Chapter Nine

That governments make laws to regulate private sector economic activity is as old as the capitalist system itself.

The first regulations, enacted by the British Parliament during the Industrial Revolution (1765), were made ostensibly to regulate labor laws, but had the hidden agenda of imposing the power of the newly created Parliament on the nobility, the only class rich enough to afford the very expensive cotton mills.

Still under the influence of laissez faire and the well-noted French intolerance of centralized government, the initial phase of the French Industrial Revolution was hardly regulated.

The different impact of regulating and non-regulating of the British and the French industrial Revolutions respectively could not have been more pronounced.

The French Industrial Revolution, given absolute free rein took off at a torrid pace only to falter. Whereas burdened by the increasing cost of regulation, the emerging Industrial Revolution in Britain was slower to grow, but maintain its initial momentum to push the British economy decidedly many decades ahead of French economic development.

This sent the clear political economy message that the market left completed unchecked could be detracted from performing at its best due to the poor stewardship of man, its principal agent.

So what are regulations?

Regulation defines a set government policies intended to change behavior of economic agents. They alter private sector prioritization of incentives.

Why regulation?

Producers are driven to maximize profits, and some would cheat, cut corners, or through sheer ignorance abuse free market principles, and their attempts to impose externality costs on consumers can only be prevented through regulation.

Conservatives say leave the market alone because the market will over the long-run correct itself; and that if efficiency is the criterion for criticizing the market–called market failures–then government which is suppose to eliminate market failures should be held to the same efficiency standards, and if we do, says conservatives, it would be discovered that government only makes the case worse because between markets and the government, the government is more proned to failure, which they term, government failures.

Liberals think government intervention is necessary because the short term costs of market failures is intolerably too high for those they affect.

Without regulation the market would not perform anywhere near its potential efficiency. Anything that undermines society's efficacy is against the public interest.

Government as the protector of the public interest enters the market with regulation to ensure the existence of a greater level of competition and openness necessary to guarantee a higher level of market performance than is possible when market failures are present.

Five types of market failures justify regulation: Monopoly, Free rider costs, Malice, Externalities, and Market Instability.

Because monopolists, con artists, and free riders abuse the free competitive spirit of markets, their activities undermine whatever capacity the market might have for self-correction.

1. Monopoly is defined as any form of restrictiveness on competition. Monopoly occurs in two ways: either by controlling the price of a product, meaning monopolies are not prices-takers, or by controlling the supply of a product.

2. Free riders may restrict competition by cutting corners, not so much out of outright malice, but in fear they would lose to those who cheat unless they match their malpractice.

3. Malice or intentional meanness is behind a lot of the cheating in the private sector. Cheating is usually carried on by typically small companies (big corporate scandals such as the recent ones of early to mid-2002, are the exception) and con-artists whose activities are not visible enough to easily track down.

The Telecommunications Act of 1995, meant to open up the long distance telephone industry to greater competition, has instead resulted in a lot of cheating and abuse of the opportunity.

A particular type of deception is the tendency of companies to hide the not-so-friendly aspects of their products and services like insurance in overtly legalistic language or in very fine print that the average customer is unlikely to understand or care enough to read. "The devil is in the details."

4. Externalities are the unplanned side effects of a market economic activity. Because their costs and benefits were unknown at the time of production, such costs and benefits are usually not included in the calculation of the cost of production nor the price, respectively. Unless regulation mandates their compensation by those enjoying such benefits or to those suffering their costs, the presence of externalities will discourage the socially optimal (socially ideal) production of goods and services loaded with externalities.

5. The fourth form of market failures that justifies regulation is the tendency of the private-market economy to periodically fluctuate out of control, or the tendency of the free market system not to stay within stable prices whenever the economy approaches full employment (Think of full employment as whenever the economy is performing at or near its full potential).

Government monetary and fiscal policy are regulations meant to stabilize the economy as a whole over time. This form of market failures is slightly different from those restricting competition, and is studied as part of macroeconomics.

Even though conservatives blame "big government" for costly regulations, government does not initiate regulatory action unless it is pressured into doing so by interested groups within the private sector

Thus even though regulation occurs within the political process, ultimately economic regulations are initiated within the private sector and public safety and environmental regulations are initiated by the general public and not by government.

It is those individuals, corporations, and segments of the general public which has come to feel that only regulations can protect their interests against marketplace maleficence that appeal to government for regulation.

