Chapte

10

Federal Regulation of
Business

This chapter discusses the reasons for government regulation

of business, the historical and current patterns of federal
regulation, the scope of federal regulations, the attempts by
many presidents to stem the tide of advancing regulation, the
legal basis for regulations, how regulations are made, the
overall costs and benefits of regulations, what governments
around the world are doing in regulating business, and the
likelihood that regulation will continue to expand.

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Lockheed Martin Skunk Works

Opening Case
Skunk Works was a successful facility that
had virtual freedom to produce airplanes
without close supervision by the Department
of Defense or Lockheed management.
New social regulations in 1975 severely
restricted previous freedoms, affecting
creativity and quality.
Material purchasing requirements
EEOC requirements
OSHA
The
story ofrequirements
the Skunk Works illustrates a serious problem with
intrusive regulations that complicate business activity.
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Underlying Reasons for Government

Regulation in the Private Sector
Government regulation of the private
sector is justified under two
circumstances:
When flaws appear in the marketplace that
product undesirable consequences.
When adequate social, political, and other
reasons for government regulations exist.

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Flaws in the Market

Natural monopoly
Destructive competition
Externalities
Inadequate information

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Social, Political, and

Other Reasons for Regulation
Socially desirable goods and services
Protecting individual rights and privacy
Resolution of national and global
problems
Regulation to benefit social groups

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Historical Patterns of Federal

Regulation of Business
First wave During this period, regulations were
predominantly promotional for business.
Second wave The era of regulation was
dominated by public demands for government to
regulate big business, and the Supreme Court
gave the federal government new power to act.
Third wave The burst of activity in this wave
was the result of many New Deal laws designed to
deal with the ravages of the Great Depression of
the 1930s.
Fourth wave Intent to improve the quality of
life resulted in new controls that deeply involved
government.
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War Blips
Civil War there was limited control over
production and prices, but the North created the
National Banking System to help finance the war.
World War I introduction of substantial
controls over industry, but the war ended before
the controls began to bite.
World War II and to a lesser extent the Korean
War wartime controls were completely
abandoned.
Vietnam War and wars in the Middle East no
comparable increase in regulation.
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Attempts to Stem the Tide

1949 Hoover Commission established
19761980 Carter administration deregulated a
number of industries
19801988 President Reagan named V.P. George H.W.
Bush to head a new Task Force on Regulatory Relief
19881992 George H.W. Bush administration had
mixed actions
1993 President Clinton issued Executive Order 12866,
Regulatory Planning and Review
2001 President George W. Bush rescinded many orders
signed by President Clinton and issued The Presidents
Management Agenda
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The Legal Basis of Government

Regulation in Business
The fundamental authority for federal regulation of
business is the Constitution of the United States.
Article 1, Section 8 provides Congress powers to:

Regulate commerce
Provide for the general welfare of the Unites States
Levy and collect taxes
Provide for the common defense
Borrow money
Establish bankruptcy laws
Promote science and useful arts

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Supreme Court Interpretations of

Constitutional Power Early History
In 1819 the Supreme Court gave business a strong
protective shield against arbitrary state power.
In other cases, the Supreme Court firmly
established the legal foundation for the
supremacy of federal law over state law.
The Court expanded federal legal power to control
interstate commerce.
The Supreme Court ruled that the state had a
right to exercise its power over private property
unless it said in plain words that it intended to
surrender its power.
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Milestone Decisions: Post-Civil War

to 1911
The progressive movement led to state laws regulating
railroads after the Civil War, which the Supreme Court
said were constitutional.
The Court upheld the idea that a corporation is a person
and that therefore the benefits of the Fourteenth
Amendment extend to it.
Efforts by federal, state, and local governments to
introduce social reforms, such as permitting workers to
strike, met with repeated rebuffs by the Court.
Generally, the Court permitted state regulations where
they were believed to promote morals, peace, and good
order, or health and safety of the public.
Antitrust rulings were not promising for those interested
in breaking up monopolies.
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The Court Invalidates New

Deal Laws
When President Franklin Roosevelt was elected in
1932, he faced the most devastating economic
depression the country had ever suffered.
To deal with this economic catastrophe, President
Roosevelts New Deal broke new federal
regulatory ground.
The new laws were quickly challenged in the
courts and received harsh treatment.
The Schechter case struck down the National
Industrial Recovery Act when the Supreme Court, in
a unanimous decision, declared it to be
unconstitutional.
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Attack and Reversal

Outraged and frustrated, Roosevelt sent Congress a
plan to change the Court by appointing one new
justice for every justice over age 70 who didnt retire.
The plan would die in Congress, but had its intended
effect.

In a surprise ruling, the Supreme Court reversed itself

and held that the Jones & Laughlin steel plant was
subject to federal regulation under the commerce
clause because it shipped steel out of Pennsylvania.
The Court settled the question of whether federal
regulation of business was constitutional with the
reversal of the Schechter decision.

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How Government Regulations are

Made
All federal regulation originates in an act of
Congress.
A bill is a proposed piece of legislation placed
before the Congress for its approval.
When a bill is passed by both houses of
Congress and signed by the president its
provisions become law.
It is then the responsibility of the appropriate
regulatory agency to create the specific
regulations (rules) needed to implement the
provisions of the bill.
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The Burden of Complying with

Regulations
Total dollar costs $843 billion in the year
2000, 8.6 percent of the total GNP.
Not included in the cost figures:
The cost of running federal agencies to
administer the regulatory process.
Indirect costs such as impact on a companys
employment or productivity.
Indirect costs borne by other firms or the
community.

Small businesses bear a disproportionately

large share of the federal regulatory burden.
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Administrative Costs of
Regulation

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Benefits of Government
Regulation
Regulation has helped to:

Improve the position of minorities

Clean the environment
Prevent monopoly
Reinforce free competition
Prevent corruption
Strengthen the banking system
Reduce industrial accidents
Provide resources for the elderly
Control communicable diseases, and so on

These benefits are enormous and incalculable

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Growing Demands for New

Regulations
Pressures for new regulations are strong,
numerous, and likely to continue in the future.
Business interests will exert great pressure
for federal help in reducing costs of regulation.
Individual businesses will pressure the
federal government in order to harm their
competitors, both domestic and foreign.
The mixed economy
Ours is a mixed economy in which individuals
enjoy much economic freedom but governments,
especially federal government, exercise
pervasive and strong controls.
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Wide Variation in Foreign Regulation

and its Impact
A study made by the World Bank classifies
business regulations in 130 countries into the
following categories:

Starting a business
Hiring and firing workers
Enforcing contracts
Getting credit
Closing a business

The regulatory burden tends to be heavy in

poor countries and light in rich countries.
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Principles of Good Regulation

1. Simplify and deregulate in competitive
markets.
2. Focus on enhancing property rights.
3. Expand the use of technology.
4. Reduce court involvement in business
matters.
5. Make reform a continuous process.

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Concluding Observations
There have been ups and downs in the trend of
regulations, but the basic direction has been
up, with respect to both total volume and
complexity.
The cost of federal regulations is huge, but the
cost is offset in significant degree by the many
benefits of regulation to society as a whole,
individuals, companies, and industries.
Analysis of both costs and benefits suggests
that costs can be reduced and benefits
increased by reforms in the regulatory system.
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