Deregulation Essay ⋆ Political Science Essay Examples ⋆ EssayEmpire

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Deregulation is the removal of businesses or whole industries from the process of government regulation. Deregulation can also refer to the sale of state-owned enterprises, known as privatization, but privatization may entail the creation of new regulatory institutional arrangements and does not necessarily represent an absence of regulation. In theory, the term can be used broadly to refer to businesses becoming exempt from all types of regulation, from price controls and competition law to pollution abatement rules to equal employment opportunity law.

Recent history has shown that deregulation is most likely to dismantle economic regulation and occurs mainly in industries that are considered ideal for natural monopolies. Natural monopolies are generally characterized by high fixed or start-up costs and by increasing returns to scale, where profits are realized only by serving large numbers of customers. This includes utilities, such as telecommunications and electricity, and transportation industries, such as trucking and commercial air travel. For much of the twentieth century, companies in these industries acted as monopolies that were either state-owned or regulated by public competition authorities.

The United States undertook deregulation of these industries in the late 1970s in order to let the free market play a greater role. Similar deregulation occurred in European countries as well as in developing countries in Africa, Asia, and Latin America, but the transformation there involved privatizing nationalized industries followed by the creation of new independent regulatory agencies to oversee the newly privatized businesses. Deregulation and privatization have been pushed by economists and politicians in order to reduce public sector costs, to increase efficiency in the production of services, and to reduce manipulation of output and prices for political reasons. The process, as well as the effects of deregulation on both continents, has been the subject of extensive research in economics, political science, and public administration.

Deregulation In The United States

In the United States, several factors set the stage for deregulation in the transportation and utilities industries. First, for decades, the biggest companies had functioned as natural monopolies, overseen by regulatory agencies, yet dominating their respective industries. High fixed or overhead costs and increasing returns to scale had provided the traditional justification for natural monopoly status, but this conventional wisdom began to change as more academics and policy analysts suggested that these industries should be opened to market competition. Additionally, the belief that regulation was contributing to business costs led presidents Gerald Ford and Jimmy Carter to see deregulation as a potential solution to the rising inflation problem.

Perhaps most important, by the late 1970s a substantial amount of economic research was demonstrating that economic regulation existed primarily for the benefit of the regulated industries. In The Politics of Deregulation, political scientists Martha Derthick and Paul Quirk argued that this body of economic work was the primary engine that drove the efforts to deregulate several industries (1985). Marver Bernstein, one of the first scholars to analyze the issue, suggested that regulatory agencies endured a life cycle in which the agency’s initial enthusiasm and eagerness to provide corrections to the free market eventually gave way to a perceived need to protect existing firms from competition, thus resulting in industry “capture” of the regulating agency (1955).

Economist George Stigler followed up on the work of Bernstein, most notably with his article “The Theory of Economic Regulation,” published in 1971. To support his claim that regulation benefited regulated interests first and foremost, he analyzed market entry regulations in the trucking industry as well as occupational licensing requirements. According to Stigler, such regulations hindered competition by inflating the profits of established competitors while blocking market entry to smaller firms, ultimately resulting in higher consumer prices. The situation could sustain itself, argued Stigler, only because the costs of regulation to each consumer was not worth the cost of organizing other consumers in order to bring about change. Stigler’s highly influential work served as the basis for other important articles on the social costs of regulation by Gary Becker (1983), Sam Peltzman (1976) and Richard Posner (1975). James Q. Wilson also built on this research by arguing that capture was more likely to occur in situations where the benefits of regulation were narrowly concentrated on industry, while the costs were widely dispersed across consumers (1980).

Derthick and Quirk showed that demand for deregulation often came from agency staff. Economists within the Civil Aeronautics Board recommended against continuing regulations that erected significant barriers to market entry against smaller airline companies. Additionally, future Supreme Court Justice Stephen Breyer, who worked then as special counsel on the Senate Judiciary Committee, convinced Senator Ted Kennedy of the anticompetitive effects of airline regulation, and, therefore, of the need to deregulate. Thus, the ideas of economists brought together a coalition of market-oriented Republicans, inflation hawks, and consumer advocates, such as Ted Kennedy and Ralph Nader.

