Government Regulation

1. 8 Government Regulation

2. Chapter 8 Government Regulation of Business • Key Points • Reasons for government regulation • Primary constitutional foundation of regulation of foreign, interstate and intrastate commerce • Understanding the “fourth branch” of government • Duties of and constraints on agencies • Pros and cons of regulation and deregulation

3. Fundamental Questions Throughout Course What is the proper role of business in society? Has business abused the public trust? Is government the answer to the problem? Might we rely on self regulation (ethics and social responsibility) and market “regulation”? What is the proper blend of these “control” devices as well as others left unexplored (e.g., social customs)?

4. Market Failure—Part I Imperfect Information: An efficient free market presumes reasoned decisions. Reasoned decisions require adequate information. Because we cannot have perfect information and often will not have adequate information, the government may impose regulations either to improve the available information or to diminish the unfavorable effect of inadequate information. Monopoly: Natural monopolies exist where a single large firm is more efficient then several smaller ones. In such situations, the government has commonly intervened to preserve the efficiencies of the large firm while preventing that firm from taking unfair advantage of the consumer.

5. Market Failure—Part II Externalities: When all the costs of a good or service are not fully internalized or absorbed, those costs or benefits fall elsewhere as what economists have labeled externalities, neighborhood effects, or spillovers. Government regulation is sometimes considered necessary to place full cost on those who generated it, which in turn is expected to result in less wasteful use of resources. Public Goods: Some goods and services cannot be provided through the pricing system because we have no method for excluding those who choose not to pay. For such public goods, the added cost of benefiting one person is zero or nearly so. Thus, in the absence of government regulations, public goods would not be produced in adequate quantities.

6. Regulatory Life Cycle? Stage One: The free market itself—the period when government regulation is absent from the market in question Stage Two: A market failure is identified suggesting the need for government intervention Stage Three: Government regulation is imposed in the form of a rule Stage Four: Regulatory failure occurs because, in brief, the benefits of the rule in question no longer exceed its costs Stage Five: The government may respond with regulatory reform to correct the failure Stage Six: The regulation in question is simply eliminated. The market, thus fully deregulated, has returned to Stage One and the regulatory life cycle is complete Source: Joseph P. Toumain, “American Regulatory Policy: Have We Found The ‘Third Way’?” Kansas Law Review 48 (May 2000), p. 829.

7. Philosophy and Politics • An explanation for government regulation may also lie in the political process: • One view is that regulation is considered necessary for the protection and general welfare of the public: To achieve a more equitable distribution of income and wealth; or to stabilize the economy, thus curbing the problems of recession, inflation and unemployment • Another view is that regulation is developed at the request of industry and is operated primarily for the benefit of the industry, illustrated by the various subsidies and tax advantages afforded to business • Bureaucrats who perform government regulation are themselves a powerful force in maintaining and expanding that regulation

8. The Constitutional Foundation of Business Regulation Commerce Clause, Article I, Section 8: “The Congress shall have the power … To regulate Commerce with foreign Nations, and among the several states …” Supremacy Clause, Article VI, Section 2: “This Constitution and the Laws of the United States … shall be the Supreme Law of the land.” Police Power: State authority to regulate commerce resides in the police power specified by the Constitution; police power refers to the right of state governments to promote public health, safety, morals and general welfare by regulating persons and property within each state’s jurisdiction

9. Interstate Commerce Heart of Atlanta Motel v. U.S. (S. Ct. 1964) (public accommodation provisions under the Civil Rights Act of 1964 found constitutional) U.S. v. Lopez (S. Ct. 1995) (Gun-Free School Zones Act held unconstitutional) Brzonkala v. Morrison (S. Ct. 2001) (Violence Against Women Act held unconstitutional) Gonzalez v. Raich (S. Ct. 2005) (federal government can regulate use of medical marijuana, even where state law permits such use)

10. Regulation of Commerce Foreign Commerce: The federal government has exclusive regulatory authority over foreign commerce Interstate Commerce: Regulation by the federal government or state governments or both may be permissible Intrastate Commerce: Purely intrastate commerce, having no significant effect on interstate commerce, is within exclusive regulatory jurisdiction of the states; of course, commerce purely intrastate in nature is uncommon

