Dividends of Deregulation

By Hood, John | Policy Review, July-August 1997 | Go to article overview

Dividends of Deregulation


Hood, John, Policy Review


Washington, D.C., in the mid-1970s must have felt like heaven on earth to fed- eral regulators and those who favor government control over the nation's eco- nomic activity.

From 1970 to 1975, federal spending on regulation grew by 77 percent (in inflation-adjusted dollars) and regulatory staffs grew by 46 percent. Presi- dent Nixon had created new federal oversight agencies such as the Environmen- tal Protection Agency and the Occupational Safety and Health Administration. It was the heyday of lobbying groups and self-styled consumer watchdogs that prodded, cajoled, protested, litigated, and otherwise drove regulatory policymaking in many areas of economic and social life that previously had been the domain of state governments or the private sector.

In the two decades since, however, politicians of both parties have voted to deregulate major industries and dismantle some of the bureaucracies that over- saw them. In that time, deregulation has improved the lives of every American by raising the quality of service and shaving billions of dollars off the cost of telephone service, natural gas, and air travel, as well as the groceries, clothes, and other goods transported by truck or rail (see table).

This early wave of deregulation in the mid- and late 1970s slightly predated the supply-side revolution on taxes. Thus it can be viewed as the first major milestone of the emerging movement toward free-market economics. A new report by Robert Crandall of the Brookings Institution and Jerry Ellig of George Mason University's Center for Market Processes examines five deregulation efforts undertaken since the mid-1970s:

Natural Gas. Under strict federal regulation since 1954, the natural-gas industry began to exhibit shortages in the late 1960s. By the 1970s, producers were unable or unwilling to supply as much gas as customers wanted to buy at the regulated price.

In 1978, Congress set a timetable for deregulation of most natural-gas prices. By 1985, when all gas discovered after 1976 was freed from federal price regulations, gas prices began a steep plunge. After that, federal regulators began to transform natural-gas pipelines into "open access" transporters of gas from various producers. Deregulation not only lowered prices for con- sumers, Crandall and Ellig state, but also improved the quality of service by removing the threat of artificially created shortages.

Airlines. Before 1978, both the maximum and minimum fares for air travel were set by the Civil Aeronautics Board (CAB). The CAB began to loosen its regula- tions in the mid-1970s. In 1978, Congress passed legislation to abolish the CAB within six years, open up the industry to new competitors, and eliminate government-set fares.

"Virtually all observers, including airline commissions established by both President Clinton and President Bush, agree that deregulation dramatically lowered air fares," Crandall and Ellig write. They conclude that when adjust- ments are made for other factors that could explain fare reduction, deregula- tion still emerges as a major cause of the savings. One study found that deregulation had saved passengers $12.4 billion annually. Also, deregulation improved the quality of air travel by increasing frequency of flights in many areas and reducing transfers.

Trucking. Federal regulation of interstate trucking began in 1935. Throughout the 1960s and early 1970s, economic research showed that trucking rates would be far lower in a competitive marketplace. In response to the growing opposi- tion to interstate regulation, Congress passed legislation in 1980 that virtually deregulated the trucking industry.

Within six years, the number of licensed motor carriers had doubled. As Crandall and Ellig note, many of these new carriers were small owner-operators who had previously worked for the large licensed companies. Even as the total number of carriers increased, however, portions of the industry such as the "less than truckload" (L. …

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