Of the many factors contributing to the dominance of the American economy in the 20th century, two stand preeminent. First, the 19th century consolidation of a large national market under one set of rules; by 1890, the most advanced economies – America, Germany, Great Britain, France – all possessed a national market for a broad range of products and services with no significant restrictions on trade. Second, among these countries it was the good fortune of the United States to be the largest national market in terms of population, natural resources and GDP. The result was unparalleled innovation and economic growth.

Last month we discussed the emergence of a global market for online degree programs and the inherent advantages held by the United States due to market size, English language and the prestige of America’s elite institutions: 54 of the top 100. Outside of entertainment and the consumer Internet, it’s hard to think of an industry where America approaches this level of dominance. (Recall that at America’s post-war height, it only represented 40% of the global economy.) Moreover, America has a massive head start. Approximately 3 million students in the U.S. are studying for degrees delivered entirely online. We estimated the market opportunity at over $200 billion – or 10x the current size of the current U.S. “export” market in higher education (i.e., international students studying in the U.S.). The opportunity is of transformative scale for America’s universities and is already a priority for our most forward-thinking institutions.

There’s also no question that the path from here to there will be marked by game-changing innovations. The way students will learn online 20 years hence won’t be recognizable to today’s online students for whom online courses are a fairly literal and unimaginative translation of a classroom experience to an online environment without much regard to what the medium might permit. We will see remarkable advances in adaptive learning, simulation-based learning, telemetrical data feedback on student learning, and in outcome measurement and assessment generally.

Looking for locus of these impending innovations? America would seem to be a great bet. As the University of Minnesota economist Jacob Schmookler pointed out in his seminal work Invention and Economic Growth (1966), “the amount of invention is governed by the extent of the market.”

There must be Schmookler acolytes leading K-12 policy in the current administration because recent initiatives are Hamiltonian in their ambition to smear federal glue over our balkanized K-12 system. Race to the Top has required states interested in securing additional funding to reform policies around a defined set of defined progressive priorities and align curricula and assessments to the new Common Core State Standards in both English Language Arts and Math. The Common Core has now been adopted to some extent by 46 states and for the first time America has something approximating a national market in K-12. If ol’ Schmook were still with us, he’d be predicting an explosion of innovation from publishers and edtech companies who will invest in systems and products to serve 46 states at a time. (Of course, whether the level of innovation could ever be enough to overcome the broken sales and distribution model in K-12 is a question Schmook didn’t opine on.)

As with everything in life, there’s not enough Schmook to go around. Nowhere is this more clearly true than the Department of Education where the architects of higher education policy have never heard of Schmookler. We say this because while their colleagues in K-12 are moving heaven and earth to create a national market in K-12, new higher education rules proposed and passed by this administration are tearing apart our large market for online degree programs and, in so doing, jeopardizing one of our most important economic opportunities.

The 2009-10 NPRM process led by the Department of Education yielded a number of controversial rules. Lost in the fog was a new rule covering online programs: 34 C.F.R. § 600.9(c) (2011). The rule set forth that in addition to meeting the requirements of their own state, online providers would have to meet the requirements of all states where students reside.

Prior to the passage of this rule, states and online providers co-existed in mutual ignorance. States that required authorization for any institution enrolling a student from the state were not considering enforcement against online providers. And states without authorization requirements were not considering enacting them.

The new federal rule awoke a sleeping giant. Suddenly states with authorization requirements began enforcing them. And states without them began moving to enact them. For example, Maryland’s proposed rule imposes scrutiny comparable to an accrediting agency, requiring that universities enrolling students in the state meet defined criteria for curriculum design, faculty resources, library resources, and market demand (new programs outside of the liberal arts and sciences require submission of Maryland government and private survey data). Nevada’s proposed rule defines education levels for instructors, requires a submission of coursework and dictates that if the regular instructor is replaced by a substitute, the substitute must possess the same qualifications. In the name of consumer protection, states like Maryland and Nevada have enacted what are effectively protectionist rules – either to generate revenue from fees or to literally protect their own public universities from competition.

There have been three developments since the federal rule was enacted. First, in response to complaints from traditional colleges and universities now offering programs online, the Department delayed enforcement to 2014. Second, bills that would repeal the rule began moving through Congress. And then on June 5 the DC Circuit Court of Appeals affirmed a district court decision that struck down the rule on a technicality: violation of the Administrative Procedure Act (APA) for failure to provide adequate notice of the rule to regulated parties. (For the Department, the month of June was a month to forget – bookended by DC courts invalidating much of their regulatory work over the past three and a half years.)

Unfortunately, none of this matters because the horse has left the barn. Neither the DC Circuit action nor Congressional repeal will have any impact on the new state rules and zeal for enforcement. So large, resource-rich universities like USC report that in order to offer their new online M.A. in Teaching in partnership with 2Tor, they have had to comply with “a slew of obscure and irrelevant provisions, such as needing to submit typewritten applications and specifying the fire rating of file cabinets in which student records were to be stored.” On the other end of the spectrum, given the time and expense associated with complying with new state authorization rules, Troy University, an Alabama public institution with one online degree program, is waiting to review the geographic composition of online cohorts before deciding to comply with authorization, or reject students. If it is innovation we seek, we are heading in the wrong direction.

Although some legal commentators believe that last week’s Supreme Court decision upholding health care reform, but decidedly not on commerce clause grounds, means that federal power under the commerce clause will continue to ebb, online education is ripe for federal preemption under the commerce clause. While initiatives like the Lumina Foundation-backed State Authorization Reciprocity Agreement attempt to negotiate agreements with states to accept common standards and reciprocity for authorization, the administration should pay heed to the Pottery Barn rule (“You break it, you own it”) and attempt an urgent repair through federal action. The size of the international opportunity, the future prosperity of our colleges and universities and Schmookler all demand it.

Thanks to Vickie Schray, former Acting Deputy Assistant Secretary for Postsecondary Education, and now VP Regulatory Affairs at Bridgepoint Education for her assistance with this letter.

University Ventures (UV) is the premier investment firm focused exclusively on the global higher education sector. UV pursues a differentiated strategy of ‘innovation from within’. By partnering with top-tier universities and colleges, and then strategically directing private capital to develop programs of exceptional quality that address major economic and social needs, UV expects to set new standards for student outcomes and advance the development of the next generation of colleges and universities on a global scale.

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