10 Unforeseen Effects of Deregulation

Actor/singer Jamie Foxx visits a Philadelphia radio station owned by Clear Channel in Dec. 2010. Thanks to deregulation, Clear Channel owns more than 850 radio stations in 150 U.S. markets. See corporation pictures.
Jeff Fusco/Getty Images

Since the late 1900s, few industries in the U.S. have escaped government regulation. The free market is a hallmark of capitalism, but government sometimes intervenes if and when it goes awry. Often, that need is prompted by cries from some part of the public.

Regulation can be designed to protect the public against monopolies, high prices, poor service or some danger. It can also be designed to insulate businesses and industries against the free market's risks.

During the late 19th and the 20th centuries, an alphabet soup of federal regulatory agencies grew up. Most people have heard of the biggies:

  • FCC: Federal Communications Commission. This covers the telephone, telegraph and broadcasting industries.
  • ICC: Interstate Commerce Commission. This body governs railroads, trucking and shipping.
  • FDA: Food and Drug Administration. This agency regulates products and their labels.
  • SEC: Securities and Exchange Commission. This body covers our stock exchanges.
  • OSHA: Occupational Safety and Health Administration. This covers the safety and health of our workers.
  • EPA: Environmental Protection Agency. This takes care of the environment and human health concerns.
  • FAA: Federal Aviation Agency. This body regulates air travel.

That's only a start. There are many others, as well as state regulatory agencies.

But whenever there's regulation, a push for deregulation follows. In the late 1970s and 1980s, regulatory reform became popular politically. The reasons varied: Sometimes, industries thought they could be more profitable with less government intervention. Sometimes, consumers and public-interest groups thought regulators had grown too cozy with the industries they regulated. Other times, regulations didn't work or became inefficient as years passed. When inflation was bad, businesses felt that price regulations made it hard for them to respond quickly enough.

Deregulation can be accomplished legislatively, with Congress passing new laws or amending old ones. Or it can be handled administratively, with agencies writing new rules or choosing not to enforce some. Usually, deregulation isn't complete: Some regulations are removed or eased, but others remain.

Deregulation doesn't always work as expected. Some economists believe that deregulation usually leads to someone being hurt. [source: McKenzie] It's just not easy to predict whom.

Keep reading to find some examples of surprise effects -- some pleasant, but most not so much -- of deregulation.

10
Bye, Bye Jobs

The Interstate Commerce Commission (ICC) was created in 1887 to regulate railroads. It controlled rates, ruled on proposed mergers and made sure the railroads served most areas.

By the 1960s, times had changed. Railroads had new competition from cars, trucks and airplanes. Rate regulations made it hard for them to compete, especially against trucks. A third or more of the industry was bankrupt, or about to be.

Deregulation started with the Railroad Revitalization and Regulatory Reform Act of 1976. That made it easier for the railroads to change rates, merge and stop running unprofitable routes. Four years later, Congress passed the Staggers Rail Act of 1980, which further eased regulations.

There were good results. Railroads made rates more flexible. They dropped the businesses that were losing money and increased the profitable ones. They abandoned miles of tracks. When the interstate highways got crowded and gas prices rose, railroads started hauling truck trailers.

But the passenger service and short routes the railroad companies abandoned were the ones that needed more workers. It didn't take many workers to serve a train loaded with nothing but coal or grain. Unions lost power and had to agree to drop the job of brakemen -- about a third of workers on trains [source: Slack].

Similarly, after Congress passed the Airline Deregulation Act of 1978, airlines started new routes, dropped unprofitable ones and slashed fares. Within a few years, fuel prices rose and many airlines began to lose money. Mergers and bankruptcies hurt the power of labor unions, and they had to give concessions on jobs and wages. Many jobs were lost.

9
Down and Out on the Farm
The high-speed Amtrak Acela train at a station in Philadelphia. Despite this innovation, Amtrak doesn't reach many rural areas.
The high-speed Amtrak Acela train at a station in Philadelphia. Despite this innovation, Amtrak doesn't reach many rural areas.
Lisa Lake/Getty Images

People in rural areas are sometimes the unforeseen victims in deregulation.

