Deregulation

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airline deregulation

Deregulation is the process of removing or reducing state regulations (rules and laws, etc.), typically in the economic sphere. It is the undoing or repeal of governmental controls on the economy. It became common in advanced industrial economies in the 1970s and 1980s, as a result of new trends in economic thinking about the inefficiencies of government regulation, and the risk that regulatory agencies would be controlled by the regulated industry to its benefit, and thereby hurt consumers and the wider economy.

The stated rationale for deregulation is often that fewer and simpler regulations will lead to a raised level of competitiveness, therefore higher productivity, more efficiency and lower prices overall. Opposition to deregulation may usually involve apprehension regarding environmental pollution and environmental quality standards (such as the removal of regulations on hazardous materials), financial uncertainty, and constraining monopolies.

Regulatory reform is a parallel development alongside deregulation. Regulatory reform refers to organized and ongoing programs to review regulations with a view to minimizing, simplifying, and making them more cost effective. Such efforts, given impetus by the Regulatory Flexibility Act of 1980, are embodied in the United States Office of Management and Budget’s Office of Information and Regulatory Affairs, and the United Kingdom’s Better Regulation Commission. Cost–benefit analysis is frequently used in such reviews. In addition, there have been regulatory innovations, usually suggested by economists, such as emissions trading. Deregulation can be distinguished from privatization, which is taking state-owned service providers into the private sector.

The deregulation movement of the late 20th century had substantial economic effects and engendered substantial controversy. The movement was based on intellectual perspectives which prescribed substantial scope for market forces, and opposing perspectives have been in play in national and international discourse. The movement toward greater reliance on market forces has been closely related to the growth of economic and institutional globalization between about 1950 and 2010. Critics of economic liberalization and deregulation cite the benefits of regulation, and believe that certain regulations do not distort markets and allows companies to continue to be competitive, or according to some, grow in competition. Much as the state plays an important role through issues such as property rights, appropriate regulation is argued by some to be ‘crucial to realize the benefits of service liberalization.’

Critics of deregulation often cite the need of regulation in order to: create a level playing field and ensure competition (e.g., by ensuring new energy providers have competitive access to the national grid); maintain quality standards for services (e.g., by specifying qualification requirements for service providers); protect consumers (e.g. from fraud); ensure sufficient provision of information (e.g., about the features of competing services); prevent environmental degradation (e.g., arising from high levels of tourist development); guarantee wide access to services (e.g., ensuring poorer areas where profit margins are lower are also provided with electricity and health services); and prevent financial instability. and protect consumer savings from excessive risk-taking by financial institutions.

Sharon Beder, a writer with ‘PR Watch,’ wrote ‘Electricity deregulation was supposed to bring cheaper electricity prices and more choice of suppliers to householders. Instead it has brought wildly volatile wholesale prices and undermined the reliability of the electricity supply.’ Former bank regulator William K. Black claims that inappropriate deregulation helped create a criminogenic environment in the savings and loan industry, which attracted opportunistic control frauds like Charles Keating, whose massive political campaign contributions were used successfully to further suppress regulatory oversight.

The combination substantially delayed effective governmental action, thereby substantially increasing the losses when the fraudulent Ponzi schemes finally collapsed and were exposed. After the collapse, regulators in the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) were finally allowed to file thousands of criminal complaints that led to over a thousand felony convictions of key Savings and Loan insiders. By contrast, between 2007 and 2010, the OCC and OTS combined made ‘zero’ criminal referrals; Black concluded that elite financial fraud has effectively been decriminalized.

Economist Jayati Ghosh is of the opinion that deregulation is responsible for increasing price volatility on the commodity market. This particularly affects people and economies in developing countries. More and more homogenization of financial institution which may also be a result of deregulation turns out to be a major concern for small-scale producers in those countries.

