What were the apparently powerful forces that rendered most of the bureaucracy impervious to reform? In this book, professional economists and lawyers who were at, or near, the top of the decision-making process in various federal agencies during the Reagan years discuss attempts to reign in the bureaucracy. Their candid comments and personal insights shed new light on the susceptibility of the American government to bureaucratic interests. This book is required reading for anyone wishing to understand the true reasons why meaningful, effective governmental reform at the federal level is so difficult, regardless of which political party controls the White House or Congress.
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Regulatory Lessons from the Reagan Era: Introduction
Roger E. Meiners and Bruce Yandle
The "Reagan revolution" officially began in November 1980, when Ronald Reagan swept Jimmy Carter out of the White House and the Republican party made unexpectedly large gains in Congress. This political strength was maintained through 1984, but it seems clear that the 1986 elections that returned the Senate to the Democratic party spelled the end of that revolution. With the Reagan revolution behind us, we can now begin not only to evaluate its relative successes and failures, but to see what lessons can be learned from these added years of observation of our political economy at work.
The purpose of this book is to bring together the views of professional economists and legal scholars who have devoted much of their careers to studying government and the regulatory process. The contributors to this volume generally favor either deregulation or regulation that embodies a greater degree of economic rationality. While the authors would not necessarily characterize themselves as supporters of the Reagan administration, most are sympathetic to the general economic goals it originally professed. Indeed, most worked for the federal government during part of the Reagan years, some because they had explicit hopes that they could help rationalize policy making and the regulatory process.
Looking back at November 1980 and the general expectations that were commonly discussed, some of us are a bit chagrined by the overly optimistic expectations we held early in the administration. Economists who understood, or even contributed to, the economic theory of regulation described by Robert McCormick in chapter 2 should have known that rapid change is unlikely. They should have known, too, that the sage advice of even the most eminent economists would not lead members of Congress to act against their own interests. Nevertheless, there was talk about abolishing numerous agencies, such as the Department of Education, the Department of Energy, and a host of lesser agencies that had been attacked as imposing unnecessary burdens on individuals and the productivity of U.S. business.
Now, with the regulatory reform of the Reagan administration finished, not one major agency has been abolished. The real estate market in Washington, D.C., did not collapse; the federal government still employs hundreds of thousands of career employees to run the same agencies they ran before the advent of the Reagan administration. Nevertheless the world today is different from what it was when Ronald Reagan took office, and so is federal regulation.
This collection of papers helps evaluate how the world of regulation has changed. The volume is not intended to be an indictment of, or paean to, the regulatory record of the Reagan administration, nor will the volume comment on other economic policies undertaken since 1981. Drawing on the experiences of people who were there, we wish to provide comments on successes and failures and to discover the reasons for what occurred. It is our hope that such an understanding will enable us to make better predictions of what is likely to happen in the future.
To help put the contents of this volume in perspective, the rest of this chapter will provide a review of the general state of regulatory development in recent years. An overview of the content of each chapter follows. The style of various chapters differs, and substantially different approaches to the issues are taken. Some address specific policy development in particular areas. Others are concerned with a better understanding of the workings of the bureaucracy. And still others further our still developing economic theory of regulation. While each chapter bears the mark of its author, we find a common theme runs through the volume: People make a difference. Just how much difference they make in effecting changes in regulation will be discovered as each chapter is read.
A Perspective on the Economic Theory of Regulation
When James Buchanan was awarded the Nobel Memorial Prize in Economic Science in 1986, he was cited for his work in developing public-choice theory, which concerns the application of economic theory to political institutions. The media commonly described Buchanan's contribution as the "discovery" that politicians and bureaucrats work to further their own self-interest. Shallow-minded political commentators (and some narrow-minded economists) attempted to belittle Buchanan's work by commenting to the effect that any idiot knows that people act in their own self-interest. Actually, economists for years talked, and most political scientists today talk, as if elected and appointed officials do not operate in their self-interest. The economic theory of regulation and the public-choice approach to government processes is a relatively new development. The seminal works on public-choice theory have all been written in the last thirty years, and it is only during the past two decades that the economic theory of regulation has been developed and applied to studies of legislation and regulation.
As recently as 1964, one of the first economic analyses of the impact of a regulatory agency was produced. That year, Nobel laureate George Stigler published an article about the consequences of Securities and Exchange Commission (SEC) regulation of securities markets. Prior to the publication of his article, there had been essentially no critical examination by economists of the reasons for the origins of the SEC or, more importantly, the impact of its regulations in practice. Rather, there was uncritical acceptance of the public- interest view that Congress, in its wisdom, had protected investors by creating the SEC and its assorted regulations. Stigler attempted to demonstrate empirically that SEC regulations did not enhance the efficiency of security markets. Given our understanding of regulations today, this hardly seems to be a startling conclusion. However, in 1964 this conclusion was nothing short of heresy.
