15 September 2009

Deregulating Business

This article is excerpted from the book Outline of the U.S. Economy, published by the Bureau of International Information Programs. View the entire book (PDF, 3.26 MB).

The 1980s tax cuts were only one part of a broad movement to reduce government’s economic role. Another was deregulation.

During the 1970s, a number of thinkers attributed some of the nation’s economic sluggishness to the web of laws and regulations that businesses were obliged to observe. These regulations had been put in place for sound reasons: to prevent abuse of the free market and, more generally, to achieve greater social equity and improve the nation’s overall quality of life. But, critics argued, regulation came at a price, one measured by fewer competitors in a given industry, by higher prices, and by lower economic growth.

During the economically trying 1970s and early 1980s, many Americans grew less willing to pay that price. President Gerald R. Ford, a Republican who succeeded Richard M. Nixon in 1974, believed that deregulating trucking, airlines, and railroads would promote competition and restrain inflation more effectively than government oversight and regulation. Ford’s Democratic successor, Jimmy Carter, relied heavily on a key pro-deregulation adviser, Alfred E. Kahn. Between 1978 and 1980, Carter signed into law important legislation achieving substantial deregulation of the transportation industries. The trend accelerated under President Reagan.

The intellectual and political trends favoring deregulation were not limited to the United States. Movements to empower private businesses and reduce government’s influence gained momentum in Great Britain, Eastern Europe, and parts of South America. In the United States, courts and legislators continued to carve away government regulations in important industries, including telecommunications and electric power generation.

The most dramatic step was the 1984 breakup of the American Telephone and Telegraph Company, the nationwide telephone monopoly. Prior to the government’s action, AT&T dominated all phone service, both local and long-distance, and it argued that admitting new service providers would threaten network reliability. AT&T obliged Americans to rent their telephones from its Western Electric subsidiary, a monopoly that stifled the development of innovative types and styles of phones. A far smaller rival, MCI Communications, contended that technology advances would enable competition to flourish, benefiting consumers.

The federal government took up MCI’s cause, filing an antitrust suit asking a federal judge to end AT&T’s monopoly. AT&T capitulated, agreeing to split off its local telephone service into seven new regional phone companies. This began an era of intense competition and innovation around the convergence of phones, computers, the Internet, and wireless communications. (AT&T maintained its long-distance network, but in 2005 the company was purchased by one of its former local phone subsidiaries.) While many American consumers found the changes in phone service confusing, they eagerly snapped up a speedy parade of new communications products.

The loosening of regulations on electric power service in the 1990s has been far more controversial, and its benefits disputed. For a century following Thomas Edison’s time, most Americans purchased electricity from companies that operated legal monopolies in their regions. State commissions regulated these utilities’ local rates, while federal regulators oversaw wholesale sales across state lines. Prices were generally based on the costs of making electricity, plus a “reasonable” profit for the utility.

About half of the U.S. states chose to open electric service to competition in the hope that new products and lower prices would result. But these moves coincided with sharp increases in energy prices beginning in 2000. A political backlash against electricity deregulation ensued, worsened by a scandal surrounding the failure of Enron Corporation, a Texas-based energy company that had been a key promoter of competitive electricity markets.

The deregulation movement stopped in midstream after 2000, leaving an electricity industry partially regulated and partially deregulated, and divided by divergent regional agendas. Some areas of the country rely on coal to generate electric power. Elsewhere, natural gas turbines, hydro-dams, or nuclear plants are important source of electricity, and in the 2000s, wind-generated power began to grow. These differing regional interests slowed movement toward a national response to climate change issues, including such possible measures as the development of renewable electricity generation and an expanded power transmission grid. Instead, state governments have been the principal policy innovators.