Week 6: Regulation and Deregulation

1. Week 6: Regulation and Deregulation UBGA107 Section Notes

2. Review • Corporate Political Strategies • Grassroots organizing • Lobbying and Testimony • Electoral Politics

3. Examples: Grassroots Organizing • Basement Project Grows in Support of Troops • By K.L. VantranAFPS • A grassroots effort, started in Connecticut two years ago to support troops fighting the war on terrorism, has grown into a nonprofit organization that has volunteers in several states. • "It's bigger than I ever thought it would be," said Andi Grant, president and founder of Give2TheTroops, Inc. The wife of a Marine reservist said she started the "very, small basement project" when her husband Brian was deployed for Operation Iraqi Freedom in December 2002. • "I knew my husband would receive many letters and packages from me, but my concern was for other troops who didn't receive mail from family or friends," she said. "I was worried about their morale." • Grant said sending packages helped take her mind off worrying about her husband and also gave her son, Ryan, who was also very worried about his father, something to be involved in. • Grant contacted her son's elementary school, choir and friends. "Everyone was ecstatic to help," she added. "Word spread quickly, and cards and donations for the troops arrived daily at our doorstep. Our list of troops kept growing. The more troops that wrote us, the more packages we sent. In our first month, we sent 129 boxes. The next month, we sent out 232." • To date, Grant said the organization has sent more than 5,000 packages. "We've stopped counting," she added. "That's not important to us."

4. Lobbying and Testimony • Links Between Lobbying, Fundraising, Legislation Laid Out • By Dan Morgan • Washington Post Staff WriterFriday, October 8, 2004; Page A04 • On April 23, 2002, lobbyist Richard Bornemann wrote a memo laying out a long-term plan by which Kansas-based Westar Energy Inc. could gain influence in Washington by "joining the fold, so to speak," of then House Majority Whip Tom DeLay (R-Tex.). Over the next several months, Westar contributed $25,000 to a Texas political fund affiliated with DeLay, and Westar employees donated $33,200 to various congressional campaign committees, including those of DeLay and senior House GOP members in charge of energy legislation. • Westar executives then used their newfound access -- which included an invitation to a golfing and fundraising event at a West Virginia resort -- to press DeLay and his aides to add to a pending energy bill a provision that Westar considered vital to a corporate restructuring plan. The provision was included, despite the objections of officials at the Securities and Exchange Commission.

5. Electoral Politics • Kerry backers assault Nader campaign • AUGUSTA - Supporters of Sen. John F. Kerry launched a take-no-prisoners assault Wednesday against struggling independent presidential candidate Ralph Nader, charging that his attempt to get on the ballot in Maine was illegal and that he had taken thousands of dollars from contributors to the Swift Boat Veterans for Truth political action committee. Meanwhile, officials at Maine Democratic Party headquarters insisted an appeal Wednesday by state party Chairwoman Dorothy Melanson to the Maine Supreme Judicial Court challenging Nader's inclusion on the Maine ballot was not intended to represent the party's position on the issue.

6. Today • Discuss First Case Analysis • Regulation and Deregulation

7. Legal Basis for Regulation • Section 8, Article I of Constitution gives Congress the power “to regulate Commerce … among the several states … “ • Fifth Amendment and Fourteenth Amendment Due Process Clauses limit government power to regulate • Case law: Munn v. Illinois (1877) (juris privati), Nebbia v. New York (1934) (extension to enterprises not affected with a public interest)

8. Due Process • Due process of law is a legal concept that ensures the government will respect all of a person's legal rights instead of just some or most of those legal rights, when the government deprives a person of life, liberty, or property. • The Due Process Clause of the U.S. Constitution is descended from a similar clause of the Magna Carta in which the King of England agreed (in the year 1215 A.D.) that "No Freeman shall be taken, or imprisoned, or be disseised of his Freehold, or liberties, or free Customs, or be outlawed, or exiled, or any otherwise destroyed; nor will we pass upon him, nor condemn him, but by lawful Judgment of his peers, or by the Law of the Land."

9. Procedural Due Process • Procedural due process is essentially based on the concept of procedural fairness. As a bare minimum, it includes an individual's right to be adequately notified of charges or proceedings involving him, and the opportunity to be heard at these proceedings. In criminal cases, fair procedures help to ensure that an accused person will not be subjected to cruel and unusual punishment, which occurs when an innocent person is wrongly convicted.

