Contemporary Regulatory Policy 9781685852450

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CONTEMPORARY REGULATORY POLICY

EXPLORATIONS IN PUBLIC POLICY SERIES EDITOR

James J. Gosling, University of Utah

EDITORIAL B O A R D

Charles W. Anderson, University of Wisconsin Dennis J. Dresang, University of Wisconsin Marc Allen Eisner, Wesleyan University Stephen L. Elkin, University of Maryland Jeffrey R. Henig, George Washington University Cathy Johnson, Williams College Ira Sharkansky, Hebrew University of Jerusalem

CONTEMPORARY REGULATORY POLICY

Marc Allen Eisner Jeff Worsham Evan J. Ringquist

LYN N E R I E N N E R PUBLISHERS

B O U L D E R L O N D O N

Published in the United States of America in 2000 by Lynne Rienner Publishers, Inc. 1800 30th Street, Boulder, C o l o r a d o 80301 www.rienner.com and in the United K i n g d o m by Lynne Rienner Publishers, Inc. 3 Henrietta Street, Covent G a r d e n . London W C 2 E 8LU © 2000 by Lynne Rienner Publishers, Inc. All rights reserved Library of C o n g r e s s Cataloging-in-Publication Data Eisner, Marc Allen. Contemporary regulatory policy / by Marc Allen Eisner, Jeff Worsham, Evan J. Ringquist. p. cm. — (Explorations in public policy) Includes bibliographical references and index. ISBN 1-55587-767-2 (he : alk. paper). — ISBN 1-55587-772-9 (pb : alk. paper) 1. Administrative procedure—United States. 2. Administrative agencies—United States—Decision making. 3. Deregulation—United States. I. Worsham, Jeffrey. II. Ringquist. Evan J., 1962III. Title. IV. Series. KF5411.E58 1999 342.73'066—dc21 99-12979 CIP British Cataloguing in Publication Data A Cataloguing in Publication record for this book is available f r o m the British Library.

Printed and bound in the United States of America

@

The paper used in this publication meets the requirements of the American National Standard for P e r m a n e n c e of Paper for Printed Library Materials Z39.48-1984. 5 4 3 2 1

To Patricia, Jonathan, and Benjamin—the key actors in the most important of all subsystems, my family. —M. A. E. To Debby-chan, who, by tolerating, supporting, and living with me, has demonstrated time and again the relationship between outputs and outcomes. And to my parents, who gave up on any attempt at control and settled for influence long ago. —J. W. To Laurie, who regulates my behavior, and to Rachel, who has taught me volumes about the powers of the agent in principal-agent relationships. —E. J. R.

Contents

Preface

ix

PART 1 UNDERSTANDING REGULATION 1

A Primer on Regulation

2

Explaining Regulatory Change

19

3

A Brief History of Contemporary Regulatory Politics

35

PART 2

3

CONTEMPORARY REGULATORY POLICIES

4

Regulating Market Competition

61

5

Regulating Financial Intermediaries

91

6

Regulating Telecommunications

111

7

Environmental Protection Regulation

133

8

Regulating the Workplace

171

9

Regulating Consumer Products

197

10 Regulating Energy

233

11 Making Sense of Regulation in a Deregulatory Era

271

List of Acronyms and Abbreviations Bibliography Index About the Book

285 289 317 333 Vll

Preface

This v o l u m e represents the a u t h o r s ' o n g o i n g interest in regulatory policy, politics, and administration and participation in scholarly debates over the question of regulatory control. It is designed to provide a lively overview of some of the central debates and an informed survey of c o n t e m p o r a r y regulatory policies. Although we share a healthy respect for economics, we are political scientists by training. As a result, the book approaches the subject matter largely through the lens of policy analysis. We have e n d e a v o r e d to present the material in such a fashion so as to maxim i z e a c c e s s i b i l i t y — t h a t is, we have done so without presenting a single e q u a t i o n — s o that the book will offer something of substance to a broader informed audience.

•

Besides accessibility, the book differs f r o m many of the existing volu m e s on regulation in two ways. First, we are c o m m i t t e d to a simple proposition: institutions matter. In other words, the way in which public authority is organized will have a p r o f o u n d impact on political accountability, opportunities for participation, and the ultimate success of public policy. If public policy is, in essence, a pattern of goal-driven actions, the way in which policy is i m p l e m e n t e d by regulatory a g e n c i e s must be of central concern to students of regulation. Yet much of the existing work in regulation adopts simplifying assumptions that remove organizations f r o m the picture, essentially t r a n s f o r m i n g regulatory studies into exercises in applied microeconomics. Second, although we are critics of bad policy and administration, we are not critics of regulation per se. Rather, we believe there are valid reasons to regulate, and these justifications go well beyond discussions of market failure. Unfortunately, much existing work on regulation begins with the explicit or implicit assumptions that markets are in and of themselves sufficient and that public policy has little if any positive role to play in governing an advanced industrial economy. There are no efforts here to stake out an ideological argument against regulation, but

IX

X

PREFACE

rather an effort to understand those factors that have shaped regulatory policy design and implementation. Many of our colleagues, former mentors, students, and friends have weathered the results of our ongoing collaboration. Many have helped us understand where we were wrong along the way. We will not identify here all those who have contributed to our efforts; the bibliography provides some sense of our intellectual debts. We surrender our right to thank those who have helped us over the years so that members of the larger audience (my, we are presumptuous) do not hold them accountable for our work. We would, though, like to explicitly thank those who have made the study of regulation so much fun: Thorne Auchter, Paul Rand Dixon, Anne GorsuchBurford, Rita Lavelle, Manuel Lujan, Ken "Famous" Meier, James C. Miller III, Daniel Oliver, Terrance Scanlon, M. Danny Wall, and James Watt. Although this volume is a team effort, there was a division of labor. Chapters 1, 2, and 11 were written (and rewritten) collectively. The remaining chapters were written individually, albeit with some prodding and comments by the other members of the team. Eisner claims primary responsibility for Chapters 3 (regulatory history), 4 (antitrust), 8 (occupational safety and health), and 9 (consumer product safety). Ringquist wrote Chapter 7 (environmental protection), coauthored Chapter 10 (energy), and collected a wealth of data integral to the case studies. Worsham wrote Chapters 5 (finance) and 6 (telecommunications) and coauthored Chapter 10. He is also responsible for 87 percent of the acronyms and all errors of omission or commission committed by his coauthors elsewhere in the book.

Part 1 Understanding Regulation

1 A Primer on Regulation

Regulation has been a central component in the rhetorical wars of the last several decades. To critics on the right, regulation describes governmental forays into social engineering designed to encumber corporations with any number of politically defined duties and compliance costs (the socalled regulatory burden). To advocates on the left, regulation describes the positive use of public authority to hold corporate A m e r i c a accountable, a goal that is deemed worthy given the i m m e n s e p o w e r exercised by the modern corporation and the lack of any other direct means of forcing businesses to accept responsibility for workplace injuries, environmental degradation, and potentially hazardous consumer products. T h e term regulation has become something of a code word for government intervention. Unfortunately, there is often little connection between o n e ' s willingness to speak of regulatory excesses and o n e ' s knowledge of regulatory policy. This volume is designed, in large part, to provide a relatively detailed overview of regulatory policy and administration in several issue areas. Readers of this volume should have a clear understanding of the key policies and agencies in a variety of these areas, as well as an appreciation for how (and why) patterns of regulation have changed over the course of the latter decades of the twentieth century. We need to preface our discussion with some important preliminary material. Specifically, in this chapter, we d e v e l o p a definition of regulation, survey the justifications and explanations offered for regulation, examine a host of regulatory tools, and introduce competing explanations typically offered for regulatory policy change.

•

W H A T IS R E G U L A T I O N ? Regulatory policies are a subset of public policies more generally, so it is useful to begin with a s o m e w h a t broader question: What is public policy?

3

4

U N D E R S T A N D I N G REGULATION

J a m e s E. A n d e r s o n d e f i n e s policy as "a p u r p o s i v e c o u r s e of action followed by an actor or set of actors in dealing with a problem or matter of c o n c e r n " (1984: 3). Similarly, C l a r k e E. C o c h r a n and colleagues d e f i n e public policy as "an intentional course of action followed by a government institution or official for resolving an issue of public c o n c e r n " (1990: 2). At first glance, this has much to c o m m e n d it. The focus turns to patterns of action, as opposed to mere rhetoric or symbolic statements of intent. More important, policy concerns goal-oriented behavior rather than random acts. Yet there is a problem, as T h o m a s R. Dye reminds us that "we can never be sure whether or not a particular action has a goal, or if it does, what that goal is. . . . All we can really observe is what g o v e r n m e n t s c h o o s e to do or not to d o " (1992: 3). In the end, D y e ' s definition is quite minimalist: "public policy is whatever governments choose to do or not to d o " (1992: 4). T h e m o v e m e n t away f r o m intentions is useful. T h e y cannot be observed, and it is difficult to m a k e a connection between statements of intent and patterns of action, given that the f o r m e r may provide an ex post facto justification of the latter. We depart f r o m Dye, however, on the issue of choice. T h e patterns of public action that constitute policy are the products of a c o m p l e x interorganizational system and bureaucratic routines (see Chapter 2). While there are choices, they are often distorted by organizational routines that constrain the opportunity set available to decisionmakers. As a result, it makes sense to adopt an even more minimalist definition of policy as patterns of governmental action and inaction. This does not mean that we are unconcerned with issues of intentionality and choice. Yet h u m a n agency must be understood as being constrained by structure. D e c i s i o n m a k e r s operate within a dense organizational context in which a given set of values, m e t h o d o l o g i e s , bodies of expertise, and policy tools are favored over others. W h e n making policy, decisionmakers situate current policies in relation to past initiatives, often seeking to reconcile new initiatives with existing organizational capacities. Nor d o e s this minimalist definition m e a n that we are u n c o n c e r n e d with policy impacts. We must focus attention not only on what the government does (the patterns of action), but on whether such actions actually reduce p r o b l e m s , on whether they do so in w a y s that are c o s t - e f f e c t i v e , and on whether this is a c c o m p l i s h e d without giving rise to a host of unintended c o n s e q u e n c e s that impose costs that e x c e e d the b e n e f i t s of g o v e r n m e n t intervention. What of regulation? One may follow Kenneth J. Meier (1985: 1), who notes that "regulation is any attempt by the government to control the behavior of citizens, corporations, or subgovernments" (1985: 1). Such a definition may appear too broad at first. All public policy is designed to coerce certain patterns of behavior. If control were unnecessary, the desired results would be forthcoming without governmental coercion. A narrower

