Editorial
Has Deregulation Failed?
by Fred E. Foldvary, Senior EditorAccording to Consumer Reports, deregulation has failed, and the affected industries need to be reregulated. They say regulations protect consumers. Really?
As I wrote in my Dictionary of Free-Market Economics, "regulation" consists of "laws and administrative rules that persons and enterprises are legally obliged to follow. These can be market-enhancing or market-hampering, but when economists and business persons speak of regulations, they typically mean excessive, market-hampering ones. Regulation is a substitute for taxation, since government can mandate an activity rather than taxing" to provide the activity. Often "regulation" more narrowly means a restriction on the entry of firms into an industry, so that when it is deregulated, firms may enter and increase competition.
Wayne Crews has estimated the cost of regulations in the U.S.A. at about $7000 per household per year. So even when a regulation provides a social benefit, one also has to account for the social cost.
Comes now the July 2002 Consumer Reports saying that deregulation has harmed consumers. In their web site, they call it "dethroning the consumer." "Why consumers suffer most in a free market." (Go to http://www.google.com and search for "Consumer Reports July 2002").
The report claims that "free markets have gone bad," implying that the affected industries are in a free market. But even after "deregulation," these industries are being taxed and restricted. "Freedom" is an absence of arbitrary restrictions, imposed costs, or subsidies. In a truly free market, there is no restriction, imposed cost, or arbitrary subsidy on peaceful and honest enterprise. The U.S.A. has never in its history had a truly free market.
The article then claims that deregulation has led to multibillion-dollar bailouts. But a bailout implies the absence of a pure market. In a truly free market, a business that fails goes bankrupt, its assets are distributed to the creditors, and the firm ceases to exist. A bailout is a subsidy, contrary to a free market.
The article reports that cable-television costs rose after "deregulation." But as economist Thomas DiLorenzo states, in the U.S.A., cable television is a government-protected monopoly:
"In most cities, the local governments grant a single cable television company a monopoly franchise. Monopoly prices are charged, and the government shares in the 'loot' by taxing a portion of the monopoly profits. Millions of dollars are typically spent by cable companies to bribe, implicitly and explicitly, legally and illegally, city politicians into granting their company the monopoly franchise. The list of examples of how industrial policy constitutes a conspiracy by business and government against the public is almost endless."
According to Consumer Reports, subsidies and local monopolies are part of the free market. What else is there in a free market? "Hidden charges," "loopholes," "unauthorized switching of service." In other words, force and fraud. For this consumer-protecting journal, in a free market, anything goes: cheating, stealing, fraud, deception, lies! No wonder the market stinks!
But, contrary to what Consumer Reports says, theft is not part of a pure market. The pure free market consists of voluntary action. Force and fraud violate property rights and therefore are violations of free-market ethics. If government allows this, then government is imposing costs and providing subsidies. This is no free market. This is command-and control intervention. This is, yes, regulation.
Now we get to the "massive failure" of deregulated banking. Consumer Reports states that in the early 1980s when Congress deregulated banking, it "more than doubled federal deposit-insurance coverage, shifting more risk of bank failure to government." As a result, 10 years later, there was "the biggest banking crisis since the Great Depression." But was this increase in federal deposit insurance to $100,000 per account "deregulation"? Just the opposite! This massive subsidy was a huge increase in government intervention. Shifting risk to the government is the opposite of a move to a free market.
Then there is electricity, where "Californians" have allegedly experienced horrible "market forces." When the force was with us in California, it was government force. In the restructured electricity industry, government in California set the consumer prices, prevented electricity firms from entering into long-term contracts, and hampered the building of power plants. When one aspect of industry is deregulated and other aspects get more intervention, the totality is not true deregulation. The article does admit that deregulation has "not honestly happened yet." Indeed, so why speak of "the fickle nature of market forces"?
Honestly, I can't figure out this Consumer Reports story. In every case cited on the failure of deregulation, there is an increase in subsidies, a government-protected monopoly, greater government controls, or a failure to criminalize and punish fraud. How can they call this "deregulation" and "free market"? Maybe someone here can explain it to me, because, frankly, I'm puzzled. The article seems like it came from 1984 where freedom means slavery and market means government. If an economist was consulted, he must have gotten his degree in Moscow prior to 1990. It's a shame that many readers will be misled by this confused "consumer" report.
Copyright 2002 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.
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