Deregulation Totally Explained

Everything about Deregulation totally explained

Deregulation, a term which gained widespread currency in the period 1970-2000, can be seen as a process by which governments remove, reduce, or simplify restrictions on business and individuals with the intent of encouraging the efficient operation of markets.

Overview

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.
   Deregulation is different from liberalization because a liberalized market, while often having less and simpler regulations, can also have regulations in order to increase efficiency and protect consumer's rights, one example being anti-trust legislation. However, the terms are often used interchangeably within deregulated/liberalized industries.
   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. Academic research on wedding economic theory with regulatory activity continues.
   One can distinguish between deregulation and privatization. Privatization can be seen as taking state-owned service providers into the private sector. This can result in making the privatized enterprise more subject to market forces than was the state-owned entity. But the degree to which there's freedom to operate in the market and the extent of competitiveness in the market for the goods and services of the privatized entity or entities may depend on other measures taken in addition to privatization.
   In some instances, partial privatization may be selected, where provision of some portion(s) of the state-owned service are provided by private-sector contractors, but the government retains the capacity to self-operate at contract intervals, if it so chooses. An example of partial privatization would be some forms of school bus service contracting, such as arrangements where equipment and other resources purchased with government capital funds are used by the contractor for a period of time in providing services, but ownership is retained by the governmental unit. In such situations the arrangement can be seen as a sort of contracting out of functions for which the government takes responsibility.
   One influential measure of worldwide business regulations that has inspired mostly deregulation but also in some instances increased regulations is the Ease of Doing Business Index.

Case study: United States

The experience of the United States offers a broad view of modern deregulation, as many service industries were effectively deregulated beginning in 1971. Studies show that transportation deregulation has increased GDP by up to 3% annually. During deregulation of Savings and Loan associations, about $160 billion was lost - $124.6 billion by the US Government - and re-regulation was enacted. In the electricity area, the process is under debate due to setbacks like the California energy crisis.

History of regulation

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 in order 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 multiple providers could be financially viable offering similar services, prices determined by competition were seen as more favorable 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 sees 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.

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.
   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 in which the Council of Economic Advisors (represented by Hendrik Houthakker and Thomas Gale Moore), the White House Office of Consumer Affairs (represented by Jack Pearce), The Department of Justice, the Department of Transportation, The Department of Labor, and other agencies participated (Rose, et al, pp 152-160).
   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.(Rose, et al, pp 154-156) 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, Pub. L. 94-210. 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. They set the general conceptual and legislative framework which has replaced the regulatory systems put in place between the 1887 and the 1930s. The dominant common theme of these Acts, as evidenced in the articles individually treating these Acts in this encyclopedia, 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 the term 'deregulation' arose, though regulations to promote competition were put in place.
   A series of enactments were needed substantially 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 2 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 steps, 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 Emergency Natural Gas Act (signed February 2, 1977) was a mix of regulation in response to OPEC price hikes and deregulation and the 1973 oil crisis in the U.S. The Airline Deregulation Act is also a notable example. Its reintroduction of competitive market forces to the heavily regulated commercial airline industry was highly successful.
   Communications in the United States (and internationally) is an area 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. One can see an emerging era in which wireless, traditional landline telephone, and cable companies increasingly invade each others’ traditional markets and compete across a broad spectrum. 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’ as to prices and entry into markets. See for this line of thinking Crandall, “Competition and Chaos – U.S. Telecommunications Since the 1996 Telecom Act”, Brookings Institute, 2005. 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. See for further development of this area Telecommunications Act of 1996 and Concentration of media ownership.

Deregulation by Countries

Argentina

Argentina underwent heavy economic deregulation, privatization, and had a fixed exchange rate during the Menem administration (1989–1999).

Australia

Australia was an early leader in deregulation with a broad program of deregulation beginning in the early 1980s. Having announced a wide range of deregulatory policies, Prime Minister Bob Hawke announced the policy of 'Minimum Effective Regulation' in 1986. This introduced now familiar requirements for 'regulatory impact statements' but it took many years before the policy was complied with by government agencies. Australia experienced deregulation of their labour market during the late 1980s under Hawke/Keating Labor government's. Since then the country has had extensive deregulation of their labour market since 2005. This process was made under John Howard's Liberal Party of Australia. In 2007, the Rudd Labor Government promised extensive deregulation, particularly in the business sector, even appointing Lindsay Tanner Minister for Finance and Business Deregulation. Shortly afterwards it announced it would regulate to ban plastic bags in supermarkets.

Canada

The province of Ontario attempted to in 2002 but since pulled back due to voter and consumer backlash at the resulting price chaos. The government is still searching for a stable working regulatory framework. See Ontario electricity policy for more.
The province of Alberta has deregulated their electricity provision. Customers are free to choose which company they sign up with. However 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.
Former Premier Ralph Klein based the entire deregulation scheme on the Enron model, and continued with it even after it was shown that the Enron guys were NOT "the smartest guys in the room.

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.

Japan

Since the economic bubble in 1990s collapsed, the Japanese government has seen deregulation as an effective way to lift its economy because it has a huge deficit and can't make a large tax cut.

New Zealand

New Zealand has had extensive deregulation since 1984. It was instigated by the Labour Party.

Russia

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

United Kingdom

The United Kingdom has developed a programme of better regulation since 1997. This has developed to include 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 is proposed (a Legislative and Regulatory Reform Bill) which is intended to establish statutory principles and a code of practice.

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

2002 - Ontario Bill 210- Electricity Supply, Pricing and Conservation ActFurther Information

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