Deregulation: The Good, The Bad, and The Ugly

The other day, I had a long conversation with a good friend of mine on the topic of deregulation, the doing away with government regulations on industries, and whether or not it is a good thing.  The general consensus seemed to be that some industries require serious regulations, while in other industries; not so much is needed.

From looking at our own history, deregulation will lead to companies having monopolies in certain industries, while in other industries; there is innovation and competition that seems to be long lasting.  So now the question is which industries benefit and which suffer from deregulation?

First we should discuss trusts and monopolies in the United States for those that may be unaware.  A trust was an agreement by which stockholders in several companies transferred their shares to a single set of trustees. In return, the stockholders received a certificate allowing them to a specified share of the consolidated earnings of the jointly managed companies. The trusts came to dominate a number of major industries, and were, in effect, monopolies.

A monopoly is when a company or corporation is the only supplier of a particular good or service, once it has eliminated competition as rivals were driven out of business, due to lack of government regulation promoting fair competition and pricing.  Economists and others have long known that unregulated monopolies tend to damage the economy by (1) charging higher prices, (2) providing inferior goods and services and (3) suppressing innovation, as compared with a competitive situation (i.e., the existence of numerous, competing suppliers of the good or service).

Historians credit President William McKinley with starting the era of trust busting, but President Theodore Roosevelt gets most of the credit for it, as he is labeled the “Trust Buster”.  During his presidency, he helped break up trusts and monopolies such as J.P. Morgan’s Northern Securities Company, which controlled all major railroads in the Northwest.  He also helped bring action against John D. Rockefeller’s Standard Oil, and the American Tobacco Company, which both controlled over 80% of goods and services in their industries.

Originally, these industries were unregulated, which allowed corporations to form trusts and monopolies.  By invoking competition law (Sherman Act of 1890), trusts and monopolies were broken up to create fair competition in the free market.  In this case, federal regulations were necessary and helped in creating fair competition in the free market, as well as doing away with anticompetitive pricing.

We are all familiar with the 2008 financial crisis, also known as the Great Recession, but do we all know how the financial industry came crashing down?  The short answer to this would be deregulation.  Much of the federal regulation placed on the financial industry actually came from legislation during the Great Depression (1929-1939).

After the Stock Market Crash of 1929, the federal government began instituting a series of regulations to try and prevent another financial crisis, by limiting the powers that banks and other financial institutions had.  Prior to the 1929 crash, the federal government took the laissez-faire approach of leaving the financial sector free from federal involvement and not enforcing the regulations it already had during the Roaring 1920’s.  This laissez-faire approach led to huge income inequality, an overextension of credit, buying on margin, and monopolistic practices by businesses.

Once President Franklin Roosevelt was elected in 1932, he took a different approach that was designed to place more federal regulations on the financial industry, also known as the New Deal regulations, as well as enforce existing regulations.  As a result, the United States did not see a serious financial crisis from 1933-1983.

The systematic dismantling of those same New Deal regulations by greedy bankers began in earnest in 1980, peaked in 1999 with the repeal of the Glass-Steagall Act, and finally climaxed in 2004, a final decision that paved the way for the implosion of everything regulation was designed to protect.

During the Presidencies of Jimmy Carter and Ronald Reagan, the beginning of the deregulation of the financial sector took place.  When looking at Savings and Loans, their lobbyists began bribing Congress to deregulate the industry.  Congress promised to cover any losses if Savings and Loans made bad investments with their customer’s savings, but also pledged not to regulate or manage these investments.

In economics, this is known as a “moral hazard”, because it attracts investors to abandon their normally careful, conservative investments and make high-risk, high-return gambles in its place.  Investments turned sour; to cover their losses, the culprits committed even more offenses. Charles Keating was caught attempting to bribe five U.S. Senators to bail him out of trouble. To date, about 650 Savings and Loans have gone under, and another 400 are threatening to. The final total to the taxpayers: half a trillion dollars.

By the late 1980’s, there was a mini crash in the stock market, high unemployment, a housing crisis, and a nasty recession.  All of which points to the financial sector being deregulated at that time, as these effects had not been as severe since the Great Depression and prior.

During the 2000’s, we saw a huge spike in federal spending, low taxes, an overextension of credit, and further deregulation of the financial sector.  All of this seemed to mimic the 1920’s and the lead up to the Great Depression.  The end result was the 2008 financial crisis, which has been the worst financial crisis since the Great Depression.  The final total to taxpayers: $1 trillion dollars and more.

Aside from the financial industry, the airline industry, trucking industry, telephone industry, and cable television industry were all deregulated at one point or another.  The result of that were too few companies offering goods and services at high prices, which in some cases, were inferior.

However, there are other industries, which are not heavily regulated today, that seem to benefit both companies and consumers.  If we take a look at the technology industry, there seems to be little regulation, but still maintains innovation and competition.  All of which benefits the consumer, as goods and services are reliable and fairly priced.  After working as a systems administrator for a few years, I can say that the market is flooded with vendors that are all competing for consumers.

Prices are good and products are reliable, but also know that because of competition law, this has also helped unfair pricing and other anticompetitive practices from occurring in the market.  Although this type of regulation is in place, it is not considered to be too much when compared to regulations in other industries.

At the end of the day, it appears that certain industries require serious federal regulations for fair competition, while others are doing fine with very little federal regulations.  However, this all points to the idea of having smart regulation, rather than a bunch of laws, which conflict, drastically limit a businesses abilities, and make no sense.  The perfect analogy is an umpire who makes a few bad calls during the baseball game.  The solution is to find better umpires…not get rid of them completely.