Reforming Regulation This chapter elaborates on some main reform recommendations for improving federal regulations. Chapter 11 McGraw-Hill/Irwin© 2006.

Reforming RegulationReforming Regulation

This chapter elaborates on some main reform recommendations for improving federal regulations.

ChapterChapter 11

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Ted Turner Attacks Media Giant Opening Case

Today Ted Turner is involved in a controversy over new rules set forth by the FCC concerning mergers and acquisitions in the telecommunications industry.

In June 2003 The FCC approved sweeping revisions of its regulations concerning the allowable structure of the media marketplace.

According to Turner, unless we have a climate that will allow more independent media companies to survive, a dangerously high percentage of what we see and don’t see will be shaped by the profit motives and political interests of large, publicly traded conglomerates.

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.11-3

Turner believes that when large companies dominate a market, they not only choke innovation but they also focus more on profits than on public interest.

Why Regulatory Reform? Although measures to calculate regulatory costs

are imperfect, they suggest that the burdens on business and the economy are heavy and growing.

Demand for reform and/or a showing of justification arise from many regulatory shortcomings.

Some regulations conflict with others, some are poorly implemented, some impose directives better developed by private enterprises, and some fail to achieve the objective for which they were originally created.

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.11-4

Why Regulatory Reform? (continued)

The environment may have changed over the life of a regulation, making revision necessary.

When reforms are introduced to correct situations, substantial benefits can accrue.

Reforms can provide incentives for business to improve the quality of products and services, increase productivity, reduce prices, and hire more employees.

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.11-5

Statutory Reform The most fundamental type of regulatory reform is

statutory reform by Congress. Important recommendations by knowledgeable critics:

Congress should review major past legislation and change laws where appropriate.

Congress should create a congressional office of regulatory analysis to independently assess old legislation and new proposals from agencies.

All regulatory agencies should be required to pass rules through the Office of Management and Budget.

Congress should require all agencies to prepare cost-benefit analyses for major rules.

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.11-6

Privatization Privatization has many

dimensions, ranging from almost complete deregulation of industries to fostering competition through application of the antitrust laws.

Business and government often work together to blend the unique characteristics of each.

A widespread policy of state and local governments to contract out public services should be noted.

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.11-7

Privatization

A method of reducing regulation by shifting authority or assets from government to the private sector, which will perform the same function.

Deregulation Deregulation refers generally to the removal

or substantial reduction of government regulations of entire industries.

Proponents of deregulation claim it brings competition, lowers prices, stimulates innovation, and stops abuses engendered by government control.

Sometimes there are negative consequences such as higher prices, poorer service, and lower productivity.

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.11-8

Reduce Command Controls in Favor of Incentive Controls

Command controls require firms and individuals to meet specific standards or perform certain behaviors.

Incentive controls seek to achieve desired regulatory ends by permitting affected firms or individuals flexibility in choosing methods to meet goals. If this is done, the presumption is that innovation will

be inspired in technology, service, pricing, management, and/or organization.

In turn this will lead to more efficiency, government standards will be met, and compliance costs will be lowered.

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.11-9

Government-wide Paperwork Burden-Hour Estimate Continues to

Grow

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.11-10

Remove Flapdoodle and Conflicting Standards and Specifications

Among the massive volumes of federal regulations there exist some that are absurd, trivial, or nonsensical.

Given the huge mass of federal regulations foolish directives are inevitable.

Some critics believe there are so many that removing them would be a significant reform.

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.11-11

Regulatory Analysis President Reagan’s Executive Order 12291 and

President Clinton’s Executive Order 12866 require federal agencies to write a regulatory impact analysis (RIA) for major new rules.

Each RIA requires: A statement of the need for the proposed action An examination of alternative approaches An evaluation of the benefits and costs of the

proposed action and the main alternatives identified by the analysis

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.11-12

Sunset Laws A sunset law is one that limits the life of a regulatory

program at the time it is authorized. A persistent problem with rules, authorities, and agencies is

that they sometimes continue in force long after the world has changed and they are no longer needed.

There are proposals for different types of sunset legislation. Require major regulations to include a provision for

automatic review by Congress on a certain date Require the OMB or the president to recommend to

Congress possible agencies or programs for elimination Require Congress to approve new regulations that place

heavy burdens on the private sector.

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.11-13

Regulatory Reform in Foreign Countries

In the last decade regulatory reform has been continuous and substantial in most developed countries. It has been less aggressive in most

underdeveloped countries, but where undertaken, the results have for the most part been positive.

Regulatory reform is actively pursued in all of the economically advanced member nations of the Organization for Economic Co-operation and Development.

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.11-14

The Basic Antitrust Laws

The Sherman Antitrust Act (1890) The Clayton Act (1914) The Federal Trade Commission Act

(1914) The Hart-Scott-Rodino Antitrust

Improvement Act (1976)

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.11-15

Theories of Antitrust Enforcement

The Structure TheoryThe Performance TheoryResearch FindingsThe Theories in Practice

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.11-16

Mergers Total value of mergers and acquisitions

increased rapidly from 1995 to 2000, then began to decline due to declining stock values and weaknesses in the global economy.

In evaluating proposed mergers and deciding which ones to challenge, enforcement agencies face difficult choices. A merger may yield significant cost savings by

eliminating duplications and creating other efficiencies.

It may leave fewer companies in the industry, which increases concentration and could lead to price increases from collusion among remaining companies.

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.11-17

Guidelines for Antitrust Action

Market definitionCompetitive effectsEntryExpected efficiency gains

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.11-18

Type of Merger Most mergers are horizontal mergers, or

mergers that combine the businesses of companies within the same industry.

Vertical mergers occur when a company acquires other firms, either back in the production chain toward raw materials, or forward, toward consumers of final products and services.

A conglomerate merger combines two firms in unrelated lines of business.

Horizontal mergers are more likely to create competitive problems.

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.11-19

High Technology Industries Many of the fastest-growing companies are

found in high-technology industries. A question arises for antitrust regulators about

how to deal with such intellectual monopoly power while at the same time assuring innovation. These companies have produced products and

services that clearly have benefited consumers in lower-priced and higher-quality products.

Antitrust regulators dealing with such issues tend to focus more on innovation than on competition.

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.11-20

Recent Trends in U.S. Merger Enforcement

Federal antitrust challenges to proposed mergers fell sharply from 2000 to 2001 and increased slightly in 2003.

The Justice Department’s Antitrust Division and the FTC challenged 34 mergers in 2002 and 36 in 2003. This compared with 80 in 2000.

State attorney generals have been more active in prosecuting abuses of the antitrust laws.

In the past few years the Antitrust Division has aggressively pursued foreign companies for price-fixing arrangements that gouged American consumers.

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.11-21

Foreign Merger Laws and Activity

Around the world, nations are adopting antitrust laws, but many have little experience in enforcing them.

The rise of antitrust laws is caused by economic globalization and trade liberalization.

Recently the European Union (EU) Competition Commissioner has been the most active foreign antitrust regulator in the world.

The EU has forced some U.S. companies proposing mergers with European firms to make important concessions before approval.

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.11-22

Concluding Observations Reform of government regulations is clearly

needed. In undertaking regulatory reforms, two important

considerations must not be neglected: Care should be taken to avoid eliminating needed

regulations. We should not expect too much.

In the future we can expect little regulatory reform because reform has a weakened political base.

Because the benefits of reform to one person are very small in relation to the costs involved in bringing it about, there is a lack of initiative by individuals, except those in business.

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.11-23