View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by Washington University St. Louis: Open Scholarship Washington University in St. Louis Washington University Open Scholarship Weidenbaum Center on the Economy, Murray Weidenbaum Publications Government, and Public Policy Contemporary Issues Series 25 12-1-1987 The Benefits of Deregulation Murray L. Weidenbaum Washington University in St Louis Follow this and additional works at: https://openscholarship.wustl.edu/mlw_papers Part of the Economics Commons, and the Public Policy Commons Recommended Citation Weidenbaum, Murray L., "The Benefits of Deregulation", Contemporary Issues Series 25, 1987, doi:10.7936/K7TM789W. Murray Weidenbaum Publications, https://openscholarship.wustl.edu/mlw_papers/14. Weidenbaum Center on the Economy, Government, and Public Policy — Washington University in St. Louis Campus Box 1027, St. Louis, MO 63130. Other titles available in this series: 4. Regulation and the Public Interest, Murray L. Weidenbaum 5. An Economist in Government: The Benefits Views of a Presidential Adviser, Murray L. Weidenbaum of Deregulation 1 1. Serving as an Outside Director, Murray L. Weidenbaum by Murray Weidenbaum 13. Revamping the Federal Trade Commission, James C. Miller III 14. The United States in the World Economy: Problem or Solutio11? Murray L. Weidenbaum 15. A Program for Reducing the Federal Budget, Murray L. Weidenbaum 17. What Should Be Done for Displaced Workers? Richard B. McKenzie Contemporary Issues Series 25 18. Free to Lose: The Bright Side of Economic Failure, Richard B. McKenzie 20. Do Tax Ince11tives for Investment Work? Murray L. Weidenbaum 21. Responding to Corporate Takeovers: Raiders, Management, and Boards of Directors, Murray L. Weidenbaum 22. The Rhetoric of Antitrust, Thomas J. DiLorenzo 23. Today's Challenges to Economic Freedom, Murray L. Weidenbaum 24. Crowding Out Small Business: The U11fair Competition of Nonprofits, Thomas J. DiLorenzo Additional copies are available from: Center for the Study of American Business CS18 Washington University Campus Box 1208 Center for the St. Louis, Missouri 63130 Study of Phone: (314) 889-5630 American Business Washington University • St. louis December 1987 The Benefits of Deregulation by Murray Weidenbaum The deregulation of American transporta­ tion, telecommunications, energy, and finan­ cial markets over the past 10 years has been a triumph of ideas over entrenched political interests. For 90 years-from the establish­ ment of the Interstate Commerce Commis­ sion in 1886 to the passage of the Toxic Substances Control Act in 1976-government regulation of American economic activity continuously expanded, and created in its wake powerful constituencies who benefited from the regulation. Yet this trend in government rule-making has changed dramatically and perhaps irrevo­ cably during the past decade, resulting in remarkable benefits for the American econ­ omy. Deregulation has lowered the cost of pro­ ducing goods and services. It has offered a wider array of choices to the American con­ sumer. And it has substantially bolstered the international competitiveness of our economy. What caused the shift toward deregulation was not a realignment of political forces. The most significant developments were sup­ ported by a bipartisan coalition in both the legislative and executive branches of the fed­ eral government. Consumer activists such as Ralph Nader offered support at vital points, as did leaders of both political parties, including Presidents Ford and Carter and Senator Edward Kennedy. But the most important role was played by a very unusual Murray Weidenbaum is Mallinckrodt Distinguished Uni­ versity Professor and director of the Center for the Study of American Business at Washington University in St. Louis. This article is reprinted from the Summer 1987 edition of Policy Review, the quarterly magazine of the Heritage Foundation. set of actors in the public policy arena: econ­ field also had concluded during the 1970s omists, political scientists, legal scholars, that Interstate Commerce Commission (ICC) and similar purveyors of ideas. regulation was protecting the carriers (rail­ roads, truckers, and their unions) while increasing costs to shippers by billions of Intellectual Support dollars a year. Comparable studies were made of other regulated industries, such as Three streams of economic research and radio, television, and utilities. policy analysis dealing with different aspects A consensus gradually emerged. Transpor­ of regulation reached a confluence in the tation regulation in the United States did not early 1970s. The first, and most substantial, protect its purported beneficiaries, con­ focused on the heavy and widely distributed sumers, but instead was