Those asking for regulation often seek one or all of the following objectives:

Like all government laws, regulations must go through the normal political process of law making:

Because regulation are initiated as a private sector activity, but made into law only through the political process, the making, implementation, and supervision of regulations brings together both economic and political forces.

On the economic side are economic agents: consumers and producers, industries, firms (small operators as well as giant corporations), households, institutions, communities, interest groups, and lawyers.

On the political side are political forces like politicians, bureaucrats, regulatory agencies, Congress and Congressional representatives, professional and non professional lobbyists, civil, criminal, and bureaucratic courts.

Regulation is therefore a major component of political economy because they are called forth as a result of market competition, they can only be granted through the political process.

Regulation can be enacted by all who exercise governmental power at the federal, state, and county levels, though state and county regulations are binding on only industry and economic agents operating within their jurisdiction.

Regulations come in waves marking those periods when social discontent with marketplace malpractice build up to a politically critical mass that can no longer be ignored.

1. Regulation and Deregulation: Because legislation is part of the political process, initial legislation which draws a lot of negative reaction from those ill-affected by regulation, is likely to be followed by a set of counter-regulations called forth by those industries and companies ill-affected by initial legislation.

3. Enforcement of existing regulation is usually achieved only through the creation of more regulations adding to the cluster of initial regulations and deregulations.

4. Regulations tend to generate momentum for other similar regulation. This is called a spill-over effect.

5. Re-regulation: Sometimes, deregulation goes too far to remove regulations before their intended effects have been fully satisfied, making it at times necessary to re-establish deregulated laws.

The four main waves of regulation in US history are:

A. Specific antimonopoly regulations that target specific industries charged with violating antitrust (or antimonopoly) laws.

B. Protective regulations whose objective is to protect the public interest from defective products posing a danger to public health and safety.

C. Environmental protection laws adopted mainly from the mid-1960s to the1970s.

D. Fiscal and monetary policies to ensure the stability and smooth running of the economy as a whole.

The intrusiveness of each of these sets of regulation depends on the degree of market violation it is intended to correct.

Anti-monopoly/Anti-trust Regulations was the first major form of market failures that called for regulation in US economic history. This type of regulation falls under the category of economic regulations or industry-specific regulation.

Anti-Monopoly Regulations: The call for regulation against monopoly practice was first raised by the consuming public against the industry-entry restrictive practices by owners of the first transcontinental railroads in order to sustain their usually high railroad fees.

This lead to the creation of:

i to give the ICC an enforcement capacity,

ii to give the ICC the authority to set maximum railroad rates.

iii to place the burden of proof in challenging ICC rates on the railroads themselves.

Corporate mergers and anti-trust laws:- are a special kind of monopoly laws passed to prevent the creation of monopolies in the first place. A trust is a company formed by merging two or more existing companies for the purpose of restricting price competition and thereby gaining monopoly profit, that is profit above the market equilibrium price, eg Du Pont.

Too Much Competition or Natural monopolies: Open competition would not lead to profitable production of some goods and services. To be profitable such goods and services must be mass-produced or sold. This rather unusual condition calls for the creation of monopolies to ensure profitable production in certain industries.

Services like the selling of entertainment tickets, and products like beer yield too little profit per item to allow competitive production; only their mass production would be profitable enough to attract private production.

Natural monopoly is also justified for products and services necessary for human survival and therefore likely to encourage over-exploitation of the consuming public: electricity, water and sewage, garbage collection, inspection of meat and diary products, and in some countries, medical care.

Such reasoning was behind the creation in 1934 of AT&T as a long-distance telephone monopoly.

In return for government monopoly protection, natural monopolies must accept some level of government restriction on their pricing.

The various waves of protective regulation were often associated with spurs in economic growth.

Protective regulations are motivated by the fear that singular devotion to profit maximization during periods of economic boom would mean quality-of-life issues would be unnecessarily sacrificed unless the government, on behalf of the consuming public, set in place certain regulatory safeguards.

The first wave of protective regulation corresponded with the first significant quantum leap in economic development at the turn of the century that was the result of several developments.

The quality-of-life concerns it raised came to be known as the progressive movement, a nation wide movement that resulted in a set of multiple regulations meant to ensure producers during this time of economic boom take into account quality-of-life concerns as importantly as profit maximization.

Unlike economic regulation, therefore, protective regulations are designed to be general in score, that is, they are not targeted at any specific industries, but to ensure producers across the board would not sacrifice public safety in the pursuit of profits.

