Which Is Worse: Regulation Or De-Regulation?

Libertarians preach the morality of the market, and socialists preach the morality of the state. Those convinced of the market’s morality want de-regulation; those convinced of the state’s morality want regulation.

In truth, neither seems to work.

Consider for example the rules against collusion. The political left imposed this regulatory rule in order to prevent monopoly behavior by companies. One consequence has been that, unable to collude, firms are slaves to their bottom lines. In order to compete successfully in the competitive new world of globalism, firms have curtailed pensions and health insurance for their employees.

Or consider the regulation of new drugs, which drives up costs and delays remedies without, apparently, doing much to improve safety.

Or the fleet mileage standards that regulation imposes on car makers. These regulations destroyed the family station wagon. Families needing carrying capacity turned to vans and to panel trucks. Car makers saw a new market and invented the SUV, which as a "light truck" was exempt from the fleet mileage regulations. The effort to impose fuel economy resulted in cars being replaced by over weight fuel-guzzling SUVs.

On the other hand consider the current troubles resulting from banking and financial de-regulation. The losses from this one crisis greatly exceed any gains from de-regulation.

Or consider the plight of the de-regulated airlines and deterioration in the quality of air service. Or the higher costs of telephone service and the loss of a blue chip stock for widows and retirement funds that resulted from breaking up AT&T. Or the scandals and uncertainties from utility de-regulation which permits non-energy producers like Enron to contract to deliver electric power.

Economists claim that de-regulation results in lower prices. Cheap advanced fare airline ticket prices are cited as evidence. What these economists mean is that the fares without stopovers are cheap to people who can plan their trips in advance. Other passengers subsidize these advanced fares by paying four times as much. Moreover, de-regulation has created bottom-line competition that has lowered service, removed meals, and results in periodic bankruptcy, thus forcing the airlines’ creditors to pay for the low fares. Pilots, flight attendants, and aircraft maintenance crews subsidize the lower fares with reductions in salaries and pension benefits. Are bankruptcies and mergers leading the industry toward one carrier and the re-emergence of regulation?

Consider the fall-out from trucking de-regulation. As in the case of the airlines, the claim was that more communities would be served and costs would decline. But which costs? De-regulation made every minute a bottom-line item. Trucks became bigger, heavier, and travel at higher speeds. Highway safety suffers, and highway maintenance costs rise. The courtesy of truck drivers declined. When trucking was regulated, truckers would stop to help people whose cars had broken down. Today that would throw off the schedule and threaten the bottom-line.

Economists dismiss costs that aren’t included in price. For them the cost that matters is the price paid by consumers. The truck that gets there faster delivers cheaper to the consumer. The myriad ways in which people pay the price of de-regulation are not part of the price paid at the check-out counter.

Economists also say that off shoring lowers Wal-Mart prices, thus benefitting the consumer. They don’t say that by moving jobs abroad off shoring reduces the job opportunities and life-time earnings of the US labor force, or that it wrecks the finances of the laid-off US workers and destroys the tax base of their local communities. None of these costs of off shoring enter into the price of the offshored goods that Americans purchase.

Privatization vs. socialization is another dimension of the conflict. Those who distrust the power of private ownership put faith in public ownership, and those who distrust the power of the state find freedom to be imperiled in the absence of private ownership. 20th century experience established that public ownership is economically inefficient without producing offsetting gains in public welfare. Those in charge of nationalized firms live well both at the expense of taxpayers and consumers.

Nevertheless, privatization can be pushed too far, and it has. As a result of the upfront cost of building prisons and their high operating costs when in government hands, prisons are being privatized and have become profit-making ventures. Governments avoid the construction costs and contract for incarceration services. Allegedly, the greater efficiency of the private operation lowers the cost.

Private prisons, however, require a constant stream of prisoners. They cannot afford to have vacant cells. If incarceration rates fell, profits would disappear and bankruptcy would descend upon the owners. Thus, privatized prisons create a demand for criminals and, as a result, might actually raise the total cost of incarceration.

The US--the "land of liberty"--has the largest prison population in the world. With 5 percent of the world’s population, the US has 25 percent of the prison population. The US has 1.3 million more people in prison than crime-ridden Russia, and 700,000 more prisoners than authoritarian China, which has a population four times larger.

In the US the number and kind of crimes have exploded. Prisons are full of drug users, and the US now has "hate crimes" such as the use of constitutionally protected free speech against "protected minorities." It is in the self-interest of prison investors to agitate for yet more criminalization of civil liberties and ordinary human behavior.

The case for de-regulation is as ideological as the case for regulation. There is no open-and-shut case for either approach. Such issues should be decided on their merits, but usually are decided by the reigning ideology of an epoch or by powerful interest groups.

The Bush regime has de-regulated the government in the sense that the regime has removed constraints that the Founders put on executive power. This was done in the name of the "war on terror." Simultaneously, Bush has increased the regulation of our travel and communication, spying on our Internet use and specifying to the ounce the quantities of toothpaste and shampoo with which Americans can board commercial airliners.

Crises destroy liberty. Lincoln used the crisis of states withdrawing from the union to destroy states’ rights, an essential preservative of liberty in the minds of the Founders. Roosevelt used the Great Depression to destroy the legislative power of Congress by having that power delegated to federal agencies. Bush used 9/11 to assault the civil liberties that protect Americans from a police state.

Perhaps we have now reached a point where both libertarians and left-wingers can agree that the US government desperately needs to be re-regulated and again held accountable to the people.

Paul Craig Roberts [email him] was Assistant Secretary of the Treasury in the Reagan Administration. He is the author of Supply-Side Revolution : An Insider's Account of Policymaking in Washington; Alienation and the Soviet Economy and Meltdown: Inside the Soviet Economy, and is the co-author with Lawrence M. Stratton of The Tyranny of Good Intentions : How Prosecutors and Bureaucrats Are Trampling the Constitution in the Name of Justice. Click here for Peter Brimelow’s Forbes Magazine interview with Roberts about the recent epidemic of prosecutorial misconduct.