definition would seem appropriate. In this volume, regulation will be used to describe an array of public policies explicitly designed to govern e c o nomic activity and its consequences at the level of the industry, firm, or individual unit of activity. As this definition suggests, we are not concerned with policies affecting e c o n o m i c activity at the m a c r o e c o n o m i c level, but with policies that function directly at a m i c r o e c o n o m i c level. A useful distinction that we retain is m a d e b e t w e e n traditional e c o n o m i c regulation and the new social regulation. Economic regulations govern c o n d i t i o n s u n d e r which f i r m s may enter and exit the market, c o m p e t i t i v e p r a c t i c e s , the size of economic units, or the prices f i r m s can charge. E c o n o m i c regulations c o m m o n l y target a single sector of the economy, and the jurisdiction of the agencies that administer these regulations is generally limited to a single economic sector as well. Most of the regulatory initiatives introduced during the Progressive Era and the New Deal were economic regulatory in nature. The new social regulations, in contrast, are designed to force corporations to accept greater responsibility for the safety and health of workers and consumers, as well as for the negative by-products of the production process. They also address various social issues that are not directly e c o n o m i c (e.g., equal opportunity in employment). In clear contrast with e c o n o m i c regulations, social regulations apply across sectors; the associated agencies must regulate on an e c o n o m y - w i d e basis. Because they impose large costs on firms, they are bitterly opposed by the regulated parties. Although social regulations have been introduced throughout the history of regulation, they b e c a m e dominant after the late 1960s, as qualityof-life issues became more salient.

W H Y REGULATE? Given the diversity of regulatory policies, there is no single explanation of why governments regulate. One can identify several rationales for regulation, each of which is premised on a particular vision of governmental authority and expectations concerning how this authority will be exercised. Each p r o v i d e s some important insights. We restrict our attention to f i v e explanations: 1. R e g u l a t i o n s are public policies designed to f u r t h e r the " p u b l i c interest" 2. Regulations constitute efforts to prevent or compensate for market failure 3. Regulations are the product of industry demands for wealth transfers 4. R e g u l a t i o n s are the product of agencies captured by regulated industries

5. R e g u l a t i o n s are the p r o d u c t of the c o m p e t i t i o n a m o n g r e g i o n a l political e c o n o m i e s T h e s e e x p l a n a t i o n s of w h y g o v e r n m e n t s r e g u l a t e are not m u t u a l l y e x c l u sive. I n d e e d , several m a y be s i m u l t a n e o u s l y correct. Let us e x a m i n e each in turn.

R e g u l a t i o n a n d the Public Interest T h e f i r s t p o r t r a y a l of r e g u l a t i o n r e f l e c t s the n o r m a t i v e a s s u m p t i o n that r e g u l a t i o n is the a p p l i c a t i o n of p u b l i c a u t h o r i t y to f u r t h e r the " p u b l i c int e r e s t . " A n early use of this r a t h e r a m o r p h o u s c o n c e p t in r e g u l a t i o n w a s the S u p r e m e C o u r t d e c i s i o n in Munn v. Illinois ( 1 8 7 7 ) . In this d i s p u t e , state r e g u l a t o r s had required that grain elevator o w n e r s be licensed a n d obs e r v e l e g i s l a t i v e l y d e t e r m i n e d m a x i m u m rates. W h e n the r e g u l a t i o n w a s c h a l l e n g e d , the C o u r t sided w i t h the state, a r g u i n g that the e x t e n s i o n of r e g u l a t o r y authority w a s a c c e p t a b l e given that it w a s a b u s i n e s s " a f f e c t e d with the p u b l i c i n t e r e s t . " T h e C o u r t c o n t i n u e d , a r g u i n g that this " a f f e c t a tion c o u l d logically be e x t e n d e d to transportation, water supply, t e l e p h o n e , e l e c t r i c a n d gas m a n u f a c t u r i n g and t r a n s p o r t i n g c o m p a n i e s , " o p e n i n g the d o o r to increased g o v e r n m e n t activity ( S a n d e r s 1981: 19). In fact, m a n y of the r e g u l a t o r y a g e n c i e s c r e a t e d at the n a t i o n a l level in the n e x t s e v e r a l d e c a d e s w e r e directed by statute to r e g u l a t e in the public interest. W h a t precisely is the public interest? P r e s u m a b l y , the c o n s u m i n g public h a s an interest in fair prices, h o n e s t d e a l i n g s , and s a f e t y that c o u l d be s e c u r e d e f f e c t i v e l y t h r o u g h r e g u l a t i o n . T h e p r o b l e m is, the public interest is o f t e n u s e d to l e g i t i m i z e s e l f - i n t e r e s t e d c l a i m s . A s D e b o r a h A. S t o n e n o t e s : " t h e r e is virtually n e v e r full a g r e e m e n t on the p u b l i c interest . . . so m u c h of politics is p e o p l e f i g h t i n g o v e r w h a t the p u b l i c interest is and trying to r e a l i z e their o w n d e f i n i t i o n s of it. Let it be an e m p t y b o x , n o m a t t e r " ( 1 9 8 8 : 15). Be this the c a s e , it is d i f f i c u l t to d e t e r m i n e what is g a i n e d by a d o p t i n g a p u b l i c interest e x p l a n a t i o n of regulation.

R e g u l a t i o n a n d M a r k e t Failure C o m p e t i t i v e m a r k e t s a l l o w f o r a relatively c o s t - f r e e e x c h a n g e of p r o p e r t y a n d f a c i l i t a t e an e f f i c i e n t a l l o c a t i o n of g o o d s via the p r i c e m e c h a n i s m . P r i c e s signal c o n s u m e r s to m a k e s u b s t i t u t i o n s in their c o n s u m p t i o n d e c i sions; they signal p r o d u c e r s to alter their p r o d u c t i o n levels. Prices also signal p r o d u c e r s to a d j u s t the mix of inputs they use, leading t h e m to p l a c e a g r e a t e r e m p h a s i s on r e s o u r c e s with l o w e r prices. W h e n prices e x c e e d m a r ginal costs, t h e r e b y resulting in a b n o r m a l l y high p r o f i t s , f i r m s are i n d u c e d to e n t e r the m a r k e t , e x p a n d i n g s u p p l y and e r o d i n g m o n o p o l y p r o f i t s .

A PRIMER ON REGULATION

7

Given the importance of these functions to society, one should not be surprised that market maintenance is an often cited justification for regulation. There are several conditions deemed essential for perfect markets: (1) there must be a sufficient diffusion of economic power such that all actors are price-takers; (2) there must be no public goods; (3) there can be no externalities, that is, all costs must be borne by the parties to an e c o n o m i c transaction; (4) buyers and sellers must have complete information; and (5) there can be no transaction costs (see Stokey and Z e c k h a u s e r 1978: 2 9 7 - 3 1 7 ) . Of course, this is an idealized state of affairs. If any of these conditions are not met, this ideal is compromised (i.e., market failure occurs). Markets are relatively robust, however, and can continue to function even when some of these conditions are violated. Nevertheless, m a n y argue that regulatory policy is necessary as a means of preventing or compensating for market failure. Let us briefly note how regulatory policies may help address some of the key sources of market failure. Firms as price-takers. A first and most important condition for competitive markets is a decentralization of economic power such that each actor is a price-taker (i.e., no buyer or seller should be able to influence the price of a good through independent action). When firms exercise such market power, markets fail. One regulatory response has been antitrust (see Chapter 4), which controls mergers and the use of various nonmarket restraints, such as cartels and price-fixing. There are instances, however, in which promoting competition would impose large costs on society. In certain industries, very large economies of scale may create a situation of natural monopoly. A natural monopoly exists when the average cost of producing a good declines over the relevant range of demand for that good. Under these circumstances, a single large producer will be able to m a n u f a c t u r e the good at a cost no competitor can match. Monopolies tend to be allocatively inefficient. To maximize profit, they restrict production below the level that would be socially optimal and charge higher prices than those obtainable in a competitive market (i.e., they extract monopoly rents). Promoting competition will not help. A more decentralized economic structure might provide the same level of output, but it would do so at a higher price. Regulators may, as a result, opt for a regulated monopoly and guarantee a certain rate of return in hopes of creating incentives to produce at a level that would meet demand (see Averch 1990: 34). Public goods. All public goods share two characteristics: nonexcludability and nonrivalry. Nonexcludability occurs when it is impossible or prohibitively expensive to prevent those who do not purchase the good from consuming it. Nonrivalry means that one actor's enjoyment of the good does not reduce or prohibit the enjoyment provided to others. By their very nature,

8

UNDERSTANDING REGULATION

public goods are impossible to provide through the market. No entrepreneur will produce a good for which she can neither restrict access nor charge a price. Take the example of clean air, a classic public good. Because of nonrivalry and nonexcludability, it would be irrational for individuals to voluntarily devote resources to the attainment of clean air by paying to reduce air pollution. The rational individual would free ride (see Olson 1965). Clean air would thus be characterized by nonprovision or gross underprovision. Environmental Protection Agency (EPA) regulations have dealt with this situation by forcing polluters to employ control technologies. The costs are borne by the firms, but also by consumers via prices and by the population as a whole via taxation. Externalities. An externality is best understood as the difference between the private costs and benefits of a given product and the costs and benefits absorbed by society. For the price mechanism to function effectively, all costs must be reflected in prices. There are legitimate reasons for wanting prices to internalize all costs of production. Without internalizing the costs, society is essentially subsidizing production, and, as a result, the industry is overproducing. EPA regulations are excellent examples of policies designed to force this internalization of costs by requiring firms to control their release of pollutants (see Chapter 7). Occupational Safety and Health Administration (OSHA) regulations are examples of policies forcing corporations to internalize the costs of injury or disease associated with the production process (see Chapter 8). Many critics of social regulation complain that regulations have increased costs and limited production and reinvestment in certain industries. What these critics fail to realize is that this is precisely the point. Complete information. Although market actors are assumed to rationally pursue their self-interest, it is difficult to make rational decisions concerning whether one will benefit from the purchase of a given product or service at the market price under conditions of information scarcity or information asymmetry. Producers have more information regarding the cost and quality of a good than do consumers. This is especially true for experience goods (i.e., goods for which consumers can judge quality only after purchase) or goods purchased relatively infrequently. Many regulatory policies address problems of information scarcity and asymmetry. Consider truth-in-labeling regulations, which require that firms disclose the ingredients of their products. Certainly, there are cases—such as pharmaceuticals—in which consumers simply lack the expertise to understand the value of the ingredients. The Food and Drug Administration (FDA) approves pharmaceuticals, and this approval certifies that the chemical agent will perform as promised and that known side effects have been disclosed. Consumer protection is examined in some detail in Chapter 9.

