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Weidenbaum, The Case for Deregulation
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Promoting
Economic PROSPERITY.(deregulation) 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. |
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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. |
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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. |
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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. |
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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. |
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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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