The Political Economy of Deregulation Interest Groups in the Regulatory Process ROGER G. NOLL AND BRUCE M. OWEN This book has two basic themes. First, regulation itself benefits certain firms at the expense of others, thereby lhe creating and destroying the very interest groups that par­ ticipate in debates on deregulation. Second, debates about regulatory reform exhibit common properties that, when Political Economyof recognized, can help sort out the public interest from the cacophony of self-interest that surrounds it. Case studies Deregulation by five experts are included in this volume: • "The Political Economy of Financial Regulation," InterestGroups Andrew S. Carron • "Air Pollution, Environmentalists, and the Coal intheRegulatoryProcess Lobby," Robert W. Crandall • "The Creation, Growth, and Entrenchment of Spe­ cial Interests in Oil Price Policy," Joseph P. Kalt • "The Political Economy of Federal Regulation of Sur­ face Transportation," Marcus Alexis With case studiesby • "Deregulation and Vested Interests: The Case of Air­ lines," Alfred E. Kahn Roger G. Noll is Institute Professor of Social Science at the California Institute of Technology. Bruce M. Owen is an economist in private practice in Washington, D.C. ~ American Enterprise Institute for Public Policy Research ~ 1150 Seventeenth Street, N.W., Washington, D.C. 20036 Job Name:2274803 Date:15-06-18 PDF Page:2274803pbc.p1.pdf Color: Cyan Magenta Yellow Black The PoliticalEconomyof Deregulation The PoliticalEconomyof Deregulation InterestGroups intheRegulatoryProcess Roger G. Nolland BruceM.Owen American Enterprise Institute for Public Policy Research Washington, D.C. Distributed to the Trade by National Book Network, 15200 NBN Way, Blue Ridge Summit, PA 17214. To order call toll free 1-800-462-6420 or 1-717-794-3800. For all other inquiries please contact the AEI Press, 1150 Seventeenth Street, N.W., Washington, D.C. 20036 or call 1-800-862-5801. Acknowledgments We are grateful to many at AEI and CBS for suggestions that have undoubtedly improved the work. William Lilley III and George Vra­ denburg III at CBS and Jack Meyer and Marvin Kosters at AEI were especially helpful. Robert Crandall, Joseph Kalt, and Ken Baseman made significant contributions to chapter 1; Ken Baseman and Peter Greenhalgh were indispensable to the drafting of chapters 2 and 3. Henry Grabowski generously reviewed portions of the manuscript. Paul Gottlieb provided excellent research assistance. The individual authors of each chapter remain, of course, responsible for the content of what they have written, and the editors for the coherence, if any, of the whole. Library of Congress Cataloging in Publication Data Noll, Roger G. The political economy of deregulation. (AEI studies ; 379) Includes bibliographical references. 1. Industry and state-United States-Case studies. 2. Trade regulation-United States­ Case studies. I. Owen, Bruce M. II. Title. III. Title: Deregulation. IV. Series. HD3616.U47N64 1983 338.973 83-2638 ISBN 0-8447-3520-5 ISBN 0-8447-3519-1 (pbk.) 3 5 7 9 10 8 6 4 © 1983 by the American Enterprise Institute for Public Policy Research, Wash­ ington, D.C., and London. All rights reserved. No part of this publication may be used or reproduced in any manner whatsoever without permission in writing from the American Enterprise Institute except in the case of brief quo­ tations embodied in news articles, critical articles, or reviews. The views expressed in the publications of the American Enterprise Institute are those of the authors and do not necessarily reflect the views of the staff, advisory panels, officers, or trustees of AEI. /IAmerican Enterprise Institute" and @) are registered service marks of the American Enterprise Institute for Public Policy Research. Printed in the United States of America Contents PREFACE PART ONE 1 INTRODUCTION: THE AGENDA FOR DEREGULATION 3 Organization of This Study 6 Network Television Deregulation 7 The Fifty-five Mile-per-Hour Speed Limit 11 Rebates in Real Estate Services 12 Regulatory Reform in New Drug Applications 13 Automobile Emissions Standards 16 Natural Gas Deregulation 20 Conclusion 24 THE POLITICAL ECONOMY OF DEREGULATION: 2 AN OVERVIEW 26 The Role of Interest Groups in a Federal System 26 The Forms of Economic Interests 29 Regulation as an Element of Corporate Planning 32 Regulation as a Creator and Destroyer of Interests 33 Resistance to Changed Circumstances 37 Strategic Use of Regulation 39 Factors Affecting Successful Representation 41 Applications to Deregulation Debates 46 3 THE PREDICTABILITY OF INTEREST GROUP ARGUMENTS 53 Destructive Competition 53 Elimination of Desirable Cross-Subsidies 58 Excessive Risk 59 Harm to Consumers 60 The Incentive to Withhold or Distort Information 63 Conclusions about Regulatory