Deregulation

The erosion or abandonment of formal regulations by legislative means is known as deregulation. Formerly regulated industries—transportation, electric utilities, gas utilities, telecommunications, and financial markets—share certain characteristics that made them candidates for regulation, and in transitioning to deregulation they share a common set of problems.

Wherever they have appeared around the world, regulatory systems were not the result of strategic planning, but represented a reaction to financial, economic, and political crises. The airline industry, the steel industry, and every other industry have been subject to direct and indirect regulation. Indirect regulation dealing with the environment, work safety, product quality, truth in advertising, and similar issues affects all firms. The fundamental reasons for regulating the banking industry lie in the key role banks play in the efficient functioning of the economic system and in the conduct of an effective monetary policy, as well as protection for depositors and monetary stability.

In a Brookings Institution study, Martha Derthick and Paul Quirk acknowledge that government regulation had long been rationalized as a way of guaranteeing service to the public by industries having the character of public utilities and as a means of protecting the public from monopoly pricing practices, including the destructive competition that was said to lead to the creation of monopolies. However, the regulatory agencies had instead sheltered the regulated industries from competition and fostered very costly inefficiencies. Long a target of experts in administrative law, public administration, and political science, who found much fault with their structure and procedures, by the 1960s the regulatory commissions had become a target also of economists, who attacked their purposes by undertaking to show that the social costs of regulation far outweigh the benefits.

The notion of government regulation as a profitseeking enterprise in which self-interested groups and individuals seek to gain competitive advantage and in which the regulator is captured by the regulated is the basic argument of Chicago School economists George Stigler and Sam Peltzman. Deregulation suddenly changes the game of market competition, threatening the long-held advantage of dominant large firms and opening the way for new entrants.

The United States

Deregulation has been the global trend since the late 1970s and early 1980s. In the United States, the energy, airline, trucking, and telephone industries were deregulated in 1978, 1980, and 1982. Under strict federal regulation since 1954, the natural-gas industry began to exhibit shortages in the late 1960s. By the 1970s, producers were unable or unwilling to supply as much gas as customers wanted to buy at the regulated price. In 1978 Congress set a timetable for deregulation of most natural-gas prices. By 1985, when all gas discovered after 1976 was freed from federal price regulations, gas prices began a steep plunge. After that, federal regulators began to transform [Page 500]natural-gas pipelines into “open access” transporters of gas from various producers. Deregulation not only lowered prices for consumers, but also improved the quality of service by removing the threat of artificially created shortages.

Before 1978, both the maximum and minimum fares for air travel were set by the Civil Aeronautics Board (CAB). The CAB began to loosen its regulations in the mid-1970s. In 1978, Congress passed legislation to abolish the CAB within six years, open up the industry to new competitors, and eliminate government-set fares. Under regulation, intercity airline routes were served by one, two, or three carriers, all charging the same fare; after deregulation both the number of carriers and their prices became highly competitive, including such practices as restricted discounts, promotional fares, reduced off-peak fares, and premium services.

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