What is Deregulation?

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Definition:

Deregulation involves scaling back government rules and restrictions in one or more industries.

🤔 Understanding deregulation

In a market economy, the government mostly allows the market to regulate itself through forces like supply and demand. However, some level of regulation exists in most industries. Sectors with a higher need for consumer protection, such as airlines and healthcare, often come with more oversight. When the government rolls back rules for a particular industry, it’s called deregulation. Some argue that deregulation promotes economic growth by making it easier for companies to do business, increasing free-market competition, and lowering prices. Others point out that too much deregulation can harm consumers and the environment.

Example

Regulations for businesses exist at every level of government. Suppose you operate an art studio. Local rules might dictate when you’re allowed to operate, whether you can serve food and alcohol at events, and what type of business license you’re required to have.

Let’s say your state government decides there are too many rules for art studios and removes some of the more stringent regulations. This would be an example of deregulation — The government is getting rid of rules to make it easier for you to run your business.

Takeaway

Deregulation is like your parents getting rid of curfew…

When you were a teenager, your parents may have told you to be home by a specific time. When you got older, they probably decided that a little extra freedom was in your best interest and eliminated your curfew. Governments sometimes do the same for businesses — scaling back the rules when they believe a particular sector needs a little more freedom.

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How does deregulation work?

Deregulation occurs when the government cuts back rules and oversight of certain businesses. While the US largely has a free-market economy, most industries have some level of regulation. Deregulation occurs when the government decides to roll back some of those rules, usually in order to improve competition and the ease of doing business in a particular sector.

At the national level, deregulation can happen in three primary ways:

  • Congress passes a bill to repeal an existing regulation, which the president signs into law. For example, in 1999 Congress repealed much of the Glass-Steagall Act, which had regulated the banking industry for more than 60 years.
  • The president can issue an executive order to alter regulations or their enforcement. One example was the order that President Donald Trump signed in April 2019 to speed up the construction of oil pipelines, in part by streamlining the review process.
  • Government agencies can roll back regulations they previously issued. Congress passes laws, but it leaves the creation and enforcement of rules to relevant federal government agencies. These agencies can rewrite existing rules or pull back on enforcing them. For example, in 2019, the Department of Labor rolled back a 2016 regulation that increased the wage threshold for an employee to be considered exempt from the Fair Labor Standards Act, which extends protections like overtime guarantees and a minimum wage to eligible employees.

What are the types of deregulation?

Some industries are more prone to strict regulation (and therefore, deregulation) than others. These include sectors that pose a significant financial or personal safety risk for consumers, such as banking, aviation, and energy.

Banking

In the US, the past century has been an ongoing cycle of financial regulation, lobbying against regulation, financial deregulation, financial crisis, and more regulation. Today, nine different US government agencies oversee aspects of the financial sector.

The first US banking regulation dates back to 1913. In response to a 1907 bank run that led to the closure of several banks, the law created the Federal Reserve to bring more stability to the industry. Much of the 1920s were spent rolling back many of the initial banking regulations. The stock market crash of 1929 and the Great Depression gave rise to the Glass-Steagall Act of 1933, which forced the separation of investment banking and commercial banking.

The 1960s and 1970s saw regulations such as the Truth in Lending Act to protect consumers and the Community Reinvestment Act to expand the availability of credit in underserved areas.

During the 1980s and 1990s, the banking industry pushed for the repeal of the Glass-Steagall Act. Congress slowly rolled back pieces of the legislation before fully repealing it in the Gramm-Leach-Bliley Act, which President Bill Clinton signed into law in 1999.

Less than a decade later, the US once again found itself in a financial crisis. Many people blamed the Great Recession on deregulation of the financial sector. In response, Congress once again passed a significant piece of banking regulation, the Dodd-Frank Wall Street Reform Act. The 2011 law created more oversight of financial institutions and additional consumer protections.

Airlines

In 1938, the Civil Aeronautics Act created a board responsible for regulating the civilian aviation industry. Over the next several decades, the board created rules governing the routes airlines could fly, how many airlines could fly at once, and how much they should charge.

Critics argued that these regulations made it difficult for airlines to operate efficiently and made air travel cost-prohibitive for many Americans. In 1978, President Jimmy Carter signed into law the Airline Deregulation Act, which got rid of the Civil Aeronautics Board and many of its regulations. The law gave airlines the ability to control their own routes and fares, and more consumers were able to fly at a more affordable price.

The airline industry is still subject to plenty of regulation today. The US Department of Transportation now regulates the industry, along with the Federal Aviation Administration, the Transportation Security Administration, and the National Transportation Safety Board.

