Deregulation refers to the deletion, abandonment, or relaxation of various laws, rules, and regulations that affect business and industry. However, the topic of deregulation is best understood by first understanding the purposes and effects of regulations.
It is often thought that individual firms lack the perspective and/or the incentive to protect society. Consequently, the regulation of business and industry by government is for the purposes of consumer protection and or the enhancement of business competition. Regulation is generally thought to also protect minorities, employees, investors, and the environment.
The railroad industry was one of the first industries that the federal government targeted. As a result, the Interstate Commerce Act was passed in 1887. As such, the Interstate Commerce Act created the first regulatory body in the United States—the Interstate Commerce Commission, which still regulates transportation rates, as well as establishes rules and regulations for interstate commerce.
The United States government expanded its control over industry by focusing on trusts, where a company is established for the purpose of controlling multiple companies. Consequently, the Sherman Antitrust Act was enacted in 1890 to control monopolies. In 1914, the Clayton Act amended the Sherman Act by forbidding specific business actions. For example, tying contracts interlocking directorates and discriminatory pricing were made illegal, if the results of these actions lessened competition.
The Federal Trade Commission Act, also enacted in 1914, formally established the Federal Trade Commission (FTC). Among other responsibilities, the FTC remains responsible for defining, detecting, and enforcing compliance with the Clayton Act. The Wheeler-Lea Act of 1938 expanded FTC jurisdiction to include any practice or practices that harm the public in general and those practices that harm competitors. The Robinson-Patman Act was enacted in 1938 due to the growth of large retailing conglomerates. This law covered discrimination against buyers as well as sellers.
In 1958 the National Traffic and Safety Act was enacted. This legislation provided for the creation of compulsory safety standards for automobiles and tires.
In 1966 the Fair Packaging and Labeling Act was passed. This act provided for the regulation of the packaging and labeling of consumer goods. It also required manufacturers
to state package contents, the maker of the contents, and how much of individual contents are included.
The Antitrust Procedures and Penalties Act was enacted in 1974. This legislation increased fines for violation of the Sherman Act. Two years later, the Antitrust Improvement Act required firms to notify the FTC of merger plans. This act also gave state attorney generals the power to sue for the benefit of consumers.
It is generally thought that the permissiveness of the federal government began during the presidency of Richard M. Nixon, which led the way for formal deregulation. During the 1980s the government turned its focus from laws, rules, and regulations to the creation of market incentives that were thought to motivate business.
Proponents of deregulation argue that government intervention impedes the natural laws of supply and demand and ultimately increases costs to consumers. In addition, the over-regulation of business is thought to thwart innovation by creating delays and increased red tape. Thus in 1981 the Ronald Reagan administration created the Task Force on Regulatory Relief to review all proposed new regulations and review old regulations. The establishment of this task force also lead to the increased use of cost-benefit analysis, which compares the cost of all regulations to their benefit.
DEREGULATION AND THE AIRLINE INDUSTRY
Approximately thirty years ago, the United States government put into practice a series of deregulation legislation concerning the airline industry. The effort was intended to encourage healthy competition and lower the inflated airfare costs. To a certain extent, the deregulation worked, and the 1990s saw the continual growth of the airline industry, with a large turnover rate of airline companies.
However, airlines went through a dramatic decline in the early period of the twenty-first century. According to a 2008 article in the New York Times, “Did Ending Regulation Help Fliers?,” the airline industry lost more than $30 billion between 2001 and 2006 due to many problems that had not been expected at the time of deregulation. The terrorist attack of 9/11 encouraged investor doubt and customer dissatisfaction with airlines, and the rising costs of air fuel again increased airfare. It has yet to be seen if deregulation had an ultimately positive effect on the airline industry or not.
DEREGULATION AND THE AMERICAN ENERGY INDUSTRY
Certain deregulation policies, such as 1992 Energy Policy Act, encouraged free action of the companies offering electricity in the United States. As a result of this deregulation, energy companies began a series of splits and mergers, an occurrence that moved state by state as the deregulation became more common. In 1998, California initiated a series of steps designed to eliminate energy monopolies and offer its public more choices in where they got their electrical power.
