Deregulation

Deregulation is when government reduces its role and allows industry greater freedom in how it operates. It is therefore not the opposite of regulation, which refers to governmental administration of market constraints developed by written law and judicial decisions.

Overview

As a result of deregulation, France Télécom operates phone booths in Wellington, New Zealand.

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 usually involves apprehension regarding environmental pollution, quality standards (such as the removal of regulations on hazardous materials), financial uncertainty, and constraining monopolies.

A parallel development with deregulation has been organized, ongoing programs to review regulatory initiatives with a view to minimizing, simplifying, and making more cost effective regulations. 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.

One can distinguish between deregulation and privatization, where privatization can be seen as taking state-owned service providers into the private sector.

By country

Argentina

Argentina underwent heavy economic deregulation, privatization, and had a fixed exchange rate during the Menem administration (1989–1999). In Dec., 2001, Paul Krugman compared Enron with Argentina, claiming that both were experiencing economic collapse due to excessive deregulation. Two months later, Herbert Inhaber claimed that Krugman confused correlation with causation, and neither collapse was due to excessive deregulation.

Australia

Having announced a wide range of deregulatory policies, Labor Prime Minister Bob Hawke announced the policy of 'Minimum Effective Regulation' in 1986. This introduced now familiar requirements for 'regulatory impact statements', but compliance by governmental agencies took many years. Australia experienced deregulation of their labor market during the late 1980s under Hawke/Keating Labor governments. The country saw extensive deregulation of the labor market beginning in 2005 under John Howard's Liberal Party of Australia through their WorkChoices policy. However, it was reversed under the following Rudd Labor government.

Canada

See also: Ontario electricity policy

Natural gas is deregulated in most of the country, with the exception of some Atlantic provinces and some pockets like Vancouver Island and Medicine Hat. Most of this deregulation happened in the mid 1980s. There is price comparison service operating in some of these jurisdictions, particularly Ontario, Alberta and BC. The other provinces are small markets and have not attracted suppliers. Customers have the choice of purchasing from a local distribution company (LDC) or a deregulated supplier. In most provinces the LDC is not allowed to offer a term contract, just a variable price based on the spot market. LDC prices are changed either monthly or quarterly.

The province of Ontario began deregulation of electricity supply in 2002, but pulled back temporarily due to voter and consumer backlash at the resulting price volatility. The government is still searching for a stable working regulatory framework.

The current status is a partially regulated structure in which consumers have received a capped price for a portion of the publicly owned generation. The remainder of the price has been market price based and there are numerous competitive energy contract providers. However, Ontario is installing Smart Meters in all homes and small businesses and is changing the pricing structure to Time of Use pricing. All small volume consumers are to be shifted to the new rate structure by the end of 2012. There is price comparison service operating in these jurisdictions.

The province of Alberta has deregulated their electricity provision. Customers are free to choose which company they sign up with, but there are few companies to choose from and the price of electricity has increased substantially for consumers because the market is too small to support competition. If they choose they may remain with the utility at the Regulated Rate Option.

Former Premier Ralph Klein based the entire deregulation scheme on the Enron model, and continued with it even after the highly publicized and disastrous California electricity crisis (and the collapse of Enron because of illegal accounting practices.)

European Union

• 2003 Corrections to EU directive about software patents
• Deregulation of the air industry in Europe in 1992 gave carriers from one EU country the right to operate scheduled services between other EU states.

Ireland

The taxi industry was deregulated in Ireland leading to an influx of new taxis. This was due to the price of a licence dropping overnight. The number of taxis increased dramatically.

United Kingdom

The Conservative government of Margaret Thatcher started a program of deregulation and privatization after the general election of 1979. These included express coach (Transport Act 1980), British Telecom (completed in 1984), privatisation of London bus services (1984), local bus services (Transport Act 1985) and the railways (1993).

