Chapter 10
Regulating
Business
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
The Federal Aviation Administration
o Every commercial suborbital flight or reentry of a
spacecraft from orbit must be licensed by the Federal
Aviation Administration (FAA)
o The FAA is one of 14 regulatory agencies, boards,
and offices in the huge regulatory conglomerate
known as the Department of Transportation
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The Federal Aviation Administration
o The FAA enforces codified license requirements
covering hundreds of pages
o Before issuing a launch license the FAA makes
elaborate use of statistical models
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Reasons for Government Regulation of
Business
o Two circumstances justify regulation of the private
sector:
o When flaws appear in the market that lead to
undesirable consequences
o When sufficient social or political reasons for
regulation exist
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Flaws in the Market
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Social and Political Reasons for Regulation
Socially desirable goods and services
Socially desirable production methods
Resolution of national and global
problems
Regulation to benefit special interests
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Figure 10.2 - Historical Waves of
Government Regulation of Business
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Waves of Growth: Wave 1
o During this period, regulations were predominantly
promotional for business
o Early offices that performed regulatory functions
were the Patent and Trademark Office (1836), the
Copyright Office (1870), and the Bureau of fisheries
(1871), and the Comptroller of the Currency (1863)
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Waves of Growth: Wave 2
o In 1887 Congress built the prototype of the modern
federal regulatory authority when it created the
Interstate Commerce Commission (ICC) to regulate
railroads
o Independent regulatory commission: A regulatory
agency run by a small group of commissioners
independent of political control
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Waves of Growth: Wave 2
o In 1914 the Federal Trade Commission (FTC) was
established in response to the large, dominant trusts in
many industries
o By the early 1930s there were seven more new
federal agencies and commissions regulating business
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Waves of Growth: Wave 3
o To deal with the economic catastrophe of the Great
Depression, President Roosevelt proposed the New
Deal a series of programs to bring “Relief, Recovery,
and Reform”
o The new laws were quickly challenged in the courts
and the Supreme Court, in a unanimous decision,
declared the National Industrial Recovery Act to be
unconstitutional
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Waves of Growth: Wave 3
o Outraged and frustrated, Roosevelt sent Congress a
plan to change the Court by appointing one new
justice for every justice over age 70 who didn’t retire
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Waves of Growth: Wave 4
o In the late 1960s and early 1970s, a groundswell of
interest in improving the quality of life created the
fourth wave of government regulation
o The result was a sudden burst of new controls
designed to achieve broad social objectives
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Waves of Growth: Wave 4
o Several new independent commission were created
including the Equal Employment Opportunity
Commission (1964), the Consumer Product Safety
Commission (1972), and the Nuclear Regulatory
Commission (1974)
o Most of the new authorities went to executive agency
o Executive agency: A regulatory agency in the
executive branch run by a single administrator
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Waves of Growth: Wave 4
o The voluminous buildup of regulations to achieve
social objectives existed simultaneously with a
deregulation movement
o Deregulation: The removal or substantial reduction of
the body of regulation covering an industry
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Waves of Growth: Wave 5
o At the end of the fourth wave the idea that regulation
had grown into excess and should be trimmed back
was deeply entrenched
o Two events in the next decade brought on a new
surge of activity
o The terrorist attacks in 2001 led to creation of a
mammoth regulator for protecting American security
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Waves of Growth: Wave 5
o A crisis in financial markets led to federal intervention
in the economy on a scale not seen since the Roosevelt
administration in the 1930s
o The Federal Reserve Board and the Department of the
Treasury intervened to prevent panic and system
collapse
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Waves of Growth: Wave 5
o Troubled Asset Relief Program (TARP): A program
that gave federal regulators power to exchange funds
for an ownership interest in banks and corporations
o In return for its support, the government imposed
conditions
o To administer the TARP program Congress created a
new agency, the Office of Financial Stability (OFS),
in the Treasury Department
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War Blips
o During the civil war there was limited control over
production and prices
o The North created the National Banking System to
help finance the war
o World War I brought substantial controls over
industry, but ended before the controls began to bit
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War Blips
o The federal government exercised complete control
over the economy during World War II and to a lesser
but substantial extent during the Korean War
o After both wars, the wartime controls were abandoned
o No comparable increase in regulation came during the
Vietnam War or the two Gulf wars
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How Regulations are Made
o Regulation: Government activity that guides the
behavior of citizens, groups, and corporations to
reach economic or social goals