Energy

Historically, energy and utility companies exist as natural monopolies, because the start-up capital necessary to enter the industry creates a significant barrier to entry. Because of this, and the fact that it provides vital services, the industry has always been heavily regulated to protect consumers.

Efforts to deregulate the nation’s electricity market began with the 1978 Public Utility Regulatory Policies Act, which allowed private investment in the power generation sector.

Deregulation ramped up in the 1990s, when government agencies at the federal and state level began scaling back some rules for the industry. This rollback was a result of the sharp increase in electricity prices over the previous decade, amid rising inflation and fuel prices. The thought was that fewer rules would make it easier for competitors to join the industry, reducing costs for consumers. Many states have deregulated their utilities, which made it easier for out-of-state companies to compete in the market.

The push for deregulation eventually slowed. One reason was that California, among the first states to deregulate, experienced a power crisis due to an artificial electricity shortage in the early 2000s, which increased utility costs.

Another factor was the Enron scandal in 2001. The Texas-based energy company had been at the forefront of pushing for deregulation before it filed for bankruptcy and its chief executives were convicted of financial crimes.

Deregulation in the energy industry has slowed significantly, with only Michigan, South Dakota, and West Virginia, deregulating since 2005.

What is the history of deregulation?

In the US, the first executive regulatory agency dates back to 1887, when Congress created the Interstate Commerce Commission to oversee railroad rates. Since then, the government has created a variety of agencies to oversee everything from trade to stock exchanges to food safety. Their powers expanded and new agencies emerged in the 1930s during the New Deal, a series of policies that President Franklin D. Roosevelt promoted to create jobs and stimulate the economy after the Great Depression.

Congress took the first step toward deregulation when it passed the Administrative Procedure Act of 1946, which limited the scope of the regulations that agencies could create. The law said that agency regulations could only be based on laws and that agencies had to seek public input.

The 1970s and 1980s saw a wave of bipartisan deregulation in industries like transportation and telecommunications. This was in response to the perception that some agency watchdogs had been “captured” by the industries they regulated and that lack of market competition meant high prices and few choices for consumers.

Today, debate continues about the right level of regulation needed to balance economic growth and efficiency with consumer protection. President Donald Trump ran on the campaign promise of reducing government regulation and red tape. Under his administration, significant deregulation continues to occur in areas including the environment, labor protections, and healthcare.

How does deregulation affect the economy?

Many economists believe that deregulation increases economic growth. Since deregulation began in the 1970s, prices have gone down in several industries such as transportation, natural gas, and communications. In the late 1990s, as the US deregulated many industries, the country’s economy grew at more than twice the rate of nations that didn’t deregulate to the same degree.

The effects of deregulation aren’t all positive. Deregulation in the banking industry has often been a precursor to economic downturns, which have been detrimental to the economy. Some economists point out that a certain level of regulation is key to allowing the market to operate with stability. Economists continue to disagree about how much regulation is needed.

It’s important to remember, however, that the economic effects of deregulation aren’t the only ones that matter. If deregulation removes critical consumer and environmental protections, that can cause costly and dangerous harm.

What are the advantages and disadvantages of deregulation?

Deregulation can be a controversial topic. While the US has a largely free-market economy, just about every industry experiences some level of regulation. Here are some of the pros and cons:

Advantages of deregulation

  • It can reduce costs for consumers.
  • Deregulation can increase competition because it removes barriers to entry for new companies to enter a market.
  • It can increase profits for companies, which might incentivize people to start businesses.

Disadvantages of deregulation

  • Particularly in the financial services industry, significant deregulation has often been the precursor to financial crises.
  • Deregulation sometimes removes critical protections for consumers, employees, or the environment.
  • Less oversight can leave room for fraud and other predatory or illegal activity.

What is currently happening with deregulation in the banking industry?

The US has a long history of tightening and then loosening oversight of the banking industry, which continues today. When President Trump was running for office in 2016, one of his campaign promises was to roll back some banking regulations. Specifically, he promised to undo the Dodd-Frank Wall Street Reform and Consumer Protection Act, which Congress passed in 2010 in response to the Great Recession. The law created stronger regulations and consumer protections in the financial industry.

In 2018, President Trump signed the Economic Growth, Regulatory Relief, and Consumer Protection Act, a bipartisan bill that rolled back some of the Dodd-Frank Act’s provisions without repealing it. One significant change was to exempt small and medium-sized banks from some of the regulations.

Deregulation in the financial industry and beyond has also been happening within federal agencies under the Trump administration. In 2017, he issued an executive order that requires agencies to do get rid of two regulations for every new rule issued. Amid the weakened rules are also those regulating standards for carbon emissions, clean air, water, and toxic chemicals.

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