The New Role and Politics of State Regulation: Is the Recent Trend of Expanding State Regulation Beneficial or Harmful?

Article excerpt

FOUR FRIENDS ARE HAVING A DRINK after a think tank's annual meeting. Two are ideologically conservative scholars--she is a fan of as much deregulation as possible, he is an ardent states' rights advocate. The other two are businesspeople--she operates mainly in one state, he operates a nationwide, and increasingly international, firm. The topic of American state regulation comes up.

The deregulation scholar expresses disappointment with state regulators, arguing that, from trucking to insurance to telecommunications, they have not wanted to reduce their role. She wants more federal preemption of state regulation. Her scholarly colleague argues for more devolution--give the states time and they will be forced, via economic development competition, to find efficient policies, which include more deregulation. In any case, he adds, that is the appropriate level at which to address issues of intrastate commerce. The business leaders join in--she is happily dominating her state legislature and getting protective regulation. He is frustrated by varying regulatory policies across the states and by emerging activist attorneys general and other state policymakers,

Who is right? What do we really know about the politics and economics of state regulation, and the extent to which it supplements, substitutes, or otherwise interacts with federal regulation?


State regulation has been around a long time, predating federal regulation (indeed, predating the federal government). Insurance and corporate charters were the first forms. In 1752, Pennsylvania granted a charter to Ben Franklin's Philadelphia Contributorship for the Insurance of Houses from Loss by Fire. Pennsylvania chartered the first stock insurance company in 1794. Even though the Civil War marked a major shift toward a greater federal role in the economy relative to the states, the states helped develop ideas about how to regulate the railroad industry, which provided the critical infrastructure for the development of national commerce. The 1890 Sherman Act is generally cited as the start of antitrust regulation, but 20 states had passed antitrust legislation before 1890. In the 20th century, states developed trucking regulation before the federal government. Prior to the Great Depression, most financial regulation took place at the state level. Texas initially won innovation awards for its 1962 decision to relax regulations on the investment choices of its savings and loans, an idea the federal government later adopted. California legislation on automobile emissions pushed forward national environmental regulations. Florida deregulated economic regulation of its intrastate trucking industry in 1980, the same year in which the federal government deregulated interstate trucking--both to great successes.

Thus, perhaps under many analysts' radar, state regulation is not a harmless anachronism from the 19th century. As much as 20 percent of the American economy is regulated by the states, including elements of such critical industries as telecommunications, energy, insurance, and professions. Despite predictions to the contrary, it does not seem likely to fade away, either from state-vs.-state economic development competition or in the face of growing international trade.

Consider five 21st century state actions. In the area of monopoly and competition, determined state attorneys general from nine states resisted a proposed U.S. Department of Justice settlement of the Microsoft antitrust case. In occupational regulation, New Mexico became the first state to allow psychologists to prescribe medication, formerly permitted only to M.D. psychiatrists. Addressing asymmetric information problems in the wake of many Internet finn collapses and corporate accounting scandals, New York Attorney General Eliot Spitzer successfully sued Merrill Lynch, prompting much wider investigation of financial firms. Also dealing with information, seven state legislatures passed "do not call" laws against telemarketers, the popularity of which prompted the Bush administration's Federal Trade Commission chair Timothy Muris to develop a national rule limiting telemarketing that he admitted would not have been developed otherwise. …