designed to benefit burdens that economic regulation imposed the employees, executives, and shareholders on the economy, especially in the field of of the companies being regulated. Govern­ transportation, and the smaller and far more ment rule-making shielded entrenched firms concentrated distribution of any resulting from potential new competitors and kept a benefits. The second research effort dealt high price umbrella over the regulated indus­ with the fundamental nature of the r~gula­ try. tory process, especially the relationships between regulators and those regulated. The third area of research focused on the general costs of regulation, especially to the con­ Transportation regulation did not protect sumer. consumers, but instead benefited the It is difficult to pinpoint the exact start of employees, executives, and shareholders the influential research that led to transpor­ of the companies being regulated. tation deregulation, but The Economics of Competition in the Transportation Industries, written by John R. Meyer, et al. in 1959, was The second, and related, stream of a landmark study. Important work followed research focused on the political efforts of on each of the major modes of transporta­ interest groups that benefited from regula­ tion, notably George W. Douglas and James tion. Political scientist Marver Bernstein pre­ C. Miller, III on airlines, and Thomas Gale sented in 1955 a basic "capture" theory of Moore on trucking. regulation. As the only political force in the The airline industry provided the clearest regulatory agency's environment with any examples of the heavy cost of regulation, par­ stability, the industry eventually forced the ticularly the price differences for trips on agency to accommodate its needs. George regulated and non-regulated airlines. Inter­ Stigler and Sam Peltzman generalized this state travel was under the jurisdiction of the theory, contending that regulatory policy Civil Aeronautics Board (CAB); intrastate tra­ reflects the interests and the power of the vel was beyond the CAB's purview. Research concerned groups, not necessarily the con­ found that a traveler could fly 500 miles sumer's. In 1982, Stigler was awarded the from San Diego to San Francisco in the Nobel Prize in Economics for his seminal unregulated California market and pay less articles on the theory of regulation and his than someone flying 300 miles from Port­ empirical studies of the effect of regulation land, Oregon to Seattle, Washington under on specific industries. the CAB's control. The third line of research-focusing on Most American economists writing in this costs to consumers-saw the topic move 2 3 from the business pages and academic jour­ public's attention. Perhaps the first was the nals to the front pages and the nightly news. dead haul-the numerous requirements that The American Enterprise Institute (AEI) led resulted in trucks returning empty from the way in the mid-1970s with several widely delivery even though there was ample oppor­ cited reports on the high cost of regulation, tunity to fill them wi~h cargo. The public among them my own Government-Mandated needed no great expertise in industrial orga­ Price Increases, Sam Peltzman's Regulation nization to resent the waste that resulted. of Pharmaceutical Innovation, John P. This unusual form of applied research con­ Gould's Davis Bacon Act, and Rita Ricardo­ centrated increasingly on the Occupational Campbell's Food Safety and Regulation. In Safety and Health Administration. OSHA 1977, AEI began publishing a bimonthly jour­ jokes (based on that research) became a sta­ nal, Regulation, that is devoted entirely to ple of business conversation. Is it true that government rule-making. The issue hit a OSHA made one company build separate responsive chord with the media, influential "his" and "her" toilets even though the only policy groups, and finally the Congress. two employees of the firm were married to each other? Did OSHA really issue a bulletin to farmers telling them to be careul around Deregulation gave policy-makers an cows and not to step into manure pits? Both opportunity to curb escalating inflation of those questions could, quite accurately, be without trading off jobs. answered in the affirmative. By the late 1970s, support for regulatory reform had become widespread. It included A few simple concepts made the issue business executives who found themselves attractive. Deregulation presented policy­ inundated with a flood of rules to follow and makers with an opportunity to curb escalat­ reports to file, lawyers and political scientists ing inflation in a way that did not involve a who thought that the regulatory agencies tradeoff with jobs. Indeed, reduced regula­ often were captured by the regulated