Competitive reforms were passed in the airline industry with the Airline Deregulation Act of 1978, in the trucking industry with the Motor Carrier Act of 1980, and in telecommunications with the breakup of AT&T into the regional “baby” bells in 1984. The irony of the success of Stigler and others was that their theories dictated that deregulation could only occur if regulated firms no longer wanted to be regulated. Indeed, in his 1989 retrospective examination of the theories behind deregulation, economist Sam Peltzman suggested that regulated firms had come to believe that, by the late 1970s, the benefits of regulation no longer outweighed the costs. It is important to note that deregulation in the United States had its limits. The Reagan administration wanted to scale back environmental, worker safety, and health regulations, but Congress was divided over such plans. Additionally, there was variation in the extent to which the states implemented the reforms. Public policy scholar Paul Teske showed in a 1991 article that after the AT&T divestiture, not all the states followed the advice of economists, and in a 1994 article, Teske and colleagues demonstrated that the trucking industry was able to move to the state level to capture regulators and secure beneficial regulation.

In the 1990s, the financial sector also witnessed a strong movement toward deregulation with the Gramm-Leach-Bliley Act of 1999, which repealed the Glass-Steagall Act of the Great Depression era. Proponents of the Glass-Steagall Act claimed that it eliminated conflicts of interest in finance by keeping a firm barrier between commercial and investment banking.

The banking industry, on the other hand, had sought its repeal in order to expand the operations of individual financial institutions. Additionally, Congress passed the Telecommunications Act of 1996, which outlined the regulation of broadcast spectrum and further reformed the regulation of telecommunications. However, critics such as Ralph Nader have maintained that the law has allowed large media companies to further consolidate and reduce competition in media markets.

Deregulation In The European Union And The Developing World

Deregulation followed a somewhat different trajectory in the European Union (EU), although, as with the United States, the movement was toward liberalization of markets. Postwar European regulatory institutions generally consisted of executive ministries that directly controlled nationalized industries, again in areas once thought appropriate for natural monopolies, such as transportation, energy, telecommunications, and broadcasting. In order to implement deep macroeconomic reforms, but also partly due to the influence of research by Stigler and others, such arrangements were gradually dismantled at varying speeds across Europe. Political executives then delegated the authority to regulate markets to independent agencies, with the idea that agencies would foster industry competition and limit state intervention.

In his analysis of European deregulation, public policy scholar Fabrizio Gilardi found that governments in several European countries delegated regulatory authority to independent agencies in order to enhance their credibility and potentially increase investment in newly regulated companies (2002). Thus, while deregulation may have occurred in the form of reduced state intervention, this regulatory regime was replaced by one of independent agencies, prompting some European Union public policy scholars, such as Giandomenico Majone, to ask whether they were witnessing deregulation or reregulation (1990).

Majone has posited that these changes have resulted in the creation of the modern “regulatory state” in Europe (1996). He argued that governments are primarily responsible for redistribution, stabilization (e.g., macroeconomic), and regulation, yet in the EU, government’s role as regulator has grown at the expense of its other two roles. To Majone, EU governments that had once primarily focused on manipulating nationalized industries, in order to achieve particular income or employment targets, now delegated authority to agencies that were charged with correcting market failures. Moreover, the EU’s stated goals of achieving a single, integrated market have required continual efforts to harmonize regulations across member states. Thus, somewhat ironically, deregulation in the EU has led to the creation of the European “regulatory state.” Deregulation in developing nations has also largely followed a path of privatizing state-owned enterprises. Much of the academic research in this area has come from economists attempting to evaluate the effects of privatization on production costs, prices, and consumer access to the goods in question. Numerous studies have been conducted; David Parker and Colin Kirkpatrick summarize much of the literature on privatization evaluation in a 2005 article. They find that privatization by itself is often ineffective, but that when it is accompanied by competition and regulation by an independent public agency, privatization can lower production costs and lower prices for consumers, while increasing the choices available to them. However, the authors also indicate that many studies suffer from methodological flaws and that it may be difficult to generalize such findings beyond the most common context for such research, telecommunications.

The Future Of Deregulation

In industries once considered natural monopolies, deregulation has achieved mixed results, but research has helped to specify the economic and political conditions under which deregulation or privatization can be successful. However, the global financial crisis of 2008–2009 created strongly unfavorable impressions of the deregulation of financial institutions in the United States in the 1990s. Many observers attribute the repeal of the Glass-Steagall Act to the development of sophisticated debt instruments and questionable housing loans that combined to cause the crisis. Moreover, varying standards of regulation induced some commercial banks, such as Countrywide Financial, to shift their status to that of thrift or savings-and-loan institutions, which were less heavily regulated. Finally, some observers also perceived a regulatory conflict of interest, as enforcement was financed by fees collected by regulated entities. These events, as of 2009, have created strong demand for tight regulation of financial institutions, particularly in the United States, where many believe the crisis originated. Thus, while we may be witnessing a long-term trend toward privatization of natural monopoly industries, deregulation of other sectors of the economy has been more controversial and may experience greater volatility in the level and strength of government regulation.

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