Strategies and Tactics 64 PART Two THE POLITICAL ECONOMY OF FINANCIAL REGULATION 4 Andrew S. Carron 69 Deposit Rate Ceilings 71 New Thrift Asset Powers 75 Expanded Securities Powers for Banks 79 Conclusion 81 AIR POLLUTION, ENVIRONMENTALISTS, AND THE COAL LOBBY 5 Robert W. Crandall 84 Coal and the Sulfur-Oxides Problem 84 The 1977 Clean Air Act Amendments 85 The Coal Market 88 The Effects of Scrubbing on Coal Production 90 The EPA Rule Making 91 The Effect on Air Quality 92 The Effect on Costs 94 The Political Appeal of the Scrubbing Requirement 95 THE CREATION, GROWTH, AND ENTRENCHMENT OF SPECIAL 6 INTERESTS IN OIL PRICE POLICY Joseph P. Kalt 97 Background on Policy 98 Regulatory Winners and Losers 99 Powers, Priorities, and Allocation Controls 103 Subsidies and Special Interests under the Entitlements Program 106 Conclusion: The Politics and Economics of Regulatory Reform 112 THE POLITICAL ECONOMY OF FEDERAL REGULATION OF 7 SURFACE TRANSPORTATION Marcus Alexis 115 Federal Regulation of Railroads 115 Federal Regulation of Trucking: The Motor Carrier Act of 1935 119 Reform of Truck Industry Entry and Rate Regulation: A Case History 121 Summary and Conclusion 128 DEREGULATION AND VESTED INTERESTS: THE CASE OF 8 AIRLINES Alfred E. Kahn 132 Regulation as a Creator of Vested Interests 132 Airline Regulation: The Players 135 The Predicted Dire Consequences of Deregulation 136 The Competitive Alternative 139 Performance since Deregulation 140 PART THREE 9 CONCLUSION: ECONOMICS, POLITICS, AND DEREGULATION 155 CONTRIBUTORS 163 Preface This book has two basic themes. First, regulation itself benefits certain firms at the expense of others, thereby creating and destroying the very interest groups that participate in debates on deregulation. Second, debates about regulatory reform exhibit common properties that, when recognized, can help sort out the public interest from the cacophony of self-interest that surrounds it. A variety of current regulatory reform controversies are analyzed in this volume along with more detailed case studies of deregulation during the 1970s. While several areas of federal regulation are high­ lighted, special emphasis is placed on regulatory reform in network broadcasting. The Federal Communications Commission is currently considering a proposal to deregulate certain aspects of broadcast net­ work behavior. Much of the material in this book was initially devel­ oped under a commission to the editors from CBS Inc. to help people understand this proposal against a backdrop of the great deregulation debates of the past decade. The study was intended to illustrate how the role of special interest groups and the public interest can be quite similar from one regulatory reform dispute to another, despite widely varying settings. Although each new regulatory dispute may appear unique, this book presents some of the common elements running through regulatory reform controversies. It became apparent as the study progressed that, if its conclusions were 'valid, they would necessarily have application not only to the relatively narrow issues in the regulation of network broadcasting, but also to many other current regulatory reform controversies. It was the general applicability of the analysis that made the study of interest to the American Enterprise Institute. Accordingly, the original material has been extended, generalized, and edited under AEI's aegis and direction. Throughout this book we focus on deregulation, but this is really a shorthand word that stands not only for the relaxation and removal of regulation, but also for its reform. The term "deregulation," as we use it, includes regulatory reform efforts designed to place greater reliance on market forces to serve consumers: to improve regulation by reducing the costs of achieving desired regulatory goals. Outright withdrawal of regulation has been proposed in common carrier trans­ portation and in other areas, while in the health, safety, and broad­ casting areas most current proposals involve reform, not complete removal of regulation. While the examples and case studies in this book are drawn al­ most exclusively from federal experience under regulation, a great deal of regulation also takes place at the state and local levels. We believe that the lessons to be learned from the federal experience with deregulation are equally applicable to such areas as state insurance and utility regulation, cable television franchising, occupationallicen­ sure, taxicab regulation, and the many other attempts by states and cities to regulate economic behavior. ROGER G. NOLL BRUCE M. OWEN PART ONE 1 Introduction: The Agenda for Deregulation Regulation is a peculiarly American institution, though all nations use political and legal processes to constrain the