At first, the results of such state deregulation practices—also attempted by Texas and Illinois—were chaotic, leading to shortages and inflated energy prices. As states regulated and deregulated their electrical energy companies, the national industry saw the rise of several large conglomerations. Powering marketing, or the trading of electricity through energy companies, become common. Long-term results, however, are expected to lead to stability and healthy growth of America's energy industry.
THE TOLLBOOTH THEORY
Among the arguments for deregulation is the concept called the Tollbooth theory. This theory proposes that in economies controlled through heavy regulation, the ethical relationship between industry and government will slowly collapse and the economy will suffer. As penalties increase and regulations become too constricting to allow free movement by companies, the Tollbooth theory says the bureaucracies will begin accepting bribes and payoffs in exchange for helpful deals; they will look the other way while companies violate the regulations. A system of corruption is then established that threatens the economy and destabilizes all industries.
Supporters of deregulation and the Tollbooth theory often use Russia as an example, citing reforming legislation passed from 2001 to 2004 and its effects. These laws pertained to certification and registration by businesses; they established clear limits to the amount of regulation possible, helping to pull Russia from what was theorized as a Toll-booth economy. The amount of red-tape businesses had to surmount was drastically lessened, and much registration was localized. Freed from over-regulation, Russia's economy is expected to continue to improve, with small business employment growing and start-up companies becoming more common. (Of course, high energy prices might be a better explanation for Russia's economic resurgence).
Opponents to the Tollbooth theory use the Public Interest model instead, which theorizes that governments use regulations to control dangerous market trends, and that regulation does not usually lead to corruption or instability.
In recent years, deregulation has become a popular international method to improve economic conditions and open nations to more global business. Many deregulation policies effect tariffs and customs fees, giving international
companies more opportunities to conduct business overseas. In Europe, for instance, the EU nations completed a marketing directive in 2007 which was intended to fully open the European Union nations to outside trade. The directive was immensely successful, with fourteen out of the fifteen original EU nations reaching fully open markets.
Deregulation is making an impact elsewhere, as well. In 2007, European businesses formally encouraged Japan to continue its deregulation policies, which were opening many Japanese markets to foreign competition. The European businesses believed that the intense deregulation Japan had spearheaded from 2001 to 2006 had led to reform-fatigue. Japan, after breaking up its post office monopoly and opening such markets as medicine and telecommunication, is now slowing deregulation efforts, afraid that they are harming internal business.
In India, deregulation has the potential to change oil prices for the growing country. In a 2008 reaction to dropping oil subsidies, the Indian government raised fuel prices, causing an even worse spike in the continuing inflation. Another possibility, encouraged by international vendors, is for India to drop tariffs on imported oil, a deregulation activity it has already refused once but is now reconsidering.
Despite rumors that in 2008 China would attempt the deregulation of fuel industries so far refused by India, the Asian nation has instead opted for a tax cut on their windfall profit tax. China has also considered raising fuel prices, but has not yet made any moves to deregulate their fuel companies, as the government is also worried about high inflation. The Chinese tax cut, however, is expected to be highly successful and serves as an example for alternatives to deregulation.
In a different type of market, the United Kingdom is now beginning to deregulate its broadband industry. Previously to 2008, broadband companies were forced to offer broadband internet services at a fixed rate determined by the government, but new analysis showed that competition between United Kingdom broadband companies was rising. Now, if four or more broadband companies are present for consumers to choose from, the price cap regulation does not apply. As the high-speed internet market continues to grow in the UK, forecasts suggest even more widespread deregulation.
SEE ALSO Economics
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Rachman, D.J., and M.H. Mescon. Business Today. New York:Random House, 1987.
Yakovlev, Evgeny, and Ekaterina Zhuravskaya. Reforms in Business Regulation: Evidence from Russia, 2008. Available from: http://www.hecer.fi/Seminars/Papers/zhuravskaya_paper.pdf.
Throughout most of the twentieth century, advanced industrialized nations embraced a notion of the state as being an agency of the “common good,” as overarching and mediating the sectional and competing interests of civil society. The material underpinning of this discourse was the failure of private corporations to maintain an adequate provision of public goods through the market as well as the general belief that firms, if left unfettered, might conduct their business at the expense of the “public interest.” In order to protect citizens and consumers, therefore, the state undertook the direct administration and provision of certain public goods—such as defense, the rule of law, various aspects of education, health, water supply, and electricity—through the planning of investment and the allocation of resources. Markets for private goods, in turn, were subjected to regulations with regard to product quality, safety, and other attributes.