A PRIMER ON REGULATION

Transaction

9

costs. Transaction costs are best d e f i n e d as "the costs associated

with the transfer, capture, and protection o f property r i g h t s " ( B a r z e l 1989: 2). Stated another w a y , transaction costs include the costs o f determining the price o f a g o o d , negotiating the e x c h a n g e o f the g o o d , and m o n i t o r i n g to ensure that both sides l i v e up to the terms o f the transaction ( W i t t m a n 1995). T h e s e costs are not associated with production and thus are not incorporated into the price. Rather, they r e f l e c t the uncertainty that m a y acc o m p a n y m o r e c o m p l e x products. I f transaction costs are t o o high, otherw i s e desirable transactions m a y not occur. R e g u l a t o r y p o l i c y m a y p r o v i d e some means o f reducing these costs. A s Chapter 5 w i l l reveal, banking regulations have reduced the transaction costs in financial markets by requiring that financial intermediaries meet prespecified capitalization and reserve requirements. T h e provision o f deposit insurance further reduces transaction costs. Consumer protection regulations (Chapter 9 ) also reduce transaction costs b y assigning liability f o r d e f e c t i v e and hazardous products. *

*

*

M u c h o f what w e refer to as regulation

can be explained analytically as

a response to market failure. Y e t there are several problems with the market-failure explanation. First, market failure is o f t e n introduced ex post as a means o f separating " g o o d " f r o m " b a d " regulations. E x p l i c i t arguments concerning market failure are rare in the debates leading up to new regulatory initiatives; when they occur, they are usually combined with arguments that have distinct social and political dimensions. Y e t one routinely d i s c o v ers arguments c o n c e r n i n g market failure in debates o v e r the appropriate limits o f governmental authority. A s W . K i p Viscusi, John M . Vernon, and Joseph E. Harrington note, " I d e a l l y , the purpose o f antitrust and regulation p o l i c i e s is to f o s t e r i m p r o v e m e n t s j u d g e d in e f f i c i e n c y terms. W e should m o v e c l o s e r to the p e r f e c t l y c o m p e t i t i v e ideal than w e w o u l d have in the absence of this type o f intervention" (1995: 10). T h e underlying assumption is that markets must be assigned a primary role and the state must enter in only w h e n it can facilitate the market's f u n c t i o n i n g . " T h e role o f g o v e r n m e n t , " in the w o r d s of M i l t o n Friedman, " i s to do something that the market cannot do f o r i t s e l f ' (1962: 27). W h i l e there is no reason, on the f a c e o f things, to assume that the market w i l l be the institution o f choice, marketfailure arguments essentially raise the market to the status o f a benchmark. S e c o n d , if w e are to take the question o f market failure seriously, w e must r e c o g n i z e that there is p r o b a b l y a g o o d balance b e t w e e n regulatory policies that mitigate market failure and p o l i c i e s that exacerbate it. O c c u pational regulations c o m m o n l y i m p o s e great barriers to entry in p r o f e s sions c h a r a c t e r i z e d by l o w l e v e l s o f c o m p l e x i t y ( e . g . , barbers, taxi d r i v ers), thereby a l l o w i n g established actors to c l a i m m o n o p o l y rents. M a n y e c o n o m i c regulations w e r e designed to circumvent markets by establishing

10

UNDERSTANDING REGULATION

barriers to entry and exit and guaranteeing higher levels of profitability than might exist under a competitive market. Indeed, many critics of regulation have concluded that regulatory policies have been used to aggrandize established industry actors at a high cost to consumers. Let us turn to these interpretations now. Regulation and Cartel M a n a g e m e n t

Despite the common reference to market failure, regulations have often been used to circumvent market forces. According to George Stigler's classic "The Theory of Economic Regulation" (1971), regulations are designed and operated for the benefit of the regulated parties. Industries may seek direct subsidies, controls over entry and exit, policies that affect substitutes and complements as a means of protecting or expanding the market for their goods, and authority to engage in some form of price-fixing. Stigler argues that the creation of barriers to entry is the most important form of policy sought by regulated firms because such barriers can allow a de facto cartel to exist under the authority of the government, particularly when combined with some of the above-mentioned policies. The conclusion that regulations are designed to benefit the regulated parties may appear odd at first blush. Many major pieces of regulatory legislation charge the agencies in question to regulate "in the public interest." How, then, is it possible that behind this justification exists a set of policies that increases the wealth of the regulated and forces the population to absorb deadweight monopoly loss and higher taxes? According to Stigler, because costs are diffuse and information is scarce, uninterested voters lack the incentive to hold their representatives accountable. Moreover, legislators receive political and material rewards from the regulated, who, in essence, purchase the support of the state. Stigler's economic interpretation was extended through the efforts of Richard Posner (1974) and Sam Peltzman (1976). According to Posner, many regulations did not simply emerge as the products of industry efforts, but reflect the interests of coalitions consisting of the regulated parties and key customer groups. Both have their demands reflected in regulations, with the costs forced on to the unorganized. Peltzman, on the other hand, interprets Stigler's theory as being "ultimately a theory of the optimum size of effective political coalitions" (1976: 212). For Peltzman, there are diminishing returns associated with both group size and wealth transfers in politics. After a point, larger political coalitions are counterproductive (since they reduce the per capita transfer of wealth), and larger wealth transfers provoke public opposition that is difficult to overcome. Regulation concentrates potential benefits among a small group of firms, while the costs are diffuse and borne by an unorganized electorate.

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11

T h e key m e t h o d o l o g i c a l a s s u m p t i o n s of the e c o n o m i c theory of regulation h a v e been w i d e l y a d o p t e d a m o n g " p u b l i c c h o i c e " scholars. We will e x a m i n e the d i f f i c u l t i e s with these m e t h o d o l o g i c a l and m o d e l i n g d e c i s i o n s in C h a p t e r 2. For now, it is i m p o r t a n t to n o t e that w h e r e a s the e c o n o m i c t h e o r i e s of r e g u l a t i o n w o u l d s e e m to h a v e s o m e v a l u e in e x p l a i n i n g key e c o n o m i c r e g u l a t i o n s , they h a v e little to say a b o u t the social r e g u l a t i o n s that h a v e d o m i n a t e d regulation since the late 1960s. Social r e g u l a t i o n s imp o s e l a r g e c o s t s on the r e g u l a t e d p a r t i e s a n d p r o v i d e d i f f u s e b e n e f i t s f o r the p u b l i c at large. W h i l e the p u b l i c m a y h a v e f e w i n c e n t i v e s to m o b i l i z e on behalf of regulation, the regulated certainly h a v e little to gain and m u c h to l o s e f r o m the i m p l e m e n t a t i o n of social r e g u l a t i o n s . T h u s , the cartel m a i n t e n a n c e so central to the e c o n o m i c t h e o r i e s of r e g u l a t i o n m a y be inc r e a s i n g l y i r r e l e v a n t , p a r t i c u l a r l y f o l l o w i n g the c o m p e t i t i v e d e r e g u l a t i o n of the past t w o d e c a d e s (see D e r t h i c k and Q u i r k 1985).

Regulation and Capture T h e o r y T h e key insights of the e c o n o m i c theory of r e g u l a t i o n w e r e r e c o g n i z e d by early a n a l y s e s of the r e g u l a t o r y state (see, e.g., H e r r i n g 1936). B e g i n n i n g in the 1950s, a n u m b e r of analysts b e g a n a r g u i n g that a variety of f a c t o r s c o n t r i b u t e d to this state of a f f a i r s . In Regulating Business by Independent Commission, M a r v e r B e r n s t e i n ( 1 9 5 5 ) noted that r e g u l a t o r y c o m m i s s i o n s t e n d e d to m o v e through a life c y c l e of types. A f t e r the e n e r g y of gestation and y o u t h is e x p e n d e d , c o m m i s s i o n s e n t e r a s t a g e of m a t u r i t y w h e n " t h e c o m m i s s i o n b e c o m e s m o r e c o n c e r n e d with the g e n e r a l h e a l t h of the industry and tries to prevent c h a n g e s w h i c h a d v e r s e l y a f f e c t it. Cut off f r o m the m a i n s t r e a m of political life, the c o m m i s s i o n ' s s t a n d a r d s are d e t e r m i n e d in light of the d e s i r e s of the industry a f f e c t e d " ( 1 9 5 5 : 87). By the t i m e it e n t e r s old a g e , the c o m m i s s i o n s i m p l y strives to m a i n t a i n the status q u o . S a m u e l H u n t i n g t o n ( 1 9 5 2 ) arrived at s i m i l a r c o n c l u s i o n s with r e s p e c t to the I n t e r s t a t e C o m m e r c e C o m m i s s i o n ( I C C ) . A g r i c u l t u r a l s h i p p i n g interests (especially f a r m e r s ) had been s u c c e s s f u l in s h a p i n g I C C r a t e - m a k i n g . H o w e v e r , w h e n this core c o n s t i t u e n c y lost political p o w e r d u r i n g the first d e c a d e s of the c e n t u r y a n d r a i l r o a d r e g u l a t i o n d e c l i n e d in s a l i e n c e , the I C C h a d to turn to the r e g u l a t e d interests t h e m s e l v e s f o r s u p p o r t . T h e result w a s the T r a n s p o r t a t i o n A c t of 1920, w h i c h d i r e c t e d the I C C to e n f o r c e minimum r a t e s d e s i g n e d to g u a r a n t e e i n d u s t r y p r o f i t a b i l i t y . T h e I C C h a d been c a p t u r e d and w o u l d spend the next half c e n t u r y as a m o r i b u n d a g e n c y g u a r d i n g railroad profitability. W h i l e regulatory capture w a s presented by m a n y as resulting f r o m the d e c l i n e of the original c o n s t i t u e n c y , others a r g u e d that this i n t e r p r e t a t i o n was f a r too charitable. Gabriel K o l k o (1963, 1965), a revisionist historian, provided a wealth of evidence to support his contention that representatives

