The Birth, Death and Resurrection of Regulation

Steven Hayward

June 1, 1999

A funny thing has happened on the way to the triumphalist, post-Cold War world of free market capitalism: we have more government regulation than ever. The pages of the Federal Register, which lists all federal regulations, was a mere 47,000 pages at the end of the Reagan years, but stands today at more than 70,000 pages. What’s going on?

One way to begin to get at the heart of the matter is to ponder the current controversy over urban sprawl. The “smart growth” movement is proposing that we need to have long-range comprehensive land use planning and regulation to solve the perceived problems of sprawl. Now, on the surface this seems eminently plausible. Why should land use regulation be any more conceptually or practically difficult than trucking regulation, or airline regulation, or energy regulation, or telecommunications regulation, or banking regulation, or…oh, wait a minute–we’re deregulating all these things just now, aren’t we? We’ve gone so far as to abolish the Interstate Commerce Commission, the oldest regulatory body of the federal government, and we are in the process of deregulating the marketplace for electricity, which was unthinkable even twenty years ago. (By the way, the one recent exception you can point to–the re-regulation of cable TV–is almost
certainly the exception that proves the
rule about deregulation. Congress decided to re-regulate cable TV back in 1992 because of perceived abuses within the monopoly franchise system. So Congress re-regulated, and then was shocked–shocked–to find cable TV rates went up under the new regulations in many places. Which proves, to paraphrase Shakespeare, that there are more things happening in the marketplace, my dear Horatio, than are dreamt of in your regulations.)

Why is this deregulation trend happening? And how do we explain the seeming anomaly of new intensive regulation of the marketplace for land, while we are deregulating the markets for so many other basic resources and forms of commerce? Finding the answer to these questions requires understanding how the character of regulation has changed in recent decades.

Total Regulation

Few people have explored this question with the probity or originality of John Adams Wettergreen, a scholar who passed away ten years ago this month, who spent several years working out an account of the evolution of government regulation in America. Wettergreen’s unfinished manuscript, tentatively titled Total Regulation, will probably never be published, but it remains a treasure to those few of us who were privileged enough to have seen the work-in-progress. There is no one capable of carrying on his work, chiefly because his analysis turned on a number of careful distinctions that are profound but not easy to grasp.

What made his approach so unique and important is that while most analyses of regulation take an economic approach, Wettergreen worked out a strictly political analysis. Instead of intricate cost-benefit calculations, deadweight loss estimates, or clever public choice theories of whose self-interest regulation serves, Wettergreen thought that the public interest rhetoric that politicians offered to justify regulation should be taken seriously, that beneath the routine bloviating on the floor of the House and Senate, there could be discerned a serious teaching about our constitutional order as it confronted the problems of a modern industrial economy that were never anticipated by the Founders. Moreover, Wettergreen discerned a fundamental change in the nature of regulation starting in the 1970s–an ominous change that was largely unappreciated both then and now.

Regulation in America

National regulation first came to be a significant aspect of American government in the Progressive Era. The standard account of the origin of regulation is that the rise of concentrated economic power in the form of the modern corporation
(i.e., the “trusts”) required the countervailing power of government to keep big business from being too powerful. This may be true, but is too facile. It was Richard Hofstadter’s contribution, in The Age of Reform, to offer a social explanation for the demand for government regulation that began in the Progressive Era, an explanation he called middle class “status anxiety.” The rise of the big corporation had a large social as well as economic effect on local communities, Hofstadter thought. Local community leaders and small businesses, such as the mayor, the dry goods store proprietor, the lawyer, and the banker, were suddenly eclipsed by the huge factory, owned and run by out-of-towners.

The specter that all towns might become “company towns” fueled concern and anxiety about the change the new, large corporations and trusts were bringing to middle class America. While this concern did not make sense on economic grounds (as subsequent scholarship and economic theory has proven), it did make sense from a social point of view: very large corporate enterprises would seem to upset the middle class character of American democracy; modern large scale industry seemed a plausible threat to the principle of equality at the heart of American idea of natural right. At the most extreme, it was feared that modern industry’s conquest of nature might also undermine the traditional moral restraints on commerce. The concentration of wealth, it was thought, needed to be broken up through antitrust–just as the concentration of government power needed to be broken up through the constitutional separation of powers. (Commodore Vanderbilt confirmed this fear with his
famous rejoinder to the question about the public interest in the railroads: “The public be damned.”)

Wettergreen saw an important political twist to this phenomenon. The original complaint about the first giant national industry–the railroads–wasn’t that prices were too high or service poor, but that prices were unequal, which was indeed the case. It wasn’t fair, some Democratic reformers said, for one person to pay a different price than another person
for the same level of service. And inequality in the rate structure undermined a key goal of liberal
individualism: competition. Republicans, then as now the more economically literate party, argued that differential rates served the purposes of encouraging competition in
many cases, and that a simple rule of uniformity of rates would retard competition and economic development. The irresolvable partisan disagreement led to the solution that an expert regulatory agency should be established to regulate railroad rates in the interest of fairness, equality, and competition. The
Interstate Commerce Commission was born.