Since 1997 the Labour governments of Tony Blair and Gordon Brown developed a programme of better regulation. This included a general programme for government departments to review, simplify or abolish their existing regulations, and a "one in, one out" approach to new regulations. In 2006, new primary legislation (the Legislative and Regulatory Reform Act 2006) was introduced to establish statutory principles and a code of practice.

The Labour governments did not privatise any public services, although some other government-owned businesses such as QinetiQ were privatised. But a great deal of infrastructure and maintenance work was contracted to private enterprise under the Public-Private Partnership, with competitive bidding for contracts within regulatory framework. This included large projects such as building new hospitals for the National Health Service, building new state schools, and maintaining the London Underground.

New Zealand

Since the deregulation of the postal sector, different postal operators can install mail collection boxes in New Zealand's streets.

See also: Economy of New Zealand

New Zealand has had extensive deregulation since 1984. Originally instigated by the Labour Party, it was later continued by the erstwhile opposition National Party. As a result, New Zealand, from having a reputation as an almost socialist country, is considered one of the most business-friendly countries of the world, next to Singapore. However, critics charge that the deregulation has brought little benefit to some sections of society, and has caused much of New Zealand's economy (including almost all of the banks) to become foreign-owned.

Russia

Russia went through wide-ranging deregulation (and concomitant privatization) efforts in the late 1990s under Boris Yeltsin, now partially reversed under Vladimir Putin. The main thrust of deregulation has been the electricity sector (see RAO UES), with railroads and communal utilities tied in second place. Deregulation of the natural gas sector (Gazprom) is one of the more frequent demands placed upon Russia by the United States and European Union.

United States

History of regulation

See also: Great Depression and Causes of the Great Depression

Many industries in the United States became regulated by the federal government in the late 19th and early 20th century. Entry to some markets was restricted to stimulate and protect the initial investment of private companies into infrastructure to provide public services, such as water, electric and communications utilities. With entry of competitors highly restricted, monopoly situations were created, necessitating price and economic controls to protect the public. Other forms of regulation were motivated by what was seen as corporate abuse of the public interest by businesses already extant, such as occurred with the railroads following the era of the so-called robber barons. In the first instance, as markets matured to where several providers could be financially viable offering similar services, prices determined by competition were seen as more economically efficient than those set by regulatory process.

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–1920s), 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 1970-2000

Deregulation gained momentum in the 1970s, influenced by research at the University of Chicago and the theories of Ludwig von Mises, Friedrich von Hayek, and Milton Friedman, among others. 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. Alfred E. Kahn played an unusual role in both publishing as an academic and participating in the Carter Administration's efforts to deregulate transportation.

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 (represented by Hendrik Houthakker and Thomas Gale Moore), White House Office of Consumer Affairs (represented by Jack Pearce), Department of Justice, Department of Transportation, Department of Labor, and other agencies.

The proposal addressed both rail and truck transportation, but not air carriage. (92d Congress, Senate Bill 2842) 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 (October 24, 1978), Staggers Rail Act (signed October 14, 1980), and the Motor Carrier Act of 1980 (signed July 1, 1980).

These were the major deregulation acts in transportation that set the general conceptual and legislative framework, which 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 of 1982. 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 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." 49 U.S.C. § 14501(c)(1) (Supp. V 1999).

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 thoroughgoing than the legislation dealing with U.S. 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.

Energy

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 effected 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.

Natural Gas Choice programs allow residential and small volume natural gas users to comparison purchase from natural gas suppliers, aside 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 (as of 2008).

Communications

See also: Telecommunications Act of 1996 and Concentration of media ownership

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 others' 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.

Finance

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 Gramm-Leach-Bliley Act in 1999, which repealed the parts of the Glass–Steagall Act which had not already been repealed. This 1999 Act took down barriers to competition between traditional banks, investment banks, and insurance companies, in some cases allowing firms to participate in all three markets thus making distinctions between these categories less clear.