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of the regulated industries commonly played a central role in drafting regulatory legislation. Governmental authority was used to manage industries, thereby reducing the problems of overproduction and "ruinous competition" that might undermine profitability. It also obviated the need for state-level regulations that were often more radical and could have significant negative effects on the regulated industries. The use of regulation to protect industry reflects the contention that a d v a n c e d capitalism requires a far greater integration of the state and e c o n o m y than often supposed by free market advocates (see McConnell 1966; Lindblom 1977). Of course, the same criticism raised in response to the economic theory of regulation is applicable to capture theory. Although capture may have been c o m m o n p l a c e in m a n y e c o n o m i c regulatory agencies, there is little evidence that capture is possible in an age of social regulation (Meier 1988: 2 1 - 2 5 ; see also Worsham 1997). T h e new social regulatory agencies e n f o r c e e c o n o m y - w i d e m a n d a t e s and impose heavy costs. M o r e o v e r , the policy process in these agencies a f f o r d s advocacy groups multiple veto points and expanded access to the courts (see Stewart 1975; Eisner 1993b: 118-133). As a result, capture is no longer m u c h of a threat. Instead, the regulated parties have p o w e r f u l incentives to reduce regulatory autonomy, embroil agencies in lengthy appeals, and force regulators to j u s t i f y their decisions using market criteria.

Regulation and

Sectionalism

The explanations presented above m a k e note of the economic benefits of regulation, either in the abstract (i.e., in relation to their impact on issues of market failure) or as they accrue to individual f i r m s and industries. However, some scholars have sought to discover the extent to which major regulatory initiatives have reflected the competition among regional political economies. Richard Bensel (1984) and Elizabeth Sanders (1986, 1987) have been the primary contributors to this line of inquiry. Sanders (1987) identifies distinct regional trading areas and examines the voting behavior of representatives on key regulatory initiatives. Building on I m m a n u e l Wallerstein's world s y s t e m s theory, Sanders f o c u s e s on c o m p e t i t i o n between an industrial " c o r e " and a " p e r i p h e r y " to reveal that m a n y key initiatives have been attempts to use policies to prevent the shift of economic power across trading areas. For e x a m p l e , early antitrust legislation received a far greater level of support f r o m the representatives of the agrarian periphery than f r o m those f r o m the industrial core of the Northeast (see Sanders 1986). Given the limited relevance of some of the economic explanations to the new social regulation, the applicability of the regional political economy perspective is particularly noteworthy. T h e provisions of the 1977

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Clean Air Act a m e n d m e n t s are especially revealing in this regard. First, a coalition of eastern coal mine operators, coal miners, and environmentalists s u c c e e d e d in preventing coal-fired p o w e r plants f r o m meeting air quality guidelines by shifting f r o m high-sulfur eastern coal to lower-sulfur western coal, even though this would have improved air quality more than the technological pollution control requirements that were eventually adopted. S e c o n d , by adopting a " p r e v e n t i o n of significant d e t e r i o r a t i o n " standard that allowed little additional air pollution (and thus industrial development) in relatively clean areas, the act reduced the incentives for firms to r e l o c a t e f r o m the industrial M i d w e s t and Northeast to the relatively less developed South and West (Ackerman and Hassler 1981). In short, both ele m e n t s of the 1977 legislation protected the interests of the industrial core and handicapped the development of the periphery. T h e applicability of the regional political e c o n o m y approach is not limited to environmental regulation. In explaining the new social regulations of the 1970s, Sanders's analysis of roll-call votes on key amendments to regulatory legislation s h o w s that r e p r e s e n t a t i v e s f r o m the core voted routinely to impose more stringent regulatory standards and impede the diminution of standards, whereas the periphery sought to minimize regulatory burdens. As Sanders explains: " T h e deindustrializing regions perceived in regulatory law a means of slowing e c o n o m i c decline by raising the costs of capitalization in the periphery, insulating the national economic f r o m international e c o n o m i c forces, undoing the 'artificial' decentralization of the e c o n o m y p r o m o t e d by the periphery, and divesting the c o r p o r a t e p o w e r h o u s e s that had emerged out of periphery industries" (1987: 131).

P O L I C Y C H O I C E S IN REGULATORY P O L I T I C S Regulators have at their disposal a veritable arsenal of policy tools that vary tremendously with respect to the degree to which they replace market mechanisms, impinge upon business decisions, and impose costs on regulated industries. In this section, we discuss nine of the most common regulatory policy tools: prohibitions; licensing; price, rate, and quantity restrictions; product standards; technical production standards; performance standards; subsidies; information provision; and assigning property rights and liability. P e r h a p s the strongest policy tool available to regulators is the ability to introduce legal prohibitions. For example, the EPA has banned the production and use of several pesticides, including D D T and Aldicarb. Other product p r o h i b i t i o n s include sales of a u t o m o b i l e s without catalytic converters, the sale or purchase of h u m a n organs, and the manufacture, sale, or purchase of certain narcotics. In a similar vein, current U.S. regulatory

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policy prohibits the practice of trading stocks and c o m m o d i t y f u t u r e s based on insider information and m o n o p o l i s t i c practices on the part of businesses. Regulators may also establish a system of licensing or certification to control entry and guarantee that all actors meet standards d e e m e d necessary to achieve desired regulatory goals. In banking, for example, regulators have required that financial institutions meet specific capitalization and reserve r e q u i r e m e n t s . Similarly, nuclear p o w e r plants must d e m o n strate a need f o r additional electric generating capacity and are required to meet certain safety standards before they can receive a government operating license. Licensing s y s t e m s are not only used in highly technical areas, but are extended to everything f r o m cosmetology to tree surgery. G o v e r n m e n t s h a v e a long history of using price, rate, and quantity regulation. T h e y use policy to regulate the prices charged for g o o d s and services, the quantities of these items, and their flow to market. Price controls and rate setting have been essential components of passenger airline regulation, interstate trucking regulation, long-distance telephone service regulation, b a n k i n g regulation, and all interstate sales of oil, natural gas, and electricity. Federal regulators set prices and rates on the a s s u m p t i o n either that a lack of market competition would result in excessive profits and suboptimal levels of p r o d u c t i o n or that excessive competition could lead the regulated to trade safety for market share. Controls on the quantity of goods produced are c o m m o n in the area of agricultural products and natural resources. T h r o u g h m a r k e t i n g orders and p r o d u c t i o n quotas, f o r example, the United States Department of Agriculture ( U S D A ) limits the amount of tobacco, citrus fruit, fresh milk, and other commodities that can be sold in interstate commerce, while the Department of Energy ( D O E ) — and its precursors—limited for decades the importation and production of various fuels. Officials may establish and enforce product quality standards in hopes of achieving product safety and e f f e c t i v e n e s s . Food and drug regulation and c o n s u m e r protection have relied extensively on such standards. For example, the U S D A enforces quality standards that assure a safe food supply, and the F D A requires that all drugs are demonstrated to be safe and effective b e f o r e they can be sold in interstate c o m m e r c e . Product quality standards are also applied to n o n c o n s u m a b l e goods, such as the a u t o m o bile safety standards established by the National H i g h w a y Traffic Safety Administration and the h o m e a p p l i a n c e energy e f f i c i e n c y standards promulgated by the D O E . W h e r e a s product standards establish requirements for the quality and safety of products themselves, technical production standards establish requirements for the process by which certain goods are produced. O c c u p a tional safety and health policy and environmental protection policy are t w o

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areas in which technical standards have been vital to the realization of policy goals. In the former, employers are required to install certain safety devices and provide a certain level of safety training to employees in order to reduce workplace injury and death rates. In the latter, companies are required to install equipment that reduces the pollution released into the environment. In both cases, technical production standards change the process by which goods are produced. These standards are often referred to as command and control regulations since they command firms to meet a certain regulatory goal and control how they reach this goal. More recently, regulators have begun to experiment with performance standards as a tool of regulation. Under performance standards, regulators may establish regulatory goals (e.g., a certain reduction in workplace accidents or pollution emissions) and delegate to regulated parties the task of finding the most cost-effective means of realizing these goals. The assumption here is that firms will be able to meet regulatory goals at a lower cost because they have the best knowledge of the technologies they apply in the production process and the incentive to minimize costs. Performance standards have been used in recent years in environmental policy as regulators have sought to use incentives rather than command and control policies to reduce air pollution. Another common regulatory tool is the use of subsidies. When employing subsidies, government officials reimburse firms for a portion of their costs or pay these costs themselves. Officials dole out these subsidies to assure the production of certain goods or services that might not occur under normal market conditions. Subsidies may be direct, as when the USDA pays farmers to leave land fallow or when the DOE pays the costs of enriching uranium fuel for nuclear power plants. Subsidies may also be indirect, as when government regulators allow companies to charge higher prices for long-distance phone service in an effort to keep down the costs of local telephone service (generally referred to as a cross-subsidy). As we saw above, information scarcity is a common justification for regulation. One of the least intrusive tools available to regulators is aimed at remedying this market failure—the provision of information to consumers. The government itself may provide information to consumers at little or no cost, as with the Department of Commerce's consumer information pamphlets. More commonly, however, regulators require firms to provide information to consumers directly, through product information statements and through truth-in-labeling laws. Implicit in the decision to rely upon information provision rather than product standards is the belief that there is and should be a market for low-price/low-quality goods and services. The least intrusive policy tool available to regulators is assigning property rights and liability for the harm caused by defective or dangerous

