Regulatory Change Then and Now

• Pages: 47-64

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CHAPTER IV

REGULATORY CHANGE THEN AND NOW

Sam Peltzman



We have come through what is sometimes called an Age of

Deregulation. It began in the last quarter of the last century and lasted

until the current economic crisis. As this is written, in early 2009, it

remains unclear whether reports of the demise of that Age are premature

or what alternatives may be in the offing. In this paper , I want to review

some forces that contributed to regulatory change in the recent era and

then to assess the implications of this history for the present and future.

One message will be to caution readers about simple characterizations of

the history and easily drawn implications from it.

To anyone living through this era as an adult, the change in the terms

of discourse about state intervention in the economy has been

remarkable. Consider the conversation in the public square of 1970 or

so. Words like privatization or deregulation were not heard. The serious

discussion was about how far to push state intervention. In the United

States of that time, a wave of path-breaking ― social regulation‖—of the

environment, the work place, automobiles and other consumer products,

pharmaceuticals, etc.—was about to crest. ―Macro‖ policy was about

―fine tuning‖ the federal budget to tame the business cycle. Antitrust

law, which was ostensibly pro-market, had become a rule-bound

regulatory system that reflected a pervasive distrust of market forces.

Market shares in the single digits became actionable.

Outside the United States, serious parties of the left ran on platforms

of pervasive intervention in the economy, including nationalization of

basic industries. When they won, as in France in 1981 and the United

Kingdom previously, they implemented those policies. Key prices, like

wages, were regulated or subject to political negotiation. Competition

policy was essentially nonexistent. The interventionist policies then in

vogue in the developed world were exported to the less-developed

countries by our elite educational institutions and by the advice and

support emanating from international institutions.

 University of Chicago.

48 Competition as Public Policy

Of course, much of this changed in the ensuing decades. That

change is sometimes linked to the advent of Thatcher and Reagan or the

fall of the Berlin Wall, but it was in motion before 1980 and well along

by 1989. No important left wing party since Mitterand‘s election has

been elected on a platform of comprehensive state intervention. These

parties may call them themselves Socialist, but they have won by

renouncing socialism in practice. Institutional and educational elites,

like the World Bank or the Harvard Economics Department, are today

more likely to be criticized for their pro-market stubbornness than for

their interventionism. The current crisis has provoked discussion of a

sunset of this deregulatory age, and I will take up that possibility later.

My main goal here is to inform any such discussion with a closer

look at some of the changes in regulation of the last 30 or so years. What

economic forces were driving these changes? What lessons can be

drawn from the interplay of these forces for the present crisis? The

answers that will emerge are more nuanced than simple characterizations

permit.

A. Forces Producing Recent Regulatory Change

I do not want to review the micro detail of the changes. Nor will I

try to give a comprehensive view of the political economy of regulatory

change. Instead, I want to focus on two important forces that shaped

much of the recent change. For convenience, I will label them

―obsolescence‖ and ―crisis,‖ with the caveat that they are often related

rather than distinct categories. I begin with the former, whose

implications are simplest to understand.

Regulation becomes obsolete when market forces or technological

change drastically increase the cost of enforcing the previous

equilibrium. The banking industry provides a convenient example. It

comes into the 1970s with regulatory restrictions that have since

vanished. Around 1970, the industry is balkanized by state level

branching restrictions that range from none (California) to complete

(Illinois). Interstate branching is prohibited. Interest rates on deposits

are regulated nationally by the Federal Reserve. Entry is tightly

regulated by the Federal Deposit Insurance Commission (FDIC). Over

time, the effectiveness of these restrictions became progressively

undermined by market developments, some induced by the restrictions

themselves. The interest rate restrictions, for example, begat the

Eurodollar market, money market funds, and the growth of less-regulated

intermediaries like savings and loan associations. The geographical