Some believe that this deregulation contributed to the U.S. financial crisis of 2007-2009 and the Global financial crisis of 2008-2009. However, others dispute this assertion, and a lively debate on the causes of financial crisis is still under way as of August, 2009.

Related legislation

• 1976 - Hart-Scott-Rodino Antitrust Improvements Act PL 94-435
• 1977 - Emergency Natural Gas Act PL 95-2
• 1978 - Airline Deregulation Act PL 95-50
• 1978 - National Gas Policy Act PL 95-621
• 1980 - Depository Institutions Deregulation and Monetary Control Act PL 96-221
• 1980 - Motor Carrier Act PL 96-296
• 1980 - Regulatory Flexibility Act PL 96-354
• 1980 - Staggers Rail Act PL 96-448
• 1982 - Garn–St. Germain Depository Institutions Act PL 97-320
• 1982 - Bus Regulatory Reform Act PL 97-261
• 1989 - Natural Gas Wellhead Decontrol Act PL 101-60
• 1992 - National Energy Policy Act PL 102-486
• 1996 - Telecommunications Act PL 104-104
• 1999 - Gramm-Leach-Bliley Act PL 106-102

Controversy

See also: Anti-globalization, Globalization, and Neoliberal

The deregulation movement of the late 20th century had substantial economic effects and engendered substantial controversy. As preceding sections of this article indicate, 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 liberalisation 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 realise the benefits of service liberalisation".

Critics of deregulation often cite the need of regulation to:

• create a level playing field and ensure competition (e.g. 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.

For deregulation

Adam Thierer wrote, "The first step toward creating a free market in electricity is to repeal the federal statutes and regulations that hinder electricity competition and consumer choice."

Against deregulation

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."

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.

See also

• Ease of Doing Business Index
• Electricity provider switching
• Michael H. Belzer
• Political economy
• Public service company
• Stranded costs

Further reading

• Barnum, John W (September 15, 1998), What Prompted Airline Deregulation 20 Years Ago? Presentation to the Aeronautical Law Committee of the Business Law Section of the International Bar Association, retrieved 2009-08-17
• Derthick, Martha; Quirk, Paul J. (September 1985), The Politics of Deregulation, Brookings Institution, ISBN 978-0-8157-1817-8
• Kahn, Alfred E., "Airline deregulation", Concise Encyclopedia of Economics
• Moore, Thomas Gale (November/December 1988), "Rail and Truck Reform: The Record So Far", Regulation {{citation}}: Check date values in: |date= (help)
• Robyn, Dorothy (1 January 1987), Braking the Special Interests, University of Chicago Press, ISBN 978-0-226-72328-0

External links

• Crews, Clyde Wayne (28 February 2000), Jump, Jive an' Reform Regulation: How Washington Can Take a Swing at Regulatory Reform, Competitive Enterprise Institute, retrieved 2009-04-26
• Powering a Generation of Change, Smithsonian Institution, retrieved 2009-04-26
• Zhuravskaya, Ekaterina; Yakovlev, Evgeny (14 March 2008), Deregulation of Business, Social Science Research Network, retrieved 2009-04-26
• Nachshon Draiman CEO (2000), The deregulation of the natural gas industry and other utilities, Multiut, retrieved 2009-04-26
• Jay Draiman, Dir. of Utilities & Sustainability (1999), Age of Deregulation, US GAS ELECTRIC, retrieved 2010-12-19
• Nachshon Draiman CEO, http://www.multiut.net/, retrieved 2009-04-26 {{citation}}: Missing or empty |title= (help)
• Doing Business project, World Bank, retrieved 2009-04-26
• Regulation: From Economic Deregulation to Safety Regulation, Federal Highway Administration, 8 November 2006, archived from the original on October 18, 2007, retrieved 2009-04-26. This comprehensive study indicating, among other things, that transport deregulation reduced distribution costs in the United States from about 14% of gross domestic product to under 11% (If this measure is selected, current dollar savings can be calculated by multiplying current GDP by @3%).^{[Misplaced in article]}