11. State and Local Regulation of Interstate Commerce • Such regulation is unconstitutional if: • It expressly discriminates against interstate commerce • It unduly burdens interstate commerce • It imposes only an “incidental” burden on interstate commerce, but that burden is clearly excessive in relation to local benefits • Legitimate local purposes could be adequately served by reasonable non-discriminatory alternatives • Example:Granholm v. Heald (S. Ct. 2005)

12. State and Local Regulation of Business • Categories: • Controlling entry into business • Regulating competition • Preventing consumer fraud • Example: • Voyeur Dorm v. City of Tampa (11th Cir. 2001)

13. History of Federal Independent Agencies 1887: First federal regulatory agency established (for the purpose of regulating railroad routes and rates) 1930s: Federal regulation became pervasive in response to the Great Depression 1960s-’70s: New agencies created directed to social, as opposed to economic, reform 1980s and after: Strong deregulation movement

14. Agency Duties Control of Supply: Some agencies control entry into certain economic activities, by granting licenses, for example Control of Rates: Historically, those federal agencies charged with regulating utilities and carriers set the prices to be charged for the services; there has been a general decline in agency rate-setting, such as over the price of airline tickets, cable TV rates and long-distance telephone rates Control of Conduct: A major element of government regulation is through requiring information, establishing minimum performance standards and banning certain products

15. Operating the Agencies Executive Functions: Agencies implement the policy provided for in enabling legislation and in the agencies’ own rules and regulations Legislative Functions: Agencies create rules and regulation that are, in effect, laws Judicial Functions: Adjudicatory administrative hearings are used to enforce the agency’s rules and regulations

16. Legislative Function: Rules Procedural rules: Delineate the agency’s internal operating structure and methods Interpretive rules: Offer the agency’s view of the meaning of those statutes for which the agency has administrative responsibility; they are important expressions of opinion as to what the governing legislation requires Legislative rules: Are policy expressions having the effect of law; the agency is exercising the law- making function delegated to it by the legislature

17. Legislative Function:The Rule-Making Process • Informal rule making: • Publication of a Notice of Proposed Rule Making in the Federal Register • Written comments on the proposal submitted by the public • Agency may hold open hearings • Agency either discontinues the process or prepares the final rule • Final rules are published in the Federal Register and later compiled in the Code of Federal Regulations • Formal rule making: • Publication of a Notice of Proposed Rule Making in the Federal Register • Agency must hold public hearing conducted with most procedural safeguards of a trial, where all interested parties may call witnesses, challenge agency evidence, etc. • Agency decision based only on the formal record • Final rules are published in the Federal Register and later compiled in the Code of Federal Regulations

18. Judicial Function:Administrative Hearings • After investigation, a violation of a statute and/or rule may be alleged • Affected parties notified • Effort is made to reach settlement via a consent order • Failing settlement, case is heard by an administrative law judge (ALJ) • ALJ decides all questions of law and fact and then issues a decision • Order may be appealed to the agency or commission • After exhausting opportunities for review within the agency, appeal may be taken to the federal court system

19. Controlling the Agencies Executive Constraints: President appoints the top administrators and has great influence in the budget process Congressional Constraints: Congress creates and can dissolve agencies and controls agency budgets; it can directly intervene by amending the enabling legislation or by passing laws that require agencies to take specific directions Judicial Review: Agency rules and orders may be challenged in court; however, historically, courts have taken a rather narrow approach to judicial review, giving deference to the presumed expertise of the administrative agencies

20. Insufficient Regulation? • We have many regulatory success stories: Cleaner air, child labor laws, etc. • Our reliance on government intervention is restrained by worldwide standards • Reduced regulation may just result in increased litigation

21. Excessive Regulation? • From 2002 to 2003, number of federal government employees increased by 12.1 million • Regulatory agencies have been “captured” by the industries they regulate, which use regulation to reduce new competitors • Industry has too much power, through the agencies, in the political process, leaving the public voice unheard • Agencies are criticized for inefficiency, incompetence and arbitrariness

22. Deregulation Assessed • Good news: • Deregulation has brought lower prices, more innovation and consumer benefits in some areas • Bad news: • Deregulation has created mega-firms, loss of service to smaller markets and new opportunities for abuse in financial services