LP #11: Deregulation- A Code Word For Safeguarding the Economic Rights of the Vulnerable
Author: Matthew Mitchell
Classical liberals and modern liberals have more in common than we think. To see how, look to the history—and hopefully to the future—of deregulation.
For the modern liberal, the great and noble concern is the vulnerable. Are they exploited by the rich and powerful? Are they protected from the ravages of chance? This concern has led many modern liberals to embrace the regulatory state, believing that it is the best tool to rein in what they see as the excesses of capitalism. Few modern liberals express this view better than Senator Elizabeth Warren. In a 2018 speech calling on “federal agencies to pass strong regulations that benefit the public,” the Senator declared that deregulation is “just a code word for ‘let the rich guys do whatever they want.’”[i]
For the classical liberal, on the other hand, the great and noble concern is individual freedom. Is the individual free to exercise her own rights to life, to liberty, and to property? Is she able to be the author of her own life story without undue interference from others? This concern has made the classical liberal a skeptic of government regulations that hem in the individual’s basic rights, including her basic economic rights.
When powerful interests conspire with the state to deprive the vulnerable of their economic freedom, these two concerns are one and the same.
Liberals and Classical Liberals on Regulation
In his classic statement on the economics of regulation, the late Chicago economist and Nobel Laureate George Stigler wrote in 1971:
The state — the machinery and power of the state — is a potential resource or threat to every industry in the society. With its power to prohibit or compel, to take or give money, the state can and does selectively help or hurt a vast number of industries…. The state has one basic resource which in pure principle is not shared with even the mightiest of its citizens: the power to coerce.[ii]
Like his colleague Milton Friedman, Stigler was a forceful advocate for the free market. But at the time, his views were shared by many on the left. The self-declared leftist historian Gabriel Kolko challenged the conventional view of the progressive era in his 1962 book The Triumph of Conservatism. His careful analysis demonstrated that the regulations of the progressive era were “invariably controlled by leaders of the regulated industry, and directed toward ends they deemed acceptable or desirable.”[iii] Writing in 1973, consumer advocates Mark Green and Ralph Nader asserted that “the verdict is nearly unanimous that economic regulation over rates, entry, mergers, and technology has been anticompetitive and wasteful,”[iv] and that “our unguided regulatory system undermines competition and entrenches monopoly at the public’s expense.”[v]
How Regulation Undermines Competition
How does the regulatory system undermine competition? There are at least six ways that businesses use regulations to obtain advantage “at the public’s expense.”
· First, some regulations facilitate price cartels. In the 19th Century, the Interstate Commerce Commission enforced railroad price-setting schemes.[vi] During the New Deal, the National Industrial Recovery Act cartelized over 500 industries.[vii] And today, regulations like state “post-and-hold” rules facilitate price collusion in alcohol distribution.[viii]
· Second, some regulations set minimum prices. Producer-favoring price controls have been imposed in many industries, including agriculture,[ix] finance,[x] and urban transportation.[xi]
· Third, some regulations limit quantity. And thanks to the law of demand, this too can raise the price (without raising so much attention as a regulated price floor). This strategy is common in agricultural regulations dating back to the New Deal.[xii] State certificate of need laws limit dozens of medical technologies and procedures, raising prices, limiting access, and undermining the quality of care.[xiii]
· Fourth, many regulations limit entry. Like quantity controls, barriers to entry reduce supply, but they do so at the firm and/or individual provider level rather than at the product level. Occupational licensing affords the clearest example of a regulatory barrier to entry. As an added benefit, licensure is easy to pass off as “pro-consumer” even though the balance of evidence suggests it raises prices and even undermines quality.[xiv]
· Fifth, some regulations raise rivals’ costs.[xv] Differences between rival business models may allow one firm to profit through regulations that hobble its competitors. In 2012, for example, the National Electric Manufacturers Association lobbied to maintain a ban on incandescent light bulbs. Since the Association’s member firms specialize in the production of newer, compact-fluorescents and LED bulbs, the ban raised the costs of smaller, rival firms that specialized in easier-to-make incandescent bulbs.[xvi]
· Finally, there are regulations that encourage or even mandate demand. Insurance companies predictably supported the individual insurance mandate in the Affordable Care Act. And auto repair shops have long supported state-mandated annual safety inspections.[xvii]
These sorts of anticompetitive regulations have been documented in dozens of case studies in industries as diverse as electricity,[xviii] education,[xix] wireless spectrum,[xx] airlines,[xxi] and plumbing.[xxii] Business leaders themselves have occasionally offered some of the best evidence for anticompetitive regulation. Writing to his former employer in 1892, U.S. Attorney General Richard Olney sought to assuage the railway man’s concerns about the first federal regulatory agency, the Interstate Commerce Commission. “The older such a commission gets to be,” Olney reassured his friend, “the more inclined it will be found to take the business and railroad view of things…. The part of wisdom is not to destroy the Commission, but to utilize it.”[xxiii]
