Government Deregulation and Business - Term Paper Example

Government Deregulation Federal and governments have imposed regulations on business from the commencement of the industrial age at the turn of the previous century. Public Utilities, airlines, telecommunications, trucking and railroads have all been subject to regulation by the government.  Promoters of the free-market system espouse that regulations upset the positive influences of competition which is a deterrent to growth and innovation.  Advocates of regulation disagree saying that the public interest would be better served by governmental intervention because corporate monopolies weaken the customary checks and balances of the marketplace. Deregulation takes place when regulatory restraints on industries are reversed.  This discussion will give an explanation of governmental deregulation, why it is necessary and the benefits and drawbacks of deregulation. It will then focus on those industries that have and have not benefited by deregulation. Proponents of deregulation consider that regulation of business is costly to consumers even when cautiously constructed by the best of intentions as this tactic adds to the expenses that companies shoulder which is then passed on to consumers. To the degree of increased regulations imposed by the government, the greater proportionate financial burden is consequently incurred by the consumer. In addition, whatever benefit incurred from regulations do not out-weigh the costs. Unregulated competition among companies is characteristically healthier as this allows businesses to contain everyday costs in imaginative and adaptable ways and allows for experimentation to discover the methods customers would prefer to pay those costs. Efficient production should be calculated in terms of customer demand, not by means of economic philosophies, or set pricing structures set by the government that only foresee long-term production costs. All regulation can hope to accomplish is to keep consumer prices as low as possible for the consumer, its original intent. In doing this, many times short-term costs are not properly accounted for. The implementation of pricing structures requires a massive amount of information, which, while it may be accurate during the initial study, may vary widely during the term of price fixture. Temporary and fluctuating factors where costs, investment and demand are rather unpredictable have been problematic for industries that have come under government regulation such as transportation and utility. A marketplace devoid of regulation provides incentive to minimize costs and maximizes investment potential. Price caps; a slightly less intrusive method of regulation is not as cost effective as having an unlimited positive aspect. Price cap regulation may also place limitations on the quality of choices or of non-price inequities that are not present when competition is unregulated (Farrell, 1997). Deregulation is the procedure by which government eliminates certain regulations on corporations with the intention of promoting the efficient operation of industries considered vital to the public’s interest. Deregulation theorizes that less regulatory constraints will elevate the level of industry competitiveness, thereby lowering consumer prices through means of more efficient operations. The fundamental concept of deregulation is to open up a market and allow competition to perform its price-cutting magic. In the case of utility deregulations, the existing company remains the instrument of delivery and continues to manage the process, but additional providers are encouraged to enter the market in the competition to draw consumers. This, of course, forces prices down and improves service quality. “Both by improving incentives and by removing administrative/legal hurdles, unregulated competition (or even unregulated monopoly) encourages more rapid innovation” (Rydholm, 2001). The Reagan administration vigorously supported the policy of economic deregulation during his administration. The policy was designed to advance economic competition by allowing the marketplace to determine priorities and as well as principles of business behavior rather than unnecessary governmental intervention. The resulting cost savings was expected to stimulate productivity and new product development. As part of that endeavor, “the Reagan administration reduced the stringency of many industrial standards required by such government agencies as the Securities Exchange Commission (SEC) and the Environmental Protection Agency (EPA) to name only a few” (Gershon, 2002, p. 4). Deregulation also served to eliminate the problematic situation of regulated companies controlling government decisions regarding the industry and using its agencies for self-serving interests. In other words, deregulation reduced corruptive techniques that customers ultimately paid for (Wikipedia contributors, 2006). In theory, deregulation is intended to encourage competition and thereby open the market system to additional service companies. The lack of any regulation would, however, possibly result in monopolization; the reason government began regulating business in the first place. “Instead of fostering an open marketplace of new players and competitors, too much consolidation can lead to fewer players and hence less competition” (Gershon, 1997). Re-regulations have led to somewhat more restricted and balanced methodology that places emphasis on quality rather than quantity of intervention. With this re-do of the system, the government began to regulate industries on a case-by-case basis instead of simply adjusting the amount of regulation on business. The intent was, and is, to regulate business shrewdly, using advanced economic theory. These harmonizing measures were enacted because of the perceived deregulation debacles such as the failure of the Savings and Loan industry (Wikipedia contributors, 2006). The federal government challenged AT&T’s use of its monopoly on local telephone service to compete unfairly in 1982. Its legal proceedings by the government led to a consent measure in 1982 that divided the company into seven regional telephone companies and separated long-distance and equipment businesses. Previously, AT&T controlled 90 percent of all long-distance revenues. By 1984, 700 other corporations shared this market. According to a 1977 Gallup poll, telecommunication service was enhanced following deregulation. The poll found that, before deregulation, 60 percent of users rated telephone company service efficiency of long distance service as good or excellent. Afterwards this number rose to 80 percent because customers had additional choices, the fundamental nature of a free-market system. Customer equipment and long distance rates dropped because of the fierce competition which also served to produce new technologies and methods of service (Hood, 1997). Those opposed to deregulation maintain this 1980’s trend was instigated for reasons of self interest by the industries themselves. They argue that corporations in every industry are obviously opposed to regulations and restrictions imposed on them by the government and