Deregulation (Economics)

The elimination of laws that can conceivably prevent the efficient performance of markets. It is usually carried out by lawmakers to correct wrong judgment in the past or to address [Page 145]changing economic and social circumstances. It is possible for deregulation to be followed by reregulation. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 was enacted to reregulate thrifts after a period of deregulation and failure of the savings and loan (S&L) institutions.

The ultimate aim of deregulation is to reduce the amount of restrictions that are imposed on economic activity so that the markets can function under less restrictive or regulatory conditions to produce much more efficient outcomes. Some critics of deregulation are normally apprehensive about the impact of deregulation on consumer welfare and the environment.

Deregulation has affected markets, financial institutions, savers, and investors in the United States and Europe. Many of the regulations in the United States that were enacted in the 1930s (as a result of the Great Depression) were phased out in the 1980s. For example, the Depository Institutions Deregulation and the Monetary Control Act (DIDMCA) of 1980 phased out Regulation Q, which imposed interest rate ceilings and set the interest rate ceiling on demand deposit at 0% under the Glass-Steagall Act of 1933. The removal of interest rate ceiling was partly intended to make thrift institutions more competitive, but the overambitious drive to be competitive without adequate safeguards contributed to the failure of the thrifts in the 1980s. The DIDMCA also expanded the asset and liability powers of banks and thrifts to enable them to give loans to businesses and offer more services to customers.

In the spirit of deregulation and competition, the Garn-St. Germaine Depository Institutions Act of 1982 made it possible for depository institutions to compete with money market mutual funds by creating money market deposit accounts and the Super Negotiable Order of Withdrawal (NOW), that is, special interest-bearing checking accounts.

Deregulation also hit the energy market in the late 1990s as a result of the increasing demand for energy supply. By the 1990s, the Clean Air Act (1963) restricted the ability to supply an increasing amount of energy to meet U.S. consumer demand in the absence of a significant substitute and sufficient power-generating facilities. On a state-by-state basis, there was a movement to deregulate the energy industry to meet the escalating demand.

In the airline industry, the Airline Deregulation Act (ADA) of 1978 removed government control from commercial aviation to make the passenger airline indus try much more responsive to market forces. Economic integration, such as that of the European Union, and globalization have increased the desire to deregulate mar kets, but deregulation has not always been without dire consequences—bankruptcies, downsizing, unemploy ment, financial crisis, and environmental pollution. For more information, see Burton and Lombra (2003), Schiller (2006), and Stiglitz (2003).