And indeed, as I have noted, the industry did use the commission to facilitate price-fixing schemes. Railroads had attempted to organize private price-fixing schemes many times before but private cartels are notoriously difficult to maintain. Once the conspiracy has been formed, members have a strong incentive to undercut their coconspirators, causing the cartel to fall apart. The state, with its “power to coerce,” as Stigler put it, can keep a cartel together. Beyond this, private cartels are now illegal. A government-organized cartel can overcome both problems![xxiv]
Left liberals haven’t just been content to write about the problem of anticompetitive regulation. There is a long—and long forgotten—history of progressive leaders rolling back the regulatory state. Beginning in 1975, Senator Ted Kennedy held a series of hearings exposing the anticompetitive regulations promulgated by the Civil Aeronautics Board (Nader was a witness). With the help of his legal counsel, future Justice Stephen Breyer, Kennedy showed that unregulated intrastate routes were less expensive than regulated interstate routes of comparable distance. Two years later, when President Carter appointed the economist and self-described “good liberal Democrat” Alfred Kahn as the head of the Civil Aeronautics Board, Kennedy’s hearings gave Kahn the intellectual and political support he needed to start lifting regulatory restrictions.[xxv] This, in turn, gave Carter and the rest of Congress the proof-of-concept that they needed to finally shut down the CAB in 1978. Consumers won. Following deregulation, inflation-adjusted airfares fell to half their regulated levels and air travel—once the luxury of the elite—came to the masses (in 1965, only 1 in 5 Americans had ever flown; in 2000, half of Americans made a roundtrip flight that year).[xxvi]
But Carter didn’t stop there. As he would put in his 1980 debate with Ronald Reagan: “We’ve been remarkably successful, with the help of a Democratic Congress. We have deregulated the air industry, the rail industry, the trucking industry, financial institutions. We’re now working on the communications industry.” For his part, Kennedy was proud of his deregulatory legacy. In his famous Dream Shall Never Die speech at the 1980 Democratic Convention he declared:
While others talked of free enterprise, it was the Democratic Party that acted and we ended excessive regulation in the airline and trucking industry, and we restored competition to the marketplace. And I take some satisfaction [with] this deregulation legislation that I sponsored and passed in the Congress of the United States.[xxvii]
It is an uncomfortable truth for both Democrats and Republicans that deregulation was initiated by Carter, not Reagan. And indeed, the 39th president’s record on deregulation rivals and perhaps even eclipses that of the 40th president.
The economic analysis of regulation hasn’t changed much. Indeed, the evidence continues to mount that many regulations protect industry insiders from competition rather than consumers from harm.[xxviii] We also have a better understanding of the stultifying economic effects of regulatory accumulation. Using machine-learning tools to identify restrictions in the code of federal regulations, economists estimate that regulatory accumulation slowed economic growth by approximately 0.8 percentage points a year from 1980 to 2012.[xxix] This means that if regulatory mandates had been held to their 1980 levels, then by 2012 the economy would have been nearly 25 percent larger and per capita GDP would have been $13,000 greater than it was.[xxx] What has changed is the modern liberal approach to regulation. The views of Carter, Kennedy, and Kahn are all but extinct in the modern Democratic party. In its place, the Warren view that deregulation is a way to let the rich guys do whatever they want has taken hold. History and experience, however, show that regulation can be a powerful tool for the rich to gain anticompetitive advantage.
Deregulation can both liberate the individual and end the exploitation of the vulnerable.
[i] Elizabeth Warren, “Remarks at Coalition for Sensible Safeguards Symposium,” Elizabeth Wararen Senate Website, June 5, 2018, https://www.warren.senate.gov/newsroom/press-releases/senator-warren-delivers-speech-on-dangers-of-deregulation.
[ii] George J. Stigler, “The Theory of Economic Regulation,” The Bell Journal of Economics and Management Science 2, no. 1 (April 1, 1971): 3–21, https://doi.org/10.2307/3003160.
[iii] Gabriel Kolko, The Triumph of Conservatism: A Reinterpretation of American History, 1900-1916 (New York, NY: The Free Press, 1963), 3.
[iv] Mark Green and Ralph Nader, “Economic Regulation vs. Competition: Uncle Sam the Monopoly Man,” The Yale Law Journal 82, no. 5 (April 1973): 881.
[v] Green and Nader, 871.
[vi] Gabriel Kolko, Railroads and Regulation, 1877-1916 (New York: W. W. Norton & Company, 1970), 62.
[vii] Ellis W. Hawley, The New Deal and the Problem of Monopoly: A Study in Economic Ambivalence, Reissue edition (New York: Fordham University Press, 1995); Harold L. Cole and Lee E. Ohanian, “New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis,” Journal of Political Economy 112, no. 4 (August 1, 2004): 779–816, https://doi.org/10.1086/421169.
[viii] James C. Cooper and Joshua D. Wright, “Alcohol, Antitrust, and the 21st Amendment: An Empirical Examination of Post and Hold Laws,” International Review of Law and Economics 32, no. 4 (December 2012): 379–92, https://doi.org/10.1016/j.irle.2012.08.001.
[ix] Benjamin Bridgman, Shi Qi, and James A. Jr. Schmitz, “The Economic Performance of Cartels: Evidence from the New Deal U.S. Sugar Manufacturing Cartel, 1934—74,” Research Department Staff Report (Minneapolis, MN: Federal Reserve Bank of Minneapolis, November 2009), https://www.minneapolisfed.org/research/sr/sr437.pdf.