The Railroad Revitalization and Regulatory Reform Act of 1976 and the Staggers Rail Act of 1980 made it easier for railroads to abandon passenger service, which had been a financial drain. Many went out of the passenger business. Congress had established Amtrak, a federally subsidized rail corporation intended to provide rail service nationwide, in 1970. Amtrak was supposed to be for profit, but it faced the same problems the railroads had. Passenger service wasn't a moneymaker.

Amtrak started service in 1971, but it never made it to many remote and rural areas. Deregulation a few years later meant that railroads no longer had to offer passenger service in addition to freight. Most dropped it and soon pulled up unused tracks. That left rural people without service. Eventually, high fuel prices and global warming made Americans think about alternatives to automobiles. But by then, much of the passenger rail service was history.

Some regulations require various industries to serve rural areas where business isn't as profitable. Deregulation can mean rural folks get left out. When Americans began the massive shift to cell phones instead of landlines after telephone deregulation, people in areas with poor cell phone coverage were out of luck. Those may be the same areas where deregulated cable TV companies won't venture. And that can mean no affordable broadband Internet.

Want a little entertainment? Thanks to deregulation, just a little is what you might get. Keep reading to find out why.

8
Face the Music

In the 1930s, government officials believed that the airwaves were an important new resource that should belong to the public. So they set up the Federal Communications Commission (FCC) to guard the public interest in the new medium of the day: radio. The FCC regulated how many radio stations one company could own. It encouraged local ownership. It issued broadcasting licenses and renewed them only if given proof that the station served the public.

By the 1990s, the Internet, cable TV and other technologies had changed the game. With the thought that a freer market would encourage new developments and improve service, Congress passed the Federal Telecommunications Act of 1996. For radio, that deregulation meant companies could own more stations in the same market -- and as many as they wanted nationwide.

The result? A few large companies own most commercial radio stations. Clear Channel is the giant, owning more than 850 stations across the country [source: Clear Channel]. These few companies control the music you hear on the radio. Their stations tend to play the same things, even across somewhat different formats. That's why no matter where you tune in, you're likely to hear the same songs.

The consolidation also makes it hard for new musicians to break in to the radio market. They already have enough trouble dealing with consolidation in the recording industry. And don't expect to hear local musicians on radio stations.

Deregulation doesn't always mean fewer choices. Some people may think it means too many. Read on to find out why.

7
Try Me! No, Me!
Thanks to deregulation of the telephone industry, this phone could have different carriers for local and long-distance service.
Thanks to deregulation of the telephone industry, this phone could have different carriers for local and long-distance service.
Dreamlight/Getty Images

Back in the day, if you wanted phone service, you called the local phone company. Same for electricity or natural gas. If you were traveling, a travel agent booked your plane ticket. Life was simple.

Not anymore. One unforeseen effect of deregulation is more choices in life. That means you're flooded with direct mail and telemarketers trying to get you to choose one thing or another. It means having to make choices about things that used to be decided for you. For many people, it means confusion about what they need or want and the best way to get it. Competition can be good, but confusion can be stressful.

Consider:

  • Telephone deregulation started with the breakup of AT&T in 1984. It continued with the Telecommunications Act of 1996. The result: Multiple businesses competing for your local, long distance and cellular service. Weekly or daily marketing calls. Do you need a landline? Which deal is best?
  • In many states, the utility commission is easing regulations on electricity and natural gas companies. Consumers have choices of energy suppliers rather than being forced to use their local utility. Which choice will save them money?
  • The Airline Deregulation Act of 1978 eased controls on fares, schedules and routes. A result? Prospective passengers online, trying to book the best among a dizzying array of ticket prices, watching prices change or become unavailable as they decide. Fly direct? Go through a hub? Take the red eye? When can you use the free flights you've earned?

This may be the information age, but how much do you get? Keep reading.

6
How much do we know?

The Telecommunications Act of 1996 did more than homogenize the music on commercial radio. Another unforeseen effect was that it limited the news and information you receive.

