Deregulation refers to the deletion, abandonment, or relaxation of various laws, rules, and regulations that affect business and industry. However, the topic of deregulation is best understood by first understanding the purposes and effects of regulations.
It is often thought that individual firms lack the perspective and/or the incentive to protect society. Consequently, the regulation of business and industry by government is for the purposes of consumer protection and or the enhancement of business competition. Regulation is generally thought to also protect minorities, employees, investors, and the environment.
The railroad industry was one of the first industries that the federal government targeted. As a result, the Interstate Commerce Act was passed in 1887. As such, the Interstate Commerce Act created the first regulatory body in the United States—the Interstate Commerce Commission, which still regulates transportation rates, as well as establishes rules and regulations for interstate commerce.
The United States government expanded its control over industry by focusing on trusts, where a company is established for the purpose of controlling multiple companies. Consequently, the Sherman Antitrust Act was enacted in 1890 to control monopolies. In 1914, the Clayton Act amended the Sherman Act by forbidding specific business actions. For example, tying contracts interlocking directorates and discriminatory pricing were made illegal, if the results of these actions lessened competition.
The Federal Trade Commission Act, also enacted in 1914, formally established the Federal Trade Commission (FTC). Among other responsibilities, the FTC remains responsible for defining, detecting, and enforcing compliance with the Clayton Act. The Wheeler-Lea Act of 1938 expanded FTC jurisdiction to include any practice or practices that harm the public in general and those practices that harm competitors. The Robinson-Patman Act was enacted in 1938 due to the growth of large retailing conglomerates. This law covered discrimination against buyers as well as sellers.
In 1958 the National Traffic and Safety Act was enacted. This legislation provided for the creation of compulsory safety standards for automobiles and tires.
In 1966 the Fair Packaging and Labeling Act was passed. This act provided for the regulation of the packaging and labeling of consumer goods. It also required manufacturers to state package contents, the maker of the contents, and how much of individual contents are included.
The Antitrust Procedures and Penalties Act was enacted in 1974. This legislation increased fines for violation of the Sherman Act. Two years later, the Antitrust Improvement Act required firms to notify the FTC of merger plans. This act also gave state attorney generals the power to sue for the benefit of consumers.
It is generally thought that the permissiveness of the federal government began during the presidency of Richard M. Nixon, which led the way for formal deregulation. During the 1980s the government turned its focus from laws, rules, and regulations to the creation of market incentives that were thought to motivate business.
Proponents of deregulation argue that government intervention impedes the natural laws of supply and demand and ultimately increases costs to consumers. In addition, the over-regulation of business is thought to thwart innovation by creating delays and increased red tape. Thus in 1981 the Ronald Reagan administration created the Task Force on Regulatory Relief to review all proposed new regulations and review old regulations. The establishment of this task force also lead to the increased use of cost-benefit analysis, which compares the cost of all regulations to their benefit.
DEREGULATION AND THE AIRLINE INDUSTRY
Approximately thirty years ago, the United States government put into practice a series of deregulation legislation concerning the airline industry. The effort was intended to encourage healthy competition and lower the inflated airfare costs. To a certain extent, the deregulation worked, and the 1990s saw the continual growth of the airline industry, with a large turnover rate of airline companies.
However, airlines went through a dramatic decline in the early period of the twenty-first century. According to a 2008 article in the New York Times, “Did Ending Regulation Help Fliers?,” the airline industry lost more than $30 billion between 2001 and 2006 due to many problems that had not been expected at the time of deregulation. The terrorist attack of 9/11 encouraged investor doubt and customer dissatisfaction with airlines, and the rising costs of air fuel again increased airfare. It has yet to be seen if deregulation had an ultimately positive effect on the airline industry or not.
DEREGULATION AND THE AMERICAN ENERGY INDUSTRY
Certain deregulation policies, such as 1992 Energy Policy Act, encouraged free action of the companies offering electricity in the United States. As a result of this deregulation, energy companies began a series of splits and mergers, an occurrence that moved state by state as the deregulation became more common. In 1998, California initiated a series of steps designed to eliminate energy monopolies and offer its public more choices in where they got their electrical power.
At first, the results of such state deregulation practices—also attempted by Texas and Illinois—were chaotic, leading to shortages and inflated energy prices. As states regulated and deregulated their electrical energy companies, the national industry saw the rise of several large conglomerations. Powering marketing, or the trading of electricity through energy companies, become common. Long-term results, however, are expected to lead to stability and healthy growth of America's energy industry.
THE TOLLBOOTH THEORY
Among the arguments for deregulation is the concept called the Tollbooth theory. This theory proposes that in economies controlled through heavy regulation, the ethical relationship between industry and government will slowly collapse and the economy will suffer. As penalties increase and regulations become too constricting to allow free movement by companies, the Tollbooth theory says the bureaucracies will begin accepting bribes and payoffs in exchange for helpful deals; they will look the other way while companies violate the regulations. A system of corruption is then established that threatens the economy and destabilizes all industries.
Supporters of deregulation and the Tollbooth theory often use Russia as an example, citing reforming legislation passed from 2001 to 2004 and its effects. These laws pertained to certification and registration by businesses; they established clear limits to the amount of regulation possible, helping to pull Russia from what was theorized as a Toll-booth economy. The amount of red-tape businesses had to surmount was drastically lessened, and much registration was localized. Freed from over-regulation, Russia's economy is expected to continue to improve, with small business employment growing and start-up companies becoming more common. (Of course, high energy prices might be a better explanation for Russia's economic resurgence).
Opponents to the Tollbooth theory use the Public Interest model instead, which theorizes that governments use regulations to control dangerous market trends, and that regulation does not usually lead to corruption or instability.
In recent years, deregulation has become a popular international method to improve economic conditions and open nations to more global business. Many deregulation policies effect tariffs and customs fees, giving international
companies more opportunities to conduct business overseas. In Europe, for instance, the EU nations completed a marketing directive in 2007 which was intended to fully open the European Union nations to outside trade. The directive was immensely successful, with fourteen out of the fifteen original EU nations reaching fully open markets.
Deregulation is making an impact elsewhere, as well. In 2007, European businesses formally encouragedJapan to continue its deregulation policies, which were opening many Japanese markets to foreign competition. The European businesses believed that the intense deregulation Japan had spearheaded from 2001 to 2006 had led to reform-fatigue. Japan, after breaking up its post office monopoly and opening such markets as medicine and telecommunication, is now slowing deregulation efforts, afraid that they are harming internal business.
In India, deregulation has the potential to change oil prices for the growing country. In a 2008 reaction to dropping oil subsidies, the Indian government raised fuel prices, causing an even worse spike in the continuing inflation. Another possibility, encouraged by international vendors, is for India to drop tariffs on imported oil, a deregulation activity it has already refused once but is now reconsidering.
Despite rumors that in 2008 China would attempt the deregulation of fuel industries so far refused by India, the Asian nation has instead opted for a tax cut on their windfall profit tax. China has also considered raising fuel prices, but has not yet made any moves to deregulate their fuel companies, as the government is also worried about high inflation. The Chinese tax cut, however, is expected to be highly successful and serves as an example for alternatives to deregulation.
In a different type of market, the United Kingdom is now beginning to deregulate its broadband industry. Previously to 2008, broadband companies were forced to offer broadband internet services at a fixed rate determined by the government, but new analysis showed that competition between United Kingdom broadband companies was rising. Now, if four or more broadband companies are present for consumers to choose from, the price cap regulation does not apply. As the high-speed internet market continues to grow in the UK, forecasts suggest even more widespread deregulation.
SEE ALSO Economics
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