Deregulation is the process of removing or reducing state regulations, typically in the economic sphere. It is the repeal of governmental regulation of the economy. It became common in advanced industrial economies in the 1970s and 1980s, as a result of new trends in economic thinking about the inefficiencies of government regulation, and the risk that regulatory agencies would be controlled by the regulated industry to its benefit, and thereby hurt consumers and the wider economy.
Economic regulations were promoted during the Gilded Age, in which progressive reforms were touted as necessary to limit externalities like corporate abuse, unsafe child labor, monopolization, pollution, and to mitigate boom and bust cycles. Around the late 1970s, such reforms were deemed as burdensome on economic growth and many politicians espousing neoliberalism started promoting deregulation.
The stated rationale for deregulation is often that fewer and simpler regulations will lead to raised levels of competitiveness, therefore higher productivity, more efficiency and lower prices overall. Opposition to deregulation may usually involve apprehension regarding environmental pollution and environmental quality standards (such as the removal of regulations on hazardous materials), financial uncertainty, and constraining monopolies.
Regulatory reform is a parallel development alongside deregulation. Regulatory reform refers to organized and ongoing programs to review regulations with a view to minimizing, simplifying, and making them more cost effective. Such efforts, given impetus by the Regulatory Flexibility Act of 1980, are embodied in the United States Office of Management and Budget's Office of Information and Regulatory Affairs, and the United Kingdom's Better Regulation Commission. Cost–benefit analysis is frequently used in such reviews. In addition, there have been regulatory innovations, usually suggested by economists, such as emissions trading.
Deregulation can be distinguished from privatization, where privatization can be seen as taking state-owned service providers into the private sector.
Argentina underwent heavy economic deregulation, privatization, and had a fixed exchange rate during the Menem administration (1989–1999). In December 2001, Paul Krugman compared Enron with Argentina, claiming that both were experiencing economic collapse due to excessive deregulation. Two months later, Herbert Inhaber claimed that Krugman confused correlation with causation, and neither collapse was due to excessive deregulation.
Having announced a wide range of deregulatory policies, Labor Prime Minister Bob Hawke announced the policy of "Minimum Effective Regulation" in 1986. This introduced now familiar requirements for "regulatory impact statements", but compliance by governmental agencies took many years. The labour market under the Hawke/Keating Labor governments operated under an accord. John Howard's Liberal Party of Australia in 1996 began deregulation of the labor market, subsequently taken much further in 2005 through their WorkChoices policy. However, it was reversed under the following Rudd Labor government.
Natural gas is deregulated in most of the country, with the exception of some Atlantic provinces and some pockets like Vancouver Island and Medicine Hat. Most of this deregulation happened in the mid-1980s. There is price comparison service operating in some of these jurisdictions, particularly Ontario, Alberta and BC. The other provinces are small markets and have not attracted suppliers. Customers have the choice of purchasing from a local distribution company (LDC) or a deregulated supplier. In most provinces the LDC is not allowed to offer a term contract, just a variable price based on the spot market. LDC prices are changed either monthly or quarterly.
The province of Ontario began deregulation of electricity supply in 2002, but pulled back temporarily due to voter and consumer backlash at the resulting price volatility. The government is still searching for a stable working regulatory framework.
The current status is a partially regulated structure in which consumers have received a capped price for a portion of the publicly owned generation. The remainder of the price has been market price based and there are numerous competitive energy contract providers. However, Ontario is installing Smart Meters in all homes and small businesses and is changing the pricing structure to Time of Use pricing. All small volume consumers are to be shifted to the new rate structure by the end of 2012. There is price comparison service operating in these jurisdictions.
The province of Alberta has deregulated their electricity provision. Customers are free to choose which company they sign up with, but there are few companies to choose from and the price of electricity has increased substantially for consumers because the market is too small to support competition. If they choose they may remain with the utility at the Regulated Rate Option.
Former Premier Ralph Klein based the entire deregulation scheme on the Enron model, and continued with it even after the highly publicized and disastrous California electricity crisis (and the collapse of Enron because of illegal accounting practices.)
The Conservative government led by Margaret Thatcher started a programme of deregulation and privatisation after their victory at the 1979 general election. These included express coach (Transport Act 1980), British Telecom (completed in 1984), privatisation of London bus services (1984), local bus services (Transport Act 1985) and the railways (1993). The feature of all those privatisations was that their shares were offered to the general public.
From 1997-2010, the Labour governments of Tony Blair and Gordon Brown developed a programme of what they called "better regulation". This included a general programme for government departments to review, simplify or abolish their existing regulations, and a "one in, one out" approach to new regulations. In 1997, Chancellor Brown announced the "freeing" of the Bank of England to set monetary policy. They freed the Bank of England from direct government control and removed the power by the Bank of England (and therefore by the government) from controlling the financial activities of banks in the UK. In 2006, new primary legislation (the Legislative and Regulatory Reform Act 2006) was introduced to establish statutory principles and a code of practice and it permits ministers to make Regulatory Reform Orders (RROs) to deal with older laws which they deem to be out of date, obscure or irrelevant. This act has often been criticised and called "The abolition of Parliament Act".
