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Regulation vs. Deregulation

The issue of just how much government intervention is necessary in a free enterprise system is an ongoing battle between proponents of laissez-faire (“leave it alone”) to proponents who argue that continual and intense government monitoring is necessary to protect the consumer. Each year, the government produces thousands of pages of new regulations spelling out in painstaking detail what businesses can and cannot do. Each year, some regulations are increased while other regulations are lessened, but more often than not conforming to new regulations increases the cost of doing businesses.  Regardless of your position on government regulation and intervention, if it were not for many instances of American corporations’ callous disregard for the public’s safety, many of these regulations would not be required.

 

Henry Davis Thoreau (1817-1862) is considered one of the most influential figures in American thought and literature. He embraced the Transcendentalist belief in the universality of creation, and the primacy of personal insight and experience. A supreme individualist, he championed the human spirit against materialism and social conformity, and was adamantly opposed to slavery.  He is most famous for his book, “Civil Disobedience,” that explained why private conscience can constitute a higher law than civil authority.

 

His quote regarding government intervention defines his prevailing philosophy:

“That government is best which governs least”; and I should like to see it acted up to more rapidly and systematically. Carried out, it finally amounts to this, which also I believe—‘That government is best which governs not at all’; and when men are prepared for it, that will be the kind of government ….”

Regulations are rules designed to control certain actions by people. They are a distinctive statement by the government against the people, more often a specific industry, although they are portrayed as a protection for the people.  Since the effects of regulation cannot easily be quantified in terms of cost of goods or quality of life, it is difficult to assess whether the regulation is causing more harm than good. That is one of the inherent dangers of any form of regulation.

History of Government Regulation

During the 19th and early 20th century, the prevalent government attitude was to leave business alone. The belief was that as long as markets were free and competitive, private individuals and corporations would work together for the common good of society. Conversely, at times though, private interests turned to the government for assistance, as when railroad companies graciously accepted land grants and public subsidies in the 19th century. In other instances, government provides tariff protection and farm subsidies to protect those interests. Numerous other industries have turned to the government for tax breaks and subsidies, as in the case of farmers and tobacco companies.

 

Due to the growth of mammoth corporations, in 1890 the government passed the Sherman Antitrust Act, one of the most important pieces of legislation of the 19th century. The law was designed to break up monopolies. From 1890 to 1930, it passed laws regulating food and drugs because of egregious incidents that literally forced the government to take action. In 1913, even the nation’s money supply was regulated by the new Federal banking system. Because of the Great Depression of the 1920s and 1930s, government intervened in a vastly expanded capacity under Franklin Delano Roosevelt’s “New Deal.”  Due to the stock market crash of 1929, new laws regulated sales of stock, but many other laws were introduced to protect citizens and offer unemployment benefits to the working class. Thousands of laws have been passed since that era, some good and some terribly constrictive, depending on your viewpoint. Over the last 30 years, the pendulum has swung back and forth regarding government regulation.

 

Government regulation falls into two categories: economic and social regulation. Economic regulation exists in the form of price controls to protect the consumer from price gouging and tax breaks to theoretically stimulate growth and subsidies to protect American products from price-cutting by foreign markets.  Social regulation exists to protect the public as in the case of safer workplaces and a clean environment. As an example of social regulation, the Food and Drug Administration (FDA) is the ultimate authority in the approval of all new drugs because of outrageous claims about healing powers and the manufacturer’s past history of indifference to potential side effects attributable to many drugs.

 

By the 1990s, Congress had created over 100 Federal regulatory agencies. In theory, many of these agencies are structured to be isolated from political pressures, but ample evidence exists to suggest that this often is not the case; during election years agencies will withhold evidence that may be detrimental to the administration in power until after the election.

Deregulation Spurs Growth

In general, the more restrictive a government is in regulating an economy, the lower the growth rate. In the 1990s, the U. S. economy grew at an average rate of 4.3%, while Germany, France and Italy, which has a much higher rate of regulation, grew at 2.0%. The United States and Great Britain started the process of removing many regulations in the 1970s, while the three European countries have been relatively stagnant.