In reply to Stigler, two professors of finance at the University of Pennsylvania defended the SEC as "a valuable and effective agency." Further they claimed that Stigler's empirical analysis was a "triumph of ideology over scholarship." The "need" for the SEC was demonstrated by pointing to such evidence as the Pecora investigation, which Congress held prior to passage of the 1933 and 1934 SEC legislation. Were anyone to claim today that congressional investigations are unbiased and truly fact finding in intent, they would be laughed at for naïveté, but in 1964, respected economists often made such statements. Other comments on Stigler's article, including one by a professor of finance at Columbia University, defended an SEC-commissioned study that Stigler had criticized as obviously being an excellent report because it was financed by public funds. Its preparation was entrusted to a public agency, it concerned financial institutions of vital importance to the public, "it was ... a public document."
This 1964 discussion reminds us of the level of the debate less than two decades before the advent of the Reagan administration. Today, no one, even if they believe that certain regulations are justified, would make statements, at least in an academic journal, that imply unqualified acceptance of a federal agency simply because it is a federal agency, nor do we see many economists assert that studies commissioned by federal agencies are somehow less biased and of higher quality than independently produced documents.
In the past two decades, students of the public policy and regulatory process have made substantial gains in understanding the development and impact of public institutions in our political economy. Nevertheless, we still find many occurrences difficult to explain, a sign that our economic theory of regulation is not fully developed. We think the papers in this volume will help contribute to a fuller understanding. The experiences with regulatory change described and recounted in later chapters do not represent the first plowing of a new field. The reform efforts of the 1980s were part of a continuous process that originated formally in the Ford administration.
Developments in the 1970s
In the mid-1970s, when economists and scholars of regulation were developing robust theories that claimed to explain regulation, their counterparts in the Ford administration were struggling to bring about change. Regulation of all forms had been expanded, especially those dealing with safety, health, the environment, and employment — the so-called social regulation. Using arguments based on economic efficiency, the much-in-vogue cost-benefit analysis, and just plain common sense, those first modern deregulators somehow affected the quantity and quality of regulations flowing from the Federal Register printing presses.
But not to be overlooked is the fact that the broader economy was ripe for change. The nation was reeling from the effects of inflation, the OPEC-inspired oil embargo, and the onerous wage price controls concocted to deal with those two problems. The combination of rapidly rising energy prices and archaic regulation of routes and rates for airlines, trucking, and rail transportation had become a heavy burden, even for the regulators. Rapidly rising interest rates were crippling financial institutions that were bound by rate regulations. Simply put, regulatory flexibility had to be introduced where it was missing.
Importantly, the Ford administration delivered legislation that altered rail and truck regulation; it set in motion the reform of financial institutions, and initiated hearings on airline deregulation. It saw repeal of the fair trade laws and established formal mechanisms in the White House for managing the regulatory process. Looking back, it seems only logical that regulation had to respond to the significant changes in the market. The U.S. economy was being restructured.
In some ways, the Carter administration played the hand dealt by the Ford administration, but the focus of the effort was quite different. In fact, a kind of split personality is seen in the record for the period. Reforms of economic regulation, the kind produced by the Interstate Commerce Commission (ICC), Civil Aeronautics Board (CAB), and Federal Reserve Board, were remarkably successful. Again, inflation and rising energy prices played a major role. However, the output of regulations from the Occupational Safety and Health Administration (OSHA), Environmental Protection Agency (EPA), National Highway Traffic Safety Administration, Consumer Product Safety Commission, and other social regulators expanded at almost an explosive rate.
Still, during the Carter years the broad theme of regulatory reform was kept alive, and mechanisms for reviewing newly produced rules became even more elaborate. Heads of regulatory agencies formed a White House cartel and struggled over which new regulations might pass unscathed into the economy.
Regulatory reform was one of the major planks in Ronald Reagan's bid for the presidency. On assuming office, Reagan set out to deliver on his promises. But the hopes held by many Reagan appointees that somehow the regulatory stables would be cleaned once and for all overlooked several things, including the economic law of diminishing returns. It was somehow believed that the greatly expanded social regulatory agencies could be scaled back simply by applying the same energies and logic used successfully during the Ford years. It was to be learned again that incremental costs rise exponentially. The easiest reforms had already occurred.
Overlooked also was the fact that the regulation of the past was now woven securely into the fabric of the economy. Many industry spokesmen who initially opposed ardently the new and costly rules were found to be supporting those same devices. What first looked like a straightjacket now felt more like an old tweed suit. Indeed, life was much more comfortable for some surviving firms and industries with regulations than without them. Much more than cost-benefit analysis would be needed to knock down the remaining regulatory walls.
