Deregulation: Friend or Foe?
December 22, 2008 11:51 AM   Subscribe

Has deregulation ever worked out to the benefit of the greater population?

Deregulation is repeatedly rolled out as a solution to any number of problems, but in my experience it always ends up going sour. Am I blinded by my preconceptions? Are there concrete examples where deregulation has benefited the body politic rather than just the shareholders of the deregulated industries?
posted by lekvar to Law & Government (27 answers total) 9 users marked this as a favorite
Well, I think you are going to have to define what you mean by "benefit." That is to say, do you mean merely lowered cost to the public? Or are you meaning to measure an amalgam of cost, quality, effectiveness, improved service, etc. etc.

I would think that, if lowered cost were your only metric, certainly airline deregulation could be hailed as a deregulation success. Of course, if you were to also factor-in the utter adventure in fail that flying has become, then, not so much.
posted by Thorzdad at 12:12 PM on December 22, 2008

Telecommunications. I doubt that you'd be better off if Ma Bell still owned the network and all devices attached to it.
posted by themel at 12:17 PM on December 22, 2008 [2 favorites]

Pay Y2000 yen for a kilo of rice in Japan one too many times, and you'll rapidly turn into a fan of deregulation.

After 1984 huge swathes of industry were deregulated in New Zealand. Plenty of businesses, and whole industries even (household appliances, automobiles) were wiped out. It was, however, good if you wanted to buy a good car or a new stereo -- suddenly products like these halved in price or became available for the first time.
posted by dydecker at 12:19 PM on December 22, 2008

utter adventure in fail

You know, as much as I am not a proponent of deregulation, my flying experience has only improved with deregulation, it's cheaper, my bags actualy arrive at the airport that I do, the number of flights has increased exponentially. Of course, the airlines are in constant chapter 11, so I suppose you can't say it's worked out for everyone.

One only need fly to rural Canada vs. rural US regularly to see the difference in regulated vs. deregulated air travel. Sure, they look at me like a nut when I ask if I should take off my shoes in security, but I get to arrive at my destination with all the things I left with, the day I want to be there, and with some spending money left over.
posted by Pollomacho at 12:22 PM on December 22, 2008

Regulations can be good or bad. Anytime you get rid of bad regulations, there is a good result. Get rid of good regulations, bad result.
posted by callmejay at 12:29 PM on December 22, 2008

Long distance calls were expensive before telecom deregulation. On the other hand, you could say that deregulation led to the death of Bell Labs. Hard to say whether the tradeoff was worth it.
posted by zippy at 12:33 PM on December 22, 2008

On the third hand, deregulation of telecom lead to less assasinations in the developing world.
posted by Pollomacho at 12:35 PM on December 22, 2008

Interstate trucking deregulation, in 1980:
When President Carter signed the bill, he proclaimed: "I have today signed into law S. 2245, the Motor Carrier Act of 1980. This is historic legislation. It will remove 45 years of excessive and inflationary Government restrictions and redtape. It will have a powerful anti-inflationary effect, reducing consumer costs by as much as $8 billion each year. And by ending wasteful practices, it will conserve annually hundreds of millions of gallons of precious fuel. All the citizens of our Nation will benefit from this legislation. Consumers will benefit, because almost every product we purchase has been shipped by truck, and outmoded regulations have inflated the prices that each one of us must pay. The shippers who use trucking will benefit as new service and price options appear. Labor will benefit from increased job opportunities. And the trucking industry itself will benefit from greater flexibility and new opportunities for innovation."
The trucking companies were the ones who lost out here, because they had previously been protected from competition. Before deregulation they could only run approved routes, at fixed rates, with no volume discounts for high shippers.
posted by smackfu at 12:38 PM on December 22, 2008 [1 favorite]

Deregulation isn't always about price, it can also be about innovation or risk taking.

In electric restructuring, stockholders of generating companies take the risk of cost overruns instead of consumers or ratepayers. Texas has seen a massive amount of wind power come online because the barrier to entry is so low.

In telecom restructuring, we have seen a wide array of handsets that offer more options to consumers.