Cable TV Monopoly

As one minor instance of regulation, in most east coast cities, the consumer only has one choice for television service if that individual does not own a home. This lack of choice is because the various towns and municipalities only permit one cable vendor to sell their product. However, if you are a homeowner, fortunately you have a second choice - satellite TV, such as DIRECTV or the Dish Network. A few years ago, I had installed cable TV combined with their Internet DSL service, but I became very annoyed when they continually raised their prices every few months for they had a MONOPOLY thanks to government. I’m sure they felt that the few dollars they occasionally added to the bill would not be noticed by the average consumer. Well, I noticed and I dumped cable TV and converted to satellite TV. This is not a painless process, but I was thankful that I eventually was given a choice, not by government regulation but by the free enterprise market. I would like to know how many pockets are being lined by the single choice of one cable TV provider available in many locales?

OSHA - A Prime Example of Bureaucratic Power

Congress created the Occupational Safety and Health Administration (OSHA) to safeguard workers, but the fear of many Americans has been borne out by some of the ridiculous ruling and fines laid on small business by these bureaucrats. OSHA has literally forced a number of companies out of business because of exorbitant fines for very minor infractions.

 

In the opinion of many people (especially corporations), OSHA eventually should be scrapped altogether, although the advocates of laissez-faire have a difficult time supporting their position when numerous horror stories of corporate America’s callous disregard for the public have been documented in the news even if the problems occurred 20 or 50 years ago.

 

The Love Canal in New York was a perfect example of this callous attitude. The canal became a haven for the dumping of hazardous wastes from 1920-1953. The canal was abandoned and buried over in 1953 before the extent of the hazardous material was recognized.  In simple terms, Love Canal is one of the most appalling environmental tragedies in American history. In the late 1950s, about 100 homes and a public school were built at the site. Twenty five years after the Hooker Chemical Company stopped using the Love Canal here as an industrial dump, 82 different compounds, 11 of them suspected carcinogens, were found percolating up through the soil, their drum containers rotting and leaching their contents into the backyards and basements of the homes and the school. The New York State Health Department found a disturbingly high rate of miscarriages, along with five birth-defect cases in the area. A large percentage of people in Love Canal were found to have high white-blood-cell counts, a possible precursor of leukemia. Using Superfund monies, the site has been cleaned up and people eventually started to move back into the area. This tragic incident cannot be considered an isolated event, although the damage was done in this one incident over 50 years ago.

 

In the opinion of many people, OSHA’s concern for real safety is lost in a bureaucratic and regulatory blur of citation quotas, tax collection, and insane regulations that hamper legitimate business at every turn.

Some of the nonsensical rules created by this organization only fuel the fire:

 

*    Plastic gas cans are permitted on manufacturing work sites, but not on construction sites, even if they have been approved by local fire marshals.

*    OSHA only allows for radiation signs with purple letters on a yellow background, while the Department of Transportation calls for black on yellow.

*    It requires that work site first-aid kits be approved by a physician.

Times have changed. The incentives for the private sector to maintain safe working conditions are mutually beneficial to the employer, as opposed to the days when sweatshops were the norm. Besides, corporations run the risk of bad Internet publicity or very expensive lawsuits by these same individuals if they are careless about the work environment.

It’s time to take a hard look at another government agency that has probably outlived its usefulness.

Deregulating Various Industries

Let’s examine the deregulation that has occurred in four primary industries: Power, telecommunications, auto insurance and the airlines.

 

During President Jimmy Carter’s administration (1977-1981), Congress passed a series of laws that removed most of the regulatory shields around aviation, trucking and railroads in an effort to increase competition and lower prices. During this process, Congress also abolished the Interstate Commerce Commission (109 years old) and the Civil Aeronautics Board (45 years old).