[x] Sam Peltzman, “Entry in Commercial Banking,” Journal of Law and Economics 8, no. 2 (October 1, 1965): 11–50; Gregg A. Jarrell, “The Economic Effects of Federal Regulation of the Market for New Security Issues,” Journal of Law and Economics 24, no. 3 (December 1, 1981): 613–75.
[xi] Michael Farren, Christopher Koopman, and Mitchell, Matthew, “Rethinking Taxi Regulations: The Case for Fundamental Reform,” Mercatus Research (Arlington, VA: Mercatus Center at George Mason University, July 19, 2016), https://www.mercatus.org/system/files/Farren_Taxi_FINAL.pdf.
[xii] Gary D. Libecap, “The Great Depression and the Regulating State: Federal Government Regulation of Agriculture, 1884-1970,” in The Defining Moment: The Great Depression and the American Economy in the Twentieth Century, ed. Michael D. Bordo, Claudia Goldin, and Eugene N. White, 1 edition (University of Chicago Press, 2007).
[xiii] Matthew D Mitchell, “Certificate-of-Need Laws: Are They Achieving Their Goals?,” Mercatus Policy Brief (Arlington, VA: Mercatus Center at George Mason University, August 2017).
[xiv] Matthew D. Mitchell, “Ohio Occupational Licensure: Options for Reform,” Testimony before the Ohio House of Representatives, State and Local Government Committee (Arlington, VA: Mercatus Center at George Mason University, May 5, 2021), https://www.mercatus.org/publications/occupational-regulation-and-licensure/ohio-occupational-licensure-options-reform.
[xv] Steven C. Salop and David T. Scheffman, “Raising Rivals’ Costs,” The American Economic Review 73, no. 2 (May 1, 1983): 267–71, https://doi.org/10.2307/1816853; David T. Scheffman and Richard S. Higgins, “Twenty Years of Raising Rivals’ Costs: History, Assessment, and Future,” George Mason Law Review 12 (2004 2003): 371.
[xvi] Matthew D. Mitchell, “Why Would Light Bulb Manufacturers Want to Be Regulated?,” Neighborhood Effects (blog), January 6, 2012, https://neighborhoodeffects.mercatus.org/2012/01/06/why-would-light-bulb-manufacturers-want-to-be-regulated/.
[xvii] W. Mark Crain, Vehicle Safety Inspection Systems: How Effective? (Washington, D.C.: American Enterprise Institute, 1980).
[xviii] George J. Stigler and Claire Friedland, “What Can Regulators Regulate? The Case of Electricity,” Journal of Law and Economics 5 (October 1, 1962): 1–16.
[xix] Joshua D. Angrist and Jonathan Guryan, “Does Teacher Testing Raise Teacher Quality? Evidence from State Certification Requirements,” Economics of Education Review 27, no. 5 (2008): 483–503.
[xx] Thomas Winslow Hazlett, The Political Spectrum: The Tumultuous Liberation of Wireless Technology, from Herbert Hoover to the Smartphone (New Haven: Yale University Press, 2017).
[xxi] Richard E. Caves, Air Transport and Its Regulators: An Industry Study (Harvard University Press, 1962); William A. Jordan, Airline Regulation in America: Effects and Imperfections, New edition (Westport, CT: Greenwood Press Reprint, 1979).
[xxii] Sidney L. Carroll and Robert J. Gaston, “Occupational Restrictions and the Quality of Service Received: Some Evidence,” Southern Economic Journal 47, no. 4 (1981): 959–76, https://doi.org/10.2307/1058155.
[xxiii] Milton Friedman and Rose D Friedman, Free to Choose: A Personal Statement (San Diego: Harcourt Brace Jovanovich, 1990), 197.
[xxiv] Parker v. Brown, 317 U.S. 341 (1943).
[xxv] Thomas K McCraw, Prophets of Regulation (Cambridge, Mass.: Belknap Press of Harvard University Press, 1984).
[xxvi] Derek Thompson, “How Airline Ticket Prices Fell 50 Percent in 30 Years (And Why Nobody Noticed),” The Atlantic, February 28, 2013, https://www.theatlantic.com/business/archive/2013/02/how-airline-ticket-prices-fell-50-in-30-years-and-why-nobody-noticed/273506/.
[xxvii] Ted Kennedy, “1980 Democratic National Convention Concession Speech,” American Rhetoric: Top 100 Speeches, accessed September 23, 2021, https://www.americanrhetoric.com/speeches/tedkennedy1980dnc.htm.
[xxviii] See my forthcoming study with Patrick McLaughlin and Adam Thierer, “Regulatory Reform for the 21st Century,” Mercatus Center at George Mason University.
[xxix] Bentley Coffey, Patrick A. McLaughlin, and Pietro Peretto, “The Cumulative Cost of Regulations,” Review of Economic Dynamics 38 (October 1, 2020): 1–21, https://doi.org/10.1016/j.red.2020.03.004.
[xxx] Coffey, McLaughlin, and Peretto, 1.