Deregulation is the easing or elimination of governmental restrictions on economic activity. In the past century, in advanced capitalist economies such as that of the United States, governments instituted many rules restricting business behavior. As these rules always seemed onerous to businesses, businesses have always been in opposition to them. This opposition became effective in the past 30 years, leading to deregulation policies to remove the fetters on market activity and let markets determine economic outcomes. From this point of view, regulation stifles the economy, creating inefficiencies and lowered output.
The Interstate Commerce Commission (ICC), created in 1887, was the first federal regulatory agency in the United States. At that time the railroad industry was fixing rates, controlling markets, and favoring large customers, that is, acting in noncompetitive ways. The federal government tried to reintroduce competition into this industry by setting rules and regulations concerning fares and routes. However, these rules had little effect, essentially creating a protected, noncompetitive market for the railroads under the aegis of government regulation.
Since then, many different federal regulatory agencies have emerged to regulate most economic activity. For example, the oil, steel, agriculture, banking, air travel, pharmaceutical, construction, and chemical industries have all been subject to regulatory scrutiny, with varying results. Some agencies, like the ICC, have been failures; others, like the Environmental Protection Agency (EPA), have been quite successful in achieving their stated goals.
Regulation is a response to the functioning of the market. Certain undesirable outcomes may be the result of free-market activity. These kinds of outcomes can be considered as market failures, which the market itself is inherently incapable of correcting. A classic example of this is air pollution. In the refining of oil into gasoline, toxic chemicals are discharged into the air. Because the oil companies do not own the air and need not pay anyone for its use—it is commonly held by society—little incentive exists for them to limit their discharges. Whatever they spew into the air costs them nothing and therefore is not taken into account by them or consequently by the market. There may very well be costs associated with this air pollution, in the form of increased payments for health care, but they are not reflected in any market calculations. If left to the market, this problem is insoluble. Thus it becomes necessary for the government—an agent outside of the market—to step in to solve the problem.
Not wanting to eliminate markets (e.g., by replacing them with government planning), the U.S. government tries to alter these negative outcomes by limiting what businesses can do. Market failure is one main reason why a government may regulate. In addition to pollution (regulated by EPA), other examples of market failure are unwanted income distribution (not regulated in any way); lack of product information, such as the efficacy and safety of drugs (regulated by the Food and Drug Administration); and monopoly power (regulated by various antitrust laws promoting competition). A second reason for regulation would be to prevent discrimination—the Equal Employment Opportunity Commission, established in 1961, oversees this. A third reason is to promote the health and safety of workers on the job—the Occupational Safety and Health Administration sets myriad rules that employers must follow regarding worker safety. With the establishment of these more recent agencies, the federal government now regulates virtually all business in the United States in one way or another.
Not surprisingly, a backlash against this extensive regulation soon followed. Businesses chafed at having to follow all of these rules imposed by agents outside the market. The only impact that they could see was the increased costs associated with compliance with these rules. Widespread regulation seemed to be an unfair governmental intrusion into private business. The move toward deregulation was born.
While the primary objection to regulation on the part of business is the increased cost and resultant lower profits, an economic-philosophical argument also exists against this sort of government interference. Economists who believe in the free market argue that market outcomes are the most efficient and desirable of all outcomes; government involvement can only make things worse. They have faith that by following the rules of the market, letting supply and demand freely determine prices and output, the economy will be the best that it can be. This became the intellectual underpinning of the deregulation movement beginning in the late 1970s.
The first major deregulation legislation was the Airline Deregulation Act of 1978 that removed many rules governing air travel, presumably opening up this industry to more competitive forces. Within the 1980s satellite transmissions, trucking, natural gas, crude oil prices and refined petroleum products, radio, and the financial industry were all deregulated. Generally speaking though, rules concerning safety (both worker and product) and discrimination remained.
In addition to changing laws, deregulation can also occur through government neglect. If the government does not enforce the regulatory laws—by not monitoring industry for safety violations, for example—this is, effectively, deregulation. The George W. Bush administration, which strongly supported deregulation, used this as a primary tactic in its fight against what it saw as governmental interference in the free market.
The results of deregulation have been mixed. Commercial airfares have gone down, but bankruptcies and labor problems plague the airline industry. The main goal of deregulation—lower prices— occurred in some cases, while the opposite occurred in others. A striking failure of deregulation was the savings and loan debacle of the 1980s. After 1982, when Congress took oversight controls off of savings and loan institutions, those institutions responded with an orgy of speculative investments resulting in massive bankruptcies, with taxpayers ultimately paying $160 billion for this experiment in market freedom.
- Belzer, Michael. 2000. Sweatshops on Wheels: Winners and Losers in Trucking Deregulation. New York: Oxford University Press.
- Friedman, Milton and Rose Friedman. 1980. Free to Choose. Orlando, FL: Harcourt.
- Hardin, Garrett. 1968. “The Tragedy of the Commons.” Science 162:1243-48.
- Kahn, Alfred. 2004. Lessons from Deregulation: Telecommunications and Airlines after the Crunch. Washington, DC: Brookings Institution Press.
- Kuttner, Robert. 1999. Everything for Sale. Chicago: University of Chicago Press.
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