Jude Wanniski
February 21, 1997


Supply-Side Economics Lesson No. 12

Memo To: Website Students
From: Jude Wanniski
Re: Regulation

How do we think about regulation? Is it a good thing or a bad thing? If we start with the proposition that rules and regulations are necessary for the ordered functioning of society, as they are for a family, we at least can begin a discussion about regulation without prejudice. If there are too few rules and regulations of the right kind, society will suffer. If there are too many, there are problems too. If there are too few stop signs at street corners, the cost to society will be very high. If there is a traffic cop on every street corner, the cost to society would be prohibitive.

In general, there is increased demand from society for regulation when there is a sustained period of economic contraction. The example I most often use is the game of musical chairs. When the music stops, and one chair is removed, the players jostle and bump as they scramble for one of the remaining chairs. When a national economy is expanding, it is as if chairs were being added to the game every time the music stopped. When this is happening, people have less need for government instruction on what is right and what is wrong, because there are so many opportunities for gain that people know are beneficial and legitimate. In the long expansion of the British economy after the Napoleonic wars, from 1815 to 1914, you can trace the lowering or elimination of tax rates as larger economies yielded more than enough revenue for public purposes. You could also see the private sector on its own develop a Victorian morality, social codes of behavior, without any need for government direction.

Similarly, in the long expansion of the U.S. economy from the 1780s to 1929, government regulations were added slowly, as the complexity of commercial society grew. The monetary deflation of the 1870s, as we returned to the gold standard suspended during the Civil War, was the most painful economic contraction of the century. The social turbulence in the period brought the kind of business excesses that inevitably lead to demands for government regulation. That is, when legitimate opportunities for gain are limited, legitimate businessmen begin to cut corners and worse, in a sense stealing from the future. They don't clean up after themselves, polluting the earth, and use child labor to remain competitive, etc. Environmentalists appear and gain public support in such periods, as do business "muckrakers," who highlight the doings of monopolists, polluters or charlatans. The Progressive Era identified with Teddy Roosevelt extended to the 1913 passage of the Federal Reserve Act as well as the Sixteenth Amendment, permitted an income tax.

The Wall Street Crash of 1929 ushered in the greatest economic contraction of this century and led to an explosion of regulation, as massive bumping and jostling took place and a large fraction of the population was thrown out of work. Social legislation is necessary when society finds itself with more demands on its limited resources than it can supply. Regulation is an activity almost exclusively designed to benefit the community, by limiting the freedom of the individual. There is no disagreement among economists of any school that regulation has economic costs. When asked to weigh the costs in dollar terms, economists will of course tend to follow their political predilections in making their guesses. In the nearly 70 years since the Crash, Depression and Wars have added exponentially to the amount of regulation of U.S. business and commercial life. Sometimes its seems there is a traffic cop on every corner.

Eliminating regulation is almost an impossibility when the economy is in contraction. The vested interests that originally induced the government to enforce new rules now have entrenched bureaucracies. Because every institution has self-survival as its highest priority, government regulatory agencies will protect themselves even in periods when there is no demand for their rules. A long era of non-inflationary economic expansion would be required to have them wither on the vine, as the private sector provides so much opportunity that there are no workers left to man unnecessary bureaus. Here is an interesting report that appeared this week in Investor's Business Daily which bears upon our discussion here:

Deregulation's Benefits, Investor's Business Daily, Feb. 19,1997

A new study documents that when industries are deregulated, the savings to businesses are passed on to consumers. The research comes from Robert Crandall of the Brookings Institution and Jerry Ellig of George Mason University.

Crandall and Ellig studied the effects of deregulation in the natural gas, airlines, telecommunications, trucking and railroad industries.

* Generally, prices in those industries plummeted at least 25 percent, and in some cases 50 percent since deregulation took hold.

* The total annual savings exceeded $50 billion. Not only did consumers benefit in terms of lower prices, but quality improved.

* Consumer prices for natural gas have declined between 27 percent and 57 percent after inflation since deregulation of that industry commenced in 1978.

* In the trucking industry, prices have plunged between 28 percent and 56 percent since deregulation in 1980 while competition soared as the number of carriers doubled in six years.

* Since the 1984 breakup of AT&T Corporation, long-distance prices have been cut almost in half and use of fiber optics has been speeded up due to competition.

* Following deregulation, railroad prices declined 44 percent and airline prices have been reduced by almost one-third. In a separate study by Clemson University economists, it is argued that deregulation of the electric power industry would bring the average $69 a month electric bill of consumers down by about $30.