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products. According to many scholars, most market failures could be remedied by establishing clear property rights and liability standards that would facilitate the use of tort and contract law. For example, if an individual is harmed by the actions of a firm, a defective product, or a faithless contractual partner, he may seek compensation through the courts. In this way, bad corporate actors will be driven from the market, obviating the need for additional regulatory actions by government. While this regulatory tool is seldom used by itself, it is an important component of the regulatory toolbox in areas such as consumer protection, occupational safety and health, environmental protection, and, increasingly, financial and securities regulation. T h e Relationship Between R e g u l a t o r y J u s t i f i c a t i o n s a n d Tools

One should conceive of regulatory tools as being on a continuum where the uses to which they are put overlap. For instance, a quantity restriction of zero is, for all intents and purposes, a prohibition. Similarly, licensing and certification programs are also a type of indirect information provision, since, for example, USDA inspection and grade certifications provide consumers with information regarding the quality and healthfulness of food. Regulatory tools, in fact, are similar to other tools in that different ones may be used to accomplish the same task. Just as pliers, a crescent wrench, and a pnuematic socket driver can all be used to turn a bolt, a subsidy, a technical production standard, and a performance standard can all be used to protect the health and safety of workers. Different regulatory tools are best suited to certain tasks. Indeed, there is a close connection between the reasons for regulation and the appropriateness of regulatory tools. Subsidies, for example, are a poor choice for dealing with negative externalities. Paying firms to reduce their pollution may encourage some firms to actually employ more polluting production processes. If the subsidies for pollution reduction are high enough, they may provide an incentive for additional firms to enter the market, thereby contributing to overproduction. Similarly, assigning liability and relying upon tort law are poor choices for protecting financial investors, since when these investors are entitled to seek compensation for fraud or mismanagement, the financial entity responsible for the damages will often be bankrupt. In fact, assigning property rights and liability is a poor choice of regulatory tools any time the damages suffered by consumers or other firms cannot be easily reversed (e.g., death or debilitating injury). Finally, technological and social changes often affect both the justifications given for regulation and the appropriate regulatory tools. Consider the situation of telecommunications. For decades, long-distance telephone service was considered a natural monopoly: the federal government set the rates for American Telephone and Telegraph (AT&T). Improvements in

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computer and fiber-optic technology, however, opened up the possibility of competition for long-distance service while undermining claims of natural monopoly. In response, in the 1980s, the federal government deregulated long-distance telephone rates (see Chapter 6). We see something very similar occurring today in the area of electricity generation. Improvements in technology have made retail competition for electricity feasible, and soon both wholesale and retail purchasers of electricity will be able to choose their supplier of this commodity, replacing price and rate regulation with competition (see Chapter 10). In a different area, vast improvements in monitoring and remote sensing technology have made measuring levels of pollution much easier and more accurate. These advances have allowed for performance standards in pollution control that require the heretofore unavailable ability to continuously and instantaneously measure pollution emissions. Deregulation as a Policy Tool Deregulation—the process of reducing or eliminating government regulations—has been one of the most visible and forcefully articulated elements of the contemporary regulatory debates. Advocates of deregulation provide three general justifications for deregulation. First, even if regulations often stem from honorable motivations (e.g., to protect the public interest or to compensate for market failure), they have unexpected and pernicious effects once put into practice. Second, other observers—on both the right and the left—criticize regulations on political grounds, arguing that they are used to reward political allies and entrenched industrial interests. Finally, other scholars believe that any attempt by government to solve social or economic problems will produce suboptimal results when compared with the free market (see Wittman 1995). While its most zealous advocates promote deregulation as a cure-all for many economic problems, it is m o r e productive (and more accurate) to view deregulation as simply another regulatory tool, which is better suited to some problems than to others. For example, the deregulation of long-distance telephone rates and airline ticket prices in the 1970s and 1980s was wholly appropriate, given the crumbling natural monopolies in these areas. On the other hand, deregulation (and increased competition) is less appropriate as a remedy for negative externalities. It is important to recognize that deregulation does not always mean moving f r o m regulation to no regulation. Often, deregulation simply involves replacing one tool of regulation with another, less intrusive tool. Consider, for example, recent changes in the regulation of flammability in infant sleepwear. Rather than m e e t i n g a g o v e r n m e n t - m a n d a t e d level of f l a m e resistance, manufacturers now simply provide labels that identify the flame-resistant nature of the garment (i.e., product standards have been replaced with

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i n f o r m a t i o n provision). E v e n w h e n an industry e x p e r i e n c e s c o m p l e t e deregulation in one area (e.g., airline ticket prices), regulation continues in other areas (e.g., airline safety and m a i n t e n a n c e standards). In thinking about deregulation, then, we have to evaluate it as we would any other policy tool: Is it appropriate for addressing the problem at hand?

CONCLUSION As s h o w n above, the question " W h y r e g u l a t e ? " has multiple answers, some more satisfactory than others. Competing explanations posit that regulation is a response to the d e m a n d s articulated by elected officials (e.g., public interest theory, sectional political-economic c o m p e t i t i o n ) , p o w e r f u l interests (e.g., the e c o n o m i c theory of regulation, capture theory), or the e n v i r o n m e n t (e.g., failing markets). Each explanation has d o m i n a t e d the study of regulation during different periods: the public interest rationale prior to World War II and during the 1960s; the e c o n o m i c theory of regulation and capture theory in the 1960s and 1970s; and the public choice interpretation of regulatory policy as the product of influence and r e n t - s e e k i n g elected o f f i c i a l s in the 1980s and 1990s. N o n e of these explanations can account for regulatory policy choices in all areas. T h e most o b v i o u s problem is the fact that the regulatory b u r e a u c r a c y is d e e m p h a sized or assumed away. Regulatory bureaucracies, however, are an important element in the process of regulatory decisionmaking. If public policy is d e f i n e d as patterns of g o v e r n m e n t a l action, we cannot be content with restricting our f o c u s to e x o g e n o u s demands for policy, but must also consider factors that are internal to the bureaucracy. Moreover, we must situate regulation in the larger political-institutional network of relationships, seeking to understand how relationships with the president, the Congress, the courts, other regulatory and nonregulatory agencies, and state-level implementers shape the patterns of governmental action. In Chapter 2, we e x a m i n e in more detail three of the most c o m m o n theoretical explanations for regulatory policy change: the bureaucratic politics perspective, which posits that most of the forces generating changes stem f r o m f o r c e s within the b u r e a u c r a c y ; the s u b s y s t e m s perspective, which focuses on coalitions linking institutional actors and affected interests; and the principal-agent perspective, which e m p h a s i z e s the relationships between v o t e - m a x i m i z i n g elected officials and their b u d g e t - m a x i mizing bureaucratic agents. We explore the conditions under which each explanation of regulatory policy is likely to be most accurate, grounding this discussion in the c o n c e p t s of complexity, salience, and bureaucratic leadership. In the chapters that follow, we discuss recent developments in several regulatory areas, e v a l u a t i n g these d e v e l o p m e n t s through each of the three theoretical lenses discussed in Chapter 2.

2 Explaining Regulatory Change

How do we explain regulatory c h a n g e ? Any attempt to u n d e r s t a n d the course of public policy must, of necessity, focus on bureaucracy. Implementation is the primary responsibility of most bureaucratic organizations, their reason f o r existence, and the source of their power. T h r e e vantages to understanding the role of bureaucracy in the implementation of public policy dominate the field. At the microlevel, the bureaucratic politics perspective focuses on the motivation and behavior of bureaucrats and bureaucracy as organizational p h e n o m e n a . At the mesolevel, the subsystems perspective views policy as the outcome of bargains struck among a select group of interested actors operating through institutional arrangem e n t s normally out of the public eye. At the m a c r o l e v e l , the principalagent perspective is concerned with how elected officials control (or fail to control) their bureaucratic agents. Let us explore each of these perspectives in somewhat greater detail.

•

T H E BUREAUCRATIC POLITICS PERSPECTIVE Bureaucracy is at the heart of public policy and implementation in particular. The bureaucratic politics approach models bureaucracy as an organization that shapes the actions of its m e m b e r s and is in turn shaped by them. Understanding the motivation of personnel in an organizational setting, as well as how this shapes the pursuit of particular goals by the organization, is the central preoccupation of the bureaucratic politics approach. Bureaucrats do not always receive clear signals f r o m elected officials. Legislation quite often incorporates vague or a m o r p h o u s goals, leaving it to bureaucrats to figure out what it is they are being asked to accomplish. Even w h e n signals are clear, b u r e a u c r a t s ' i n f o r m a t i o n advantage over elected officials may allow them to exercise considerable discretion over

