Deregulation

One of the hot-button topics for the Republican/Tea Party candidates is deregulation. Government is too big, they say. There are too many regulations keeping business handcuffed. If government would get out of the way, businesses would be more profitable, hire more people, and the economy would flourish. If it’s good for business, it’s good for the country. And if a company is too greedy or provides bad service or causes harm, free and open competition will drive them out of business. The market is self-regulating – dwindling sales will eliminate crooks and swindlers. At first hearing it makes sense. Who wants to be regulated? Who wants the government telling them what they can and can’t do?



Well, the experiment has been tried. In 1978, the airline industry was deregulated. Prices and routes would no longer be set by the government. The FCC still enforces air safety, but the industry itself is free to act as it pleases. What was the result? First, most long distance flights were eliminated. They are the most costly to run, so most airlines went to a hub and spoke arrangement. If you want to fly from San Francisco to New York on Delta, you fly to their hub in Atlanta and connect from there to New York. Yes, it takes longer, uses more fuel, and requires long layovers in airport terminals, forcing you to buy expensive food. Many smaller third-tier cities simply lost their air service entirely. Second, services were curtailed – no more cooked meals delivered to your seat, more crowded seating, longer layovers, more lost baggage. Most airline employees – everyone from mechanics to pilots - suffered longer hours, fewer benefits, and large pay cuts. The employees had little recourse. Their unions were severely weakened. When the air traffic controllers went on strike, President Reagan simply fired them all and hired “replacement officials.” Third, with few bureaucratic hoops to jump through, scores of new start-up airlines popped up, offering cheap fares and no-frills service. There was huge turmoil throughout the industry. Many of the dominant players, some of whom had founded the industry – Eastern, Pan Am, TWA, Continental – went bankrupt, along with more than a hundred of the newer airlines like Braniff and Midway and America West, putting tens of thousands out of work.



Another example of deregulation is the thrift industry. Thrifts, or Savings and Loans, were created in the 19th century, first in Britain and then in the US. The idea was to encourage people to save by paying them interest on their savings deposits, and then using the money to fund loans for buying homes. It allowed people to grow their savings, get some income, and buy their own homes. Most S&L’s were originally non-profit organizations, similar to credit unions, set up to benefit their members by pooling their resources. Because of the number of people who lost all their savings in bank failures during the depression, federal regulations were set up to keep the thrift industry separate from the banks. They allowed the S&L’s to pay interest on deposits, which banks could not, but not to offer checking accounts. S&L’s could offer only savings accounts and home loans. But with the rise of new products services such as certificates of deposit, electronic funds transfers, IRA’s, and ATM’s – together with skyrocketing interest rates (some CD’s in the 70’s were paying more than 20% APR) – both industries were under enormous competitive pressure and urged deregulation. In two acts in 1980 and 1982, the government deregulated both industries, essentially eliminating any distinctions. S&L’s could offer NOW accounts, from which a consumer could write a Negotiable Order for Withdrawal and give it to another person to allow them to withdraw the money from their account – identical to a check. Banks could pay interest, sell insurance, offer brokerage services and investment products. As with airlines, hundreds of new start-up financial institutions popped up. But without government oversight and auditing, many were soon on the ropes. Most turned to offering investment products that were little more than Ponzi schemes. As long as more customers kept opening more accounts, the company could pay the interest. But as with all Ponzi schemes, the number of gullible victims dried up, and institutions began to fail in record numbers. In only a few years, 747 thrifts – 25% of the industry – went bankrupt. To avoid having hundreds of thousands lose their savings and/or homes, the government stood by its deposit insurance, costing the taxpayers $88 billion dollars, one of the major causes of the soaring national deficit of the early nineties. Hundreds of thousands lost their jobs.