Ultimately, regulations (or market forces) should send the right incentives to meet our policy objectives. It's all about finding the right balance.
posted by Pants! at 12:58 PM on December 22, 2008

Any regulatory system, heavy or light, can be abused without proper oversight. It also has to do with the end we are trying to achieve-- the airline examples above, for instance, and I'm sure all the bankers who (previously) were getting rich off of financial deregulation were thrilled with it. Personally I believe regulation is appropriate to achieve the greatest common good, and not just to lower prices (for instance safety, innovation or access can also be a measure) and certainly that deregulation on "trickle down" ideas are the purest bullshit (deregulate so that the rich get richer and all boats/rising tides blah blah blah).
posted by nax at 1:16 PM on December 22, 2008

Deregulation is a notoriously vague word - sort of a catchall term often featured alongside the ubiquitous "free market." It may refer to privatization of state-owned industries. It may refer to the removal of any federally mandated limitations on business, like anti-trust laws, and the easing of corporate tax rates to stimulate investment, etc (see economic liberalization).

Deregulation in all it's forms is a huge part of the laissez-faire economic policies seen atop the Republican agenda for decades now (see Neoliberalism). It's purpose is almost always to leave as few impediments as possible between the markets and the private entities seeking access to those markets. It may benefit society as a whole in addition to shareholders and executives, but this is in no way guaranteed and likely will only benefit those who purchase the particular product or commodity in question.

So, to try to answer your question, it can be beneficial for the greater population in many ways, including lower prices and a greater variety and quality of products. It can also help to modernize a calcified industry by allowing for more of an incentive to innovate and take risks, as Pants! said. On the other hand there are obvious downsides, including job loss, increased pollution, stagnant wages, opaque derivatives markets, weakened unions, income disparity, neutered financial oversight, and the commingling of government and industry, to name a few.

One notable piece of deregulatory legislation is the Gramm-Leach-Bliley Act of 1999, which some would argue set the stage for our current economic meltdown.
posted by kurtroehl at 1:27 PM on December 22, 2008 [1 favorite]

I'm curious as to what your experience is with deregulation going sour? I've spent a significant percent of my work life on compliance issues, and sometimes wonder if people who think businesses are not regulated enough have spent much time in the private sector.
posted by txvtchick at 2:56 PM on December 22, 2008

Response by poster: Well, txvtchick, to be honest I have no direct experience with de/regulation. I have a lot of anecdotes and I've read a lot of finger-pointing op-eds. Thus my question.
posted by lekvar at 3:26 PM on December 22, 2008

It's true that Texas has more wind power -- what place has more wind? :-) -- but our electric rates are higher in the deregulated "competitive" areas (Houston, Dallas, etc) than they are in the vestigial monopoly areas (San Antonio, Austin). The plans and choices are very confusing for average consumers. A lot of us are paying more, and we don't understand why. I'd say it's a mixed success at best.
posted by Robert Angelo at 3:58 PM on December 22, 2008

Response by poster: dydecker, can you exppand a little bit about the 2000 yen kilo of rice?
posted by lekvar at 4:54 PM on December 22, 2008

Gramm-Leach-Bliley had very little to do with the current crisis. It had nothing to do with credit default swaps, mortgage underwriting, securitizing of mortgages and the rest. All it deals with is ownership of different companies.

President Clinton:
"I don't see that signing that bill had anything to do with the current crisis. Indeed, one of the things that has helped stabilize the current situation as much as it has is the purchase of Merrill Lynch by Bank of America, which was much smoother than it would have been if I hadn't signed that bill ... On the Glass-Steagall thing, like I said, if you could demonstrate to me that it was a mistake, I'd be glad to look at the evidence."

The current crisis may well have been caused by a lack of regulation and oversight, but it wasn't because of deregulation- there never were any regulations on this stuff.
posted by gjc at 6:30 PM on December 22, 2008

Okay - maybe it would be helpful if I pointed out where regulation doesn't work. Look at Sarbanes-Oxley. The guys responsible for the Enron, Worldcom, Tyco, etc. scandals were prosecuted and many went to jail for fraud. One of them died, probably due to stress. Members of Aurthur Anderson, the company that certified Enron's books, were convicted of obstruction of justice and the company effectively went out of business. In other words, there were sufficient laws on the books to penalize unscrupulous behavior.

But now every public company, whether or not they've engaged in unscrupulous behaviour, has to comply with a poorly written law that is hugely expensive and time consuming to implement. The number of meetings, consultants, documentation, and projects necessary to implement SOX - which do absolutely nothing to increase productivity and revenue so you can hire more people or buy more stuff from companies that would hire more people - is mind boggling. And in the end, you get what you would have with a decent audit anyways. Bear Stearns, Lehmnan Brothers, and Merrill Lynch, were all SOX compliant. What good did it do? What was the point?

I think kurtroehl's post is pretty even-handed, but some would argue that the crisis would be a lot worse without Gramm-Leach.
posted by txvtchick at 7:17 PM on December 22, 2008

Yea, just to clarify, I did not intend to suggest that our current problems are all the fault of Phil Gramm, merely to point out an example of what I consider to be a noteworthy piece of dereg legislation. Gramm-Leach probably did help to save some of the major institutions that were on the brink of default, but it also helped create these behemoths in the first place. The bloated, over-leveraged and disastrously interconnected financial entities created since 1999 do not speak highly of the general policy concept that spawned them. And as I said, gjc, deregulation can be a code word for many different processes, and there does not necessarily need to be any specific "regulation" to be repealed in the first place for it to be classified as deregulation. This is all my opinion, of course.
posted by kurtroehl at 8:34 PM on December 22, 2008

dydecker, can you exppand a little bit about the 2000 yen kilo of rice?

Y2000 is around 20 US dollars. Imported rice is banned in Japan. If they stopped subsiding the farmers who make up the base of the LDP vote, then Japanese would be able to eat Thai rice at a quarter the price.

The same goes for plenty of other foodstuffs in Japan - even salt! - it's one of the only countries in the world where the supermarket is just as expensive as going out to eat.

As far as rice goes, a lot of it is grown by part-time farmers, even in little paddies in the outer suburbs of the big cities. It's not uncommon for a salaryman to have a tiny rice farm going on the side.

More info
posted by dydecker at 10:09 PM on December 22, 2008

Oops that was an outdated link. The policy is basically the same though: most of the "rice imports" are warehoused then shipped overseas as food aid.
posted by dydecker at 10:17 PM on December 22, 2008

Robert Angelo, here are a number of studies that have looked at the Texas power markets. While there is a price disparity, several studies have shown that people can pay less than what prices were before retail choice.

One study approached this by comparing prices before and after, adjusting for fluctuations in the gas market. Another used rate setting methodologies from pre-deregulation days to determine what rates would have been and compared those to current prices.

I've noticed personally that the largest coop in the state, Pedernales Electric Coop, often has comparable rates than neighboring Round Rock, where people can choose their provider. Right now the lowest price available in Round Rock is 12.7 cents per kWh. in PEC, the price is 10.678 cents per kWh plus a $20 per month "service charge." If you use 1500 kWh a month and include the costs of the service charge, PEC ends up being 12 cents per kWh. If you use 1000 kWh, it is 12.68 cents per kWh, just about the same as Round Rock.
posted by Pants! at 5:52 AM on December 23, 2008

On the subject of banking de/regulation, see Matt Yglesias, who works for the Center for American Progress, is a well-known liberal blogger, and used to write for The Atlantic and American Prospect.

He suggests that the best way to deal with banks that are "too big to fail" is just to regulate them so they can never get that big in the first place, and then deregulate them do whatever they want.

That's a combination of regulation and deregulation that would meet our policy objectives of liquid capital markets and protection from massive institutional failure bringing down everyone else.
posted by Pants! at 6:04 AM on December 23, 2008

Telecommunications. I doubt that you'd be better off if Ma Bell still owned the network and all devices attached to it.

Isn't that an example of regulation? Limiting the power of something deemed monopolistic, etc.
posted by defenestration at 1:46 PM on December 23, 2008

defenestration: Read up on Bell's history. Here is a nice take from the ever-unbiased Cato institute. One Policy, One System, Universal Service!
posted by themel at 2:48 AM on December 25, 2008

Best answer: Defenestration: you're right, a for-profit company does not willingly concede market share to its competitors.

The rationale behind Universal Service policy is that the more people are connected to a network, the more valuable it becomes. This remains true today for social networking sites: the people using it are the draw, not just the site itself. But to get people on a network in the first instance, a massive amount of investment was necessary to run copper wire to every neighborhood, then every home.

Because of the size of the country, it was thought that telecom was a natural monopoly: no one was likely to replicate an infrastructure connecting hundreds of thousands of homes and businesses. Regulators decided it would only really work if everyone could afford it. People in cities paid more than the actual cost of providing service + "reasonable profit," and the monitored surplus was used to subsidize the exorbitant cost of service in rural areas. Truly rural areas were shunned even by the Bell Network: to this day, remote communities rely on smaller providers and co-ops.

By the 1970s, upstart companies such as MCI proved that it could be profitable for a rival company to offer service to densely-populated office buildings and business customers. Manufacturers figured out that better handsets could be connected to the network without degrading the performance of the system. New companies leaned on the government, and it was persuaded to open parts of the US telecom market to competition.

Experts still thought that the "last mile" of the network was a natural monopoly because it would take too much time and money to sink a new copper network in the ground. Regional Bell Companies continued to provide local service at regulated rates, but they were separated from the equipment and long-haul segments of the telecom monopoly. Local monopolies had to let MCI, Sprint and others serve their customers, who could use whatever phones were being sold in stores. Your friendly Bell company would ferry traffic between your phone and the long distance network. Only making local calls? The price would be kept affordable by regulators.

Gradually, the Bell monopoly in the long-haul telecom and equipment monopolies gave way to competition, which grew ever stronger as Judge Green presided over disputes in court; the antitrust DoJ consent decree was far more compelling than regulations promulgated by the FCC. Before you know it, you're getting called at dinner time, begging you to switch long distance carriers. Sprint decides to build a better long-haul network, sinking fiber optic cable into the ground: "you can hear a pin drop," and AT&T scrambles to reinvest in a better long-distance network. Engineers figure out how to split colors of the light spectrum so that the capacity of fiber optic cables increases on existing cable. Rates plummet. Service improves. Don't like how your provider treats you? Choose another one. Perhaps more profoundly, the backbone of the Internet was being put in place as competitive companies built out long-haul routes.

Telecom competitors started rethinking the "natural monopoly" idea and eyeing the last mile as a potential source of revenue during the boom. Cable companies had been deploying an infrastructure that could push a lot more data into the home. Mobile phone service was doing away with the need to dig up streets and physically connect each user. But there were drawbacks: coax cable networks were highly asymmetric, pushing video to the home, but requiring very little information in the other direction from folks flipping channels. Wireless networks lacked the 99.99+% reliability of a wired network; static and dropped calls are still a pain. Eventually, Congress bought into the premise that if competition was good for the long distance and equipment markets, it could be fantastic for the local networks, too. The Telecommunications Act of 1996 was signed into law on February 8th. It did not have an antitrust clause; it relied on the FCC for regulatory enforcement, and the regional monopolies rubbed their hands with glee. They merged into ever-larger monopolies on the FCC's watch: NYNEX + SNET + Bell Atlantic = Verizon, which then merged with MCI, reassembling local and long distance power from a sole provider. Southwestern Bell bought up PacTel (West Coast), Ameritech (Midwest), BellSouth and AT&T. AT&T remained the strongest brand name, so that's what it's known as today. US West merged with Qwest, but it hasn't achieved the economic glory of telecom companies in densely populated regions. Verizon and AT&T have not built out all new local networks in each other's regions. They aren't stupid. Vampires have a certain cachet right now, and they're happily sucking revenue from in-region telecom customers.

Let's say you're connecting to the Internet using DSL (as I am): you're still using copper wire with modems attached on either side. Or maybe you're using cable: they have merged, too, and pushed fiber closer to neighborhoods to accommodate two-way traffic; a back-up power system makes sure you can still call for help if the electricity cuts out.

A dozen years or so have passed since Congress passed the Telecom Act. You don't really need a landline anymore. More an more people are choosing to use their mobile phone as their main number. But who's your service provider? Verizon? AT&T? Maybe NexTel-Sprint, or a reseller, offering minutes on the other networks? It's not a coincidence that you're still getting phone service through an established monopoly.

Duopoly is progress, of a sort: you can opt for ESPN via cable or satellite, and connect to the Internet via DSL vs cable modem. I can get decent national phone coverage from Verizon or AT&T using my mobile. Regulators probably aren't going to change the power dynamic anytime soon. The companies involved are too powerful: there's too much money at stake, and their networks have become critical infrastructure.
posted by woodway at 5:43 PM on February 2, 2009

Response by poster: I realize that lot of people said the same thing already, but that's a damned fine write-up, woodway.
posted by lekvar at 6:08 PM on February 2, 2009

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