During the last two decades of the century, however, it became clear that the state was embedded in a global capitalist system, and that its autonomy to engage in regulation and provision had become constrained by the logic and dynamics of that system. State regulation and planning ultimately resulted in an increasingly severe fiscal crisis, with rising public expenditures and debts, persistently high levels of inflation, and weak balances of payment. Governments were forced to reassess their approach, and they started to embrace the emerging doctrine of neoliberal economic and social theory.
Neoliberal economics is premised upon a conception of the individual as a rational utility-maximizing consumer. Neoliberal proponents argue that when consumers spontaneously and impersonally interact in the market, the result is both individual liberty and economic efficiency. The market, which has no ends or purposes, allows individuals to incorporate their consumption into a personal plan that spontaneously produces the optimum allocation of social resources.
The resultant neoliberal restructuring of the state was an attempt to realign both the state and international capital by depoliticizing decisions about the allocation and provision of services. This has involved the privatization of some sectors of the economy, a redefinition of the concept of public services, and the gradual removal of restrictions on businesses. The stated rationale was that fewer regulations would lead to greater competitiveness, and therefore to higher productivity and efficiency, and to lower prices for consumers.
However, various high-profile failures of deregulation— such as the savings and loans crisis in the United States in the 1980s and the California electricity crisis at the end of the 1990s—brought home the point that consumers and citizens require protection from various forms of market failure, such as:
- negative externalities, which occur when the socially optimal output diverges from the private optimum, as is the case with environmental pollution;
- monopolies, which occur when an entity’s market power prevents competition, and therefore allows higher prices to be charged at lower output than is feasible in a competitive market, producing a net economic welfare loss, allocative inefficiency, and a Pareto suboptimal equilibrium;
- instances in which some public goods may not be provided by the free market at all because of their characteristics of nonexcludability and nonrivalry;
- inequality, which occurs when differences in income and wealth restrict some members of society from accessing vital goods and services.
Strengthened regimes of re-regulation were developed as a result of these concerns. If regulation can reduce prices below monopoly levels and provide a remedy for other market failures without compromising new entry, competition, choice, innovation, and other long-term attributes of a competitive market, then the case for it is compelling, at least during the transition to a competitive market. Examples include pollution taxes to correct for externalities; taxation of monopoly profits (the “windfall tax”); regulation of oligopolies and cartel behavior; continued and direct provision of some public goods (e.g., defense; law and order); subsidies; product and safety regulations; the specification of output levels and quality; and price controls.
Regulation creates questions about the extent to which it actually works in the public interest. The specification of what the optimum regulatory solution should be is insufficient if not supplemented by a theory of the behavioral motivations underlying both regulators and those regulated. The “capture model,” for example, argues that actors’ respective self-interests will produce a regulation policy that maximizes their joint interest in stable and predictable outcomes, but that may also be skewed toward the monopoly solution that regulatory policy is seeking to prevent in the first place.
In addition, regulators may not have sufficiently precise information about the cost structure and consumer responsiveness to price changes to be able to properly set output and prices in a given industry. Regulators are therefore dependent upon those regulated to provide them with basic information, a situation that may create opportunistic behavior in the resultant interaction process. The challenge, then, is well known from other areas of the social sciences and is generally referred to as the principal-agent problem, namely how best to design a system of contracts that motivates the regulatees to act in the interest of the regulators—within the constraints of imprecision, lack of observability, bounded rationality, and asymmetric strategic moves.
SEE ALSO Antitrust; Antitrust Regulation; Equality; Pareto Optimum; Privatization; Public Goods; Taxation
Francis, John. 1993. The Politics of Regulation: A Comparative Perspective. Oxford: Blackwell.
Lane, Jan-Erik. 2000. The Public Sector: Concepts Models and Approaches, 3rd ed. Thousand Oaks, CA: Sage.
Posner, Richard. 1974. Theories of Economic Regulation. Bell Journal of Economics and Management Science 5: 335–358.
Most societies rely on competitive markets to handle the allocation of scarce resources to their highest and best uses. Yet markets are not without their shortcomings. For this reason, governments sometime institute regulatory control. In 1887, the first regulatory agency, the Interstate Commerce Commission, was created to regulate monopolistic pricing policies of railroads.
