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Weidenbaum, The Case for Deregulation
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USA Today (Magazine)
Jan, 1999

Promoting Economic PROSPERITY.(deregulation)

Author/s: Murray L. Weidenbaum

Curbing governmental regulation of American businesses would allow them to become more competitive in the global marketplace.

IN EVERY NATION, obstacles to prosperity and economic growth result from activities of government. While there is no agency with a mission to depress the economy or accelerate inflation, many government actions---especially taxation, spending, and regulation--have those undesirable effects. Costs for regulation of business actually are a hidden tax severely reducing the competitiveness of domestic businesses at a time when they face an increasingly global marketplace.

Reducing the burden of regulation can contribute to more rapid economic growth without the inflationary and currency repercussions that often accompany more stimulating monetary and fiscal policies. Reform of regulation responds specifically to policymakers' desires to reduce the structural impediments to economic growth.

The role of regulation should not be considered in isolation, but as a part of an extensive effort to reduce the burden of government involvement in the economy. This comprehensive approach is essential because of the ease of substituting regulation for other forms of government activity, such as direct Treasury outlays.

The popular view of regulation is wrong. It is not a contest between "the forces of good" (meaning the government) and "the forces of evil" (obviously, business). The reality is that the consumer is at the receiving end of the numerous impacts and repercussions generated by regulation. Business is the middleman.

The nature of regulation becomes apparent when one looks at it from the viewpoint of the business enterprise. For each box on the company's organizational chart, there are government agencies that are counterparts: environmental regulators and construction of new facilities; job safety regulators and the workplace; employment regulators and human resource policies; transportation and communication regulators and the movement of goods, services, and information. Those agencies--and many others--are involved heavily in the firm's internal decision-making. The impact of those government rulemakers and controllers is in one direction: increasing the firm's overhead and operating costs, slowing down its decision-making processes, and reducing the resources available to produce goods and services.

Regulation results in the higher prices consumers pay to cover the cost of compliance. That makes regulation attractive to government officials. The costs do not show up in the government's budget. Yet, citizens do not escape paying the bill. Politicians have an old saying: "The best tax is a hidden tax." Regulation generates the most hidden taxes of all since the costs are imbedded in prices of goods and services that consumers purchase.

In the U.S., expenses for meeting the rules promulgated by Federal regulatory agencies add up to more than $500,000,000,000 annually. Regulation by state and local governments add to these costs. If Congress had to appropriate another $500,000,000,000 a year in taxes to cover those expenses, it is unlikely so much regulation would be approved.

 

Beyond the direct financial impact, there are subtle and more serious burdens resulting from the government's rules and prohibitions. By the time the Clean Air Act is implemented fully in 2005, its impact (combined with that of previous environmental regulations) will reduce the U.S.'s gross domestic product by more than three percent a year. That is just one regulatory program, albeit the largest.

Regulation reduces the degree of competition, flow of innovation, and production of new and better products because so many government agencies have the power, which they frequently exercise, to decide whether or not a company can enter an industry or a new product go on the market. The biggest obstacles to developing a new biotechnology industry are not financial or technological--they are regulatory.

The rising paperwork requirements of government agencies inevitably produce a lengthening regulatory lag. This delay often runs into years and is a costly drain on the productivity of private managers as well as public officials. In 1980, a California land developer could obtain in 90 days what then was called "zoning" for a residential development. Currently, the typical company in that state receives an "entitlement to build" for one of its developments only after two years or more of intensive work.

Opening new production facilities involves surmounting an even greater array of regulatory obstacles. A former administrator of the Environmental Protection Agency has described what is required to locate a new industrial facility: "A company must obtain agreement from dozens of agencies at each [level] of government, not to mention the courts.... A single `no' anywhere along the line at any time in the process can halt years of planning, effort, and investment."

That was the experience of Dow Chemical Co. Repeated regulatory delays forced it to cancel plans for building a $300,000,000 petrochemical complex. When the project was terminated after extensive preliminary effort, Dow had obtained just four of the 65 permits that were required from various national, state, local, and regional regulatory agencies.

Many firms respond by shifting their activities to foreign locations. Some of the best-known American companies have deployed a majority of their assets overseas, including Manpower Inc., Gillette, Mobil, IBM, Avon, McDonald's, Sun Microsystems, Exxon, Chevron, Bankers Trust, Warner Lambert, and Citicorp.

The justifications for the government's awesome regulatory power are worthy: to promote a cleaner environment, achieve a healthier workplace, and keep unsafe products off the market. Yet, the reality often is different. Consider the harm that pharmaceutical regulation does to the American people. The U.S. is one of the last countries to permit the introduction of new and better pharmaceutical products. This means that Americans frequently are deprived of superior medicines for many years while the products are available to patients in other industrialized nations.