Because progress in one area of economic activity could not come unless accompanied by equal progress in other areas, the successful enactment of one protective regulation quickly spillovers into calls for, and the granting of, regulation in other areas.

For example, though the initial objective of the Pure Food and Drug Act of 1906, the precursor to the Food and Drug Administration of 1931, was the inspection of food and meat, it generated protective regulation on a wide range of activities including hours of employment, minimum wage, and employment conditions for women and children.

Today the FDA has become the chief federal commission responsible for setting standards for common consumer products.

Others were the Water Commission of 1920: A branch of the US Department of the Interior created in 1920 to regulate the building of dams for the generation of hydroelectricity in order to ensure its fair distribution to rural America.

Commodities Exchange Authority: The government agency authorized to supervise trading in securities and commodities in order to prevent price manipulation and other illegal practices in all US commodities exchange markets; superseded in 1974 by the Commodity Futures Trading Commission.

The second wave of protective regulation came in the early 1960s as part of the Great Society Movement–the general feeling throughout the country that the long economic boom associated with the "golden years" of the 1950s and 1960s, and indeed, the booming postwar US economy seemed unstoppable-- has given rise to profit maximization at the expense of the ordinary consumers, that quantity should be accompanied with production geared to improve the quality of life for both humans, and the ecosystem as well.

Positively, the great society movement was driven by a new found hope in American technological progress that, with the right kind of business and political leadership, all problems could be solved; a hope that, with government guidance, American could do even better–a typical political economy solution..

A Vigilante Attitude: An example of the positive aspect of this movement is the growth of a vigilante attitude among the public which would no longer lay-back satisfied that the interest of producers will always coincide with the interest of the public.

Noted areas of regulation within this circle of public safety regulations will include:

1. The two landmark regulations that illustrate this new vigilante attitude were the action suits against the producers of silicone breast implants and Big Tobacco.

2. Occupational Health and Safety Administration (OSHA): An agency of the U.S. Department of Labor established in 1970 by Congress to enforce mandatory job safety standards, to implement and improve health programs for workers, and above all, to provide for occupational safety by reducing hazards in the workplace.

3. Federal Trade Commission (FTC): An independent US government agency created by the Federal Trade Commission Act of 1914 and charged with the responsibility of keeping commerce and industry open, fair and competitive. It also collects and makes available to the president, Congress, and the public factual data on economic and business conditions in the country. It is the principal federal regulatory commission responsible for the investigation and prosecution of unfair business practices in the country including false and misleading advertising.

4. Misleading and false advertising includes insufficient information on food, drug, and other consumer product labels, the hiding of important information in such fine print or in overtly legalistic language the average consumer cannot find it nor understand it.

Perfectly competitive market supply often does not reach certain areas of the US economy because they have certain elements that do not attract competitive private enterprise. For example, spare American rural population is not a sufficiently large market to attract services like electricity supply, water and sewage, and air transportation on a competitive basis.

A new form of under-served economic need is the under supply of bus route services as well as all sorts of direct delivery services such as fast foods and taxi to inner cities of American cosmopolitans for fear violence, drugs, and insecurity.

The solution is government regulation to set up special government-business arrangements through which government, using various schemes, subsidizes services to such areas.

C. ENVIRONMENTAL REGULATION

The onset of a large body of environmental regulations starting shortly after the Vietnam War and lasting until the Reagan administration of the early 1980s constitutes the fourth wave of regulations to hit the US economy–the third being the development of monetary and fiscal policy as macroeconomic tools shortly after World War II.

Environmentalism is a catchall phrase serving as the rallying call for various social groups concerned about the protection of the natural environment, the ecosystem and wild animal species that are considered in danger of extinction.

What factors lead to the environmental movement?

The more specific areas of environmental concern would include:

1. The Extinction of wildlife species: that the natural process of evolution has been dangerously accelerated for some animal species beyond their natural ability for survival through procreation.

The remaining pool of some of the world’s most exotic species not on the certain extinction list is still considered too small to sustain their survival in the wild, thus they would perish without timely human intervention.

2. Population Overcrowding: The old Malthusian fear that human population growth is accelerating at a rate not matched by the rate of growth in the food supply necessary to sustain life.

That the danger of population overcrowding is occurring primarily among the poorest peoples of the Third World who are least prepared do cope with the problem.