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regulatory policy. S o m e early formal research suggested that bureaucrats would exercise this discretion in pursuit of material self-interest. This view is most forcefully articulated by William Niskanen (1971) in his portrayal of the " b u d g e t - m a x i m i z i n g bureaucrat." A c c o r d i n g to N i s k a n e n , b u r e a u crats' self-interest may be satisfied by professional advancement, increased administrative authority, larger salaries, a larger agency, or any n u m b e r of other rewards, all of which depend on a larger budget. Since bureaucrats k n o w much better than elected officials how much it costs to administer a particular program (the information advantage), they have both motive and opportunity to ask for more money than they really need. Matthew Holden shares N i s k a n e n ' s a s s u m p t i o n of the self-interest motivation of b u r e a u crats. For Holden (1966), however, this motivation is expressed as a desire to e n g a g e in imperialistic behavior, seeking greater policy responsibility and administrative authority. T h e N i s k a n e n - H o l d e n perspective on bureaucratic politics r e i n f o r c e s the c o m m o n perception of increasingly intrusive regulatory agencies with ever larger budgets. Empirical research, however, has not been kind to this perspective. Terry M o e (1989) and Miller and M o e (1983) o f f e r withering theoretical critiques of N i s k a n e n ' s work; Jonathan Bendor and Terry M o e (1985) d e m o n s t r a t e that b u d g e t - m a x i m i z i n g behavior is a d e s t r u c t i v e strategic choice for agencies; and André Biais and Stéphane Dion (1991) find little empirical support for the budget-maximizing bureaucrat hypothesis. Moreover, K e n n e t h Meier (1985), Cathy J o h n s o n (1992), and M a r c Allen Eisner (1993b) discuss n u m e r o u s instances of agencies f i g h t i n g to avoid increased policy responsibility (though to be fair, Holden recognizes this possibility). A slightly different perspective on the importance of bureaucratic politics is offered by Anthony D o w n s (1967). D o w n s argues that a good deal of agency action can be explained by the particular type of b u r e a u c r a t i c personality dominant within an agency. 1 D o w n s creates a typology of five personality types (and, by implication, agency types). The first two groups of bureaucrats are a l m o s t purely self-interested: " C l i m b e r s " and " c o n servers" are both interested in personal power, income, and prestige within the organization. The f o r m e r seek to maximize these, the latter to conserve them. A second collection of bureaucratic types is distinguished by mixed motives, being somewhat less self-interested than climbers and conservers. " Z e a l o t s " are loyal to narrow concepts or programs that are an important part of what their organization does. " A d v o c a t e s " are devoted to a broader set of functions that o f t e n take the form of an organization's overarching policy goal(s). Finally, " s t a t e s m e n " are motivated by some concept of the "public interest" and the role their agency has in fulfilling the same. While D o w n s favors the self-interested portrait of bureaucrats, his typology recognizes motives other than self-interest. In fact, a large body of

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research concludes that goals other than self-interest do in fact motivate bureaucrats. Programmatic and policy goals play important roles in the bureaucratic calculus. Bureaucrats pursue actions they believe will produce desirable policy outcomes (Marcus 1984; Johnson 1992). Professional values also shape the actions of bureaucrats, and changes in these professional norms often effect significant policy change (Eisner 1991; Khademian 1993). Bureaucrats may even be motivated by abstract notions of the public interest (Kelman 1987). While goal mismatch between civil servants and political appointees, personnel in different agencies, and bureaucrats and elected officials may still be a problem, it cannot always be explained by simple assumptions of self-interest. Rather, bureaucrats and the agencies they inhabit possess a hierarchy of goals; identifying this hierarchy offers the interested observer important insight into why they do what they do. Institutional arrangements also shape and constrain human action. James Q. Wilson (1989) argues that institutional arrangements go a long way in explaining why bureaucrats do what they do. By way of illustration, Wilson draws a parallel between bureaucrats and baseball infielders. No serious student of baseball expects attitudes, values, and beliefs to have much effect on the performance of a second baseman, and students of politics err by expecting these factors to explain the performance of bureaucrats. Agency type is one of the primary factors affecting bureaucratic behavior. Wilson identifies four agency types, focusing on the relationship between outputs (what bureaucrats are doing) and outcomes (the effect these actions have on attaining the organization's goals). "Production" agencies are those in which outputs and outcomes are readily observable (e.g., the outputs of the Internal Revenue Service [IRS] include audits and claims processing; its outcomes are revenues collected). "Procedural" organizations are those in which managers are able to oversee outputs but have very limited means of determining outcomes (e.g, the EPA can keep track of inspections but finds it difficult to determine if inspections improve environmental quality). "Craft" organizations are those in which outputs are hard to determine but outcomes are readily apparent (e.g., armies during wartime, the Forest Service, and other agencies dominated by autonomous field officers). Finally, "coping" agencies are those in which it is difficult to observe either outputs or outcomes. Universities are often described as coping agencies, since "you can neither describe the product nor explain how it is produced" (Wilson 1989: 169). Bureaucrats' behavior is affected not only by the type of organization, but also by their positions within the organization. Wilson identifies three types of personnel operating in any organization: operators, managers, and executives. Operators are "street-level bureaucrats" subject to a variety of stimuli that affect policy implementation. Their actions are shaped by the

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goals of the organization, the particular situation(s) encountered w h e n implementing policy, prior experiences and beliefs, peer expectations, interest g r o u p activity, and "the impetus given to the organization by its f o u n d e r s " (Wilson 1989: 27). All these give rise to an organizational culture that produces predictable, patterned behavior. An additional stimulus that shapes operators' behavior is managers. A m a n a g e r ' s central concern is administering the internal components of the organization—resource allocation, task specification, and maintaining progress toward goal achievement. Wilson suggests that a m a n a g e r ' s ability to m a n a g e is greatly affected by "the extent to which the goals of the agencies are clear and the work of the agencies' operators is observable" (Wilson 1989: 28). Executives are top-level a g e n c y personnel, careerists or political a p p o i n t e e s whose primary role is organizational maintenance (Wilson 1989: 181). In its most basic incarnation, maintenance involves securing adequate levels of appropriations, the recruitment and socialization of personnel, and cultivating political support. Since most agencies face no immediate threat to their actual survival, m a i n t e n a n c e has evolved into a concern with preserving, or expanding, agency autonomy (Wilson 1989: 182).

T H E SUBSYSTEMS P E R S P E C T I V E Understanding the role of private interests in the formation of public policy is a constant preoccupation of observers of American politics. Subsystem theorists argue that public policy is shaped by well-organized collections of private interests w o r k i n g in concert with a select cast of public actors (Schattschneider 1935, 1960; Bernstein 1955; M a a s 1951; Scher 1960; Long 1962; Cater 1964; Freeman 1955, 1965; Lowi 1969, 1979; Balogh 1991; Baumgartner and Jones 1993; Worsham 1997). Instead of focusing on macrolevel p h e n o m e n a involving the president, the Congress, or the courts, subsystem theorists argue that interest groups usually operate at the mesolevel of the polity in subsystems "organized around discrete programs and issues" (Thurber 1991: 319). Interest groups form alliances with interested legislators on congressional ( s u b ) c o m m i t t e e s and b u r e a u c r a t s f r o m select agencies to pursue policies that benefit subsystem m e m b e r s . Subsystems are o f t e n viewed as an equilibrium solution to the chaos represented by interest group competition at the macrolevel of the polity ( B a u m g a r t n e r and Jones 1993). A major p r o b l e m associated with group politics is the seeming inability to effect closure on decisions that a f f e c t large n u m b e r s of interests. S u b s y s t e m s restrict the n u m b e r of interested parties, greatly simplifying the deal cutting that occurs during formulation. They do so through the creation of institutional and intellectual barriers to participation in the policy process. Yet such barriers are not impermeable

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(Riker 1990; Krehbiel 1991). A variety of environmental forces outside the subsystem, as well as internal dynamics within a subsystem, provide a constant set of challenges to subsystem-induced equilibria (see Sabatier and Jenkins-Smith 1993; Baumgartner and Jones 1993; Worsham 1997). Politics bounce back and forth between relatively closed affairs, in which select interests, agency personnel, and legislators from a single committee decide the course of public policy, and more open arrangements, in which several well-organized interest groups, one or more agencies, and congressional committees vie for control of the policy process in a never ending minuet of bargaining, deal cutting, and politicking. Thus, while much of policymaking occurs in a subsystem setting, the nature of the setting itself varies over time. Subsystem politics may assume any of three forms: dominant, transitory, or competing coalitions. 2 Subsystem autonomy in deciding the shape of policy, then, is not uniform and constant through time. Rather, the content of policy is affected by the particular brand of subsystem politics in operation. In order to better understand the shifting nature of subsystem politics, let us consider the three variants of subsystem politics in greater detail. Dominant coalition politics characterize the classic "iron triangle" in which legislators from an oversight committee or subcommittee, agency personnel, and special interests get together to decide the course of public policy in a particular policy area. These arrangements were originally christened iron triangles because of their autonomy in deciding the course of policy in their field of interest. Outsiders' input is not welcome, and their influence nonexistent. Policy produced in a dominant coalition setting favors select interests over the public interest, expands the budget and responsibilities of agency personnel, and/or ensures the reelection of legislators on oversight committees. Dominant coalitions specialize in the development and delivery of distributive policy (Thurber 1991: 327-329)— that is, policy that benefits select interests and is paid for, unknowingly, by the public. A dominant coalition's ability to shape policy to its liking is greatly aided by the decentralized organization of Congress. A committee, or subcommittee, establishes unquestioned jurisdiction in a particular policy area and enters into "mutual noninterference pacts" with other such committees, while members on the floor usually rubber-stamp committee-approved legislation (Lowi 1969). Similarly, bureaucratic agencies avoid turf wars through the establishment of their own policy monopolies or through mutual accommodation among complementing agencies. Competition among interests in a dominant coalition subsystem is rare. Indeed, the rationale underlying the formation of a subsystem is to allow interest groups to shun competition for control and predictability. When dominant coalitions have

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trouble reaching consensus, one is faced with a new variation of subsystem politics: the transitory coalition Under the dominant scenario, the various interests that make up the coalition agree on common issues of concern and set aside other interests. Transitory coalitions surface when the latent interests of some members of a dominant coalition supersede the common interests. Defectors may try to form a rival coalition, but under the transitory scenario, the challenge is a fleeting phenomenon. Transitory coalitions bargain over the distribution of benefits and costs associated with a particular policy. Such bargaining is usually short lived, low key, and ends with a bargain struck among the dominant interests and challengers. With no single coalition able to force closure, the result is a hybrid of distributive and regulatory policy. Transitory coalitions are a subsystem purgatory, with would-be dominant interests waiting for the opportunity to take control or slip into oblivion. If conflict is prolonged, a subsystem characterized by transitory politics may slip into a more competitive mode. Competitive coalitions are present when traditionally dominant interests are challenged by a new coalition, giving rise to a distinctive form of politics. Transitory coalitions evolve into competitive coalitions, or new coalitions involving outsiders f r o m another subsystem respond to perceived threats to the autonomy of their home base (Ripley and Franklin 1986). Finally, challengers may simply be newcomers to the interest group setting, looking for a subsystem niche of their own (Browne 1988). Competitive coalition politics are reminiscent of what Christopher Bosso refers to as "presence politics" (1987: 246). Presence politics finds interest groups fighting to establish, and maintain, their presence in a particular subsystem. Much of the struggle involves establishing the legitimacy of their previously unrecognized claim(s) to a piece of the policy pie. When subsystem participants change, so do the values and goals of the participants, and perhaps even the organization within which the participants operate. Challengers may seek to alter the decisionmaking venue to replace distributive policy with more radically redistributive policy. They may also seek to prevent subsystem players from advancing into new policy territory—either through enforcement of existing prohibitions or by rewriting regulation to create new prohibitions. Even if the dominant coalition does not change, accommodations made with new participants to preserve the subsystem will affect regulatory behavior.

