DEREGULATION

In previous years, the 1976 election of Democrat Jimmy Carter would have signaled a new round of New Deal legislation, but the Carter administration, although it supported many traditional Democratic programs, emphasized economy and efficiency in government and, surprisingly, deregulation in several areas of the economy. The administration argued that these regulations were no longer needed or that the original intent of the legislation had been subverted by the very groups that the legislation was intended to control.

The latter point reflected the view of some academics who had long argued that regulatory agencies were often “captured” by a regulated industry. The public would be aroused by the revelation of an abuse in a certain industry and a regulatory agency would be created, staffed initially by people who were highly critical of the industry. Eventually, however, public attention would turn to other problems, and only the regulated industry itself would maintain an interest in who was appointed to the agency and what decisions it rendered. The result, naturally enough, would be that in the long run people sympathetic to the regulated industry would be appointed to the regulatory agency, and rulings would be made in the interest of the industry rather than the public. Partly as a result of such ideas, President Carter supported decontrol of natural gas prices and deregulation of the airlines, trucking, railroads, and the financial services industry, including the elimination of ceilings on deposit interest rates.

Alfred E. Kahn, whom Carter chose to deregulate the airlines, was both symbolic of the new era and a major player in it (McCraw 1984, Chapter 7). Kahn was a liberal Democrat by upbringing and sentiment, but he had come to believe that the general interest would be served best if regulators put more emphasis on increasing competition and “marginal cost pricing.” Marginal cost pricing, to take a simple example, held that airline seats should be priced at the low cost of actually carrying one more passenger rather than at the high average cost of carrying passengers (Kahn 1988). At a time when many airline seats were going unfilled, important segments of the industry welcomed Kahn’s emphasis on marginal cost pricing.

Democratic President Bill Clinton may have been sympathetic to some forms of regulation, but on the whole, the conservative tide continued. The Financial Services Modernization Act of 1999, for example, reduced regulation of the financial sector, including the elimination of the separation of commercial banking and investment banking that had been brought about by the Glass-Steagall Act in the early years of the Great Depression. In 2008, however, Barack Obama, a liberal Democrat, became the first African American to be elected president. Placed in a strong position to push a liberal agenda by the financial crisis of 2008, Obama was able to win approval for the American Recovery and Reinvestment Act of 2009 (a major spending bill), the Patient Protection and Affordable Care Act, Dodd-Frank Wall Street Reform and Consumer Protection Act, and other measures. Time will tell whether this is merely a temporary departure from the post-1976 conservative norm, or the beginning of a new era in which liberal policies are ascendant.