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Regulation in the Economic Arena

Regulation in the economic arena is an extremely contradictory issue. For many decades, prominent economists and policy makers have been trying to find the best decision making the country’s economy work efficiently. Some adherents support the market free theory, excluding government intrusion into financial affairs. The others focus on the strong necessity to control and regulate the country’s economy to avoid economic collapse.

Economic regulation means “a form of government intervention designed to influence the behavior of firms and individuals in the private sector” (Economic Regulation). It is diametrically opposed to self-regulation that can be defined as “acting according to one’s own volition, and not as a response to an external constraint” (Ogus, 1999, p.588). Deciding to set a self-regulatory regime, firms make an implicit contract. Having new agents entered, the principal have not full information about their type and intentions to follow contractual obligation. This results in a moral hazard, the key phenomenon that means the possibility to alter behavior because of insurance against negative outcomes. The advantage of self-regulatory regimes over control models of regulation is the opportunity to create a responsive regulatory system. The drawback of this regime is complete vulnerability to unethical participants and unpredictability of the finance affairs, leading to failure in many cases and requiring government intervention. (Williams, 2004).

On the one hand, government intrusion in the free market seems to be negative. In theory, it contradicts national morality. The explicit philosophy of individual rights is a cornerstone of American ethics, and government intervention is limited by the Constitution. Government regulation of the market leads to harmful consequences, interfering economic growth.

First, regulation is detrimental for small businesses. Politically connected businesses supersede smaller companies. Second, regulation is extremely expensive. It costs the United States about $1.8 trillion each year (Crews, 2011). Third, regulation results in the growth of government. Adopting new regulatory policies, government sets new agencies to enforce the projects. Fourth, government intervention causes specific problems. For instance, federal subsidies for fossil fuels have resulted in carbon pollution (Harbin, n.d.). Finally, the total government intervention is extremely harmful to the country’s economy. The example of its failure is illustrated with the weak economy of the former Soviet Union, where the government controlled and regulated economic activities and natural resources. All these facts emphasize the necessity of deregulation.

There is a central line in economic philosophy, claiming that business is separate from moral values. The profit motives are highly appreciated. Being influenced by ethics and morality, deregulation is based on the contrary principles, recognizing “the primacy of conscious and informed individual choice and responsibility for one’s action” (Younkins, 2000). Since the 1970s, partial deregulation has been provided in many sectors of the country’s economy, such as “airlines, trucking, taxi flees, utility rates, broker rates” (Younkins, 2000). For instance, in 1978, Airline Deregulation Act was passed, deregulating control over air travel. As a result, air travel dramatically enhanced, and prices fell (Smith & Cox, n.d.). Then, being extremely opposed by the Teamsters Union and the American Trucking Associations, The Motor Carrier Act of 1980 was passed to restrict the ICC’s influence on trucking. “Rates for truckload-size shipments fell about 25 percent in real, inflation-adjusted terms”, confirming the success of partial deregulation (Moore, n.d.).

All the above-mentioned facts highlight the advantages of self-regulation. Nevertheless, some prominent economists and policy makers have claimed that government management is necessary for stabilization of the country’s economic growth and prevention of economic collapse. This idea has become extremely supported after the Great Depression. It has made profound impact on American attitudes towards the government role in the country’s economy and the interpretation of the Constitution. Anthony Williams argues, “The growth of regulation since 1930s was simply a functional response to the changing public needs and interests of an evolving industrial society” (Williams, 2004, p. 2). It resulted in enlarging the government functions in various fields of economy.

Dr. Edward Younkins gives five reasons for justified government intervention: the occurrence of market structures causing troubles, the urgent necessity to use natural resources, the detrimental market strategy of the firm, the negative impact of certain firms on the country’s economy, and the strong necessity to maintain significant power blocks in the country’s economy (Younkins, 2000). In order to improve economic efficiency,  policy makers use such tools as “public expenditures, taxes, government ownership, loans and loan guarantees, tax expenditures, equity interests in private companies and moral suasion” (Economic Regulation). Referring to price control, economists note that it should be used only in cases of monopolization of the market by one firm. If the markets are competitive, price control is harmful.

The positive influence of government intrusion can be observed in the following examples. First, in Norway, Sweden, and Finland, the financial deregulation of 1980s resulted in the banking crises. These Scandinavian countries experienced a lending boom in the real estate sector. Having faced the collapse of real estate prices and inevitable loan losses, the governments provided regulatory policies and revealed the entire banking industry in 1990s (Mishkin, 2013). Second, in Russia, the bank panic of 1995 required government intervention and extraordinary intrusion. Providing effective policy, the Russian government stopped the banking and financial crisis in August 1998. Finally, the U.S. government activities during the Great Recession of 2008 illustrate the most convincing example of the beneficial influence of government intrusion. During the Great Recession, bursting of the housing bubble in the United States, the U.S. government has passed a severe test as for corresponding today’s economic reality. Undertaking fiscal policy, Congress revealed the ailing country’s economy. The government expanded spending and cut the taxes on household and business. In 2009, the American Recovery Act was passed. This government intrusion has had overwhelmingly positive results and prevented the United States from economic collapse.

To it sum up, economic regulation is a controversial issue. Trying to maintain the country’s economy efficiently, many profound economists and policy makers have different points of view on the role of government in the economic process. Some adherents claim that self-regulation is desirable. Their idea is based on the explicit philosophy of individual rights, the cornerstone of American ethics. Moreover, self-regulatory regimes give individuals and firms the opportunity to create a responsive regulatory system. Government regulation of the market can lead to destructive consequences, hindering economic growth. On the other hand, governance is essential to stabilize economic growth and prevent possible economic collapse. Without government intrusion, all business activities may turn into chaos because of different reasons: unethical participants, unpredictability of financial affairs, force major circumstances. Moreover, the financial crisis can be prevented only by government intrusion. Thus, the main idea is not in the choice between government regulation and deregulation but in a wise combination of these mutually necessary phenomena.

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