When private firms gain monopoly power, usually because of economies of scale, they are in a position to restrict production and raise price with little worry of competition; these are known as natural monopolies. The government may permit a single producer (e.g., of natural gas or electricity) to exist in order to gain lower production costs but simultaneously empower a regulatory agency to set the firm's prices.
A second reason for regulation stems from the fact that society declares certain activities illegal. Prostitution, gambling, and certain drugs are either not permitted or allowed only under certain conditions. Through a licensing system, government agencies control who enters such industries, their prices, and their methods of operation.
Another reason for government regulation arises because society establishes standards for particular professions, such as medicine, law, accounting, and real estate. The government guarantees compliance with these standards by imposing tests and other requirements. Those failing to meet these standards are not permitted to engage in that business. Hundreds of agencies administer tests and police the professions, all done ostensibly in the interest of protecting the consumer. Interestingly, license holders often push for even higher licensing requirements, often grandfathering in all current license holders, because higher salaries are possible when the number of competitors is restricted.
Many government regulations are designed to protect people from the negative consequences (i.e., externalities) of buyers and sellers who have little incentive to look out for the welfare of third parties. For example, slaughterhouses may have the freedom to kill animals for sale to their customers in grocery stores without taking into account obnoxious odors or sounds emanating from the slaughterhouse. Neighborhood residents, however, incur externality costs. Through agencies such as the Environmental Protection Agency (EPA), the government controls what slaughterhouses can and cannot do in order to lessen the negative effects on the population.
Although government regulation is pervasive, it is apparent that regulation may not achieve the lofty goals set out in the initial effort to regulate. Governments can also fail, and government failure often aggravates the problems it sets out to solve. Public choice economists have identified several specific causes of government failure. Voters are often rationally ignorant about many things, and they vote for political candidates who are uninformed or misinformed. Also, politicians are often indebted to their financial supporters, some of whom are regulated industries, and will often enact laws favorable to their supporters regardless of the negative impact on the public. Politicians may even be willing to sacrifice the future for the sake of short-term benefits for their financial supporters. Recognition of such limitations to government regulation has caused Congress to rethink regulation, especially as it relates to certain industries.
Beginning in the mid-1970s, increased dissatisfaction with the burdens of regulation, especially the costs imposed on consumers, led to the deregulation of a number of industries, including the airlines (Airline Deregulation Act of 1978), natural gas (Natural Gas Policy Act of 1978), trucking (Motor Carrier Act of 1980), and banking (Depository Institutions Deregulation and Monetary Control Act of 1980).
In 1997 some states began deregulating the production and sale of electricity. Technologies permit small companies to produce electricity at reduced costs. Under the new system (much like the system in the telephone industry), local utilities must permit competitors to use their electric lines for a fee.
Benefits from deregulation include reduced prices and increased choices for consumers. Competition among long-distance telephone suppliers is keen, no longer requiring government regulation, and is demonstrated by the fact that from 1985 to 1998 prices declined 72 percent. Expanded service and reduced prices have occurred in both airlines and trucking. Eleven thousand new trucking lines started up within three years of deregulation, and savings may be as high as $50 billion per year.
Some concerns have arisen about deregulation, however. The airline industry has become more concentrated since deregulation. In 1978 eleven carriers handled 87 percent of the traffic, while in 1995 seven carriers handled 93 percent of the traffic. Although some feared reduced safety, that has not materialized. Some of the bank failures in the 1980s were attributed to deregulation, yet depositors receive higher interest. On balance, deregulation effects have been positive.
A significant change in direction has also taken place with regard to government regulation of industries producing externalities. Many externalities arise because of the lack of property rights; consequently there is greater emphasis on establishing clearly defined property rights, which allows the market to automatically internalize the cost to buyers and sellers, making government regulation costly and unnecessary. The EPA depends less heavily on its command-and-control approach and more heavily on tradable permits, reducing the overall level of pollution and allowing firms to avoid pollution in a more cost-effective way.
Although Congress has deregulated specific industries, social regulation designed to protect consumers has expanded. Through such agencies as the Occupational Safety and Health Administration, the Consumer Product Safety Commission, the Food and Drug Administration, the Equal Employment Opportunity Commission, and the EPA, the government is attempting to provide safer products, better health care, fairer employment practices, and a cleaner environment. Government at federal, state, and local levels has also continued to increase license requirements for numerous occupations and professions.
