Deregulation

“Deregulation” refers to the trend that began in the late 1970’s and early 1980’s to reduce national government control of industries including air travel, trucking, railroads, and telecommunications. Many governors also tout the concept as an economic development strategy that will attract businesses to their state. The perceived success of federal initiatives in cutting consumer costs has led to further deregulation at all levels of government. Events such as the 2008 financial crash and the consolidation of airlines has slowed some of the momentum for deregulation in recent years, however. The emergence of “market disruptors” in some sectors, such as Uber, Lyft, and Airbnb has led both to calls for new types of regulation as well as for deregulation of more traditional competitors, such as the taxicab industry.

Traditionally, government regulation takes three basic forms: social regulation that protects the safety and health of consumers, antitrust regulation to prevent monopolies, and the regulation of so-called natural monopolies. The latter are industries with high fixed costs who operate more efficiently as a monopoly, but whose prices are regulated. Public utilities are a classic example. At the federal level, regulation in all three areas began in the late 1800’s and early 1900’s with the creation of agencies such as the Federal Trade Commission, Antitrust Division of the Justice Department, Interstate Commerce Commission, and Food and Drug Administration. State regulation in social and antitrust areas emerged prior to (and, in some cases, paved the way for) federal action. For example, the 1877 Supreme Court case Munn v. Illinois gave states the power to regulate prices of firms with monopolistic tendencies before the creation of federal regulators.

The trend toward deregulation focused initially on industries that had been previously considered natural monopolies. Shifts in economic theory led policy elites to conclude that reducing regulations would benefit consumers. National political leaders then seized on deregulation as a way to deal with major public concerns of the time, such as inflation.

The successful federal deregulation of airlines, trucking, railroads, and telecommunications led many states and even local governments to alter their approaches to regulation. In the social regulation area, federal deregulation often led to more aggressive state efforts to fill the perceived vacuum. For example, state attorneys general took on the tobacco industry, leading to a landmark $206 billion financial settlement in 1998. More recently, they have pushed to regulate for-profit higher education institutions, even as the federal government also became more active in this area during the Obama era.

In the realm of antitrust policy, the federal government tends to drive the agenda. State efforts to break up the monopoly power of the Microsoft Corporation ended after the U.S. Justice Department settled its case (United States v. Microsoft Corporation). Recent U.S. Supreme Court decisions, such as North Carolina State Board of Dental Examiners v. FTC (2015) limit states’ ability to operate independently on anti-trust policy. Specifically, this case and related rulings have made it easier to overturn state laws and regulations that are considered anticompetitive or that promote monopolies, thereby promoting deregulation through market competition.

Concerning natural monopoly regulation, states have emulated the federal trend toward deregulation, most prominently in the realm of electric power. As was the case in other areas discussed above, electricity deregulation stemmed in part from changing economic theories, especially the insight that electricity generation (as opposed to transmission and distribution) was not a natural monopoly. Political pressure from large industrial users of power also fostered deregulation. As a result, most states have adopted some form of deregulation that allows electricity companies to compete for customers in the area of power generation, but not the transmission or distribution through power lines, which remain a monopoly. By some accounts, large technology companies such as Google and Facebook have achieved monopoly status in recent years, and thus require antitrust action or regulation as natural monopolies. In contrast to power company oversight in the past, potential regulation of internet firms is probably more viable at the national rather than the state level, however.

A few general points about deregulation in the context of federalism are worth noting. First, deregulation illustrates the often-noted tendency of federal systems to promote experimentation and policy learning. The success of early federal efforts at deregulating industries formerly considered natural monopolies led Congress and the Federal Energy Regulatory Commission to encourage state utility regulators to relax their rules on generated power. States have also learned from each other how to implement deregulation effectively. The laboratories of democracy effect, when applied to deregulation, is limited by the fact that business that operate nationally must often adapt to the most stringent state or local regulations, thereby limiting potential experimentation. Recognizing this dynamic, many opponents of deregulation have shifted their efforts away from the national arena.

Second, the nuances of deregulation depend on the level of government that is responsible. There is some consensus that federal deregulation has been pro-consumer. The power of business in state politics makes it less certain that the average citizen will benefit, however, as the locus of deregulation shifts. For example, most states prohibit residential electricity customers from negotiating as a group for lower rates, leaving them less likely to reap the benefits of decontrol than industrial users. On the other hand, in some cases of social and antitrust regulation, especially those affecting industries that are not large local employers, state regulation is likely to be more stringent. Variations in the ideological makeup of state and local governments also shape patterns of regulation and deregulation. For example, states like California are much more likely to reject environmental deregulation than are more conservative venues, especially those with energy-based economies.

Third, states institutions vary, thereby increasing the inconsistency of both regulation and deregulation across jurisdictions. For example, state utility boards differ in their capability to oversee deregulation. More representative boards, which are often elected, tend to deregulate in a way that protects politically powerful interests, limiting how broad the impact will be. Appointed utility commissioners tend to be better educated and may have the technical expertise to support deregulation and to implement it effectively.

SEE ALSO: Devolution; Electric Industry Restructuring; Environmental Policy; Interstate Commerce; Munn vs. Illinois