REGULATION
Part 1
Definitions
• Regulation is a state imposed limitation on the discretion that
may be exercised by individuals or organizations. It is the
intentional restriction of a subject’s choice of activity by an
entity not directly party to or involved in that activity. Regulation
is backed by the threat of state imposed sanction.
• Regulation is pervasive, touching virtually every moment of our
lives. It is so pervasive that we often take it for granted.
• Regulation may either intentionally or unintentionally affect the
operation of markets. It can make markets either less or more
efficient. It makes markets more efficient when there is a
market failure such as an externality. It makes markets less
efficient when the polity simply prefers some other value than
market efficiency. We shall define efficiency with more precision
at a later point.
Major U.S. Regulatory Agencies
• Consumer Product Safety Commission (CPSC): enforces federal safety
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standards
Environmental Protection Agency (EPA): establishes and enforces pollution
standards
Equal Employment Opportunity Commission (EEOC): administers and
enforces Title VIII or the Civil Rights Act of 1964 (fair employment)
Federal Aviation Administration (FAA): regulates and promotes air
transportation safety, including airports and pilot licensing
Federal Communications Commission (FCC): regulates interstate and
foreign communication by radio, telephone, telegraph, and television
Federal Deposit Insurance Corporation (FDIC): insures bank deposits,
approves mergers, and audits banking practices
Federal Reserve System (the FED): regulates banking; manages the money
supply
• Federal Trade Commission (FTC): ensures free and fair competition and
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protects consumers from unfair or deceptive practices
Food and Drug Administration (FDA): administers federal food purity laws,
drug testing and safety, and cosmetics
National Labor Relations Board (NLRB): prevents or corrects unfair labor
practices by either employers or unions
Nuclear Regulatory Commission (NRC): licenses and regulates non-military
nuclear facilities
Occupational Safety and Health Administration (OSHA): develops and
enforces federal standards and regulations ensuring working conditions
Securities and Exchange Commission (SEC): administers federal laws
concerning the buying and selling of securitiesLink to web.
• This list contains the most important regulatory agencies. However, the list of
all regulatory agencies in the United States is very long. Click here for a more
exhaustive listing.
The Origins of Regulation
• State of nature. No regulation. Movement to government. Regulation.
• Early government virtually always regulated private economic
activities. Thou shalt not steal, covet, bear false witness, etc.
• As observed by Jonathan R. T. Hughes, regulation has existed in the
U.S. since colonial times. Occupational licensing is a form of
regulation that was practiced early on by microeconomies. Health
laws, business licensing, zoning, etc. were practiced from the
beginning of our republic.
• The laws of the several 13 states regulated private economic
activities, but preferred the central government to stay out as much as
possible. Individual freedom and fear of central government. Unless
of course, it benefited states and localities.
• Question: Is the state government a central government?
What is there about the Federal government that arouses such
mistrust and suspicion?
• The Constitution provided for various regulatory activities -
Levy tariffs to regulate trade, regulate currency, and the
regulate commerce clause. Slavery left to the states to
regulate, mostly, until the Civil War.
• Was the abolition of slavery a regulatory act? Was the Civil
War fought over a regulatory issue?
• Regulation involves significant problems of principal-agency.
Government and a bureaucracy are the principal, with the
regulated being the agent. There is therefore the problem of
monitoring under conditions of asymmetrical information,
conflicting interests, shirking, adverse selection, moral hazard,
and competing incentives. The principal achieves cooperation
through monitoring and the threat of sanction. However,
regulation is never perfect in achieving its goals.
• Regulation can be imposed through the judicial system, or
through the bureaucracy. If imposed through the judicial
system, then case law works out the details.
• If through a bureaucracy, then often that bureaucracy is
given rulemaking authority
• Most federal regulations and regulatory mandates are laid
out in the Code of Federal Regulations.
http://www.gpo.gov/fdsys/
• States and localities also have similar processes.
Rulemaking
• Power to make regulations is typically delegated to a regulatory
bureaucracy by Congress.
• Regulation is usually instituted through a process of rulemaking
by a bureaucracy.