will continually lobby to reduce them. This is not the case, however. Many more businesses embrace regulation than don’t because in industries such as airline, trucking, and utility, the existing monopoly often profited by federal regulations on price that restricted competition and thus padded their profits. “Before the deregulation of interstate trucking, there were some 20,000 trucking firms in the United States. Today there is more than 300,000, mostly small businesses operating in niche markets such as the transport of high-value goods like pharmaceuticals or service to out-of-the-way markets” (Hood, 1997). Deregulation, many argue, has devastated the airline industry. Although customers were delighted by the conveniences associated with the increased frequency of companies, flights and the subsequent lower airfares on the popular routes between big cities, the move reduced airline employee’s salaries and retirement benefits, bankrupted airlines and forced several instances of job cutbacks. Since 1978, a dozen airlines have merged or simply ceased to be in business. During this same time period, 50,000 airline jobs have been eliminated. In addition, standards of airline service declined dramatically while fares increased on most national air carriers. These are the opposite effects that deregulation was purported to deliver. To cut costs, airlines began scaling back maintenance and safety crews. Air service was discontinued to 130 smaller communities because of deregulation, fewer major airline companies exist. Many other smaller communities are served by only one airline, a monopoly situation for many who now must suffer the consequences of no competition and higher rates (“Cost of Cable Services”, 1991). “It’s cheaper to fly to Paris [from any big American city] than to Missoula [in Montana]. In practice, to get to Missoula you now need a car, the Greyhound Bus, or a bicycle” (Pfaff, 2006). The human and financial costs of airline deregulation far outweighed the benefits to consumers. Most Americans fully understand the stressful experience airline travel has become but many do not realize the added monetary impact on their lives. Deregulation resulted in a considerable transfer of airline debt to the public through a federal organization formed to pay the pensions of airline employees whose company was driven into bankruptcy. Under Chapter 11 provisions of U.S. bankruptcy law, the government assumed the pension liabilities sustained by the private airlines before deregulation. “The private cost of pensions which private corporations would otherwise be obliged to pay, was thereby turned into a public cost” (Pfaff, 2006). The deregulation of the airline industry is an example of the economic and human harm that this theory has caused since the 1980’s, when the practice began. Not too many years ago, many public utilities were all regulated monopolies. They were assured a reasonable rate of revenue, based on their capital investment and costs associated with production. The government compensated these corporations for the construction of auxiliary generating capacities and maintained transmission lines as well. In the 50 years prior to deregulation, productivity in the electric power industry had increased at approximately three times the rate compared to the combined economy of the nation. However, the movement towards deregulation of the industry that concluded in the late 1990’s separated the incorporated utilities such as Con Ed that once generated power in plants it owned then transmitted it to consumers. Proving that a monopoly isn’t something to be feared and eliminated, this company was a prototype of the new commercial power generating company. However, the government still controlled the pricing structures for local utility companies, the amount they could charge consumers. The theory was that local utilities that did not produce their own power could better “negotiate among competing suppliers for the best price and pass the savings along to the consumer” (Kuttner, 2003). There are three basic reasons that deregulation hasn’t been successful. First, there is a supply and demand stranglehold that can be imposed by corporations. There has been a reasonably fixed demand for electricity with a generating capacity that is barely capable of keeping up so the companies that produce power benefit from the ability to control prices. The Enron scandal, which cheated Californians out of tens of billions of dollars, was just the most extreme example of price gouging. California authorities estimated that if a power company controlled just three percent of the state’s supply, it would be able to set a monopoly price. Second, the concept of creating sizeable national markets to purchase and distribute electricity “makes more sense as economic theory than as physics, because it consumes power to transmit power. It’s only efficient to transmit electricity for a few hundred miles at most,” says Dr. Richard Rosen, a physicist at the Tellus Institute, a nonprofit research group (Kuttner, 2003). The third reason is that because of deregulation, local utilities do not have a financial incentive to invest in maintaining transmission lines. Antiquated power lines are operating too close to their capacity. The more power that is shipped long distances in the new deregulated markets, the more power those lines must carry.  In addition, when utility companies were regulated, they were mandated to recurrently submit resource plans to a state’s public service commission. The two organizations together would anticipate demand and determine how much capital should be invested in power plants and transmission lines and adjust service rates to cover costs. Under deregulation, however, “nobody plays that crucial planning role. Much of the Southeast, by contrast, has retained traditional regulation and cheap, reliable electricity” (Kuttner, 2003). The question of the government’s role in the economy by the regulation or deregulation of industries will most likely be debated for years to come. Choices between governmental regulations of markets must be made on a case by case basis by weighing factual information. References “Cost of Cable Service Up 56%.” (July 19, 1991). Washington Post. Washington D.C. Farrell, Joseph. (May 30, 1997). “Prospects for Deregulation in Telecommunications.” Federal Communications Commission. Gershon, Richard A. (1997). The Transnational Media Corporation: Global Messages and Free Market Competition. Mahwah, NJ: Lawrence Erlbaum Associates, Inc. Gershon, Richard A. (2002). “The Deregulation Paradox: The Telecommunications Industry in Crisis.” Telecommunications Policy Research Conference. Hood, John. (July 1997). “Dividends of Deregulation.” Blessings of Liberty. The Heritage Foundation. Kuttner, Robert. (August 16, 2003). “An Industry Trapped by a Theory.” New York Times. Pfaff, William. (March 31, 2006). “The Mysterious Appeal of Destructive Deregulation.” Liberty Post. Rydholm, Joseph. (February 2001). “Fueling Competition.” Quirk’s Marketing Research Review. Wikipedia contributors. (2006). “Deregulation.” Wikipedia, The Free Encyclopedia. Retrieved April 18, 2006 from Read More