FREE ESSAY ON ECONOMIC REGULATIONS

ECONOMIC REGULATIONS

The U.S and the world economy like everything else have its ups and downs. The government
plays a crucial role in deciding how the economy will set over time. An Economist by the
name of John Maynard Keynes felt that if either inflation or unemployment got out of
hand, the government could adjust the business cycle to balance the economy. Keynes was
more geared toward the bigger picture and focused on macroeconomics. His work led to the
government and many economists believing that they had control over the economy. This led
to economic regulations, which affected everyone from companies to the consumers. 
Through the history of our economy the government has made changes by enforcing many
regulations to have full control of the growth and power of the economy and to protect
the consumers. Regulations can be divided into two different categories, Economic
regulations and Social regulations. An Economic regulation covers sectors of the economy
such as electricity, natural gas, communications, transportation, aviation, agriculture,
and banking. These regulations usually include barriers to entry and exit, licensing and
tariff laws, and the control of prices and wages. These regulations include acts such as
the banking act of 1933 or the civil aeronautics act of 1938. Social regulations on the
other hand, are there to protect the consumers. These regulations concern such things as
health and safety of workers, environmental issues, and civil rights. Unlike the Economic
regulations these were created much later in the 1960's and 70's. Examples of Social
regulations would include the food and drug administration and the Equal Opportunity
Commission, which protects employers. 
Regulations were starting to appear around the time of the New Deal. The government's
main purpose for enforcing these regulations was because competition among corporations
was starting to fail. The bulk of these regulations were put into affect from 1933
through 1938. At the time regulations seemed to have been helping. The economy continued
to grow and was doing better than it ever had been. The system was able to control price
and entry competition in the nations key industries. From 1930 through the sixties the
economy was booming. There were low inflation rates that averaged 3.8 percent over that
period of thirty years. The interest rates were also low at two percent over a period of
three months. Bank failures were virtually non-existent, oil and gas supplies were
readily available. The price of gas even had a slight decline in the sixties. 
As the sixties came to an end the growth had stopped and problems in the economy started
to occur once again. The budget deficits in 1968 went from eight billion dollars to
twenty five billion dollars, and continued to rise as it exceeded over 200 billion
dollars by 1983. The growth in labor productivity from 1948 to 1968 was about 3.3 percent
and from 1968 to 1983 declined to as low as 1.2 percent. In 1974 the banking failure rate
had skyrocketed from past success. The Airlines were losing money even though they kept
on increasing the price of fares; also the nations largest railroad companies were facing
possible bankruptcy. The reason for the downturn in the economy was due to the control,
which the government had over these corporations by enforcing these regulations. The
problem with these regulations was that it caused higher than necessary costs, distorted
the patterns of supply and demand. The rate of return regulations was creating
inefficient capital allocations. These problems brought on what is called as
deregulation. Deregulation is were the government drops many of the regulations that were
put on the corporations. The period of deregulating in the late 70's is stated by many
economists to be very crucial in the affect of our economy today. Major corporations such
as American Airlines, AT&T, El Paso Natural Gas, and Bank America went through a process
of deregulating in the late 70's and into the 80's.
Even though recent acts of deregulations have occurred and have been proven to be very
successful, there are also benefits to regulations along with the disadvantages. Social
regulations are most beneficial to the consumer, because it protects them from their
employers to what they eat. With out these regulations corporations might take short cuts
to save on money, while in turn they are harming their consumers with out us having any
knowledge of it. It also protects us from our employers who might have been trying to
take advantage of us, or tries to refuse us of the benefits we deserve. There are also
economic regulations, which protect our economy by making sure corporations such as
Microsoft, don't become a monopoly. This allows our economy to stay balanced. This
protects the consumers from higher prices, and also leaves them with other options.
The major problem with Regulations is the amount of money it cost not only to the
corporations, but the government and the consumers. In 1998 the direct annual cost of
compliance with federal regulations was seven hundred billion dollars according to
professor Thomas Hopkins of the Rochester Institute of Technology. Each year the
government spends more money on regulations, adjusted to inflation the government spent
654 billion dollars in 1977 on regulations and 709 billion dollars in 1999. Federal
Regulations cause 1.3 trillion dollars in economic activity to be lost each year. So the
price of not only following these regulations is expensive, but so is enforcing them. In
the long run it cost much for the corporations than it does the government. Costs such as
paperwork, permits, equipment, worker training, attorney fees, and record keeping are
some of the expenses which may be overlooked as cost of enforcing regulations for firms.
This affects the consumer because prices will rise, corporations will reduce innovation
and economic growth due to lack of funds. It also affects the corporation's decision on
whether to hire a worker or how much should they pay him. One of the major problems with
the regulations is the burden that it puts on small companies. Many of the large
corporations have the funds to follow these regulations, while small and medium sized
companies do not. A small company creates two out of every three new jobs in America.
This means that they play as important of a role in our economy as do the larger
companies. According to the Small Business Administration (SBA) firms with fewer than 500
employees spend approximately $5,000 per employee on regulatory costs. While firms with
more than 500 employees spend only $3,500 per employee. The biggest hit is for firms with
fifty to a hundred people, they pay seven to ten times higher than larger firms. No
matter how big the firm all of them need to get the paperwork done, they need to hire
attorneys. Studies have shown that the long-term costs of certain regulations can reduce
the productivity level. 
The consumer also suffers from regulations; the more a corporation has to spend on the
regulations the higher the prices of the product or service. According to the office of
Federal Register every man, woman and child in America pays $2,800 in regulatory costs.
This means that each American works 40 days out of the year just to pay for these
regulations. Not only does it affect the cost of the products for Americans, but it also
hurts them at work. When a business puts all of its resources to regulatory laws, it is
using the resources less efficiently; it is forced to operate in a less productive, in a
more costly way. Eventually this leads to the employees, which will deny them a higher
standard of living. Many firms cannot afford to give their employees as much benefits, as
they should receive due to the high regulatory costs.
Many expert economists are against over enforcing to many regulations. They feel that it
cuts down the competition in the economy. Deregulation has been very popular among
economists over the last 25 years. They feel that deregulating the 4 major industries in
the late 70's was one of the best decisions for our economy. Robert Cradell and Jerry
Ellig did research on how the airline, trucking, electricity sector, natural gas, and
telecommunications were affected after they went through deregulations. They found many
benefits that not only helped the company, but also the consumer. During the first two
years after deregulation the average prices fell from 4 to 15 percent, and after ten
years prices went down twenty five percent. In some cases prices even fell to half of
what they used to be. They also found out the quality of service improved. Corporations
were able to give their customers more options to choose from and better reliable
service. "More freedom equals more benefits" says Ellig about deregulation. Rates fell
faster in parts of the market where regulators permitted greater customer choice. Giving
customers choices will allow for a more competitive market and in turn more benefits for
everyone.
From past experience we know that regulations can help the economy, but at the same time
over regulating can cause the economy to hit a brick wall. Too many regulations can cause
higher prices for consumers, corporations, and even the government. It also creates
barriers to entry and exit, which will allow there to be less competition in the economy.
Deregulating also has been proven to be a successful method of balancing the economy. It
has worked for many of the major industries. As long as the regulations are kept to a
minimum and are useful in protecting the consumer, there should be no problems.
Bibliography
Bibliography
Coggins, B (1998). Does Financial Deregulation Work. Northhampton, Massachusetts: Edward
Elgar Publishing.
McConnell,C & Brue,S (1998). Economics (fourteenth edition). New York: Irwin
McCgraw-Hill.
Moore, S (1999, february 22). Beware Fiscal and Regulatory Drag . [On-Line]. Available:
http://www.cato.org/dailys/02-22-99.html.
Thierer, A (1999). The Regulation Home Page. [On-Line]. Available:
http://www.regulation.org/.
Vietor, R (1994). Contrived Competiton; Regulation and Deregulation in America.
Cambridge, Massachusetts: President and Fellows of Harvard College.