1. REGULATION Part 1

2. Definitions Regulation is a state imposed limitation on the discretion that may be exercised by individuals or organizations. It is the intentional restriction of a subject’s choice of activity by an entity not directly party to or involved in that activity. Regulation is backed by the threat of state imposed sanction. Regulation is pervasive, touching virtually every moment of our lives. It is so pervasive that we often take it for granted. Regulation may either intentionally or unintentionally affect the operation of markets. It can make markets either less or more efficient. It makes markets more efficient when there is a market failure such as an externality. It makes markets less efficient when the polity simply prefers some other value than market efficiency. We shall define efficiency with more precision at a later point.

3. Major U.S. Regulatory Agencies Consumer Product Safety Commission (CPSC): enforces federal safety standards Environmental Protection Agency (EPA): establishes and enforces pollution standards Equal Employment Opportunity Commission (EEOC): administers and enforces Title VIII or the Civil Rights Act of 1964 (fair employment) Federal Aviation Administration (FAA): regulates and promotes air transportation safety, including airports and pilot licensing Federal Communications Commission (FCC): regulates interstate and foreign communication by radio, telephone, telegraph, and television Federal Deposit Insurance Corporation (FDIC): insures bank deposits, approves mergers, and audits banking practices Federal Reserve System (the FED): regulates banking; manages the money supply

4. Federal Trade Commission (FTC): ensures free and fair competition and protects consumers from unfair or deceptive practices Food and Drug Administration (FDA): administers federal food purity laws, drug testing and safety, and cosmetics National Labor Relations Board (NLRB): prevents or corrects unfair labor practices by either employers or unions Nuclear Regulatory Commission (NRC): licenses and regulates non-military nuclear facilities Occupational Safety and Health Administration (OSHA): develops and enforces federal standards and regulations ensuring working conditions Securities and Exchange Commission (SEC): administers federal laws concerning the buying and selling of securitiesLink to web. This list contains the most important regulatory agencies. However, the list of all regulatory agencies in the United States is very long. Click here for a more exhaustive listing.here

5. The Origins of Regulation State of nature. No regulation. Movement to government. Regulation. Early government virtually always regulated private economic activities. Thou shalt not steal, covet, bear false witness, etc. As observed by Jonathan R. T. Hughes, regulation has existed in the U.S. since colonial times. Occupational licensing is a form of regulation that was practiced early on by microeconomies. Health laws, business licensing, zoning, etc. were practiced from the beginning of our republic. The laws of the several 13 states regulated private economic activities, but preferred the central government to stay out as much as possible. Individual freedom and fear of central government. Unless of course, it benefited states and localities.

6. Question: Is the state government a central government? What is there about the Federal government that arouses such mistrust and suspicion? The Constitution provided for various regulatory activities - Levy tariffs to regulate trade, regulate currency, and the regulate commerce clause. Slavery left to the states to regulate, mostly, until the Civil War. Was the abolition of slavery a regulatory act? Was the Civil War fought over a regulatory issue? Regulation involves significant problems of principal-agency. Government and a bureaucracy are the principal, with the regulated being the agent. There is therefore the problem of monitoring under conditions of asymmetrical information, conflicting interests, shirking, adverse selection, moral hazard, and competing incentives. The principal achieves cooperation through monitoring and the threat of sanction. However, regulation is never perfect in achieving its goals.

7. Regulation can be imposed through the judicial system, or through the bureaucracy. If imposed through the judicial system, then case law works out the details. If through a bureaucracy, then often that bureaucracy is given rulemaking authority Most federal regulations and regulatory mandates are laid out in the Code of Federal Regulations. http://www.gpo.gov/fdsys/ http://www.gpo.gov/fdsys/ States and localities also have similar processes.

8. Rulemaking Power to make regulations is typically delegated to a regulatory bureaucracy by Congress. Regulation is usually instituted through a process of rulemaking by a bureaucracy. Types of Rulemaking: Informal Rulemaking, also referred to as “Notice and Comment” rulemaking Formal Rulemaking, require hearings, complete public record, Hybrid Rulemaking, combination of formal and informal procedures Negotiated Rulemaking, parties to the rules negotiate over the final rule

9. Informal rulemaking process is the most common: Steps Petition to make a rule, can be initiated by outsiders, the agency itself, or ordered by Congress Notice of proposed rule- Publication of a proposed rule in the Federal Register http://www.gpo.gov/fdsys/http://www.gpo.gov/fdsys/ Comment Period- Comments on proposed rules can occur in writing, via email, through hearings. Revision of the Rule after comments. Comments need not affect. Publication of the Final Rule in the Federal Register and Code of Federal Regulation http://www.gpo.gov/fdsys/http://www.gpo.gov/fdsys/ Implementation of the Rule by an Agency Adjudication of the Rule through Administrative Courts

10. Deference of U.S. Judicial System to Administrative Law and Courts Example of Rule Enforcement Process: EPA inspector evaluates whether a company is incompliance with a rule flowing from the Clean Air Act. Finds violation. EPA issues a Notice of Violation for a company violating the Clean Air Act Company responds in writing and may or may not comply with rule If company fails to comply, then takes to administrative judge who can levy a civil penalty Adjudication in administrative court Possible adjudication in civil or criminal courts.

11. Waves of Regulation Historically, there have been two different types of regulation. These are regulation of competition (maintaining competition in the economy) and protective regulation (protecting the public). Most accounts describe four waves of regulation in U.S. history 1887-1890- examples, ICC and Sherman Anti-trust 1906-1915- examples, Pure Food and Drug Act, Meat Inspection Act, Clayton Act, and FTC 1933-1938 - examples, Food Drug and Cosmetic Act, Securities and Exchange ACT, Natural Gas Act, NLRB, Public Utilities Holding Company Act. 1960's- mid-70’s- consumers, the environment, worker safety, etc. quality of life issues. - Water Quality Act, Clean Air Act, Truth in Lending Act, National Traffic and Motor Vehicle Safety Act, Motor Vehicle Pollution Control Act, various drug control laws.

12. The substance of the old regulation was primarily economic, some say often advocated by the very interests they were intended to regulate. Capture Theory vs. Public Interest Theory The New Regulation is primarily social, involving market failures, externalities, etc. We will define these later. Much of the new regulation is also highly technical and scientific, beyond the expertise of the Congress. The result has been plenary delegation of authority to new agencies, granted large amounts of discretion in dealing with regulatory problems. The origins of regulation are political, in all waves.

13. Although regulation can be justified in terms of efficiency, equity, or other important political values, it would be wrong to say these things CAUSE regulation. The origins of regulation always involve a coalition of interests seeking it as a benefit. Empirical Observation of these different eras suggests that it usually occurs on the wings of some sort of reform cycle in American politics. The Progressive Era, the New Deal, and the Great Society (a move to greater social equity). Close observation of specific cases of regulation suggests also that it may involve highly salient and visible crisis (e.g., Nader's report on the Corvair and rear engine fuel tanks spurred NHTSA; air pollution crises in the 50s and 60s spurred Clean Air Acts; Love Canal and other such incidents spurred RCRA. Policy entrepreneurs may also be important. Ralph Nader with safety regulation; Edmund Muskie with environmental regulation; Lyndon Johnson and later Nixon with EEO legislation.

14. Characteristics of Regulation Elected institutions create regulatory institutions, often a bureaucracy of one sort or another. These elected institutions, while they support regulation initially, are dynamic and may not continue to support regulation. Bureaucracy is a reflection of a static coalition at a single point in time frozen. It represents that original regulatory coalition, sometimes against future elected institutions. For example, Ronald Reagan and the Right. Question: On the nature of democracy, should the popular will of the governed always translate immediately into public policy in contemporaneous time through our elected institutions? Or should there be constraints on democratic responsiveness?

15. Regulation usually antagonizes powerful interests: Automakers, oil and chemical industries, steel manufacturers, electric power companies, monopolies, etc. Has implications for the politics of regulation. Regulation may have enormous impacts on both the regulated and the unregulated. $100 billions spent on air pollution in 70s. Closer to a trillion to bail out the thrifts and banks in the 1980s. Over 200 billion to clean up Nuclear Waste problems. Superfund and hazardous wastes 100 billion and counting. Who has seen Erin Brockovich? True story. A Civil Action. True Story.

16. Toxic substances dumped have killed tens of thousands of people in the U.S., and more in other countries. Unregulated- asbestos will kill several hundred thousand workers in the U.S. before the toll is all in. Asbestosis; mesothelioma. Radon gas in homes will kill even more. We allow the tobacco industry to kill even more by selling their poison to the American public? They have deliberately attempted to addict Americans to their products. Who has seen The Insider? Russell Crow, another true story. Banking regulation failures prior to 2007 cost the economy huge amounts. 800 billion for bank bailouts. 7.7 trillion in loan guarantees through the FED

17. Regulation often involves making decisions on matters on which there is imperfect knowledge. Example: Nuclear regulation: Radioactive emissions are hazardous to human health. Somatic effects range from 25R no effects, 50R blood changes or minor skin damage, 100 R loss of hair and vomiting, 500 R death. Genetic effects we are unsure of. Yet medical science does not know what a safe dose of radiation is for the human animal. Currently, workers can be exposed to 5 REM per year if over a certain age and not a woman in childbearing years. This is a dose that scientists have great difficulty justifying since it was determined arbitrarily after WWII by studying survivors from Hiroshima and Nagasaki. Clean air doses based on each of the five criteria pollutants is likewise very tenuous and arbitrary (SO2, NO2, O3, CO, Particulates) There are risks involved for regulators who establish these regulations. The environment of decision is one of great uncertainty.

18. Regulation may involve multiple agencies, each of which claim to represent the public and each with different interests. Examples: EPA and the Energy Department. OSHA in the Department of Labor and the Commerce department, Department of Energy and the Nuclear Regulatory Commission, Defense Department and the NRC and EPA. At the State and local levels: the city of Houston and the State Water Pollution Authority. May involve delay in addressing important problems. Example: Congress passed hazardous waste legislation in 1975 (RCRA). It was not until 1980, that hazardous waste regulation got off the ground, and then it had to endure the early Reagan administration. Why? Uncertain technology, risks for regulators, costs for powerful interests, vague legislation granting much discretion.

19. Regulatory bureaucracies operate within the context of constraints. Mission constraints-Must abide by the letter of authorizing legislation. Political constraints-shelter the core technology and assure resources. Legal constraints-Administrative Procedure Act, the law’s mission statement, the law’s requirements. Technical constraints- May not know how to solve problems.

20. The capacity of a regulatory agency to be effective depends on its resources, which include: Budgets and Personnel Technology Democratic support from representative institutions Clientele support Internal constituency- the agency staff should be professional, technically competent, develop routines, have esprit. Issue complexity. Salience to the public or other interests. Tractability of the problem. (AIDS versus automatic weapons).

21. Why Delegate Regulation to a Bureaucracy? 1) Greater expertise in bureaucracy. 2) Time constraints and congressional overload 3) Continuous contact by bureaucracy with problem; intermittent contact in legislative 4) Intentional desire to depoliticize an issue. Rational decisions may not occur in the charged environment of ideological politics. 5) Issue uncertainty- for clarification and refinement of a broad mandate in an incremental fashion. 6) Changing conditions likely to occur, hence vague mandate. Unexpected contingencies 7) Desire of bureaucrats for jurisdiction flexibility to enhance rational action. 8) Deadlock and the need to resolve collective action dilemmas. 9) Need for uniformity and fairness through time is satisfied by the institutional memory Congress may not possess. 10) Need for quick action and avoidance of lengthy delays.

22. Lowi’s Typology Lowi's Typology- Lowi classifies policies as to the coerciveness of the policy to those to whom it is applied. The theme here is that policy determines politics, not vice versa.

23. Regulation- Coercion is directly applied and immediate. It tends to be abrasive to the clientele. Hence politics is likely to be conflictual, both during legitimation and after during imple­ mentation. Initial regulation is accomplished only after input from macropolitical actors. Support may decline in later years. Public Interest theory-Public interest theory argues that most regulation occurs for the benefit of the mass public. The idea is that a need or market abuse percolates up to political institutions, resulting in a regulatory enactment. Capture theory- Capture theory suggests that once regulation is in place, the regulating entities become captured by the regulated. In economics, the Law and Economics school of thought has argued and showed empirically that regulation often serves the interests of the regulated. Why? Regulation is in their self- interest and involves “rent-seeking”. We shall define “rent seeking” later.

24. An alternative way of viewing regulatory policy is as a redistributive/distributive matter, especially when quiescence is observed and maintained. Regulators may be captured to protect the regulated. Examples, Public Utility Regulation in earlier times (Gabriel Kolko a Marxist and George Stigler a Libertarian agree on this). Regulation may be a subsidy which allows regulated interests to restrict market access and or redistribute wealth. Decisions about protective regulation are not subsystem decisions. They are decisions involving conflict and attracting the involvement of the larger political forces including the whole congress, the president and higher officials of the executive, as well as the lower levels. High visibility. Coalitions of groups, unlike those involving distributive decisions are highly unstable and subject to change and realignments dependent on the stakes and the issues. Politics is more conflictual than in distributive policy. Due to disagreements at the lower levels policy formulation and legitimation is often transferred up the chain to higher levels (that is because subcommittees are unable to resolve and be­cause of high visibility, the full Congress is called on to decide). Moreover, the influence of the subgovernment over the outcomes may be minimal or at best altered by the decisions of others in the higher arena.

25. Distributive policies- These types of policies distribute benefits to elements of society directly. No one is coerced immediately. In fact, coercion is missing. Relations are therefore consensual. Examples: subsidies, price supports, veterans benefits, highway funding, farm subsidies, Agricultureal Research Service, National Institute of Health, benefits for the disabled, corps of engineers, water projects, sewer grants, NASA, etc. Redistributive policy- costs are dispersed, benefits are concentrated. Coercion is immediate and penalties are apparent; the policy is applied indirectly throught the envi­ ronment. Examples: Income redistribution, social security, welfare, Medicare, food stamps, tax reform, etc.

26. The politics of redistribution tends to be ideological invoking conflict and an unwillingness to compromise on ends or means. It will be prolonged requiring a long time for legitimation to occur. Policy making cannot be restricted to the subsystem. Coalitions are stable lining up along ideological lines and tend to be stable through time refusing to crossover or compromise. Issues tend to be visible and salient to large numbers of people. The public usually cares and a lot. The outputs of legitimation tend to be bargains designed to give life to the policy rather than to solve problems. The policy process must build on this base in incre­ments. Even them progress toward problem resolution is slow and difficult because of the nature of the problem. It takes extraordinary conditions to secure passage and initialization of such legisla­tion. e.g., election landslides, party realignments, crisis, violence. Often there is weak clientele support after legitimation. Support tends to be transitory and declining.

27. Constituent policies- Coercion is remote or absent and policy is applied indirectly to the environment. Low levels of support will often exist for the policy due to the indirectness of benefits. Little opposition will exist due to small costs to the public. Examples: The National Parks Service, the Forest Service, foreign affairs bureaus, Departments of the Army and Navy, Defense, GAO, OPM, Treasury, Secret Service. Service intensive activities fall into this grouping, especially those agencies that serve other entities of government rather than the public directly.