 

The adverse effects of government regulation are far more numerous than most people realize. These burdens include the costs to taxpayers for supporting a galaxy of government regulators; consumers in the form of higher prices to cover the added expense of producing goods and services under government regulation; workers in the form of jobs eliminated by regulation; the economy resulting from the loss of enterprises which can not afford to meet the onerous burdens of government regulations; and society, as a whole, as a result of a reduced flow of new and better products and a less rapid rise in the standard of living.

The benefits of regulation should not be overlooked, though. To the extent that society obtains cleaner air, purer water, safer products, and healthier workplaces, these benefits are real. The mere presence of a government agency does not guarantee that its worthy objectives will be achieved, though.

For example, a steel company was required to install special scrubbing equipment at one of its plants in order to reduce the emission of visible iron oxide dust. The scrubber succeeds in capturing 21.2 pounds an hour of the pollutant. However, the scrubber is run by a large electric motor. In producing the power for that motor, the utility spews out 23 pounds an hour of sulfur and nitrogen oxides and other gaseous pollutants. Thus, even though the company is meeting government regulations on visible emissions, the air actually is 1.8 pounds an hour dirtier because of the regulatory requirement.

The question is not whether regulations produce any benefits, but whether they are worth the costs. That, in turn, leads to consideration of opportunities for improvement.

How can the burdens of regulation be reduced? Start by questioning the traditional justification, which is the notion of market failure. For a variety of reasons--ranging from the inadequacy of information to the presence of major externalities--private markets are deemed not to work well enough. (A typical externality occurs when a producer upstream discharges pollutants into a river, harming the people who live downstream.) There is, in contrast, the companion notion of government failure, the tendency for the public sector to do more harm than good when it intervenes in economic activity.

As a result, economists urge policymakers to rely primarily on competition in the marketplace to protect the consumer. In the last two decades, deregulation of transportation has made great progress in the U.S. Until the late 1970s, the Civil Aeronautics Board (CAB) regulated the airline industry. It allocated routes, controlling entry into these markets and the fares to be charged. In 1977, the CAB, led by two economists, began the process that resulted in airline deregulation. Initially, the CAB gave the companies increased freedom in pricing and easier access to routes not served previously. The results were spectacular: Fares fell sharply, planes filled, and profits soared.

 

A year later, Congress passed legislation that phased out the CAB, ending its authority to control entry and prices. Since then, air traffic has grown faster and fares have fallen more rapidly than they did during regulation. The industry's employment has risen, and labor productivity has increased.

The experience since 1978 has not been without problems, notably congestion in airports and in the sky. On balance, though, the public interest has been well-served by airline deregulation. The savings to air travelers have been estimated at over $12,000,000,000 a year (in 1993 dollars).

Encouraged by the airline experience, Congress passed a trucking law in 1980 which provided more pricing freedom to individual carriers, made entry into the market easier, and eliminated many costly restrictions on the part of the Interstate Commerce Commission (ICC). Although 300 trucking companies went out of business, the total number of trucking firms increased from 47,000 in 1982 to 300,000 in 1997. On average, operating costs per mile are down about one-third. Estimates of annual savings from trucking deregulation--including lower inventory needs--range up to $50,000,000,000 a year.

In 1980, Congress gave the railroads new flexibility in setting rates and, in 1996, it terminated the ICC. The experience with railroad deregulation has been similar to trucking. A difficult adjustment occurred at the outset as the impact of competition became more pervasive. More than 27,000 miles of unprofitable rail lines were abandoned during a period of liquidations. However, the remaining firms in the industry are in strong financial condition. Spurred by deregulation, managerial innovations have contributed to a reduction of about 50% in railroad costs per ton mile of freight hauled. The cost-cutting has enabled the railroads to pay for upgrading equipment and deferred maintenance, lower rates, and compete more effectively against other modes of transportation.

Less complete patterns of deregulation have occurred in telecommunications and banking. Greater freedom to innovate and reduce costs generally has produced positive results. Nevertheless, the continued presence of substantial regulation has prevented the full benefits of market competition from occurring.

The reluctance of government decisionmakers to support the wholesale substitution of competition for regulation is a serious obstacle, especially in the effort to achieve telecommunications deregulation. Eliminating the regulatory apparatus (as in the CAB and ICC examples) works far better than more timid attempts accompanied by government efforts to regulate closely the process of deregulation.

Simultaneous with the reduction of economic regulation, social regulation has been on the rise. Numerous new regulatory agencies now are active in the areas of ecology and safety. Their function is not to control entry, exit, prices, or profits in the tradition of the older regulation, but to handle such market failures as information inadequacies and externalities.

