What Is Deregulation?

What Is Deregulation?

Let me explain deregulation directly: it's the process of reducing or eliminating government oversight in an industry, and I'm talking about this as a straightforward technical concept.

If you're a proponent, you might say it creates more competition and drives economic growth. But if you're an opponent, you'd argue it can seriously harm consumers, workers, and the environment. I've seen how this debate has shifted market conditions over time. In the U.S., sectors like trucking, railroads, and airlines have gone through deregulation, while the financial services industry has swung between regulation, deregulation, and re-regulation based on events.

Key Takeaways

Proponents claim that stripping away regulations lets businesses operate freely, boosts the economy, and creates jobs. Opponents point out that it can hurt consumers and workers. And remember, the financial industry has seen bursts of deregulation and re-regulation over the past century.

Understanding Deregulation

Deregulation means removing government regulations and restrictions in an industry, whether at the federal, state, or local level. It cuts down on the bureaucracy that makes it hard for companies to do business and innovate.

From what I've observed, proponents say it reduces burdensome red tape, creates a competitive edge, opens doors for new players, stimulates the economy, and frees up capital for businesses to use in running their operations.

But there's criticism too. Opponents argue it leads to ethically questionable practices, removes accountability, and reduces transparency in business operations. When regulations are eliminated, it can negatively impact consumers and workers in areas like health, safety, environmental protection, consumer rights, and ethics.

Take, for instance, the FTC's new 'Junk Fees Rule' in late 2024, which stops businesses from hiding extra fees in ticket prices and hotel rates. Proponents of deregulation often say that heavy legislation reduces investment and slows growth, doing more harm than good.

The History of Deregulation in the Financial Industry

Let's look at the early days: the U.S. financial sector wasn't heavily regulated until the 1929 stock market crash and the Great Depression. President Franklin D. Roosevelt's administration responded with regulations like the Securities Exchange Acts of 1933 and 1934, and the Glass-Steagall Act of 1933.

Those Securities Acts required public companies to disclose financial info and set up the SEC to oversee markets. The Glass-Steagall Act barred financial institutions from mixing commercial and investment banking, based on the idea that profit pursuits by big banks needed checks to avoid reckless behavior harming markets.

Deregulation in the 1980s to 1990s

In 1986, the Federal Reserve reinterpreted Glass-Steagall to allow 5% of a commercial bank's revenue from investment banking, pushing it to 25% by 1996. The next year, they allowed commercial banks to underwrite. The 1994 Riegle-Neal Act enabled interstate banking and branching.

Then in 1999, the Gramm-Leach-Bliley Act under Clinton overturned Glass-Steagall completely. In 2000, the Commodity Futures Modernization Act stopped regulation of credit default swaps and OTC derivatives. By 2004, the SEC reduced capital reserve requirements for investment banks.

Re-Regulation: The Great Recession and Beyond

This deregulation wave stopped after the 2007 subprime crisis and 2007-2008 crash, leading to the 2010 Dodd-Frank Act, which restricted subprime lending and derivatives.

With the 2016 election, Trump and Republicans aimed to undo Dodd-Frank. In 2018, a bill exempted small banks from strict rules and loosened big bank collapse protections, passing with bipartisan support. Trump wanted more, but even co-sponsor Barney Frank called it a 'small number.' Major Dodd-Frank parts and the CFPB remained intact.

Effects of Deregulation

The intended effects include boosting investment by removing entry restrictions, increasing competition that drives innovation, and lowering prices for consumers.

By reducing compliance needs, companies can invest in R&D, hire more, export goods, and buy assets instead of dealing with mandates.

Example of Deregulation

Beyond finance, take the 1978 Airline Deregulation Act. It removed restrictions, letting new airlines enter, including regional ones. Airlines gained freedom to fly new routes, add planes, and carry more passengers.

What Would Happen If There Were No Federal Regulations in the U.S.?

In the worst case, hazards would rise for people using medicines, driving, eating, or buying products without health and safety standards. Workplaces might lack safety or fair conditions, eliminating weekends, overtime, or vacations, forcing long hours or job loss. Rivers could pollute heavily, even catch fire, like the Cuyahoga before 1970 environmental acts.

What Are Some of the Benefits of Deregulation?

It has increased competition and cut prices in airlines and telecom. It spurs growth by letting companies operate efficiently, freeing capital for labor or equipment. It lowers entry barriers, making it cheaper for new businesses to join markets.

What Are Some Weird Local Regulations?

Examples include frowning being illegal in Pocatello, Idaho, or underage drinking allowed in Illinois for culinary students if they spit it out.

The Bottom Line

Deregulation cuts business costs, allows more market competitors, and lowers consumer prices, boosting efficiency and growth. That's the positive side. The negative is potential harm to consumers, workers, and the environment without oversight.