Deregulating Power

As we grew up, many industries such as electric utilities had a monopoly on the markets they served. They set their own prices and the services they offered as a monopoly. To counter any egregious rip-off of the consumer, state governments set up Public Utility Commissions (PUCs). These PUCs generally regulate electric, environment, natural gas, rail, safety, telecommunications (telephone) and water. The idea behind this is that the PUCs would protect the consumer from price gouging by these utilities. For example, the California Public Utilities Commission’s focus is in “developing and implementing policies and procedures to facilitate competition in all telecommunications markets, address regulatory changes required by state and Federal legislation, assure reasonably-priced essential services and provide consumer protections against abusive practices.”

 

One of the advantages of the PUC is that consumers have an outlet for any grievances they may have due to poor service or fees charged by a utility.

 

However, creating another government agency to monitor private companies doesn’t come cheaply. The surcharges that are added to your telephone service include fees ranging from 0.170% to 0.300% of your bill.

 

Now instead of simply paying a few dollars on your phone bill, you are paying a few dollars on just about every commodity that you use driving up your ability to survive on a daily basis.

 

California Electricity Deregulation – One of the most recent and controversial efforts at deregulation occurred in California in 1996. This electricity fiasco is the perfect case for generations of economics and government students to study, and is therefore meaningful to explain to some degree of depth.

 

There are many villains in this story on both the side of corporate America and the government. California attempted to reduce consumer prices by deregulating electrical utilities. Before deregulation, California had several large privately owned companies and a few municipal utilities that operated as regulated monopolies. Prices were regulated by the California Public Utilities Commission. These utilities controlled the market from power generation through local distribution including Pacific Gas & Electric, San Diego Gas & Electric and Southern California Edison. The deregulation plan was to separate out power generation from local distribution, opening the market for intense competition and, in theory, lower consumer prices. The plan was also intended to provide incentives for cost cutting and to build new generating capacity.

 

The most amazing part of this story is while researching the facts in this case, I was dumbfounded to find supposed experts commentary on “the real scoop,” ranging from it was caused entirely by greed on the part of the utilities to every major problem was caused by government incompetence. The truth lies somewhere in between.

 

Here’s what happened:

 

·         The three largest electric utilities, who were tired of having their rates regulated by the 90-year old Public Utility Commission, banded together to propose that the business of generating power and the distribution of that power be separated.

·         Under the plan, the utility companies were still allowed to own both generating and distribution divisions.

·         California’s state legislature unanimously passed a new law, AB 1890, which only partially deregulated the electricity market.

·         The government, in its passion to create new bureaucratic structures, created the Power Exchange or California Independent System Operator, which would be the middlemen in sales of power to local distribution outlets. Unbelievably, the government then demonstrated its wisdom by setting price caps on residential electricity rates but could not set the price for natural gas, the primary fuel used in generating electricity in California.

·         The separation of the power and distribution networks was accomplished by requiring the utilities to sell through the Power Exchange.

·         With the ultimate goal an increase in competition, it was hoped that this would result in cost cutting moves by the utilities, and a more competitive market introducing new players. As another advantage, the utilities were supposed to purchase “green” power from windmills and solar power to augment the supply.

·         In the summer of 2001, sinister factors intervened to strike a blow against this marriage. Hot summer weather and cold winters combined with a drop in the power available from hydroelectric dams in the northwest (because of a lack of rainfall) reducing the supply to satisfy the increased demand.

·         High wholesale prices for electricity spiked not just in California but throughout the entire west coast. When the law was passed, both the utilities and the government anticipated the cost of wholesale electricity would remain well below the retail price.

·         The utilities therefore were forced to pay much higher prices for their supplies of electricity, and their ability to build new plants was severely constrained by lack of investor confidence to make a buck amid the limitations of the fuel type.

·         When wholesale natural gas prices began to rise in the spring of 2000, consumer prices were unchanged because of the retail price cap. Since they weren’t affected by price increases, there was no incentive for the consumers to conserve aggravating the problem.

·         The California governor, Grey Davis, could have intervened and loosened the inflexible price controls but this never happened.