• Types of Rulemaking:
• Informal Rulemaking, also referred to as “Notice and Comment”
rulemaking
• Formal Rulemaking, require hearings, complete public record,
• Hybrid Rulemaking, combination of formal and informal procedures
• Negotiated Rulemaking, parties to the rules negotiate over the final
rule
• Informal rulemaking process is the most common:
Steps
• Petition to make a rule, can be initiated by outsiders, the
agency itself, or ordered by Congress
• Notice of proposed rule- Publication of a proposed rule in
the Federal Register http://www.gpo.gov/fdsys/
• Comment Period- Comments on proposed rules can
occur in writing, via email, through hearings.
• Revision of the Rule after comments. Comments need not
affect.
• Publication of the Final Rule in the Federal Register and
Code of Federal Regulation http://www.gpo.gov/fdsys/
• Implementation of the Rule by an Agency
• Adjudication of the Rule through Administrative Courts
• Deference of U.S. Judicial System to Administrative Law
and Courts
• Example of Rule Enforcement Process: EPA inspector
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evaluates whether a company is incompliance with a rule
flowing from the Clean Air Act. Finds violation.
EPA issues a Notice of Violation for a company violating
the Clean Air Act
Company responds in writing and may or may not comply
with rule
If company fails to comply, then takes to administrative
judge who can levy a civil penalty
Adjudication in administrative court
Possible adjudication in civil or criminal courts.
Waves of Regulation
• Historically, there have been two different types of regulation. These
are regulation of competition (maintaining competition in the
economy) and protective regulation (protecting the public).
• Most accounts describe four waves of regulation in U.S. history
• 1887-1890- examples, ICC and Sherman Anti-trust
• 1906-1915- examples, Pure Food and Drug Act, Meat Inspection Act,
Clayton Act, and FTC
• 1933-1938 - examples, Food Drug and Cosmetic Act, Securities and
Exchange ACT, Natural Gas Act, NLRB, Public Utilities Holding
Company Act.
• 1960's- mid-70’s- consumers, the environment, worker safety, etc.
quality of life issues. - Water Quality Act, Clean Air Act, Truth in
Lending Act, National Traffic and Motor Vehicle Safety Act, Motor
Vehicle Pollution Control Act, various drug control laws.
• The substance of the old regulation was primarily
economic, some say often advocated by the very interests
they were intended to regulate. Capture Theory vs. Public
Interest Theory
• The New Regulation is primarily social, involving market
failures, externalities, etc. We will define these later.
• Much of the new regulation is also highly technical and
scientific, beyond the expertise of the Congress.
• The result has been plenary delegation of authority to new
agencies, granted large amounts of discretion in dealing
with regulatory problems.
• The origins of regulation are political, in all waves.
• Although regulation can be justified in terms of efficiency, equity, or
other important political values, it would be wrong to say these things
CAUSE regulation.
• The origins of regulation always involve a coalition of interests
seeking it as a benefit.
• Empirical Observation of these different eras suggests that it usually
occurs on the wings of some sort of reform cycle in American politics.
The Progressive Era, the New Deal, and the Great Society (a move to
greater social equity).
• Close observation of specific cases of regulation suggests also that it
may involve highly salient and visible crisis (e.g., Nader's report on
the Corvair and rear engine fuel tanks spurred NHTSA; air pollution
crises in the 50s and 60s spurred Clean Air Acts; Love Canal and
other such incidents spurred RCRA.
• Policy entrepreneurs may also be important. Ralph Nader with safety
regulation; Edmund Muskie with environmental regulation; Lyndon
Johnson and later Nixon with EEO legislation.
Characteristics of Regulation
• Elected institutions create regulatory institutions, often a
bureaucracy of one sort or another. These elected
institutions, while they support regulation initially, are
dynamic and may not continue to support regulation.
Bureaucracy is a reflection of a static coalition at a single
point in time frozen. It represents that original regulatory
coalition, sometimes against future elected institutions.
For example, Ronald Reagan and the Right.
• Question: On the nature of democracy, should the
popular will of the governed always translate immediately
into public policy in contemporaneous time through our
elected institutions? Or should there be constraints on
democratic responsiveness?