One problem that encouraged deregulation was the way in which the regulated industries often controlled the government regulatory agencies, using them to serve the industries’ interests. Even where regulatory bodies started out functioning independently, a process known as regulatory capture often saw industry interests come to dominate those of the consumer. A similar pattern has been observed with the deregulation process itself, often effectively controlled by the regulated industries through lobbying the legislative process. Such political forces, however, exist in many other forms for other special interest groups.

During the Progressive Era (1890s–1920), Presidents Theodore Roosevelt, William Howard Taft, and Woodrow Wilson instituted regulation on parts of the American economy, most notably in regulating big business and industry. Some of their most prominent reforms are trust-busting (the destruction and banning of monopolies), the creation of laws protecting the American consumer, the creation of a federal income tax (by the Sixteenth Amendment; the income tax used a progressive tax structure with especially high taxes on the wealthy), the establishment of the Federal Reserve, and the institution of shorter working hours, higher wages, better living conditions, better rights and privileges to trade unions, protection of rights of strikers, banning of unfair labor practices, and the delivery of more social services to the working classes and social safety nets to many unemployed workers, thus helping to facilitate the creation of a welfare state in the United States and eventually in most developed countries.

During the Presidencies of Warren Harding (1921–23) and Calvin Coolidge (1923–29), the federal government generally pursued laissez-faire economic policies. After the onset of the Great Depression, President Franklin D. Roosevelt implemented many economic regulations, including the National Industrial Recovery Act (which was struck down by the Supreme Court), regulation of trucking, airlines and the communications industry, the institution of the Securities Exchange Act of 1934, and the Glass–Steagall Act, which was passed in 1933. These 1930s regulations stayed largely in place until Richard Nixon’s Administration. In supporting his competition-limiting regulatory initiatives President Roosevelt blamed the excesses of big business for causing an economic bubble. However, historians lack consensus in describing the causal relationship between various events and the role of government economic policy in causing or ameliorating the Depression.

Deregulation gained momentum in the 1970s, influenced by research by the Chicago school of economics and the theories of George Stigler and others. The new ideas were widely embraced by both liberals and conservatives. Two leading ‘think tanks’ in Washington, the Brookings Institution and the American Enterprise Institute, were active in holding seminars and publishing studies advocating deregulatory initiatives throughout the 1970s and 1980s. Cornell economist Alfred E. Kahn played a central role in both theorizing and participating in the Carter Administration’s efforts to deregulate transportation.

The first comprehensive proposal to deregulate a major industry in the United States, transportation, originated in the Richard Nixon Administration and was forwarded to Congress in late 1971. This proposal was initiated and developed by an interagency group that included the Council of Economic Advisors, White House Office of Consumer Affairs, Department of Justice, Department of Transportation, Department of Labor, and other agencies. The proposal addressed both rail and truck transportation, but not air carriage. The developers of this legislation in this Administration sought to cultivate support from commercial buyers of transportation services, consumer organizations, economists, and environmental organization leaders. This ‘civil society’ coalition became a template for coalitions influential in efforts to deregulate trucking and air transport later in the decade.

After Nixon left office, the Gerald Ford presidency, with the allied interests, secured passage of the first significant change in regulatory policy in a pro-competitive direction, in the ‘Railroad Revitalization and Regulatory Reform Act’ of 1976. President Jimmy Carter devoted substantial effort to transportation deregulation, and worked with Congressional and civil society leaders to pass the ‘Airline Deregulation Act’ in 1978. Two years later he would sign ‘Staggers Rail Act’ and the ‘Motor Carrier Act.’

These were the major deregulation acts in transportation that set the general conceptual and legislative framework that replaced the regulatory systems put in place between the 1880s and the 1930s. The dominant common theme of these Acts was to lessen barriers to entry in transport markets and promote more independent, competitive pricing among transport service providers, substituting the freed-up competitive market forces for detailed regulatory control of entry, exit, and price making in transport markets. Thus deregulation arose, though regulations to promote competition were put in place.