·         Companies such as Enron took full advantage of the situation and charged outrageous prices to supply electricity, knowing full well that they had California over the proverbial barrel.

·         Eventually, brownouts, blackouts and soaring electricity rates were the logical fallout of this twisted interplay.

·         The situation resulted in draining the financial resources of the investor-owned utilities, the bankruptcy of Pacific Gas & Electric, and the near-bankruptcy of Southern California Edison.

·         The municipal owned utilities did not have the same problems, because they were able to raise rates and purchase their supplies on the long-term market. Purchasing through the long-term market protected them from the inevitable spikes.

The causes of this disaster were as follows:

·         The initial blow in this fiasco was struck when government only partially deregulated the industry

·         Private industry, overtly displaying their own greed, was in cahoots with government, so the blame can be laid on both sides

·         Utilities were coerced or forced to sell off much of their generating capacity

·         The utilities were forbidden from signing long-term contracts to buy supplies. This inevitably forced the utilities to pay exorbitant prices for their short-term supplies

·         Increases in residential rates were forbidden until 2002

·         Californians, who are renowned for their environmental-friendly culture demanded that all new power plants burn natural gas. Now natural gas is more expensive than fossil fuel or nuclear plants. Because of this problem, investors were unlikely to contribute the funds to build new plants. Since 1995, Texas has built 22 new power plants while California has built none, even though the drain on the existing power generation system was severely aggravated by the substantial increases demanded by Silicon Valley and the normal population increase

·         Since the utilities were forced to buy their electricity from the California Independent System Operator (Power Exchange), they were unable to take advantage of their inherent ability to get their source of electricity from numerous suppliers and at various prices to lower the costs. A substantial argument can be made that if the utilities were permitted to buy from any source and set their own rates, then hopefully the free market could have controlled the crisis

·         Supporters of the utilities argue that because of government mandated controls, they were forced to sell their own electric generating capacity, comply with price controls, and unable to buy on the long-term market.

·         Another argument can be made that there was MORE regulation with bill AB 1980 than before deregulation.

The final results were that the people of California wound up paying through the nose. California borrowed $10 billion from the general fund incurring a huge debt that will last for about 10 years. School is still out on whether FULL deregulation can ever be achieved in this negative political environment. As a footnote, price controls have been attempted many times in America with dismal results. There are just too many factors that come into play to warrant this authoritarian approach.

Deregulating Telecommunications

From 1984 to 1996, telephone service has been deregulated for phone equipment, long distance and local service. Many people were screaming that chaos would reign supreme. I would assume that these were the same people who liked mediocre service and high bills.

 

Prior to 1984, phone companies such as Pacific Bell and Bell Atlantic had a monopoly on service. These companies were collectively known as the Bell Operating Companies (BOCs) or “Baby Bells.” These companies rarely had any incentive to introduce better service or new products unless it would increase their bottom line (profit), even though they had a large technology organization called Bell Labs. I suspect they devoted more effort justifying rate increases to the PUC then in improving service.

 

With deregulation, it opened a Pandora’s box of new startup companies to compete against the existing monopolies. Yes, it is very confusing as to who offers the best service for the lowest price, but over time the market generally settles down to a handful of vendors in your area who constantly compete against each other for your business – the essence of capitalism and not the essence of communism (monopolies).

 

Average long-distance rates, deregulated in 1984, fell from an inflation-adjusted 51 cents per minute that year to 14 cents in 1999. Add it all up, and adjust for inflation and greatly increased phone usage, and the average household spent 2.6 cents per minute for 510 hours of local and long-distance calls in 1999, compared with 4.1 cents per minute in 1984 for 304 hours. A coast-to-coast phone call phone call in the U.S. costs less than a domestic long-distance call in France, which ironically is provided by a monopoly.

 

Studies suggest that service improved after deregulation, too. For example, in 1977, according to a Gallup Organization poll 60% of users rated the efficiency of the telephone company as good or excellent. Compare that to the University of Michigan Business School’s first American Customer Satisfaction Index (ACSI) score in 1994, which rated long-distance and local service an 80 out of 100. The ACSI is the first independent standardized measure of customer satisfaction in 32 industries.