T H E PRINCIPAL-AGENT PERSPECTIVE The principal-agent perspective conveys a hierarchical notion of politicobureaucratic relations. The politics/administration dichotomy, first enunciated

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by W o o d r o w Wilson (1887), is the logical p r e d e c e s s o r of agency theory. Writing four years after the passage of the Pendleton Act, Wilson was conc e r n e d with how A m e r i c a n s could " g r a f t public administration into their Constitution, which [did] not mention the s u b j e c t " (Stillman 1996: 5). In an attempt to settle fears of an administrative state (literally, government by bureaucracy), Wilson advanced the notion of a politics/administration dichotomy. This was a rhetorical device that neatly bifurcated governance into two r e a l m s — t h e political and the a d m i n i s t r a t i v e — a n d subjected the latter to the will of the former. In so doing, Wilson created new opportunities f o r introducing a d m i n i s t r a t i v e m o d e l s f r o m other contexts while finding a means of deflecting concerns over state expansion. Administration, for Wilson, was concerned with the "detailed and systematic execution of public l a w " (1887: 10) created by elected officials w h o operate in the realm of politics. Political questions were those that decided w h o got what, and w h e n . A d m i n i s t r a t i v e q u e s t i o n s addressed how goods were to be delivered. T h e separation between the realm of politics and that of administration was meant to prevent contamination in either direction. Indeed, Wilson was quite clear that while "politics set the task for administration, it should not be suffered to manipulate its o f f i c e s " (1887: 10). A d m i n i s t r a t i o n was simply a separate e n d e a v o r that, because it was b e c o m i n g increasingly complex, required a professional class of administrators. By dividing the political f r o m the administrative, Wilson hoped to put an end to p a t r o n a g e and rest f e a r s of u n c h e c k e d g o v e r n m e n t power. T h e d i l e m m a is that government action (administration) requires grants of discretion, is often hard to monitor, and clearly translates into political power. These same concerns are at the heart of principal-agent theory. Agency theory has long been a component of microeconomic analyses (Arrow 1963; Riker 1962; G o l d b e r g 1976), theories of the firm (Alchian and D e m s e t z 1972; Jensen and Meckling 1976), and transaction cost economics (Williamson 1975, 1985). In its purest form, it focuses on the relationship between a principal, who requires the services of an agent, someone with special skills necessary for the fulfillment of the principal's goals (Friedman 1995: 181). Because the principal-agent relationship exists in a context of information asymmetry and uncertainty, agents may act opportunistically to maximize their own wealth. The challenge for the principal is to discover some means of m a n a g i n g this information a s y m m e t r y and minimizing the slippage in the relationship with the agent. In business economics, the principal is often a m a n a g e r or firm, while the agent is a supplier or subcontractor. Applied to regulation, principals are the elected officials w h o pass legislation and delegate authority to bureaucratic agents w h o must develop an appropriate pattern of implementation actions. Barry Mitnick was a m o n g the first to suggest that "the roots of the 'bureaucracy problem' lie not so much in bureaucracy as they do in a g e n c y "

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(1984: 2). Agency, "acting for," is at the heart of politics and administration (Mitnick 1984: 3). Agency theory recognizes that "at least some of what the agent does will not be specified or policed, and thus may be contrary to what the principal wants" (Mitnick 1984: 4). Reflecting information scarcity and the difficulties of coalition building, principals often fail to pass detailed legislation. Reflecting the high costs, they often fail to monitor closely their agents. Because the interests and incentives of agents often differ from those of principals, agents can and do pursue goals that may not coincide with those enunciated by principals. Thus, implementation outcomes that do not coincide with a principal's desires are not necessarily the result of bureaucratic incompetence, but are often the product of deliberate agent action (Mitnick 1984: 5). There may be institutional remedies for institutional failure. One might design institutional arrangements to economize on principal monitoring costs and limit agency discretion (see McCubbins 1985; McCubbins, Noll, and Weingast 1987; Macey 1992; Moe 1985, 1989). For example, Congress might constrain agency discretion by establishing the institutional setting in which regulatory activity is undertaken (e.g., courts, independent commissions, executive agencies); restrict the scope of authority granted regulators by identifying the target(s) of regulation; specify in detail the policy tools available to implementers; define procedural requirements to limit agency autonomy; or require that certain professional groupings with a bias toward a preferred policy outcome be located within the agency. Alternatively, they may seek to manipulate bureaucratic behavior by altering rewards and sanctions available to the agent (McCubbins 1985: 725-729). Other variations argue that Congress might economize on monitoring costs by institutionalizing a role for interest groups (Banks and Weingast 1992). Jonathan Macey (1992), distinguishing between single interest group and multiple interest group agencies, suggests that agency design and institutional checks should vary according to the number of interest groups involved. Following Macey (1992: 101-103), agencies may be "hardwired" to favor interest groups with standing (or "repeat players") over groups with a fleeting presence (see also Moe 1985, 1989). Matthew McCubbins and Thomas Schwartz (1984) argue that political control has been institutionalized through the creation of incentive-based oversight mechanisms. They contrast traditional "police-patrol" oversight with "firealarm oversight," which is exercised through a "system of rules, procedures, and informal practices that enable individual citizens and organized interest groups to examine administrative decisions (sometimes in prospect), to charge executive agencies with violating congressional goals, and to seek remedies from agencies, courts, and Congress i t s e l f ' (1984: 166). Open rule-making, expanded standing, intervenor funding, and the

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F r e e d o m of I n f o r m a t i o n Act all constitute m e a n s by which interests can gain access to agency decisionmaking. Under a fire-alarm oversight system, those with the greatest stakes in and k n o w l e d g e about decisions are responsible for determining whether they are acceptable. This conserves on principal resources, mitigates information scarcity, and c o m b i n e s the responsibility for oversight with the incentives to monitor agency behavior. At the heart of agency theory is the assumption that principals must, and quite regularly do, control the discretion of agents. 3 T h e president reins in runaway bureaucracy, c o m m i t t e e chairs bring w a y w a r d agencies back into line with congressional or c o m m i t t e e desires, and the courts force bureaucrats to follow the letter of the law. In all cases, principals are intent on making agents alter what it is they are doing, either by returning to some previous understanding of what policy responsibilities entail or by renegotiating the agency "contract." As a result, at least in the political science literature, there is usually an equilibrium b e t w e e n principal p r e f e r ences and agent actions—albeit an equilibrium backed with the threat of coercion.

IN S E A R C H O F C O M M O N G R O U N D The three theories of regulatory policymaking described above are not independent but share certain elements. For example, congressional-bureaucratic relations play a central role in both subsystems theory and principalagent theory. While s u b s y s t e m s theory posits a larger role f o r interest groups, variants of principal-agent theory suggest that principals may provide certain groups with preferential access to agents. Moreover, the conflict that characterizes transitory and c o m p e t i t i v e coalitions may lead elected officials outside of the traditional policy subsystem to try to exert principal authority over an agency. For all of their similarities, however, s u b s y s t e m s and principal-agent a p p r o a c h e s d i f f e r in t w o f u n d a m e n t a l respects. First, principal-agent relationships are generally p e r c e i v e d as dyadic, while in subsystems, bureaucrats are faced with balancing directions from multiple principals. To complicate matters further, contradictory signals f r o m these principals may allow an agency to play principals against o n e another while relying upon b u r e a u c r a t i c values to guide agency activity (Woolley 1993). Second, principal-agent theory posits c o n g r e s s i o n a l - b u r e a u c r a t i c relationships as c o n f l i c t u a l , w h e r e a s subsystems theory suggests that these relationships are congenial. From the bureaucratic politics perspective, efforts to protect agency autonomy will inevitably require executives to satisfy constituents, interest groups, political elites, and the like. In short, they must attend to subsystem-like relationships. Bringing this discussion full circle, different types of agencies are

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more conducive to principal-agent controls. Production agencies, with clearly observable outputs and outcomes, present less uncertainty regarding bureaucratic behavior and are thus less costly to monitor, whereas principal control is less likely to be successful in agencies where monitoring costs are high, where bureaucrats' ability to shirk is high, and where the likelihood of these efforts effecting noticeable change is low (i.e., coping agencies). One might fruitfully examine a single event from all three perspectives and, as a result, gain a richer understanding. Take the example of bureaucratic professionalization—an important event in many of the agencies examined in Part 2 of this book. From a bureaucratic politics perspective, professionalization may be pursued as a means of enhancing agency expertise and thus bureaucratic power (see Meier 1987; Rourke 1984). From the subsystems perspective, one might find that the professionalization reflects a consensus within the subsystem that a given form of expertise is vital for a competent understanding of policy (see Eisner 1991). Professionalization, in this case, serves the additional political function of legitimizing agency actions before dominant coalition members. Finally, from a principal-agent perspective, professionalization might be interpreted as a tool of control. One means of limiting agent discretion is by inculcating a set of values via professionalization that programs an agency to pursue a stable and acceptable enforcement agenda (see Moe 1989). As this brief discussion suggests, in many instances, regulatory policy implementation and change may reflect the variables identified by two or more of these perspectives. Rather than asking which theory is "true," we need to ask which is most applicable in a given situation. This said, we believe that instances of outsiders attempting to establish themselves as principals vis-à-vis bureaucratic agents are relatively rare in most regulatory arenas because subsystems help solve the agency problem. Subsystems allow legislators and interest groups to refine policy mandates, communicate desires and demands, and tinker with policy implementation short of establishing a hierarchical, commandlike relationship envisioned by principal-agent theorists. Indeed, one rationale for establishing a policy monopoly is to improve communications among elected officials, private interests, and agency personnel so as to avoid the need for extensive and costly monitoring and reduce the need to discipline runaway bureaucrats opportunistically exploiting the authority they have been delegated.