U.S. President Ronald Reagan campaigned on the promise of rolling back environmental regulations. His devotion to the economic beliefs of Milton Friedman led him to promote the deregulation of finance, agriculture, and transportation. A series of substantial enactments were needed to work out the process of encouraging competition in transportation. Interstate buses were addressed in 1982, in the ‘Bus Regulatory Reform Act.’ Freight forwarders (freight aggregators) got more freedoms in the ‘Surface Freight Forwarder Deregulation Act’ of 1986. As many states continued to regulate the operations of motor carriers within their own state, the intrastate aspect of the trucking and bus industries was addressed in the Clinton administration by the ‘Federal Aviation Administration Authorization Act’ of 1994, which provided that ‘a State, political subdivision of a State, or political authority of two or more States may not enact or enforce a law, regulation, or other provision having the force and effect of law related to a price, route, or service of any motor carrier.’

Ocean transportation was the last to be addressed. This was done in two acts, the ‘Ocean Shipping Act’ of 1984 and the ‘Ocean Shipping Reform Act’ of 1998. These acts were less thorough than the legislation dealing with domestic transportation in that they left in place the ‘conference’ system in international ocean liner shipping, which historically embodied cartel mechanisms. However, these acts permitted independent rate making by conference participants, and the 1998 Act permitted secret contract rates, which tend to undercut collective carrier pricing. According to the United States Federal Maritime Commission, in an assessment in 2001, this appears to have opened up substantial competitive activity in ocean shipping, with beneficial economic results.

The ‘Airline Deregulation Act’ is an example of a deregulatory act whose success has been questioned. Since deregulation, real prices for air travel has fallen by more than half, and travellers have more options; but there have been questions about disruptions, employee pensions and the lack of small city service.

The ‘Emergency Petroleum Allocation Act’ was a regulating law, consisting of a mix of regulations and deregulation, which passed in response to OPEC price hikes and domestic price controls which affected the 1973 oil crisis in the United States. After adoption of this federal legislation, numerous state legislation known as ‘Natural Gas Choice’ programs have sprung up in several states, as well as the District of Columbia. The programs allow residential and small volume natural gas users to compare purchases from natural gas suppliers with traditional utility companies. There are currently hundreds of federally unregulated natural gas suppliers operating in the US. Regulation characteristics of Natural Gas Choice programs, vary between the laws of the currently adoptive 21 states.

Deregulation was put into effect in the communications industry by the government at the start of the Multi-Channel Transition era. This deregulation put into place a division of labor between the studios and the networks. Communications in the United States (and internationally) are areas in which both technology and regulatory policy have been in flux. Rapid development of computer and communications technology – particularly the Internet – have increased the size and variety of communications offerings. Wireless, traditional landline telephone, and cable companies increasingly invade each other’s traditional markets and compete across a broad spectrum of activities.

The Federal Communications Commission and Congress appear to be attempting to facilitate this evolution. In mainstream economic thinking, development of this competition would militate against detailed regulatory control of prices and service offerings, and hence favor deregulation of prices and entry into markets. On the other hand, there exists substantial concern about concentration of media ownership resulting from relaxation of historic controls on media ownership designed to safeguard diversity of viewpoint and open discussion in the society, and about what some perceive as high prices in cable company offerings at this point.

The financial sector in the U.S. has evolved a great deal in recent decades, during which there have been some regulatory changes and the creation of new financial products such as the securitization of loan obligations of various sorts and credit default swaps. Among the most important of the regulatory changes was the ‘Depository Institutions Deregulation and Monetary Control Act’ in 1980, which repealed the parts of the ‘Glass–Steagall Act’ regarding interest rate regulation via retail banking. The ‘Financial Services Modernization Act’ of 1999 repealed part of the ‘Glass–Steagall Act’ of 1933, removing barriers in the market among banking companies, securities companies and insurance companies that prohibited any one institution from acting as any combination of an investment bank, a commercial bank, and an insurance company.

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