 

Rather than dealing with the over-all condition of the industries they are regulating (as was the case of the CAB and ICC), these newer regulatory agencies are concerned with achieving social benefits such as safer products, healthier workplaces, etc. Thus, the Environmental Protection Agency (EPA) focuses on the impacts of all businesses on the environment. Unlike economic regulatory commissions which, at times, were too close to the companies they regulate, EPA and its sister social regulatory agencies ignore their adverse impact on the industries they regulate. This raises the serious question of limiting the activities of the new breed of regulators.

Surely, the public does not endorse the bureaucratic approach: Regulation is good, so more always is better than less. Economists looks at the margin and think of diminishing returns. They ask the difficult questions that have generated the basis for reforming social regulation, especially the importance of government failure.

To an economist, the response to environmental pollution is not the negative task of punishing wrongdoers. That only occurs after the foul deed has been done. Rather, the challenge is positive: to change incentives so that people will not pollute in the first place. After all, people do not enjoy a dirty environment. They pollute when it is cheaper or easier than not polluting. Fundamentally, an appropriate regime of property rights should deal with this issue.

Economic incentives

Until then, policymakers should make the maximum use of economic incentives. One basic approach is that the price of a product should reflect its burden on the environment. If prices of goods and services were increased to reflect those costs (perhaps as measured by cleanup outlays), consumers would buy less of those environmentally damaging products. The idea is to use the price system to make high-polluting products less attractive to consumers than low-polluting goods. For instance, a study of one estuary in Delaware showed that effluent fees, set at a high enough level to arrive at the desired level of water purity, would achieve the same environmental cleanup at only one-half the cost of conventional regulation.

In the U.S. regulatory process, the major use of economic incentives is the system of trading emissions permits under the Clean Air Act. This enables a company that can clean up its pollution very cheaply to sell some of its credits to one whose compliance expenses are much higher. The cost to society for achieving the desired level of air quality is lower than under the traditional approach.

What about the existing array of command-and-control regulation? Here, every president since Gerald Ford has required the regulatory agencies to do benefit/cost analysis in an effort to determine if a regulation does more good than harm. Such analysis has been used for decades in examining government spending programs. It is a simple way of balancing market failure (as measured by potential benefits of government action) against government failure (costs of government action). To an economist, over-regulation is not an emotional term. It merely is shorthand for rules for which the costs to the public are greater than the benefits.

 

Benefit/cost tests compensate for the fact that government decision-makers do not face economic constraints. If the costs to society of an agency action exceed the benefits, that situation does not have an adverse impact on the agency. The administrators may not even know about it. Under the traditional approach, they can claim credit for the benefits and ignore the costs--because, as noted, the costs are transmitted to the consumer not by the government, but by business. Regulatory activists can enjoy criticizing business about price increases, even when they result from the costs of complying with the very regulations that the activists urged be adopted.

During the presidency of Ronald Reagan, Federal agencies were directed to limit their new regulations to those that generate more benefits than costs. Many pending regulations failed to meet this requirement. In the case of the Department of Labor, approximately 40% of the proposed new rules had to be withdrawn or revised. The Clinton Administration has lowered the threshold for approval of new regulations. Agencies merely have to show a "reasonable relationship" between costs and benefits. This is a much more subjective and easier standard to meet.

Let me offer four basic principles for guidance:

* Government intervention only is warranted when markets do not work as well as regulation. The presence of "market failure" is a necessary, but not sufficient, condition for government to intervene.

* The legislature and regulatory agencies should estimate costs and benefits before they enact new laws or issue new regulations.

* Whenever feasible, the power of market incentives should be enlisted in pursuit of society's goals, instead of command-and control directives. The pressure of competition and lure of profits should be recognized as forces vital to achieving a healthy and growing economy.

* Delegations of authority by legislatures should contain specific controls to ensure that regulatory authority is not exercised capriciously. The influence of business may be substantial, but the power of government can be overwhelming. The largest company can not tax people or put them in jail; the smallest unit of government can.

Government decision-makers often overlook a fundamental fact in their rush to intervene in the private sector: Individuals and private organizations have tremendous ability to deal on their own with the shortcomings of a modern economy. Relying on private initiative moves the nation closer to the ideal of a free society while simultaneously providing a powerful incentive to improved economic performance.

Dr. Weidenbaum, Ecology Editor of USA Today, chairman, Center for the Study of American Business, and Mallinckrodt Distinguished University Professor, Washington University in St. Louis (Mo.), served as chairman of Pres. Reagan's Council of Economic Advisers (1981-82) and was a member of the President's Economic Advisory Board (1982-89).

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