Congress understood that it was delegating some of its own authority in setting up the ICC as an independent regulatory body, and that it was crossing the Rubicon constitutionally. Hence the ICC’s power was sharply limited in the early days: it could only disapprove rates the railroads set, but could not set rates itself. And although the ICC was housed in the executive branch within the Department of the Interior, Congress understood that it was answerable to the legislative branch rather than the President. Congress would make sure of this by exercising its budget authority over the ICC. And to repeat: the ICC’s charter was highly specific to a single industry and a narrow purpose: mediate the conflicting views of what constituted fairness and competition in the rate structure. Its independence was, in other words, closely

This model was followed more or less for subsequent federal independent regulatory bodies up until about 1970: agencies were limited to a single industry and with a narrow mandate as to its purposes (i.e., the Securities and Exchange Commission for Wall Street, or the Federal Communications Commission). The one early departure from this model, the Federal Trade Commission, was the exception that proves the rule. The FTC was created in 1916 with a broad but vague mandate to regulate “unfair methods of competition.” Congress, significantly, did not define what unfair methods of competition were, because there was a sharp division of opinion, which broke mostly along partisan lines again, about what remedy should be applied to “monopolies. The lack of a clear and specific bipartisan mandate quickly undermined the FTC’s practical scope and moral authority. It was internally divided, increasingly distrusted by all three branches of government, all of whom found this
vagueness and potentially irresponsible independence to be politically intolerable, and thus the FTC became a nonentity until the regulatory revolution of the 1970s.

Above all it must be understood that regulation emerged as an answer to the rapid change and modernization that began taking place in the late 19th century. But now, at the end of the 20th century, we are deregulating many of the same markets that we regulated decades ago, even though many of them, such as telecommunications, are still changing at a dizzying pace. At the same time, we are increasing regulation of other aspects of life, such as the environment. Why are we abandoning the chief means we have used for 100 years to cope with modernization and change in some areas, while we are increasing government regulation in other areas? What explains this paradox?

Broader Regulation in the Era of Deregulation

As the researches of free market scholars gained headway in the 1970s, it became increasingly evident that unregulated markets produced more fair competition and better prices for consumers. The “fairness and equality” rationale for regulation had eroded to the point that even Ted Kennedy was moved to lead the way for trucking deregulation.
At the same time, a whole new style of regulation began that was wholly different from the earlier kind of regulation, and it is this new kind of regulation that is growing. These new regulatory agencies–the Environmental Protection Agency is the best example–are allowed to operate across the economy on any and all industries, and have broad, unspecific mandates that allow them to make up their own policy goals. “The environment,” for example, has no legal definition that the EPA is bound to follow, and there are no statutory standards by which Congress or citizens may judge whether the EPA is doing its job well or badly. And so the EPA and other similar independent regulatory agencies with broad mandates are free to promulgate policies and regulations that suite their protean view about how to improve our world. In other words, a form of independent regulation that was intolerable in the form of the FTC in an earlier age is now the general
rule of American government. Wettergreen called it “total regulation,” because it has no practical limit. It represents an abrogation by Congress of its duty to govern and take responsibility, and it has numerous subtle debilitating effects on citizens, who find accountability and responsibility in government increasingly opaque.

All of which brings us full circle to the example with which we began: land use regulation. The public clamor for new land use regulation to cure the evils of “sprawl” is not akin to the older kind of regulation that was directed at supposed “market failure” that stifled competition or delivered a raw deal to consumers. It is not “market failure” in land use that has the public exercised, but precisely market performance—rapid population and economic growth is rapidly transforming the landscape and day-to-day life of our cities and suburbs. It is creating a social unease that is very close to Hofstadter’s status anxiety” that produced the middle class political support for Progressive Era regulation. People are understandably upset that the character of their towns and neighborhoods seems up for grabs because of rapid growth. Under a regime of total regulation,” however, what we will end up with is not any modest sets of rules designed to
bring some sequential order to the
market for land development, but rather a set of new independent agencies, often “regional planning agencies,” that will seek to impose a wholly new vision of how we should live. Such regulation will use vague mandates to try to force us out of our cars and into higher density neighborhoods. Local city councils and county commissions will never vote explicitly for these policy goals, but will instead leave them to the discretion of the expert regional agency.

No wonder Vice President Gore has attached himself like a limpet to this issue–it represents a way of extending the federal method of total regulation to the local level. And if it succeeds, the regulatory revolution will be nearly complete.

Steven Hayward is a senior fellow with the Pacific Research Institute, and an Adjunct Fellow at the Ashbrook Center.