Economic Regulation The U.S and the world economy like everything else have its ups and downs. The government plays a crucial role in deciding how the economy will set over time. An Economist by the name of John Maynard Keynes felt that if either inflation or unemployment got out of hand, the government could adjust the business cycle to balance the economy. Keynes was more geared toward the bigger picture and focused on macroeconomics. His work led to the government and many economists believing that they had control over the economy. This led to economic regulations, which affected everyone from companies to the consumers. Through the history of our economy the government has made changes by enforcing many regulations to have full control of the growth and power of the economy and to protect the consumers.
Regulations can be divided into two different categories, Economic regulations and Social regulations. An Economic regulation covers sectors of the economy such as electricity, natural gas, communications, transportation, aviation, agriculture, and banking. These regulations usually include barriers to entry and exit, licensing and tariff laws, and the control of prices and wages. These regulations include acts such as the banking act of 1933 or the civil aeronautics act of 1938. Social regulations on the other hand, are there to protect the consumers. These regulations concern such things as health and safety of workers, environmental issues, and civil rights.
Unlike the Economic regulations these were created much later in the 1960s and 70s. Examples of Social regulations would include the food and drug administration and the Equal Opportunity Commission, which protects employers. Regulations were starting to appear around the time of the New Deal. The governments main purpose for enforcing these regulations was because competition among corporations was starting to fail. The bulk of these regulations were put into affect from 1933 through 1938.
At the time regulations seemed to have been helping. The economy continued to grow and was doing better than it ever had been. The system was able to control price and entry competition in the nations key industries. From 1930 through the sixties the economy was booming. There were low inflation rates that averaged 3.8 percent over that period of thirty years. The interest rates were also low at two percent over a period of three months.
Bank failures were virtually non-existent, oil and gas supplies were readily available. The price of gas even had a slight decline in the sixties. As the sixties came to an end the growth had stopped and problems in the economy started to occur once again. The budget deficits in 1968 went from eight billion dollars to twenty five billion dollars, and continued to rise as it exceeded over 200 billion dollars by 1983. The growth in labor productivity from 1948 to 1968 was about 3.3 percent and from 1968 to 1983 declined to as low as 1.2 percent.
In 1974 the banking failure rate had skyrocketed from past success. The Airlines were losing money even though they kept on increasing the price of fares; also the nations largest railroad companies were facing possible bankruptcy. The reason for the downturn in the economy was due to the control, which the government had over these corporations by enforcing these regulations. The problem with these regulations was that it caused higher than necessary costs, distorted the patterns of supply and demand. The rate of return regulations was creating inefficient capital allocations.
These problems brought on what is called as deregulation. Deregulation is were the government drops many of the regulations that were put on the corporations. The period of deregulating in the late 70s is stated by many economists to be very crucial in the affect of our economy today. Major corporations such as American Airlines, AT&T, El Paso Natural Gas, and Bank America went through a process of deregulating in the late 70s and into the 80s. Even though recent acts of deregulations have occurred and have been proven to be very successful, there are also benefits to regulations along with the disadvantages.
Social regulations are most beneficial to the consumer, because it protects them from their employers to what they eat. With out these regulations corporations might take short cuts to save on money, while in turn they are harming their consumers with out us having any knowledge of it. It also protects us from our employers who might have been trying to take advantage of us, or tries to refuse us of the benefits we deserve. There are also economic regulations, which protect our economy by making sure corporations such as Microsoft, dont become a monopoly. This allows our economy to stay balanced.
This protects the consumers from higher prices, and also leaves them with other options. The major problem with Regulations is the amount of money it cost not only to the corporations, but the government and the consumers. In 1998 the direct annual cost of compliance with federal regulations was seven hundred billion dollars according to professor Thomas Hopkins of the Rochester Institute of Technology. Each year the government spends more money on regulations, adjusted to inflation the government spent 654 billion dollars in 1977 on regulations and 709 billion dollars in 1999. Federal Regulations cause 1.3 trillion dollars in economic activity to be lost each year. So the price of not only following these regulations is expensive, but so is enforcing them.
In the long run it cost much for the corporations than it does the government. Costs such as paperwork, permits, equipment, worker training, attorney fees, and record keeping are some of the expenses which may be overlooked as cost of enforcing regulations for firms. This affects the consumer because prices will rise, corporations will reduce innovation and economic growth due to lack of funds. It also affects the corporations decision on whether to hire a worker or how much should they pay him. One of the major problems with the regulations is the burden that it puts on small companies. Many of the large corporations have the funds to follow these regulations, while small and medium sized companies do not.
A small company creates two out of every three new jobs in America. This means that they play as important of a role in our economy as do the larger companies. According to the Small Business Administration (SBA) firms with fewer than 500 employees spend approximately $5,000 per employee on regulatory costs. While firms with more than 500 employees spend only $3,500 per employee. The biggest hit is for firms with fifty to a hundred people, they pay seven to ten times higher than larger firms.
No matter how big the firm all of them need to get the paperwork done, they need to hire attorneys. Studies have shown that the long-term costs of certain regulations can reduce the productivity level. The consumer also suffers from regulations; the more a corporation has to spend on the regulations the higher the prices of the product or service. According to the office of Federal Register every man, woman and child in America pays $2,800 in regulatory costs. This means that each American works 40 days out of the year just to pay for these regulations. Not only does it affect the cost of the products for Americans, but it also hurts them at work.
When a business puts all of its resources to regulatory laws, it is using the resources less efficiently; it is forced to operate in a less productive, in a more costly way. Eventually this leads to the employees, which will deny them a higher standard of living. Many firms cannot afford to give their employees as much benefits, as they should receive due to the high regulatory costs. Many expert economists are against over enforcing to many regulations. They feel that it cuts down the competition in the economy.
Deregulation has been very popular among economists over the last 25 years. They feel that deregulating the 4 major industries in the late 70s was one of the best decisions for our economy. Robert Cradell and Jerry Ellig did research on how the airline, trucking, electricity sector, natural gas, and telecommunications were affected after they went through deregulations. They found many benefits that not only helped the company, but also the consumer. During the first two years after deregulation the average prices fell from 4 to 15 percent, and after ten years prices went down twenty five percent. In some cases prices even fell to half of what they used to be.
They also found out the quality of service improved. Corporations were able to give their customers more options to choose from and better reliable service. “More freedom equals more benefits” says Ellig about deregulation. Rates fell faster in parts of the market where regulators permitted greater customer choice. Giving customers choices will allow for a more competitive market and in turn more benefits for everyone. From past experience we know that regulations can help the economy, but at the same time over regulating can cause the economy to hit a brick wall.
Too many regulations can cause higher prices for consumers, corporations, and even the government. It also creates barriers to entry and exit, which will allow there to be less competition in the economy. Deregulating also has been proven to be a successful method of balancing the economy. It has worked for many of the major industries. As long as the regulations are kept to a minimum and are useful in protecting the consumer, there should be no problems. Bibliography Coggins, B (1998).
Does Financial Deregulation Work. Northhampton, Massachusetts: Edward Elgar Publishing. McConnell,C & Brue,S (1998). Economics (fourteenth edition). New York: Irwin McCgraw-Hill. Moore, S (1999, february 22).
Beware Fiscal and Regulatory Drag . [On-Line]. Available: http://www.cato.org/dailys/02-22-99.html. Thierer, A (1999). The Regulation Home Page.
[On-Line]. Available: http://www.regulation.org/. Vietor, R (1994). Contrived Competiton; Regulation and Deregulation in America. Cambridge, Massachusetts: President and Fellows of Harvard College.