New Labour did not privatise many publicly owned services because most had already been privatised by the previous Conservative government. However, some government-owned businesses such as Qinetiq were privatised. But a great deal of infrastructure and maintenance work previously carried out by government departments was contracted out (out-sourced) to private enterprise under the public–private partnership, with competitive bidding for contracts within a regulatory framework. This included large projects such as building new hospitals for the NHS, building new state schools, and maintaining the London Underground. These privatisations were never offered to the general public to buy shares, instead being offered to commercial companies only.
New Zealand Governments adopted policies of extensive deregulation from 1984 to 1995. Originally initiated by the Fourth Labour Government of New Zealand, the policies of deregulation were later continued by the Fourth National Government of New Zealand. The policies had the goal of liberalising the economy and were notable for their very comprehensive coverage and innovations. Specific policies included: floating the exchange rate; establishing an independent reserve bank; performance contracts for senior civil servants; public sector finance reform based on accrual accounting; tax neutrality; subsidy-free agriculture; and industry-neutral competition regulation. Economic growth was resumed in 1991. New Zealand was changed from a somewhat closed and centrally controlled economy to one of the most open economies in the OECD. As a result, New Zealand, went from having a reputation as an almost socialist country to being considered one of the most business-friendly countries of the world, next to Singapore. However, critics charge that the deregulation has brought little benefit to some sections of society, and has caused much of New Zealand's economy (including almost all of the banks) to become foreign-owned.
Russia went through wide-ranging deregulation (and concomitant privatization) efforts in the late 1990s under Boris Yeltsin, now partially reversed under Vladimir Putin. The main thrust of deregulation has been the electricity sector (see RAO UES), with railroads and communal utilities tied in second place. Deregulation of the natural gas sector (Gazprom) is one of the more frequent demands placed upon Russia by the United States and European Union.
One problem that encouraged deregulation was the way in which the regulated industries often controlled the government regulatory agencies, using them to serve the industries' interests. Even where regulatory bodies started out functioning independently, a process known as regulatory capture often saw industry interests come to dominate those of the consumer. A similar pattern has been observed with the deregulation process itself, often effectively controlled by the regulated industries through lobbying the legislative process. Such political forces, however, exist in many other forms for other special interest groups. Some of the examples of deregulation in the United States in the setting of industries are banking, telecommunications, airlines, and natural resources.
During the Progressive Era (1890s–1920), Presidents Theodore Roosevelt, William Howard Taft, and Woodrow Wilson instituted regulation on parts of the American economy, most notably in regulating big business and industry. Some of their most prominent reforms are trust-busting (the destruction and banning of monopolies), the creation of laws protecting the American consumer, the creation of a federal income tax (by the Sixteenth Amendment; the income tax used a progressive tax structure with especially high taxes on the wealthy), the establishment of the Federal Reserve, and the institution of shorter working hours, higher wages, better living conditions, better rights and privileges to trade unions, protection of rights of strikers, banning of unfair labor practices, and the delivery of more social services to the working classes and social safety nets to many unemployed workers, thus helping to facilitate the creation of a welfare state in the United States and eventually in most developed countries.
During the Presidencies of Warren Harding (1921–23) and Calvin Coolidge (1923–29), the federal government generally pursued laissez-faire economic policies. After the onset of the Great Depression, President Franklin D. Roosevelt implemented many economic regulations, including the National Industrial Recovery Act (which was struck down by the Supreme Court), regulation of trucking, airlines and the communications industry, the institution of the Securities Exchange Act of 1934, and the Glass–Steagall Act, which was passed in 1933. These 1930s regulations stayed largely in place until Richard Nixon's Administration. In supporting his competition-limiting regulatory initiatives President Roosevelt blamed the excesses of big business for causing an economic bubble. However, historians lack consensus in describing the causal relationship between various events and the role of government economic policy in causing or ameliorating the Depression.
Deregulation gained momentum in the 1970s, influenced by research by the Chicago school of economics and the theories of George Stigler and others. The new ideas were widely embraced by both liberals and conservatives. Two leading 'think tanks' in Washington, the Brookings Institution and the American Enterprise Institute, were active in holding seminars and publishing studies advocating deregulatory initiatives throughout the 1970s and 1980s. Cornell economist Alfred E. Kahn played a central role in both theorizing and participating in the Carter Administration's efforts to deregulate transportation.
