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Deregul ation is the work that governments do to remove regulations that restrict business, individuals, or other institutions. The regulatory restrictions may be related to economic development, changes in environmental protections, changes in the political philosophy that organizes a nation, or for a number of other reasons. Removing regulations can come for a number of reasons, including changing political philosophies, changing technologies or demographics, or the successes of regulatory policies that render them obsolete.
Until the New Deal’s regulatory legislative program that began in 1932, the United States had historically followed an economic policy of laissez faire taken in part from the writings of Adam Smith, author of The Wealth of Nations (1776). The goal was to allow free enterprise the maximum amount of room for creating businesses, exploiting the nation’s natural resources, and for providing goods and services to the county. Economically, the country prospered under a policy of laissez faire, except that on an almost regular basis, overexpansion of farmland or of other business activities led to economic panics or depressions during the 1800s, and finally in 1929 with the Great Depression.
With the election of Franklin D. Roosevelt in 1932 as President, a major program of regulatory legislation was instituted under the name New Deal. This program was really a development of regulatory activities that had begun in the 1800s under the influence of the Progressive Movement, which was opposed to the Robber Barons, as the most successful and aggressive businessmen of the day were known. Antitrust legislation was used to curb the control of John D. Rockefeller’s Standard Oil Trust. Soon, legislation was adopted to help the growing conservation movement being encouraged by President Theodore Roosevelt.
However, it was the entry of the United States into World War I that for practical purposes changed the economy from laissez faire into a command economy. The end of the war and a “return to normalcy” meant dismantling the regulations used to direct the economy during the war. However, many of the entry and midlevel government bureaucrats in the federal government under Wilson were to become the leaders of the New Deal, including Franklin Roosevelt, who had been Assistant Secretary of the Navy.
During Roosevelt’s first term (1933-37), the United States Supreme Court declared many of the laws of the New Deal, such as the National Recovery Act (NRA), unconstitutional. The Four Horsemen-Justices George Sutherland, James Clark McReynolds, Pierce Butler, and Willis Van Devanter-were conservatives who sternly opposed the New Deal legislation. Influenced by Social Darwinism and the Gospel of Wealth, they along with defeated President Herbert Hoover favored a policy of not intervening in the economy, which was supported by Roosevelt. By 1937, the Court began upholding the policies of the Roosevelt administration. The result was that not only was the economy regulated, but so were many new areas of life. The policies of President Lyndon Johnson and others supporting the Environmental Movement after the 1970s promoted a regulatory state.
Regulatory policies aim to protect, promote, or provide, through some form of redistribution, goods and services to the people and even to the environment. Policies, once adopted, do not always last forever. Because of developing technologies, improvements in scientific understanding, changes in lifestyle or any number of reasons, policies may need to be changed or in some cases repealed.
An important deregulation in American history is found in the repeal of the Eighteenth Amendment to the United States Constitution, which sought to impose a public policy to end alcoholism and drunkenness. However, the policy failed to do either and instead fostered criminal empires and lawlessness because of the significant number of people who opposed the policy. The Twenty-First Amendment repealed the policy of federal regulation of all manufacturing and sales of alcoholic beverages and returned regulations to the state. The repeal was a major act of deregulation.
Successes and Failures
Deregulation may be an indication that a policy has been successful. The prohibition policy was a general failure, but the conservation laws adopted in the 1960s and 1970s have had some notable successes. Among the animals listed in regulations used to administer the act was the American alligator. When the hunting of alligators ceased for a decade or more, their numbers swelled to a level that led to their removal from the endangered species list. However, as their numbers increased to the point that dogs, children, livestock, and sometimes even adults were killed, wounded, or maimed, deregulations were necessary to encourage the hunting of wild alligators. Today there are estimated to be at least one million alligators in the wilds in Florida alone. There are more in other states from Texas to Virginia.
With the return of the alligator in the wild and successful alligator farms, alligator skins are again being used in belts, books, and bags and other products such as alligator meat. Today, alligator farms are an important conservation resource that provides jobs and income to a growing number of people in Florida and other states. The same story of successful recovery can be told about deer herds in the United States as well as other species brought back from the brink of extinction.