10. Substantive Due Process • The Supreme Court has held for much of its history that due process must include limits not only on how people are put on trial (procedures), but also limits on what kind of control majorities can have over minorities and individuals (substance). • First application: Infamous Dred Scott case (1856). The exclusion of slavery from a U.S. territory in the Missouri Compromise was an unconstitutional deprivation of property (Negro slaves) without due process (prohibited by the Fifth Amendment), more recently in Roe v. Wade (1973) and Lawrence v. Texas (2003)

11. Justification for Regulation • Market Imperfections • Natural Monopoly • Externalities • Public Goods • Asymmetric Information • Moral Hazard

12. Natural Monopoly • Definition • Why it is a market failure • Possible interventions • Countervailing factors to consider

13. Natural Monopoly • Decreasing marginal costs; economies of scale • Too little is produced at too a high price • Government can intervene to set price • Caveats • Is it really a natural monopoly? • Is there easy entry? • Nonlinear pricing • Competitive bidding • Public Ownership

14. Externalities • Definition • Why is it a market failure? • Possible Interventions • Caveats

15. Externalities • Negative: social cost exceeds private cost • Positive: social benefit exceeds private benefit • Solutions: • Assign property rights • Encourage lower transaction costs (Coase theorem) • Government taxes and subsidies • Government regulation

16. Public Good • Definition • Why is it a market failure? • Possible Interventions

17. Public Good • A good whose consumption does not reduce its availability for others • A public good may not be optimally supplied when exclusion cost is high (free-rider problem) • Mechanism Design • e.g., auctions / bidding

18. Information Asymmetry • Definition • Why is it a market failure • Possible Interventions

19. Information Asymmetry • Akerloff (1970) • Parties to a transaction have different levels of information • Markets may fail because parties unwilling to participate in the market place

20. Some examples: • Market for used cars • Employment market • Airline tickets • George and Sushi (Botond example) • Dating Market • Insurance market

21. Adverse Selection and Moral Hazard • Adverse Selection • Party with information advantage acts on his information to adversely affect the uninformed party • Moral Hazard • Behavior induced when people do not bear the full consequences of their action

22. Regulatory Capture • "Regulatory capture" is the name Gabriel Kolko, a Marxist historian, and others applied to a particular phenomenon: when regulators serve the interests of those they're allegedly regulating in the general public interest.

23. Mechanism of regulatory capture • The basic mechanics of regulatory capture are straightforward. You give more attention to a particular law or agency if you feel that you have something at stake - you're more likely to know about the laws and policies that affect your work, your hobbies, and issues of particular concern to you. And if you're someone important in a business that's about to come under regulation, you have a lot at stake. • Regulators may start off hostile to their subjects, and in some cases this is very much deserved. Libertarians may grouse about, for instance, government imposition of standards for food safety, but even setting Progressive rhetoric aside, the Pure Food and Drug Act came into being in response to real concerns that business was not addressing. Whether it might have addressed them in time is another matter, and one has to be fairly detached to say that people should have waited patiently in the face of diseased meat, food contaminated by offal, bugs, and anything else that fell into the vats, and so on. And freshly regulated businesses often start off hostile to their regulators - also often with good reason, since a lot of regulators start off with a "damn them all, and hang them high" attitude. • Over time, however, regulators and regulatees end up getting to know each other and working together, with or without any real sense of cooperation. Regulatees who provide information and make a show of cooperation earn the apprecation of regulators who find that endless crusade takes its toll in energy, enthusiasm, and efficiency. Regulators find that if they cooperate with their subjects in some areas, they'll get cooperation back on others. • Something else crucial happens, too: the major players in the regulated field find that they can use regulation to keep down competition. • (From fortunewriter.blogspot.com)

24. Regulation vs. Deregulation • Regulation is usually a Democrat's way of controlling monopolies in order to keep them from fleecing the public since they have no competition in a particular market place. Deregulation is usually the Republicans way of allowing business to find its own place in the market. Regrettably, neither works well in every case.

25. Example of Successful Deregulation • In an unusual act, it was a Democrat, President Carter, that deregulated the telephone companies. While there were some growing pains after the break-up of the companies, for the most part it was a successful deregulation. Today's phone service cost about the same but is many times better. At the time of the break-up telephone frequency response standards were on the order of 3 KHz. Today we enjoy a 40 to 50 KHz frequency response. It was this change that allowed the Internet to move from a command and respond mode to today's high-resolution client driven Internet. The competition between long distance companies had dropped the price of this service to next to nothing. • The problem with regulation is that the regulating agency has to guarantee the company a profit. This profit can be just about anything but is usually in the area of 6% on investment. AT&T at its peak was so large that the regulating agencies were at a loss to regulate it. anyway. AT&T generated an empire with half a hundred level of very high paid management. Since their profit was guaranteed anyway, there was less effort in research and development. The game play was to spend money on salaries and the empire. • (Winston Rogers, 2002)

26. Example of Failed Deregulation • The deregulation of the cable and satellite television industry has been a complete flop. Both services have increased their prices without increasing services, at a rate many times that of inflation. The government's decision to take competition out of the market place by allowing the mergers of these companies has been the primary cause of the problem. Today there is, for all practical purposes, only one small dish Satellite Company, where once there were four. They merged, cornered the market, and then pillaged it while our government looked on with a blind eye. • (Winston Rogers, 2002)