The act eased the cap on how many radio stations a company could own. The resulting consolidation meant that a handful of companies own almost all radio stations and thus control the news on those stations. Corporate owners cut jobs and reduced local news coverage. Two of those big companies that dominate the radio market, Viacom and Disney, also own many TV stations.

The 1996 act eased ownership regulations for TV companies as well. Companies can own TV stations that serve as much as 35 percent of the U.S. population. Broadcasters are allowed to own cable TV systems. Recently, the FCC has eased restrictions on companies owning newspapers and TV stations in the same markets. And many of the giant companies that control TV and radio also publish books and magazines.

The result: A few large corporations control most of the information you get.

Even though there are hundreds of TV channels, Americans get news and information mostly through a few big corporations. That can lead to similarities between news topics and points of view. Public-interest and media groups worry that citizens aren't well-informed and that public debate is being stifled.

Read on for more insights into deregulation.

5
Peanuts
Thanks to airline deregulation, this paltry offering may be your only meal on a cross-country flight. Hungry yet?
Thanks to airline deregulation, this paltry offering may be your only meal on a cross-country flight. Hungry yet?
Ken Reid/Getty Images

Remember the good old days, when you got a full meal when flying? When flight attendants were plying you with drinks at every turn? Now, you might be in danger of starving, with nothing but a small pack of peanuts or pretzels and a tiny cup of soda or water on a cross-country journey. The next time your stomach grumbles in the air, blame the Airline Deregulation Act of 1978.

The act didn't address food and drink. But it did relax rules on where and how frequently airlines fly and how much they charge, thereby stimulating competition and growth.

Enter startup, very-low-cost, few-frills airlines. To offer those low fares, they charged for food (if they served it) and baggage. They crammed more people into smaller spaces.

At the same time, many established airlines were expanding routes like crazy, trying to get more pieces of the deregulated market. When the dust settled, some of the startups were gone, and so were some of the former big-name airlines.

What wasn't gone was the idea that airlines could save money by cutting back on meals and legroom. Or the idea that passengers would pay for such things as the privilege of checking in early, or being allowed to bring their luggage along.

As fuel prices went up and the economy went down, passengers on many airlines found they were paying more fees and eating less food.

4
Remote Decontrol

As cable television developed, its prices were largely regulated by local governments. With deregulation moves in the mid-1980s, prices began to jump. In the early 1990s, regulations were imposed again. The massive Telecommunications Act of 1996 compelled Congress to ease most oversight and regulations on rates.

The idea was to promote technological advances and competition. The thinking was that telephone companies, wireless systems and direct broadcast satellites would compete with cable companies. Market forces then would help keep prices down and encourage companies to come up with creative ways to offer customers more TV choices.

The thinking was wrong. Nearly a decade after the deregulation, cable bills had increased by almost 60 percent in most places [source: Hear Us Now]. About 98 percent of Americans had only one cable company available to them.

The new technologies didn't emerge as well or as quickly Congress had expected. Not everybody has a good location for satellite. Wireless cable didn't work well. Cable rates kept rising.

Telephone company competition didn't help much, either. Many cable companies now offer telephone and Internet along with TV. After introductory packages expire, rates tend to go up.

Consumer advocates have been pressing for a new regulation that might help keep prices down. They want cable companies to be required to let customers choose only the channels they want rather than have to buy packages.

Read on for some positive -- or are they? -- unforeseen effects.

3
Can You Hear Me Now?
The next time you find yourself wasting time playing with a cell phone app, blame the Telecommunications Act of 1996.
The next time you find yourself wasting time playing with a cell phone app, blame the Telecommunications Act of 1996.
Sean Gallup/Getty Images

Walk in a public place -- college campus, shopping center or a city street -- and you'll see a lot of people deep in conversation on their cell phones. Texting while driving has become so widespread that states have passed laws to ban the practice. People receive reminders to silence their phones before plays, concerts and even church services. They even use them to watch movies, play games, take pictures and use countless apps, or applications.