In other situations, deregulation has been unsuccessful. In the 1970s, Savings and Loans were financial institutions that had developed into savings banks. They offered similar but different services from traditional banks. Both the banking industry and the savings and loan industry were heavily regulated in response to the many bank and savings institutions failures that had occurred during the Great Depression. However, with inflation and a growing need for amassing huge amounts of capital for big projects, voices were raised to deregulate the savings and loan industry.
For a while, it seemed that deregulation was going to be an enormous success. However, these federally insured institutions, in their rush to make loans, used lending practices that led to very financially insecure loans. Lending competition pressured lending officers into ever less well-secured loans. The appropriate capital resources needed for collateral were weak if not imaginary. By the 1980s, the savings and loan industry collapsed. In response, Congress reregulated the industry.
Modern Deregulation Philosophy
The philosophy behind much of modern deregulation was developed as an economic philosophy applicable to public policy. Milton Friedman, Alfred E. Kahn, and other economists at the University of Chicago developed the theories of Ludwig von Mises, Friedrich von Havek, and other economists. Among their ideas was the view that government had, in the New Deal and the Cold War, overregulated the economy and society. They taught that businesses were so inhibited by restrictions that markets were rendered inefficient. They also sought to remove the restrictions that hindered competition and that thereby reduced productivity. A major expectation that was offered for adopting deregulation policies was the claim that prices for goods would decrease significantly.
President Jimmy Carter made deregulation an important party of his legislative agenda, seeking the advice of Alfred Khan. Congress passed for Carter’s signature three major pieces of legislation deregulating the transportation and shipping industries in the United States. The Hart-Scott-Rodino Antitrust Improvements Act, the Emergency Natural Gas Act, The Airline Deregulation Act, the Staggers Rail Act and the Motor Carrier Act of 1980, and The Depository Institutions and Monetary Control Act were adopted in the last two years of Carter’s administration. They have had an enormous impact on the economy since.
Deregulation continued in the administration of President Ronald Reagan. Adopted were the GarnSt. Germain Depository Institutions Act (1982), the Bus Regulatory Reform Act (1982), the Natural Gas Wellhead Decontrol Act (1989), and the National Energy Policy Act of 1992.
Of enormous importance for deregulation during the presidency of Reagan was the breakup of the American Telephone & Telegraph Company (AT&T) by federal court order. The company was split into AT&T and seven “baby bells.” The breakup initiated an era of telecommunications growth, as MCI and other companies gained competitive ground. However, new technologies such as cellular phones and fiber optics, along with cable companies competing in the phone business, led to a range of regulations and deregulations that have had a variety of effects.
During Bill Clinton’s presidency, more regulatory reforms were adopted. Besides efforts at reducing the size of the federal government, legislation was adopted to deregulate the telecommunications and other industries. The Telecommunications Act of 1996 and the Gramm-Leach-Bliley Act of 1996 had major effects on the future of the United States and the world. The Telecommunication Act provided for enormous competition between the telecommunications manufacturers and communications companies.
However, by the second term of President George W. Bush, a number of actions to deregulate had met with mixed results. An electricity crisis in California, the collapse of energy trading companies such as Enron, and the communications giant MCI all exposed a number of fraudulent practices that required closer scrutiny of the respective industries if investors and the public were not to be cheated by the corrupt few. Other markets deregulated in the United States by 2006 included the media market and the natural gas industry.
Deregulation is not the same as liberalization. Deregulation seeks fewer regulations in order to promote competition, productivity, and market efficiencies. Liberalization allows more competitors into a market. However, it may not necessarily result in fewer regulations. It may be that the market with more competitors is increasingly regulated to protect consumers. It may also be that liberalization leads to the rise of oligopolies or monopolies.
The arguments made by Friedman and others in favor of deregulation were supported by observation of political scientists that the agencies that regulated industries were often subject to “regulatory capture.” Theoretically, regulatory bodies are independent and free to regulate according to their mission. However, no matter how independent a regulatory body is when it begins, it is subject to annual budget renewals.
As Congress works on budgets each year, it has members who are more attuned to the interests of industries in their districts than they are to conservation or environmental interests. Eventually, members may be appointed by administrations that are also more sympathetic to industry than to the environment. The regulatory body may be staffed with dedicated people, but unless the agency is constantly in the news as a saving champion of the environment, the agency will be faced with the possibility of budget cuts, appointments of leadership who are opposed to rigorous enforcement of environmental policies, or to the possibility that the agency may be completely eliminated in the budget process. In the end, the politics of the budgetary process and the appointing process facilitate the “capture” of the agency by opponents of rigorous enforcement. Deregulation has promoted at times regulatory capture.