• Regulation usually antagonizes powerful interests: Automakers,
oil and chemical industries, steel manufacturers, electric power
companies, monopolies, etc.
• Has implications for the politics of regulation.
• Regulation may have enormous impacts on both the regulated
and the unregulated. $100 billions spent on air pollution in 70s.
• Closer to a trillion to bail out the thrifts and banks in the 1980s.
• Over 200 billion to clean up Nuclear Waste problems.
• Superfund and hazardous wastes 100 billion and counting.
Who has seen Erin Brockovich? True story. A Civil Action. True
Story.
• Toxic substances dumped have killed tens of thousands of
people in the U.S., and more in other countries.
• Unregulated- asbestos will kill several hundred thousand
workers in the U.S. before the toll is all in. Asbestosis;
mesothelioma.
• Radon gas in homes will kill even more.
• We allow the tobacco industry to kill even more by selling their
poison to the American public? They have deliberately
attempted to addict Americans to their products. Who has seen
The Insider? Russell Crow, another true story.
• Banking regulation failures prior to 2007 cost the economy
huge amounts. 800 billion for bank bailouts. 7.7 trillion in loan
guarantees through the FED
• Regulation often involves making decisions on matters on which there is
imperfect knowledge.
• Example:
• Nuclear regulation: Radioactive emissions are hazardous to human health.
Somatic effects range from 25R no effects, 50R blood changes or minor skin
damage, 100 R loss of hair and vomiting, 500 R death.
• Genetic effects we are unsure of. Yet medical science does not know what a
safe dose of radiation is for the human animal. Currently, workers can be
exposed to 5 REM per year if over a certain age and not a woman in
childbearing years. This is a dose that scientists have great difficulty justifying
since it was determined arbitrarily after WWII by studying survivors from
Hiroshima and Nagasaki.
• Clean air doses based on each of the five criteria pollutants is likewise very
tenuous and arbitrary (SO2, NO2, O3, CO, Particulates)
• There are risks involved for regulators who establish these regulations. The
environment of decision is one of great uncertainty.
• Regulation may involve multiple agencies, each of which
claim to represent the public and each with different
interests. Examples: EPA and the Energy Department.
OSHA in the Department of Labor and the Commerce
department, Department of Energy and the Nuclear
Regulatory Commission, Defense Department and the
NRC and EPA. At the State and local levels: the city of
Houston and the State Water Pollution Authority.
• May involve delay in addressing important problems.
Example: Congress passed hazardous waste legislation
in 1975 (RCRA). It was not until 1980, that hazardous
waste regulation got off the ground, and then it had to
endure the early Reagan administration. Why? Uncertain
technology, risks for regulators, costs for powerful
interests, vague legislation granting much discretion.
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• Regulatory bureaucracies operate within the context of
constraints.
• Mission constraints-Must abide by the letter of authorizing
legislation.
• Political constraints-shelter the core technology and assure
resources.
• Legal constraints-Administrative Procedure Act, the law’s mission
statement, the law’s requirements.
• Technical constraints- May not know how to solve problems.
• The capacity of a regulatory agency to be effective
depends on its resources, which include:
• Budgets and Personnel
• Technology
• Democratic support from representative institutions
• Clientele support
• Internal constituency- the agency staff should be professional,
technically competent, develop routines, have esprit.
• Issue complexity.
• Salience to the public or other interests.
• Tractability of the problem. (AIDS versus automatic weapons).
Why Delegate Regulation to a
Bureaucracy?
• 1) Greater expertise in bureaucracy.
• 2) Time constraints and congressional overload
• 3) Continuous contact by bureaucracy with problem; intermittent
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contact in legislative
4) Intentional desire to depoliticize an issue. Rational decisions may
not occur in the charged environment of ideological politics.
5) Issue uncertainty- for clarification and refinement of a broad
mandate in an incremental fashion.
6) Changing conditions likely to occur, hence vague mandate.
Unexpected contingencies
7) Desire of bureaucrats for jurisdiction flexibility to enhance rational
action.
8) Deadlock and the need to resolve collective action dilemmas.
9) Need for uniformity and fairness through time is satisfied by the
institutional memory Congress may not possess.