 

Consumers now have more choices, the essence of a free-market economy. Instead of just AT&T, which controlled 90 percent of all long-distance revenues in 1984, 700 other companies now share in the market.

Deregulating Auto Insurance

For some unknown reason, state governments have decided to intervene in the business of regulating the auto insurance business, obviously in a misguided attempt to protect consumers from unscrupulous business practices.  Some of the most stringent regulations are in place in New Jersey, even dictating the rate structure by an archaic tier-rating system. Other provisions permit insurers to impose a 10 percent charge for late payments, police can confiscate cars of uninsured drivers, and caps are imposed on urban rates.  One of the most costly provisions is the no-fault system, whereby insurance companies pay for medical treatment, regardless of who caused the accident. I can just picture the number of claimants crying out, “my back, my back!”  The cost of this health insurance, which is built-in to the policy, costs the New Jersey consumers $1 billion per year.

 

How has all of this regulation helped the consumer?  Oh, yes, I forgot to mention that New Jerseyans pay the highest rates in the country, averaging $1,027. Prior to the government intervention, New Jersey was ranked 25th. Because of the high rates, it is estimated that between 300,000 and 600,000 residents have no insurance. Fraud, lawsuits and the high cost of medical treatment have been touted as the primary reasons for the high rates but skeptics point to the government-mandated tier-rating system and insurance surcharges as the culprits. Under these rules, when a consumer has a minor fender-bender, their rates are permitted to skyrocket. One woman, after a minor accident, was stunned to find out that her rate went from $850 to $4,000 per year.

 

Two of the major providers, GEICO and Mercury General left the state in the 1970’s but have recently returned to the market because new changes in these regulations have changed some of the governmental controls such as permitting insurers to set rates and to design their own rules. However, many insurers want no part of the New Jersey auto insurance business.

 

Of course, there is always the option to scrap all of the regulations and let the free-market govern the availability of policies, but this will never happen once government gains a degree of control.

Deregulating Airlines

In 1976, the airline industry was deregulated. Until that time, the U.S. airline industry was governed by the Civil Aeronautics Board (CAB). Each carrier’s routes and prices were set by this government organization. The U.S. airline industry operated with a somewhat imprecise relationship between costs and revenues. Airfares were set by route in consultation with the airlines flying them according to a standard cost-plus formula. Many of the less frequently traveled routes were subsidized by the higher fares charged on the major routes. This arbitrary methodology reduced or eliminated the need to compete based on operational efficiency and consumer satisfaction. The system virtually guaranteed airline costs would be covered. Once price guarantees were lifted, there was a significant re-positioning of and restructuring within the entire industry as the airlines needed to become more efficient in order to compete.

 

The Airline Deregulation Act of 1976 opened up the U.S. airline business to free market principles, which spurred a dramatically larger, more accessible and, some say, a more affordable industry.  On the positive side, deregulation opened the market to many competitors and low-cost airlines often with less frills than existed under regulation. On the negative side, many carriers disappeared through mergers, acquisitions and bankruptcy.  But in reality, that is the essence of the free market economy. The strong survive and the weak perish as in the animal kingdom.

According to the General Accounting Office (GAO), airline fares decreased by 21% from 1990 to 1998. Average airfares declined and quality of service improved at 168 of the 171 airports examined generally because of competing service from a low-fare carrier.

 

Consumers today can buy air travel today for one-half the purchasing power of a 1968 dollar, and about one-third of a 1950 dollar. I can personally remember paying $800-$900 for a round trip ticket between Los Angeles and New York in the 1970s -1980s, wherein I can fly on one of the no-frill airlines today for a fare as low as $99.

Conclusion

It can be safely said that deregulation, with the exception of a few isolated incidences, lowers costs, improves service, and opens the industries to more efficient competitors.

 

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