Then there was a second deregulation of the financial industry in the 1990’s. For the first time banks were allowed to operate across state lines, driving out of business hundreds of small-town community banks and forcing consumers to deal with far-off industrial giants. The agencies that monitored investment banking products were eliminated, in spite of strident objections from economic analysts and consumer advocates, leading to under-collateralized mortgage-based securities, derivatives products, hedge funds, and automated trading. Mortgage brokers and lenders were allowed and encouraged to write loans for people who could not reasonably expect to repay them. Homeowners’ mortgages were sold, repackaged, and sold again, to the point that foreclosures become a game of trying to find who actually holds the mortgage in a screen of false companies, fake boards, and non-existent holding companies. Again, with no one to stop them, greed drove the giant investment banks to offer products and services they knew were unsafe, and the Great Recession is the direct result. To date, more than three million American families have lost their homes and five million more are underwater and behind on their payments. Six and a half million have lost their jobs.

So the evidence is that Adam Smith was dead wrong.  Left to their own devices, the market does not self-monitor or self-regulate.  The free market does not eliminate ruthless and unethical practices, it fosters them - until the industry’s greed drives it over a cliff. And it does nothing to protect the consumer. The common and beloved image of free enterprise is of the bold entrepreneur, the determined inventor, the business that a couple of guys start in their garage, the family farmer, the hopeful young couple who open a restaurant, the older folks who run a neighborhood grocery store. But all these are a disappearing breed. As with gambling, advocates can always point to the tiny majority who strike it rich. But the vast majority fail – crushed by unregulated competition from big agro, big oil, big pharma, big box stores. Without a disinterested party to look over its shoulder, to curtail dishonest practices and unfair competition, to ensure a level playing field - someone whose only interest is protecting the consumer or the environment or the employee, unregulated business will work to grow its bottom line at the expense of its employees, its customers, the environment, the planet's health, and anything else that stands in its way.

And speaking of the environment (without which we will all die), who else but government will protect it? Industry had no incentive to protect it – there’s no profit in it and it can be more expensive to operate in a sustainable way. There didn't use to be environmental regulations – and the air became unhealthy to breathe, the waterways were poisonous, rivers caught fire, the ozone layer was punctured, fisheries collapsed, people in Los Angeles couldn't see across the street, topsoil eroded, toxic and radioactive waste was dumped in poor neighborhoods, asthma skyrocketed, and forests were destroyed. Even when it was clear to everyone that we were being poisoned, industry did nothing to change its practices. Then in 1970, over fierce Republican and industry opposition, the EPA was formed. The Clean Air Act of 1970 and the Clean Water Act of 1972 established standards and gave the government the power to enforce them. The effects are remarkable and immediately obvious to anyone who lived in America before and after the passage of these acts. An independent study of the 1990 amendments to the Clean Air Act alone estimated that during the year 2010 the law cost $27 billion to enforce but saved $110 billion in health care costs, avoided 23,000 premature deaths, 1.8 million illnesses, four million lost work days, and 31 million restricted activity days due to air pollution. So it saves us almost one hundred billion dollars a year, saves tens of thousands of lives, and makes us more productive and healthier. That’s one amendment to one environmental law, which like all environmental regulations, was bitterly opposed by the affected industries.

Which brings us to climate change. Anyone who tells you that human-caused climate change is not a proven fact is either misinformed or lying. There is no debate on the subject among the people who have spent years studying the issues and gathering data. The Intergovernmental Panel on Climate Change, a non-partisan multinational panel made up of the leading scientists and advisors from one hundred and twenty countries, determined that climate change is real, is happening already, is accelerating, and is caused by human activities such as deforestation and the burning of fossil fuels. Five years ago, more than 1,500 of the most senior scientists from sixty-three countries, including more than half of all living Nobel Laureates, signed an unequivocal statement that said “Let there be no doubt about the conclusions of the scientific community: the threat of global warming is very real and action is needed immediately. It is a grave error to believe that we can continue to procrastinate. Scientists do not believe this and no one else should either.” Yet industry and its apologists, primarily Rupert Murdoch and Fox News, continue to assert that the issue is controversial, not proven, and a subject of debate in the scientific community. These are lies. These are the same companies that polluted whole countries and decimated fisheries and forests and bitterly fought government “interference.” Now they would rather have the ecosystem collapse, rising sea levels inundate whole countries, and disrupt weather patterns, rather than allow government (which is after all, us) to regulate their harmful activities. This, to put it mildly, is criminal madness.