Many economists wonder if the benefits are high enough to warrant the cost of regulation. In addition to regulatory-imposed limits on consumer freedom, product prices rise, administrative costs are high, and some firms are driven out of business, thereby reducing competition. To further complicate things, many special-interest groups use such laws to increase their wealth at the expense of others. It has been estimated that federal regulation costs each household $6000 per year. Clearly the issues surrounding regulation/deregulation will continue to be discussed into the twenty-first century.
Kahn, Alfred E. (1988). The Economics of Regulation: Principles and Institutions. Cambridge, MA: MIT Press.
Kahn, Alfred E. (2004). Lessons from Deregulation: Telecommunications and Airlines After the Crunch. Washington, DC: Brookings Institution Press.
Teske, P., Best, S., and Mintrom, M. (1995). Deregulating Freight Transportation. Washington, DC: AEI Press.
Winston, C. (1993, September). "Economic Deregulation" Journal of Economic Literature, 1263-1289.
James R. Rinehart
Jeffrey J. Pompe
DEREGULATION refers to efforts to reduce government involvement in the day-to-day activities of the private sector. The regulation of business began in the early twentieth century when progressive reformers passed legislation to monitor corporate behavior. Franklin Roosevelt's New Deal programs enormously expanded the realm of government regulations, a trend that continued through the 1960s. By the end of the 1970s, however, the U.S. economy suffered high inflation and high unemployment and underemployment, a phenomenon known as stagflation. Many observers blamed stagflation on government regulation, which critics claimed sapped the entrepreneurial energy of the private sector. To cure this problem, deregulators advocated a sweeping reduction in government rules—the idea being to turn businesses free to operate, letting the market do the regulating.
After the administration of President Jimmy Carter deregulated the airline industry in 1978, the federal regulatory apparatus setting rules for much of industry unraveled. The Reagan Administration accelerated deregulatory policies begun under Carter and implemented the most comprehensive rollback of government regulations in American history. Deregulation affected the nation's basic industries, including trucking, railroads, buses, oil and gas, local electric and gas utilities, telecommunications, and financial services. Deregulation concentrated on eliminating trade barriers to industries and eliminating price controls. Free-market economic and political theorists fostered much of the deregulation, but so did the federal courts, which broke up the monopoly on telephone service held by the American Telephone and Telegraph Corporation (AT&T).
The results of deregulation were mixed. New airlines appeared, sparking fare wars and cheap flights on the most competitive routes. The AT&T breakup created long-distance telephone companies offering lower rates for calls. Deregulation, however, also produced disasters. A botched deregulation of the savings and loan industry contributed to the failure of thousands of savings and loan companies, forcing an enormous bailout of the industry financed by U.S. taxpayers. Competition in some industries led to workers being laid off or paid less and having benefits such as health insurance reduced or eliminated. As a result, a backlash developed against deregulation in the late 1980s.
After Republican victories in the 1994 midterm congressional elections, however, government regulation of businesses again came under attack. This time deregulators set their sights on environmental regulations, such as the federal Clean Air Act (1990) and the Clean Water Act (1972), as well as entry barriers and price controls. Once again, deregulatory zeal outpaced public support. Proregulation Democrats accused antiregulation Republicans of doing big business's bidding and claimed that corporate lobbyists played an unseemly role in deregulatory legislation. The Clinton Administration announced it would oppose deregulation policies that threatened to increase pollution and energy costs. Public opposition grew even stronger when a disastrously inept effort to deregulate the California utilities industry led to widespread power failures on the west coast. In the face of such opposition, Congress abandoned many of its most ambitious deregulatory plans. Thus, by the early twenty-first century, the battle between regulators and deregulators stood at a stalemate.
Gingrich, Newt. To Renew America. New York: HarperCollins, 1995.
Kahn, Alfred E. The Economics of Regulation: Principles and Institutions. Cambridge, Mass.: MIT Press, 1988.
Majone, Giandomenico, ed. Deregulation or Reregulation? Regulatory Reform in Europe and the United States. New York: St. Martin's Press, 1990.
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Thomas G.Gress/a. g.