Carney on Regulatory Capture

by on September 9, 2006 · 4 comments

As I mentioned back in July, Tim Carney was kind enough to send me a review copy of his new book, The Big Ripoff. With dozens of example, Tim does an excellent job of documenting just how frequently Big Business and Big Government are in bed together.

I particularly liked chapter 7, “Regulators and Robber Barons,” which is chock full of real-world examples of regulatory capture. Carney demonstrates that much of the time, the standard media story of big government pushing regulations on businesses and businesses resisting them is wrong. In many cases, what happens is that established businesses argue in favor of regulations that they perceive as hurting their competitors (often smaller competitors) more than themselves. For example, in 2001, the largest biotech companies lobbied for increased FDA scrutiny of biotech crops which, as the FDA’s own proposed rule acknowledged, would have a disproportionate impact on smaller biotech companies that lacked the resources to jump through the FDA’s hoops. He tells the story of FedEx, an upstart cargo carrier who in the 1970s was prevented from expanding by government regulations that were strongly supported by the Flying Tigers, the then-dominant air cargo company. And he discusses the controversy over “a la carte” cable regulation, which most of the cable industry opposed, but which CableVision–a company that had already invested in the equipment to offer a la carte services–lobbied for. Carney argues that CableVision calculated that imposing a la carte mandates would hurt its competitors more than it would hurt itself.

My favorite example of regulatory capture, however, is the story with which Carney opens and closes the chapter: the CAB. Carney documents that during the deregulation debates of the 1970s, every one of the big five airlines of the day lobbied vigorously against deregulation. They liked their cozy cartel with government-mandated prices and limited competition. They were opposed by competitors such as World Airways, a cargo carrier that wished to expand into the passenger airline market but was prevented from doing so by the CAB.

World’s campaign for price deregulation succeeded in 1978, and World’s business boomed. He painted himself as the industry David fighting against entrenched Goliaths. They ignited price wars with the major carriers and gained market share. But in 1982, World changed its tune, declaring the price wars “disastrous and completely irrational.” Now World was itself an incumbent, and competition didn’t look so great any more. Unfortunately, for World, they didn’t get their wish, and the company soon became a casualty of the same market upheavals they had helped to ignite. Carney writes that the passenger airline business began bleeding red ink, and World abandoned its passenger flights in 1984 and went back to being a cargo carrier.

It’s hard to draw direct analogies here to the network neutrality debate because unlike in Carney’s examples, the incumbents really are fighting new regulations. (at least the incumbent telecom companies are–there are incumbent tech companies on the pro-regulation side) But I think Carney’s stories help to flesh out the dangers of giving regulators control over a new industry. Even if network neutrality regulations have some beneficial short-run effects, there’s a real danger that in the long run, they’ll have effects similar to the CAB’s impact on the airline industry. Incumbents will find ways to accommodate themselves to the new rules, and once they’ve done so, they’ll begin lobbying for gradual adjustments to the rules that will transform them into a barrier to entry for new competitors.

Anyway, I encourage you to get Tim’s book. Whether you agree with his politics or not, he tells dozens of compelling stories of sordid affairs between business and government. There are plenty of juicy tales for both liberals and conservative to dig their teeth into. He documents the scandal of eminent domain abuse, tells the real story behind the 1998 tobacco “settlement,” and gives a less-than-rosy account of Teddy Roosevelt’s Progressive legacy. It’s an important reminder that big businesses are not and never have been doctrinaire defenders of the free market. They support free markets only when it suits their interests, and much of the time, they’re far more interested in lobbying for taxes and regulations that hamstring their competitors and preserve the status quo.

Comments on this entry are closed.

Previous post:

Next post: