How Did the Deregulation Movement Get Started?





Originally published 7-08-02

Mr. Abrams is a professor of history and an Associate Dean of International & Area Studies at the University of California, Berkeley.

Most of us understand well the role that"America's foremost consumer advocate," Ralph Nader, played in putting George W. in the White House. Not that it was intentional; only an incidental consequence of his zealous fight against the capture of most of both major parties by money bags and of his refusal to recognize a significant difference between the parties. But probably few of us remember the role that the gentleman played in promoting the deregulation movement that helped to bring on the S&L scandal of the Eighties, the gouging of electric power users last year, and now the Enron scandal.

And what mischief that movement has made! Just to treat the present case: if deregulation had not freed Enron from government constraints,"Kenny boy" Lay and his cohorts could not have done half the damage they have caused. It was the touted virtues of deregulation (plus, perhaps, the $1 million or so that Enron paid to various congressmen) that bought Enron exemptions from those left-wing relics of the New Deal era, the Public Utilities Holding Company Act of 1935 and the Investment Company Act of 1940. After all, Enron's"free market" friends in Congress were -- and still are! -- working to repeal both acts anyway, so why not give Enron a head start. How did we get hoodwinked into the deregulation mania in the first place?

Back in the Seventies, just as the great postwar era of economic growth, living-wage job creation, and rising real incomes was coming to an end, Mr. Nader called attention to how federal regulatory agencies were aiding Big Business. He singled out especially the Civil Aeronautics Board (CAB) and the Interstate Commerce Commission (ICC), with a few shots at the Federal Trade Commission (FTC) as well. What may seem odd today, he came on as a champion of The Market."If we replaced the Interstate Commerce Commission with competition in the transportation industry," he wrote in 1973,"there would be no worry about truckers and railroads controlling their regulators."

True enough. Historians with an interest in the rise of the federal regulatory agencies had done significant work on the tendency of the dominant interests within the regulated industries periodically to turn the agencies to their own purposes, and against their smaller competitors. That often had harmful effects for public and consumer interests. The same literature, however, also noted that these were cyclical problems. Their solution did not call for throwing the baby out with the bath. Periodically, the regulatory agencies did in fact do their job of constraining"market forces" in the public interest and not always in the interest of the dominant corporations.

That the big corporations in the transportation industry, airlines included, generally opposed deregulation at the time tends to confirm the view that the regulators were in the pocket of the regulated. The big corporations in those industries lost the fight then as arguments about getting government off the back of"free enterprise" swept the field. But Mr. Nader does not deserve credit for the whole of it. He only gave"deregulation" a disarmingly nonpartisan, middle-of-the road aspect. Leading the charge in his wake were the big oil and natural gas companies that whined about how regulations were deterring exploration and thus contributing to fuel shortages and the price gouging initiated by OPEC in 1973. The rest of the big corporate interests rushed in behind them. We were told to leave pricing to The Market. Somehow we were supposed to overlook how OPEC and other private sector oligopolies manipulated The Market. Then there were the bright young (and born-to-affluence) economists and law-and-economics people emerging from the colleges and the law and business schools who found it rewarding to play one-upmanship with their elders you know: those antediluvian New Dealers who'd been wrongheaded about the wisdom of Keynes.

These developments came exactly as the Vietnam debacle and Richard Nixon had eroded confidence in the integrity of government; exactly as the country faced a devalued dollar and an unprecedented (for the 20th century) merchandise trade deficit; exactly as the baby boom generation and newly emancipated women were entering a constricting job market; exactly as the new social regulations -- civil rights/affirmative action enforcement, worker and consumer health and safety standards, environmental impact requirements, endangered species concerns, truth in advertising, labeling, lending, etc.-- were raising the cost of doing business. Unofficial minorities protested their"disadvantages" in their competition with the official minorities for jobs, promotions, and educational opportunities. Small as well as big businesses complained about the burdens of the regulatory state."Deregulation" took on almost biblical authority.

Lost in the rush to renounce a governed political economy were some plain truths: (1) There is no such thing as"a free market"; all markets function within a framework of laws and constraints designed to favor some kinds of behavior and to discourage others."Deregulation" did not deregulate but rather shifted the burden of disadvantages within markets. (2) Gone, too, was the venerable notion of a Public Utility. Certain industries function with greater economic efficiency when there are few rather than many competitors, and thus require constant public supervision. Typically, those are industries that feature significant infrastructure. Transportation, energy, and communications stand out in that category. (So, too, it can be argued, are certain national defense industries.) They serve to facilitate growth in the rest of the economy. Every economist before the Seventies understood the concept of the Public Utility. Not so anymore.

Just one example: Freeing the airlines from CAB controls on routes and pricing swept away concerns about costs to people, cities and businesses that lay outside high-density traffic routes. In effect, the CAB had once traded high fares for high-traffic routes in exchange for requiring the airlines to serve low-traffic routes at feasible prices. To be sure, that amounted to a subsidy for travelers on less trafficked routes; a social policy decision determined by the value placed on decentralizing the population and business centers. With deregulation came pricing that made flying from San Francisco to Butte or from Cleveland to Washington a multiple of the cost from Los Angeles to New York.

No space to go into this further. But perhaps I have provided some fuel for thought.



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copernicus - 3/13/2002

Some literature suggests that when stagflation hit in the seventies, Keynesianism seemed to have failed to grow the economy. Economists then switched to Hayek, who theorized that Smith's "invisible hand", literally the guiding hand of God, could be better explained using Darwin's idea of natural selection. Through competition, the fittest survive, and by applying this idea to economics, Hayek proposed that the fittest economy would evolve naturally, without planning or guidance.

There are numerous problems with this proposal. First, dumb luck plays a significant role in natural selection. Second, wild populations are quite unstable. Some years a population flourishes, other years it practically disappears. This could hardly be a suitable model for human communities. Third, all the leading edge ecological studies point to the fact that cooperation is engine of both innovation and sustainability. While competition still plays an important role, it is subsumed into the larger structure of cooperation. The literature of Jane Margulis, James Lovelock, and Fritjof Capra, in his book, "the Web of Life," talk about the importance of cooperation.

Regards,
Copernicus


Thomas R. Cox - 3/6/2002

The role of Ralph Nader in bringing on deregulation seems vastly overestimated here. His ideas led Nader to a support of deregulation, to be sure, but his influence was limited at best. The jump in argument from Nader tipping the balance between Bush and Gore in the election to his comments bringing on (or even significantly aiding in bringing on) deregulation seems to be sophistry or simply wrongheaded. Ronald Reagan and his econonmic advisers should be singled out as the real culprits in any attempt to understand where deregulation as recent public policy came from.

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