3. Global Warming: The rapid, more-than-acceptable-to-life increase in the earth’s temperature caused by the emission of gasses from the burning of fossil fuels preventing infrared energy of the sun’s radiation from escaping back into space.

4. Depletion of Ozone Layer: that the thin band in the stratosphere that serves to shield the earth from the sun’s harmful ultraviolet rays, was being destroyed by chlorofluorocarbons, a class of chemicals used as refrigerants in air conditioners and several manufacturing processes, and as propellants in spray cans. They contain chlorine atoms that remain intact until they reach the stratosphere where they break up as catalysts attacking and destroying ozone molecules.

5. Environmental Racism: The tendency spurred by racial prejudice to locate uncontrolled toxic waste sites and commercial hazardous waste landfills disproportionately in the vicinity of predominantly ethnic minority residences of African- and Hispanic-Americans.

6. Pollution: The contamination of the air, fresh and underground water, estuaries, and coastlines by chemicals and other toxins.

Environmental law enforcement is carried through:

Environmental Laws Enforcement and Externalities: The enforcement of environmental laws is made particularly difficult because most environmental problems as well as the benefits of protecting the environment suffer from severe externalities or the hidden benefits and cost of production that are not easily traceable to their lawful producers and so cannot be charged nor paid for as part of regular production costs and benefits.

At the international level, the same externality problems make any single-country effort at reducing environmental dangers unlikely to be particularly successful unless accompanied by the goodwill of all countries, big and small.

Deregulation, the formal nullification of existing regulation or some of its effects, is a major part of the government's regulatory powers.

Deregulation comes through either:

Too many regulations: Over time, US regulations have not only become too numerous and even more complex, but often too complex for the ordinary entrepreneur to understand.

Over egulation and the Expanding Scope of Government: Opponents of regulation consider the accumulation of laws on business in the US as an unnecessary expansion of governmental authority.

The FDA is usually targeted as having too much power, even though for the number of roles it plays and for a large country such as the United States, its rate of drug and food approval compares very favorably with most Western European country counterpart of the FDA.

Those giving preeminence to efficiency over quality-of-life issues are likely to see regulation as limiting the effectiveness of firms, and call for the deregulation of antitrust laws. They argue US companies are regulated so heavily, they are unable to reach the size necessary to be internationally competitive.

Obsolete Regulations

Some regulations outlive their initial usefulness, particularly when the circumstances justifying their adoption have long been altered. But efforts to take them down often fail for two reasons.

Failure to remove obsolete regulations on time means such regulation actually becomes an impediment to progress within the affected industries.

Deregulating the trucking industry has led to great improvement in that industry, leaving one to wonder why it did not occur much earlier than the Motor Carriers Act of 1980 which accomplish that goal even while the advancement in tracking technology making those changes necessary had already been in effect as far back as the 1960s.

There is a large political component to regulation, deregulation, and re-regulation because even though the call for these laws comes from the private sector, the granting of these laws comes ultimately from the political process.

This means regulation, deregulation, and re-regulation are all subject to all that is politics including the possibility that proposed good regulations may fail to win Congressional approval or bad ones may be enacted depending on the successful lobbying of the political process on behalf of or against particular regulations, deregulations, or re-regulations.

2.Regulation Has a Public Relations’ Problem

Regulation has a serious P.R problem, that is, it is often perceived as negative because regulation is the law and people don't like being ordered around, and particularly not in a market system built on individualism and private free enterprise.

Besides, regulation, deregulation, and re-regulation is likely to make enemies of some in the business community while those benefitting from them do not particularly remember such benefits come voting time.

3.Political Momentum

Since regulation comes in waves, those complaining against regulation are equally likely to come in droves and may find common cause with all other individuals and social groups that, for various reasons, find government objectionable.

4. The Politics of Deregulation in the 1980s

President Reagan rode a wave of anti-government mood in the country into the White House and the 1980ss came to be known as the most anti-regulatory decade in US economic history, a decade in which many environmental laws were either taken down or weakened significantly.

Prominent among the various courses fueling that mood were:

E. RE-REGULATION

Re-regulation is the restoration of regulations that have been taken down or deregulated.

Re-regulation becomes necessary because not all deregulations work to improve the economy. Except in the case of ineffective and obsolete regulation, deregulation does not remove the original justification for regulation.

Especially politically driven deregulation leaves the original market failure in place that regulation was to eliminate, making it necessary at times–as was the case in the late second term of President Reagan’s administration–to restore deregulated legislation, a process called re-regulation.