10) Need for quick action and avoidance of lengthy delays.
Lowi’s Typology
• Lowi's Typology- Lowi classifies policies as to the
coerciveness of the policy to those to whom it is applied.
The theme here is that policy determines politics, not vice
versa.
Coercion
Direct
Indirect
Remote or Missing
Distributive
Constituent
Immediate
Regulation
Redistributive
• Regulation- Coercion is directly applied and immediate. It
tends to be abrasive to the clientele. Hence politics is likely to
be conflictual, both during legitimation and after during implementation. Initial regulation is accomplished only after input
from macropolitical actors. Support may decline in later years.
• Public Interest theory-Public interest theory argues that most
regulation occurs for the benefit of the mass public. The idea is
that a need or market abuse percolates up to political
institutions, resulting in a regulatory enactment.
• Capture theory- Capture theory suggests that once regulation
is in place, the regulating entities become captured by the
regulated.
• In economics, the Law and Economics school of thought has
argued and showed empirically that regulation often serves the
interests of the regulated. Why? Regulation is in their selfinterest and involves “rent-seeking”. We shall define “rent
seeking” later.
• An alternative way of viewing regulatory policy is as a
redistributive/distributive matter, especially when quiescence is
observed and maintained. Regulators may be captured to protect the
regulated. Examples, Public Utility Regulation in earlier times
(Gabriel Kolko a Marxist and George Stigler a Libertarian agree on
this). Regulation may be a subsidy which allows regulated interests
to restrict market access and or redistribute wealth.
• Decisions about protective regulation are not subsystem decisions.
They are decisions involving conflict and attracting the involvement of
the larger political forces including the whole congress, the president
and higher officials of the executive, as well as the lower levels.
• High visibility. Coalitions of groups, unlike those involving distributive
decisions are highly unstable and subject to change and realignments
dependent on the stakes and the issues. Politics is more conflictual
than in distributive policy. Due to disagreements at the lower levels
policy formulation and legitimation is often transferred up the chain to
higher levels (that is because subcommittees are unable to resolve
and because of high visibility, the full Congress is called on to decide).
Moreover, the influence of the subgovernment over the outcomes
may be minimal or at best altered by the decisions of others in the
higher arena.
• Distributive policies- These types of policies distribute benefits
to elements of society directly. No one is coerced immediately.
In fact, coercion is missing. Relations are therefore
consensual.
• Examples: subsidies, price supports, veterans benefits,
highway funding, farm subsidies, Agricultureal Research
Service, National Institute of Health, benefits for the disabled,
corps of engineers, water projects, sewer grants, NASA, etc.
• Redistributive policy- costs are dispersed, benefits are
concentrated. Coercion is immediate and penalties are
apparent; the policy is applied indirectly throught the environment.
• Examples: Income redistribution, social security, welfare,
Medicare, food stamps, tax reform, etc.
• The politics of redistribution tends to be ideological invoking conflict and an
unwillingness to compromise on ends or means. It will be prolonged requiring
a long time for legitimation to occur.
• Policy making cannot be restricted to the subsystem.
• Coalitions are stable lining up along ideological lines and tend to be stable
through time refusing to crossover or compromise.
• Issues tend to be visible and salient to large numbers of people. The public
usually cares and a lot.
• The outputs of legitimation tend to be bargains designed to give life to the
policy rather than to solve problems. The policy process must build on this
base in increments. Even them progress toward problem resolution is slow
and difficult because of the nature of the problem.
• It takes extraordinary conditions to secure passage and initialization of such
legislation. e.g., election landslides, party realignments, crisis, violence.
• Often there is weak clientele support after legitimation. Support tends to be
transitory and declining.
• Constituent policies• Coercion is remote or absent and policy is applied
indirectly to the environment. Low levels of support will
often exist for the policy due to the indirectness of
benefits. Little opposition will exist due to small costs to
the public.
• Examples: The National Parks Service, the Forest
Service, foreign affairs bureaus, Departments of the Army
and Navy, Defense, GAO, OPM, Treasury, Secret
Service. Service intensive activities fall into this grouping,
especially those agencies that serve other entities of
government rather than the public directly.