The analysis suggests that, based on a confidence level of 50%, the service will have some 28m passengers by 2029, generating $1.3 billion of revenue. However, as thorough as this analysis is, unanswered questions remain.
Above all, what is it that California’s railway planners know that their Japanese counterparts do not? The former state-owned Japanese National Railways and its partially privatised regional replacements have struggled for decades to make their high-speed Shinkansen (“bullet train”) routes profitable. Japan’s eight Shinkansen lines have little in the way of competition, thanks to over-crowded roads, expressways that charge exorbitant tolls and limited air services. Even so, only one Shinkansen service—JR Central’s 550-km line between Tokyo and Osaka—makes anything like a decent enough operating surplus to cover its costs, make necessary investments and pay a modest dividend.
It does so for one simple reason: the volume of traffic it carries—some 140m passengers a year. The Tokyo plain (Kanto) is home to 42m people, while greater Osaka (Kansai) has 23m. Between these two huge population centres reside a further 10m people in conurbations like Hamamatsu, Nagoya and Kyoto, all served by the Tokaido Shinkansen. At peak hours, trains leave Tokyo Station bound for Shin-Osaka and beyond on average every four to five minutes, and every seven to eight minutes for the rest of the day. The latest Nozomi (limited stop) service whisks passengers between Tokyo and Osaka in two hours and 22 minutes.
Compare that with California. As sprawling as it is, the Los Angeles basin has a population of just 18m. The nine counties surrounding the Bay Area have a little over 7m residents between them. The farming communities astride the proposed high-speed rail line through the Central Valley have a combined population of around 1m. In short, California’s high-speed railway is attempting to do what the Tokaido Shinkansen does, but with a third of the number of potential passengers, on a route that is half as long again. California’s taxpayers will pay dearly for Mr Brown’s high-speed legacy.[9]
Two notable new developments in transport, self-driving cars and the Hyperloop[10] (a passenger capsule propelled through a partly-evacuated tube by linear induction motors at up to 760 mph) have both managed to make progress by staying under the radar and working with the states before going to Federal regulators. One reason, of course, is that (especially in the case of Hyperloop) the risks of accidental death and destruction at high speeds are just as great, but the FAA is not involved because neither ever leaves the ground. And for self-driving cars, people are relatively used to carnage on the roads and it appears to most researchers that these cars will reduce accidents and deaths substantially.
The Hyperloop is especially glamorous (see the video of a test run here), and if the billions being spent on California’s high speed rail were instead spent on a Hyperloop line from LA to San Francisco, the result would be a technology-leading, tourism-generating marvel, not a has-been-technology, almost-as-good-as-French train. But the graft is already in politicians’ pockets, and it’s likely billions more will have been spent before the California high speed rail boondoggle quietly dies.
The Hyperloop technology has problems of its own, as the Economist article points out:
Everyone involved now accepts that Mr Musk seriously under-estimated the cost of building a Hyperloop between Los Angeles and San Francisco—probably by a factor of ten or more. There are few illusions, too, about the engineering difficulties involved. Fabricating an air-tight steel tube hundreds of miles long, with solar-powered linear motors providing propulsion while supporting passenger pods on air-bearings or by magnetic levitation is challenging enough. A bigger hurdle is overcoming the “pistoning” effect, caused by air in the tube (even though it would be at only a thousandth the pressure of that outside) piling up in front of the pod and slowing it down. Calculations done by NASA suggest the tube would have to be at least four times wider than the pod to prevent even the tiny amount of residual air within it blocking the pod’s passage. Mr Musk budgeted for tubes only twice as wide.[11]
In Bootleggers and Baptists terms, neither conventional high speed rail or Hyperloop are much of a threat to incumbent airline companies, and self-driving cars would be built by existing manufacturers, so they too are more likely to be allowed to prosper.
In an age of business meetings by Skype and telepresence, one would guess the market for costly long-distance passenger transportation would shrink, or at least not grow as quickly — flat demand is already observed in many business routes. More-efficient jets and updated air traffic control can limit emissions growth, while the pie-in-the-sky continental high speed rail and Hyperloop ideas would take a vast amount of capital, at least when built by government contracting rules where much of the money goes to law firms and environmental studies before anything is even built. But if California is to spend $billions on a boondoggle, let it be an interesting boondoggle which could probably attract passengers going from nowhere to nowhere.
[1] “Is the Valkyrie Co50 a test case for the FAA’s willingness to innovate?” – Mashable, Lance Ulanoff, Feb 21, 2016
http://mashable.com/2016/02/21/cobalt-valkyrie-co50-faa-analysis
[2] “For Pentagon, the price isn’t right” – By Lawrence Korb, Alvaro Genie, The Hill, 07/23/14
http://thehill.com/opinion/opinion/213191-for-pentagon-the-price-isnt-right
[3] “Tomorrowland: Tragic Misfire,” Jeb Kinnison, Oct 31, 2015
“Tomorrowland”: Tragic Misfire
[4] “Why we still don’t have flying cars” – USA Today, Glenn Harlan Reynolds, May 12, 2016
http://www.usatoday.com/story/opinion/2016/05/12/technological-progress-stagnation-regulatory-explosion-1970s-column/84225066/
[5] “The rise and fall of general aviation: product liability, market structure, and technological innovation” – Truitt, Lawrence J., and Tarry, Scott E. Transportation Journal, 6/22/1995
http://www.freepatentsonline.com/article/Transportation-Journal/17572867.html
[6] Notably the General Aviation Revitalization Act of 1994: https://en.wikipedia.org/wiki/General_Aviation_Revitalization_Act
[7] “Clearing A Runway For Planemakers” – Bloomberg Businessweek, Stephen Baker, March 19, 1995
http://www.bloomberg.com/news/articles/1995-03-19/clearing-a-runway-for-planemakers
[8] “A US high speed rail network shouldn’t just be a dream,” by Alfred Twu, The Guardian, 6 Feb 2013
http://www.theguardian.com/commentisfree/2013/feb/06/us-high-speed-rail-network-possible
[9] “Taxpayers could pay dearly for California’s high-speed-train dreams” – The Economist, Mar 27th 2016
http://www.economist.com/news/science-and-technology/21695237-taxpayers-could-pay-dearly-californias-high-speed-dreams-biting-bullet
[10] https://en.wikipedia.org/wiki/Hyperloop – Hyperloop One, one of several startups working from Elon Musk’s technology proposal, did a full-scale demo May 11, 2016: see video at https://youtu.be/vbtNrpkHmpA
[11] “Taxpayers could pay dearly for California’s high-speed-train dreams” – The Economist, Mar 27th 2016
http://www.economist.com/news/science-and-technology/21695237-taxpayers-could-pay-dearly-californias-high-speed-dreams-biting-bullet

Death by HR: How Affirmative Action Cripples Organizations
[From Death by HR: How Affirmative Action Cripples Organizations, available now in Kindle and trade paperback.]
The first review is in: by Elmer T. Jones, author of The Employment Game. Here’s the condensed version; view the entire review here.
Corporate HR Scrambles to Halt Publication of “Death by HR”
Nobody gets a job through HR. The purpose of HR is to protect their parent organization against lawsuits for running afoul of the government’s diversity extortion bureaus. HR kills companies by blanketing industry with onerous gender and race labor compliance rules and forcing companies to hire useless HR staff to process the associated paperwork… a tour de force… carefully explains to CEOs how HR poisons their companies and what steps they may take to marginalize this threat… It is time to turn the tide against this madness, and Death by HR is an important research tool… All CEOs should read this book. If you are a mere worker drone but care about your company, you should forward an anonymous copy to him.
More reading on other topics: