Managing the Transition to Deregulation

Abstract

This country is now engaged in what is undeniably an historic reconlstruction of many of the federal government's most important interventions in the private economy. One by one, regulatory programs, which have had an enormous influence on key sectors of the nation's economy, are being removed or substantially reduced: airlines, railroads, crude oil, banking, natural gas, trucking, communications, and so on. In every instance, the practical problem of managing the transition from economic regulation to reliance on the marketplace is a majorissue in the decision to deregulate. These historic shifts in regulatory policy have substantial effects on the fortunes of many of the nation's most powerful interest groups. 'l'his adds more than a mere hint of politics to these attempts to markedly reduce government intervention in the economy. Table I illustrates one consultant's analysis of the effects of trucking deregulation. We present it here not to argue the merits of trucking deregulation, nor the accuracy of this particular forecast (although we think it is reasonably on target), but merely to illustrate the effects of reform on various sectors. In essence, the Table is a balance sheet fior trucking deregulation. Even a cursory review shows winners (shippers and consumers receive dramatically lower transportation costs), losers (regulated trucking companies experience diminished earnings), and those who draw (growth in wage rates declines, but total employment rises sharply). The point is that the transition from regulation to competition affects many people's fortunes in dramatic ways. Those who would manage this transition successfully must devise policies which, among other things, reflect these effects. Our direct experience in the case of airline deregulation, c1rude oil decontrol, rail, truck, and bus deregulation, and other regulatory programs, has led us to believe that the transition problems involved in moving from regtilation to competition often are poorly understood both from an economilc and a p)olitical viewpoint. Thus, we have two objectives in this article. The first is to describe, in a generic but practical fashion, the problems which arise in moving friomn strict economic regulation to reliance on the market forces of competition. 'lhe seco(nd is to suggest some practical ways to address these problems by devising transition mechanisms which