But while the Ford and Carter administrations had inflation generating a demand for regulatory change, the Reagan administration found support for change because of an economic recession. Regulatory relief was a battle cry for the Reagan deregulators. Budget reductions brought regulatory rollbacks, modifications in rules, and changes in the working relationships of some of the regulators and the regulated. Yet while reform continued and the screen for reviewing newly proposed rules became more difficult to pass through, little in the way of fundamental change can be reported. In fact, a reading of current regulatory budgets and activities strongly suggests that another wave of regulation is in the making.
The Fourth Wave of Regulation
The historic expansion and contraction of federal regulation shown by patterns of legislation in Figure 1.1 form three waves that coincide with the Progressive period (for example, transportation regulation and antitrust laws), the New Deal (for example, financial markets, labor and agriculture regulations), and the social reform movements of the 1970s (for example, environmental, safety, and health controls). A somewhat similar pattern, shown in Figure 1.2, is observed for antitrust actions taken by federal agencies. Similar measures for the Reagan period would show a marked decline, but there is good reason to believe that counts of legislation and antitrust cases do not fully reveal important current dimensions of regulatory change.
First, past growth in federal regulation involved systematic take-overs of the work of state and local regulators by the federal government. We speculate that the amount of regulation encountered by business managers and citizens did not change, but the quality of regulation changed. It became uniform and all- encompassing across the national economy. Federal expansion reached the limit in the 1970s when virtually all forms of local regulation migrated to the federal level. In this sense, recent regulatory reform reflected an anti-federalist reaction. Recent regulatory reform also reflected a problem with uniformity. Greater flexibility was needed if federal regulators were to hold on to their newly gained political powers. Interest groups, including industries and organized consumer groups, countered the reform efforts in cases where regulation by the federal government restricted output, reduced competition, and generated substantial gains, something that could not be accomplished by the uncoordinated efforts of fifty state governments.
The reforms in transportation and communications that occurred in the 1970s and 1980s returned some regulatory power to states while revising and shifting regulatory powers at the federal level. State telephone regulators became more important after the AT&T decision, as did their transportation counterparts after the revision of the ICC's powers. The demise of the CAB led to a concentration of regulatory powers in the Department of Transportation (DOT), and changes in the regulation of financial institutions were associated with a large expansion of the Federal Deposit Insurance Corporation (FDIC), the Federal Savings and Loan Insurance Corporation (FSLIC), and the SEC and actions by states to restrict the growth of interstate banking.
Second, regulation has become increasingly complex and subtle as the emphasis moved from rate making and entry control to the investigation and attempted control of such things as upper atmospheric chemistry, the psychological response of consumers to alternative forms of advertising, and competing technologies for broadcasting microwave signals. Specification of minute details of accounting and the management of highly complex financial transactions, instruments, and markets can have substantial economic effects on industries, interest groups, and economic performance, but not make headlines on the evening news.
Along with the all-encompassing nature of federal regulation in the 1970s came strong emphasis on risk reduction and the expansion of efforts to reduce safety, health, and environmental hazards. Implementation of the many rules that followed brought recognition that regulatory risk reduction was itself risky. Sometimes the risk added by the regulators was greater than the risk they sought to remove. This third qualitative feature of modern regulation is not necessarily reflected in counts of legislation and pages in the Federal Register, but continues to characterize rules produced by EPA, OSHA, the Food and Drug Administration (FDA), and the financial regulators.
Excerpted from "Regulation and the Reagan Era"
Copyright © 1989 The Independent Institute, San Francisco, CA.
Excerpted by permission of Holmes & Meier Publishers, Inc..
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Table of Contents
Notes on Contributors,
Part I REGULATION AND DEREGULATION,
1 Regulatory Lessons from the Reagan Era: Introduction Roger E. Meiners and Bruce Yandle,
2 A Review of the Economics of Regulation: The Political Process Robert E. McCormick,
Part II REGULATION AND THE REAGAN ERA,
3 Regulatory Reform under Reagan — The Right Way and the Wrong Way Thomas F. Walton and James Langenfeld,
4 Consumer Protection at the FTC during the Reagan Administration William C. MacLeod and Robert A. Rogowsky,
5 Antitrust Policy in the Reagan Administration: Pyrrhic Victories? William F Shughart II,
6 Deregulating Telecommunications John T. Wenders,
7 Privatization of Federal Lands: What Did Not Happen Robert H. Nelson,
8 Deregulation at the U.S. International Trade Commission Lloyd R. Cohen,
9 Civil Aeronautics Board Sunset: Sunrise at the Department of Transportation? George W. Douglas and Peter Metrinko,
Part III POLITICS, REGULATION, AND BUREAUCRACY,
10 Sub Rosa Regulation: The Iceberg beneath the Surface Robert A. Rogowsky,
11 Regulation, Taxes, and Political Extortion Fred S. McChesney,
12 The Unpredictable Politics behind Regulation: The Institutional Basis Richard L. Stroup,
13 A User's Guide to the Regulatory Bureaucracy Daniel K. Benjamin,
14 The Anxious Course: Achieving Change in Washington, D.C. Alan Rufus Waters,