These are all unforeseen effects of the deregulation of the telephone industry that began with the breakup of AT&T in 1984 and picked up pace with the Telecommunications Act of 1996. The deregulation was designed to help consumers by giving them more choices. First, people were free to choose a long-distance carrier other than their local service provider. Next, the legal local monopolies were ended and people were free to choose competing local service options. In return, the remnants of AT&T -- the so-called Baby Bells -- weren't as regulated as they moved into wireless, long distance and Internet services.

What few people foresaw was the creative burst of innovation that would follow. Deregulation spawned the proliferation of smart phones, and with it, new industries of involving apps and other features.

While some of the results may be annoyances or even dangers at times, you don't hear many people volunteering to give up their phones. And options such as pre-paid phones make it possible for everyone to be connected.

What happens when deregulation goes really wrong? Keep reading.

2
Going Bust

When deregulation goes awry, companies it was intended to help can go belly-up. Sometimes, the problem appears to be lack of restraint. The deregulated industries run wild, reveling in their new freedom.

That happened to some of the established airlines after Congress passed the Airline Deregulation Act of 1978. Actually, many of the major airlines had opposed the deregulation. They didn't want new competition. But Congress got them on board by providing subsidies for them.

When start-up airlines entered the market, competition took off. Many of the older airlines competed with a frenzy, expanding into new markets.

The result? Bankruptcies. Venerated names such as Pan Am, Eastern and TWA disappeared, leaving three major airlines in the United States [source: U.S. Centennial of Flight Commission]. Most airlines that survived continued to struggle as they faced rising fuel costs and security problems after 9/11.

Another good example is the savings and loan industry. Struggling savings and loans in the 1970s and early 1980s thought eased federal regulations would solve their problems. Deregulation, most notably the Garn-St. Germain Act of 1982, erased most of the distinctions between S&Ls and commercial banks. S&Ls could offer riskier loans, and for more than just homes. They could offer checking accounts and credit cards.

With less oversight, many S&Ls went on a lending and investing spree. Some S&Ls were bought by speculators seeing a chance for big profits.

Then as the 1980s wore on, the bubble began to burst. S&Ls were failing right and left. In the late 1980s, a federal bailout and cleanup. Estimates of how much it ultimately cost range as high as $160 billion [source: Ely].

It can get worse. Keep reading.

1
Crash!
Protesters line up outside the New York Stock Exchange in October 2008, shortly after a stock crash caused many of the world's markets to close temporarily.
Protesters line up outside the New York Stock Exchange in October 2008, shortly after a stock crash caused many of the world's markets to close temporarily.
Spencer Platt/Getty Images

In 1933, President Franklin Roosevelt signed the Glass-Steagall Act. By then, the country was mired in the depths of the Great Depression, and nearly 5,000 banks had failed. Businesses and people lost money. People lost jobs. The country was in crisis. Glass-Steagall was designed to prevent another crash in the future. Among other things, it barred commercial banks from getting into the investment business. It raised barriers between commercial banks, securities firms and insurance companies.

Nearly 70 years later, the Depression was history, and there was a push for deregulation to repeal or roll back Glass-Steagall. The result was the Gramm-Leach-Bliley Act of 1999, which took down that wall between the banks that made routine loans and the ones that did risky investments.

Experts are still arguing about what caused the recession that started in 2008, but many point to Gramm-Leach-Bliley as a major culprit.

The removal of the walls between commercial banks and investment banks led to mergers and promoted risky lending. The Commodity Futures Modernization Act, passed in 2000, made things worse by letting the popular new financial derivatives and swaps go unregulated, further promoting risky mortgages.

Many banks ventured into areas they knew little about. They made bad loans and took gambles. Subprime mortgages were chopped up into pieces and bundled into bad investments. Sometimes, it was hard to tell who owned what.

What started as a subprime mortgage crisis in 2007 quickly spread through most sectors of the economy, causing what is widely regarded as the worst financial crisis in the U.S. since the Great Depression.

Keep reading for lots more information on economic concepts.

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