Deregulation in Other Countries
Following the success of some of America’s deregulation activities, a number of countries have also attempted deregulation. Some of the deregulation projects have been success and some have been disappointing. In Latin America in 1973, Chile experienced a coup d’etat, when the late General Augusto Pinochet overthrew the government of President Salvadore Allende. After the coup, reforms were instituted. These were essential actions to deregulate the economy following the Socialist regulations instituted by the Allende government. In recent years, another Socialist government has been elected; however, it has yet to try to undo the successful economic revolution that deregulation instituted in Chile. To re-regulate the Chilean economy would very likely cause economic collapse and starvation.
Also in Latin America, Argentina was deregulated by the Menem administration during the period between 1989-99. The success of these reforms has been debated. There is no doubt that eventually, massive deindustrialization occurred along with unemployment and severe financial difficulties. Eventually, the United States and some European countries offered aid to Argentina and Brazil.
Other counties that have engaged in deregulations have included Japan and Australia. Japan’s economy since its collapse early in the 1990s has been in a period of slow or negative growth. Its tradition of cartels and its huge interaction between government and private industry have made deregulation necessary, but due to Japanese nationalistic ideas, it has been resisted.
In Australia, deregulation has brought mixed results as it also has in New Zealand and in other countries. In southeast Asia, the countries that have gained the most from deregulation have been China and India. Both of these economic giants have experience enormous growth gains after they moved from a Socialistor Communist-regulated economy to economies that encourage entrepreneurship while lightening the hand of regulation.
For economists, the gains in China and India have been wonderful. However, for environmentalists, the gains have been expensive because of the absence of concern for the environment. Pollution, destruction of habitat, destruction of watersheds and farmlands through dam building projects, and, in the case of India and even quietly in China, significant population growth despite efforts to restrain family sizes to only one or two children.
In Russia and the former Soviet Union, the economic picture has been less favorable than it has been in India and China. The economy of Russia has been weak, primarily due to its legislative failures. In the old Soviet Union, all economic activity was directed by the state and the Communist Party. However, the ecological facts of life in the old Soviet Union were such that the zeal for industrialization and the quest for economic development suppressed concerns for environmental protection.
The case of Chernobyl’s nuclear power plant’s disastrous meltdown and the resulting pollutions of a vast area were more than matched by destruction of habitats, pollution of the environment, and the ruinous exploitation of many areas under communism. The goal was industrialization and not ecological integrity. The end of Communism has not led to a prosperous period of deregulation. Rather, the absence of organized regulations as well as settled business laws has created uncertainty that stymies development and ecological protection.
One industry to be deregulated in Russia since the collapse of Communism in 1989 was the energy industry. Its electricity sector and other industries were deregulated along with the natural gas sector.
In Great Britain, deregulations have come and gone as the Labor and Conservative governments have waxed and waned. Efforts at deregulation have sought to establish a system that works for the country’s economic benefit rather than to placate its political ideologues. Deregulation of environmental laws usually means a return to the destruction of the environment. Human nature is such that the desire for gain usually wins over the zeal to protect the planet.
- Ute Collier, , Deregulation in the European Union (Taylor & Francis, 1997);
- Jeffrey A. Eisenach, , Communications Deregulation and FCC Reform: Finishing the Job (Springer-Verlay, 2001);
- James M. Griffin and Steven L. Puller, , Electricity Deregulation: Choices and Challenges (University of Chicago Press, 2005);
- Peter Z. Grossman and D. H. Cole, The End of Monopoly: Deregulation and Competition in the Electric Power Industry (Taylor & Francis, 2003);
- Paul W. MacAvov, Natural Gas Market: Sixty Years of Regulation and Deregulation (Yale University Press, 2001);
- Sam Peltzman and Clifford Winston, , Deregulation of Network Industries: What’s Next? (Brookings Institution Press, 2000);
- Dipendra K. Sinha. Deregulation and Liberalisation of the Airline Industry (Ashgate Publishing, 2000);
- Richard H. K. Vietor, Contrived Competition: Regulation and Deregulation in America (Harvard University Press, 1994).