o Federal regulation originates in an act of Congress
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How Regulations are Made
o When a bill is passed by both houses of Congress and
signed by the president its provisions become law
o It is then the responsibility of the appropriate
regulatory agency to create the specific regulations
(rules) needed to implement the provisions of the bill
(rule making)
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Figure 10.3 – The Regulatory Process
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Rulemaking
o Regulatory agencies promulgate rules that have the
force of law
o Rule: A decree issued by an agency to implement a
law passed by Congress
o Rules are created in a complex, formal rulemaking
process
o The process is designed to protect the public from
arbitrary and capricious acts of government
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Rulemaking
o When an agency decides to promulgate a rule it goes
through research, deliberation, and consultation with
affected parties
o When a draft is ready, the agency publishes it as a
proposed rule in the Federal Register
o Federal Register: A daily government publication
containing proposed rules, final rules, notices of public
meetings by regulatory agencies, and presidential
executive orders
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Rulemaking
o Pages in the Federal Register are a crude gauge of
regulatory activity
o After publication in the Federal Register final
regulations are codified in the Code of Federal
Regulations
o Code of Federal Regulations: A reference work that
compiles regulations of all agencies in a series of
volumes
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Figure 10.4 - Big Rule Makers:
1990–2010
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Figure 10.5 - Annual Page Count in the
Federal Register: 1936–2010
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Rulemaking
o Even if corporations followed every regulation as it
appeared in the Federal Register and the Code of
Federal Regulations, full compliance would still elude
them
o In addition to regulations, agencies issue guidance in
documents
o Guidance: Information in nonbinding documents
intended to clarify official regulations
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Presidential Oversight
o Presidents have sought control over regulatory
agencies, but met with limited success
o Presidents have used many administrative devices to
control and slow regulation
o Executive orders
o Moratoriums
o Appointments of obliging agency administrators
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Presidential Oversight
o Budget cutting
o Central review of regulations in the White House
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Congressional Oversight
o Congress approves presidential nominees as head
regulators and makes appropriations to agencies
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Challenges in the Courts
o Formal conflicts are resolved in two ways:
o The Administrative Procedure Act requires each
agency to set up an adjudication process leading to
trial before an administrative law judge
o If the judge’s decision fails to resolve the dispute,
federal courts can review agency actions
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Challenges in the Courts
o Chevron doctrine: The general rule that federal
courts should defer to agency rules that are based on
reasonable interpretations of ambiguous statutes
o Congress has given federal courts the power to hold
unlawful agency actions that are arbitrary, capricious,
unconstitutional, in excess of agency jurisdiction, or
unsupported by evidence
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The Regulatory Burden
o The cost of regulation can be characterized in
following ways:
o Total dollar cost
o The cost of administering the regulatory process
o Other costs of regulation are large but are indirect and
much more difficult to quantify
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Figure 10.6 - Total Administrative Costs of
Regulation: 1960–2010
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Figure 10.7 - If Agencies Were Planets
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Benefits of Government Regulation
o Regulation has:
o Reduced discrimination
o Improved the environment
o Freed competition
o Reduced corruption
o Banned dangerous products
o Strengthened the banking system
o Cut workplace fatalities helped the elderly
o Controlled communicable diseases
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Regulation in Other Nations
o The World Bank conducted a study to catalog,
classify, compare, and evaluate regulations in every
nation
o Four basic findings were:
o Regulation varies widely around the world
o Poor countries regulate business the most
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Regulation in Other Nations
o Rich countries regulate business in a consistent
manner while poor countries do not
o Developed countries engage in continuous regulatory
reform to improve the business environment
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Figure 10.8 - Ease of Doing Business
Rankings
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Principles of Good Regulation
o
o
o
o
o
Simplify and deregulate in competitive markets
Focus on enhancing property rights
Expand the use of technology
Reduce court involvement in business matters
Make reform a continuous process
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Concluding Observations
o There have been ups and downs in the trend of
regulations, but the basic direction has been up, with
respect to both total volume and complexity
o Successive efforts of presidents have not succeeded in
slowing the expansion of regulation, but have
produced needed reforms
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Concluding Observations
o The cost of federal regulations is huge, but the cost is
offset in significant degree by the many benefits of
regulation to society as a whole, individuals,
companies, and industries
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