The first comprehensive proposal to deregulate a major industry in the United States, transportation, originated in the Richard Nixon Administration and was forwarded to Congress in late 1971. This proposal was initiated and developed by an interagency group that included the Council of Economic Advisors (represented by Hendrik Houthakker and Thomas Gale Moore), White House Office of Consumer Affairs (represented by Jack Pearce), Department of Justice, Department of Transportation, Department of Labor, and other agencies.
The proposal addressed both rail and truck transportation, but not air carriage. (92d Congress, Senate Bill 2842) The developers of this legislation in this Administration sought to cultivate support from commercial buyers of transportation services, consumer organizations, economists, and environmental organization leaders. This 'civil society' coalition became a template for coalitions influential in efforts to deregulate trucking and air transport later in the decade.
After Nixon left office, the Gerald Ford presidency, with the allied interests, secured passage of the first significant change in regulatory policy in a pro-competitive direction, in the Railroad Revitalization and Regulatory Reform Act of 1976. President Jimmy Carter devoted substantial effort to transportation deregulation, and worked with Congressional and civil society leaders to pass the Airline Deregulation Act (October 24, 1978), Staggers Rail Act (signed October 14, 1980), and the Motor Carrier Act of 1980 (signed July 1, 1980).
These were the major deregulation acts in transportation that set the general conceptual and legislative framework, which replaced the regulatory systems put in place between the 1880s and the 1930s. The dominant common theme of these Acts was to lessen barriers to entry in transport markets and promote more independent, competitive pricing among transport service providers, substituting the freed-up competitive market forces for detailed regulatory control of entry, exit, and price making in transport markets. Thus deregulation arose, though regulations to promote competition were put in place.
U.S. President Ronald Reagan campaigned on the promise of rolling back environmental regulations. His devotion to the economic beliefs of Milton Friedman led him to promote the deregulation of finance, agriculture, and transportation. A series of substantial enactments were needed to work out the process of encouraging competition in transportation. Interstate buses were addressed in 1982, in the Bus Regulatory Reform Act of 1982. Freight forwarders (freight aggregators) got more freedoms in the Surface Freight Forwarder Deregulation Act of 1986. As many states continued to regulate the operations of motor carriers within their own state, the intrastate aspect of the trucking and bus industries was addressed in the Federal Aviation Administration Authorization Act of 1994, which provided that "a State, political subdivision of a State, or political authority of two or more States may not enact or enforce a law, regulation, or other provision having the force and effect of law related to a price, route, or service of any motor carrier." 49 U.S.C. § 14501(c)(1) (Supp. V 1999).
Ocean transportation was the last to be addressed. This was done in two acts, the Ocean Shipping Act of 1984 and the Ocean Shipping Reform Act of 1998. These acts were less thoroughgoing than the legislation dealing with U.S. domestic transportation, in that they left in place the "conference" system in international ocean liner shipping, which historically embodied cartel mechanisms. However, these acts permitted independent rate-making by conference participants, and the 1998 Act permitted secret contract rates, which tend to undercut collective carrier pricing. According to the United States Federal Maritime Commission, in an assessment in 2001, this appears to have opened up substantial competitive activity in ocean shipping, with beneficial economic results.
The Airline Deregulation Act is an example of a deregulatory act whose success has been questioned. Since deregulation, real prices for air travel has fallen by more than half, and travellers have more options; but there have been questions about disruptions, employee pensions and the lack of small city service.
The Emergency Petroleum Allocation Act was a regulating law, consisting of a mix of regulations and deregulation, which passed in response to OPEC price hikes and domestic price controls which affected the 1973 oil crisis in the United States. After adoption of this federal legislation, numerous state legislation known as Natural Gas Choice programs have sprung up in several states, as well as the District of Columbia. Natural Gas Choice programs allow residential and small volume natural gas users to compare purchases from natural gas suppliers with traditional utility companies. There are currently hundreds of federally unregulated natural gas suppliers operating in the US. Regulation characteristics of Natural Gas Choice programs vary between the laws of the currently adoptive 21 states (as of 2008).
Deregulation of the electricity sector in the U.S. began in 1992. The Energy Policy Act of 1992 eliminated obstacles for wholesale electricity competition, but deregulation has yet to be introduced in all states. As of April 2014, 16 U.S. states (Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Michigan, Montana, New Hampshire, New Jersey, New York, Ohio, Oregon, Pennsylvania, Rhode Island, and Texas) and the District of Columbia have introduced deregulated electricity markets to consumers in some capacity. Additionally, seven states (Arizona, Arkansas, California, Nevada, New Mexico, Virginia, and Wyoming) began the process of electricity deregulation in some capacity but have since suspended deregulation efforts.
