The state---the machinery and power of the state---is a potential resource or threat to every industry in the society. With its power to prohibit or compel, to take or give money, the state can and does selectively help or hurt a vast number of industries.

                                                                                                            George J. Stigler[1]

The public interest rationale for regulation prevailed until the early 1970s, when George Stigler fundamentally changed the way many economists view much of economic regulation. After decades of studying the American economy, Stigler identified numerous instances where regulation failed to guard public interests. If the public interest approach were correct, we would expect regulation primarily in highly concentrated industries (to regulate monopoly power) or in industries with significant economies of scale or scope. But many regulations in such areas as taxi service, air transportation, trucking, and some professional licensing arrangements (barbering, for example) find little support in the public interest rationale. Stigler asked an obvious question: If the public interests are not being served, whose are?  His answer turned previous theory on its head.

 

The industry interest theory of regulation asserts that regulation is often tailored to serve the interests of regulated industries instead of those of the general public.

           

The Constitution gives Congress power "to regulate commerce among the several states." The government can tax, compel resource allocations, or change the economic decisions of households and firms without their consent. The state can use these great powers to raise or lower profitability in any industry through four major mechanisms:

 

1.   Direct subsidies to the industry, special tax breaks or punitive taxes, or advantageous or harmful operating regulations.

2.   Restriction or encouragement of entry or exit (e.g., barriers on imports).

3.   Subsidies, taxes, or limitations on complementary or substitute products.

4.   Direct price-fixing policies (price floors or ceilings).

 

            All four mechanisms have altered profitability in many industries. The merchant marine (U.S. oceanic shipping) is heavily subsidized, as is medical care for the elderly (Medicare). Entry restrictions were effective in the airline industry, where the Civil Aeronautics Board (CAB) did not license a single new trunk line during the 40 years after its establishment in 1938. Another example is regulation of trucking by the Interstate Commerce Commission (ICC). In the 1960s and 1970s, applications for new truck lines averaged over 5,000 annually, while the number of firms in operation continually shrank.[2] Law and medicine, too, are professions that benefit from restrictions on entry.  (For example, competition from nurse practitioners, chiropractors, and paralegals is limited.) Restrictions on the number of taxicabs that can operate in New York have resulted in a $100,000 current value of taxi "medallions," driving up the costs to would-be drivers and, consequently, the costs of taxi fares.[3]

 

            Government policies also affect an industry's substitutes and complements. Laws banning the use of yellow food dyes that allowed margarine to mimic the appearance of butter were enacted in the 1950s, when the dairy industry fought to hold its market for butter. Today, direct price-fixing is found in milk and cheese price supports and in many farm and tobacco subsidy programs. Truckers vigorously supported improvements (subsidies) to interstate highways and naturally, railroads opposed their development.

 

            Construction unions have successfully opposed reforms to local building codes that block labor-saving technology. The consequence is that many building codes require outdated, labor-intensive construction techniques that drive costs up but provide employment for union workers. Some economists have argued that these building codes contributed to homelessness by reducing the availability of low-cost housing.

 

            Few of these regulations are in the public interest. Some advocates of regulation blame incompetent managers for failing to guard the public interest. Others argue that agencies are often "captured" by the regulated industry. Regulators need expertise, and what better source for expertise to help solve problems than from within the industry? Constant contact with industry experts frequently persuades regulators of industry positions. This helps explain why regulations often favor the industry rather than the public and why many states now fund consumer advocacy agencies.

 

            One notable exception to the success of industry interest regulation is the International Whaling Commission. Initially established to further the interests of the whaling industry and the nations involved in whaling, it appears to have now been "captured" by animal rights forces and now serves as the leading anti-whaling regulator/advocate.

 

            George Stigler concluded that public interest theories fail to explain most regulations because they assume that business opposes regulation. Assuming instead that firms seek regulations to serve their own interests yields inferences vastly different from those based on public interest theories. His industry interest theory views government as the supplier of regulatory services to an industry. These services are paid for through lobbying or campaign contributions to policymakers who favor regulations the established firms want.

 

            All firms seek monopoly power and abhor "cutthroat" competition; most would prefer to be part of a cartel. Cheating by members, however, causes unregulated cartels to disintegrate. One way to stabilize a cartel is through regulation of entry and prices. The major benefit of regulation to an industry is probably entry restriction.

 

            Curiously, cartels are outlawed in some instances and implemented through law in others. Thus, railroads supported passage of the Interstate Commerce Act, early airlines favored establishment of the Civil Aeronautics Board, and so on. Regulated industries commonly mount major political offensives against proposed deregulation, but convictions of Teamster's Union officials in 1982 for trying to bribe a member of Congress to oppose trucking deregulation are evidence that firms are not the only beneficiaries of regulation.

 

            Occupational licensing is a barrier to entry for lawyers, medical doctors, barbers, plumbers, dog groomers, realtors, travel agents. . . . You can be jailed or fined if you operate without a license. The call for licensing is often clothed in public interest rhetoric so that the public will not notice its pockets being picked. As higher earnings stimulate the supply of potential entrants into a profession, entry restrictions evolve that impose ever higher qualifications for new applicants. Higher standards frequently bar would-be members of a profession who have credentials superior to those of "grandfathered" long-term practitioners. Of course, all this is done in the name of increasing professional quality for the public.

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