Deregulation was put into effect in the communications industry by the government at the start of the Multi-Channel Transition era. This deregulation put into place a division of labor between the studios and the networks. Communications in the United States (and internationally) are areas in which both technology and regulatory policy have been in flux. The rapid development of computer and communications technology – particularly the Internet – have increased the size and variety of communications offerings. Wireless, traditional landline telephone, and cable companies increasingly invade each other's traditional markets and compete across a broad spectrum of activities. The Federal Communications Commission and Congress appear to be attempting to facilitate this evolution. In mainstream economic thinking, development of this competition would militate against detailed regulatory control of prices and service offerings, and hence favor deregulation of prices and entry into markets. On the other hand, there exists substantial concern about concentration of media ownership resulting from relaxation of historic controls on media ownership designed to safeguard diversity of viewpoint and open discussion in the society, and about what some perceive as high prices in cable company offerings at this point.
The financial sector in the U.S. has seen considerable deregulation in recent decades, which has allowed for greater risk taking. The financial sector used its considerable political sway in Congress and in the U.S. political establishment and influenced the ideology of political institutions to press for more and more deregulation. Among the most important of the regulatory changes was the Depository Institutions Deregulation and Monetary Control Act in 1980, which repealed the parts of the Glass–Steagall Act regarding interest rate regulation via retail banking. The Financial Services Modernization Act of 1999 repealed part of the Glass–Steagall Act of 1933, removing barriers in the market among banking companies, securities companies and insurance companies that prohibited any one institution from acting as any combination of an investment bank, a commercial bank, and an insurance company.
Such deregulation of the financial sector in the United States fostered greater risk taking by finance sector firms through the creation of innovative financial instruments and practices, such as the creation of new financial products, including securitization of loan obligations of various sorts and credit default swaps. The greater risk taking caused a series of financial crises, including the savings and loan crisis, the Long-Term Capital Management (LTCM) crisis, each of which necessitated major bailouts, and the derivatives scandals of 1994. These warning signs were ignored as financial deregulating continued, even in view of the inadequacy of industry self-regulation as shown by the financial collapses and bailout. The 1998 bailout of LTCM sent the signal to large "too-big-to-fail" financial firms that they would not have to suffer the consequences of the great risks they take. Thus, the greater risk taking allowed by deregulation and encouraged by the bailout paved the way for the Financial crisis of 2007-2008.
The deregulation movement of the late 20th century had substantial economic effects and engendered substantial controversy. As preceding sections of this article indicate, the movement was based on intellectual perspectives which prescribed substantial scope for market forces, and opposing perspectives have been in play in national and international discourse.
Critics of economic liberalisation and deregulation cite the benefits of regulation, and believe that certain regulations do not distort markets and allows companies to continue to be competitive, or according to some, grow in competition. Much as the state plays an important role through issues such as property rights, appropriate regulation is argued by some to be "crucial to realise the benefits of service liberalisation".
Critics of deregulation often cite the need of regulation in order to:
Many economists have concluded that a trend towards deregulation will increase economic welfare long-term and a sustainable free market system. Regarding the electricity market, contemporary academic Adam Thierer, "The first step toward creating a free market in electricity is to repeal the federal statutes and regulations that hinder electricity competition and consumer choice." This viewpoint stretches back centuries. Perhaps the most famous economist of all, Adam Smith, argued the benefits of deregulation in his seminal work, The Wealth of Nations:
[Without trade restrictions] the obvious and simple system of natural liberty establishes itself of its own accord. Every man...is left perfectly free to pursue his own interest in his own way.... The sovereign is completely discharged from a duty [for which] no human wisdom or knowledge could ever be sufficient; the duty of superintending the industry of private people, and of directing it towards the employments most suitable to the interest of the society.
Scholars who theorize that deregulation is beneficial to society often cite what is known as the Iron Law of Regulation, which states that all regulation eventually leads to a net loss in social welfare.
Sharon Beder, a writer with PR Watch, wrote "Electricity deregulation was supposed to bring cheaper electricity prices and more choice of suppliers to householders. Instead it has brought wildly volatile wholesale prices and undermined the reliability of the electricity supply."
William K. Black claims that inappropriate deregulation helped create a criminogenic environment in the savings and loan industry, which attracted opportunistic control frauds like Charles Keating, whose massive political campaign contributions were used successfully to further remove regulatory oversight. The combination substantially delayed effective governmental action, thereby substantially increasing the losses when the fraudulent Ponzi schemes finally collapsed and were exposed. After the collapse, regulators in the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) were finally allowed to file thousands of criminal complaints that led to over a thousand felony convictions of key Savings and Loan insiders. By contrast, between 2007 and 2010, the OCC and OTS combined made zero criminal referrals; Black concluded that elite financial fraud has effectively been decriminalized.
Economist Jayati Ghosh is of the opinion that deregulation is responsible for increasing price volatility on the commodity market. This particularly affects people and economies in developing countries. More and more homogenization of financial institution which may also be a result of deregulation turns out to be a major concern for small-scale producers in those countries.