SALIENCE, COMPLEXITY, AND T H E POLITICS O F REGULATORY POLICY Given the imprecision of legislative mandates and the fluidity of political coalitions, members of Congress, the president, interest groups, and other

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policy participants are o f t e n dissatisfied with the policy actions taken by bureaucrats. E l s e w h e r e w e h a v e argued that this t e n d e n c y t o w a r d disequilibrium b e t w e e n political p r e f e r e n c e s and bureaucratic actions is a d e f i n i n g ele m e n t of policy interactions (Worsham, Eisner, and Ringquist 1997). If this disequilibrium is the normal state of affairs, there w o u l d always appear to be a m p l e j u s t i f i c a t i o n for elected officials and others to attempt to redirect bureaucratic behavior; yet these e f f o r t s are not constant across time, nor across r e g u l a t o r y a g e n c i e s and areas. We are thus left with s o m e p u z z l e s : U n d e r w h a t c o n d i t i o n s will elected o f f i c i a l s c h o o s e to act as political p r i n c i p a l s ? U n d e r w h a t c o n d i t i o n s will s u b s y s t e m r e l a t i o n s h i p s be stable or in f l u x ? U n d e r what conditions will bureaucrats act with relative a u t o n o m y ? In short, when are the e x p l a n a t i o n s outlined a b o v e m o s t applicable? F o l l o w i n g W i l l i a m G o r m l e y ( 1 9 8 6 , 1989), w e a r g u e that the r e g u l a r p a r t i c i p a n t s in p o l i c y m a k i n g c a n be p r e d i c t e d b y the s a l i e n c e a n d c o m plexity of the issue area. By salience, w e m e a n the d e g r e e of p u b l i c interest a n d a t t e n t i o n d e v o t e d to a p a r t i c u l a r p o l i c y issue. B y complexity, we m e a n the t e c h n i c a l c o m p l e x i t y of the g o a l s f a c e d by an a g e n c y and the t e c h n i c a l c o m p l e x i t y of the t a s k s r e q u i r e d to attain t h e s e g o a l s . S a l i e n c e and c o m p l e x i t y vary a c r o s s a g e n c i e s , a c r o s s issue areas, and o v e r time, aff e c t i n g the stability of policy s u b s y s t e m s , the likelihood of a t t e m p t s at political i n f l u e n c e , and the d e g r e e of d i s c r e t i o n a v a i l a b l e to b u r e a u c r a t s ( G o r m l e y 1986). M o r e o v e r , s a l i e n c e a n d c o m p l e x i t y a f f e c t the p r e d i s p o s i tion of e l e c t e d o f f i c i a l s to a t t e m p t r e d i r e c t i o n of a g e n c y b e h a v i o r . D u e to o b v i o u s r e e l e c t i o n incentives, high levels of s a l i e n c e attract the p r e s i d e n t and m e m b e r s of C o n g r e s s . C o m p l e x i t y , on the o t h e r h a n d , r e p e l s or restricts e f f o r t s at political c o n t r o l . H i g h levels of c o m p l e x i t y p o s e s i g n i f i cant intellectual barriers to entry for m e m b e r s of C o n g r e s s , particularly f o r m e m b e r s not part of the relatively c l o s e d s u b s y s t e m s that o f t e n c h a r a c t e r ize c o m p l e x p o l i c y areas ( B a u m g a r t n e r and J o n e s 1993). H i g h l y c o m p l e x policy areas also p r o m i s e low e x p e c t a t i o n s of being able to c l a i m credit f o r policy s u c c e s s in these areas (see K e l m a n 1987). E v e n the earliest princip a l - a g e n t l i t e r a t u r e r e c o g n i z e d that c o n g r e s s i o n a l i n c e n t i v e s to e x e r c i s e c o n t r o l v a r y with levels of u n c e r t a i n t y . A c c o r d i n g to M c C u b b i n s ( 1 9 8 5 ) , while high levels of policy u n c e r t a i n t y require C o n g r e s s to invest a g e n c i e s with a g r e a t deal of s u b s t a n t i v e d i s c r e t i o n , this d i s c r e t i o n is s u b s e q u e n t l y m i n i m i z e d by strong p r o c e d u r a l r e q u i r e m e n t s a n d h i g h levels of m o n i t o r ing. T h e net e f f e c t of high levels of u n c e r t a i n t y ( a n d political c o n f l i c t ) is to r e d u c e a n a g e n c y ' s d i s c r e t i o n , b e c a u s e u n d e r t h e s e c o n d i t i o n s , f e w e r policy o p t i o n s are p r e f e r a b l e to the status q u o ( C a l v e r t , M c C u b b i n s , a n d W e i n g a s t 1989; M c C u b b i n s 1985). All o t h e r things e q u a l , s a l i e n c e will attract the attention of elected o f f i c i a l s , a n d e f f o r t s by t h e s e o f f i c i a l s to r e d i r e c t b u r e a u c r a t i c b e h a v i o r s h o u l d rise a n d fall with the p u b l i c a t t e n t i o n p a i d to an i s s u e or a g e n c y . This is true whether we conceive of m e m b e r s of C o n g r e s s as credit-claiming

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vote maximizers (Mayhew 1973; Fiorina 1989), as rational actors attempting to conserve resources by relying upon "fire a l a r m s " to identify agencies in need of congressional intervention ( M c C u b b i n s and S c h w a r t z 1984), or as policy-interested individuals attempting to expand their influence in traditionally closed policy s u b s y s t e m s ( B a u m g a r t n e r and J o n e s 1993; Sabatier and Jenkins-Smith 1993). The effect of salience, however, is conditioned by complexity. Simply put, elected officials should be less likely to intervene in agencies engaged in complex tasks because such intervention will be less likely to p r o d u c e electoral r e w a r d s , less likely to improve the policy status quo, and less w e l c o m e d f r o m participants in the existing policy subsystem. In each of the case studies in Part 2 of this book, we present data on policy salience. To measure salience, we compiled data on the n u m b e r of news stories in a given year that focused on each of the policies we examined. Data was compiled through a keyword search of the Reader's Guide to Periodical Literature. This data provides a sense of how policy salience has changed over time and of the relative salience of different policies at any given time. W h i l e this salience data has certain l i m i t a t i o n s — f o r example, it d o e s not account f o r c h a n g i n g k e y w o r d c o n v e n t i o n s in the Reader's Guide or the growing n u m b e r of m e d i a o u t l e t s — o u r m e t h o d o l ogy for measuring policy salience is the current disciplinary standard (see Baumgartner and Jones 1993). T h e interaction of salience and complexity leads to the following expectations regarding the relative merits of our three theories of regulatory policy: 1. The principal-agent theory will be most applicable under conditions of high public salience and low levels of technical complexity. High levels of salience will attract elected o f f i c i a l s , while low levels of c o m p l e x i t y will not repel them and will limit the ability of dominant subsystem coalitions to prevent the entry of outsiders into the system. 2. Under conditions of high levels of salience and high levels of c o m plexity, elected officials will also attempt to exert principal-agent-like control over regulatory policy, though this propensity for intervention will be lower than in the high-salience/low-complexity case. Moreover, these efforts will likely be less e f f e c t i v e c o m p a r e d with the h i g h - s a l i e n c e / l o w complexity case as well. This is because of the barriers to entry posed by complexity, but also because of the p r e m i u m complexity places upon bureaucratic expertise. While salience levels are too high to allow an agency f r e e rein in d e t e r m i n i n g regulatory policy, the task of c r a f t i n g e f f e c t i v e policy in these areas is too difficult f o r elected officials alone. T h e most likely situation under these c i r c u m s t a n c e s is a situation of t w o or m o r e coalitions competing within the policy subsystem.

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3. P o l i c y areas characterized by l o w l e v e l s o f public salience w i l l e x perience f e w e r attempts at principal-agent direction o f regulatory activity, though if core agency functions are o f a nontechnical nature, elected o f f i cials w i l l at least not be discouraged f r o m such actions should they choose to take them. In fact, f e w p o l i c y participants w i l l be attracted to areas with l o w levels o f salience and c o m p l e x i t y . W e w o u l d e x p e c t p o l i c y to be made in a v e r y limited subsystem w h e r e participation is restricted not by technical barriers to entry, but by apathy. Bureaucrats w i l l e x e r c i s e an extraordinary d e g r e e o f discretion due to the absence o f oversight. 4. T h e principal-agent e x p l a n a t i o n f o r r e g u l a t o r y p o l i c y should be least applicable under conditions o f l o w public salience and high technical c o m p l e x i t y . T h e reasons f o r this should be o b v i o u s . P o l i c y in these areas w i l l again be made within relatively c l o s e d p o l i c y subsystems. T h e barriers to entry here are technical, and critical p o l i c y decisions w i l l be made by upper-level bureaucrats with a high d e g r e e o f technical expertise, supported by interest groups and a v e r y small number o f m e m b e r s o f C o n gress with similar degrees o f expertise. Similar to the previous case, these bureaucrats should exercise a significant d e g r e e o f discretion.

A FINAL NOTE O N ADMINISTRATIVE

LEADERSHIP

U p to this point, our discussion o f rival explanations f o r regulatory p o l i c y has been silent on the importance o f administrative leadership. E f f e c t i v e leadership, h o w e v e r , is an indispensable element o f bureaucratic

power

(Rourke 1984). First, e f f e c t i v e administrative leaders both possess the technical skills and build technical skills within an agency that are so critical to persuading other political actors o f the validity o f agency p o l i c y positions. Second, e f f e c t i v e leaders also possess the professional credentials necessary to command the respect and allegiance o f the agency rank and f i l e , and they possess the personal skills necessary f o r infusing the agency with a high level of morale and sense of mission. T h e y w i l l be capable o f building bureaucratic coalitions, uniting potentially c o n f l i c t i v e groups behind a c o m mon p o l i c y agenda. T h i r d , e f f e c t i v e leaders possess the political skills to cultivate and maintain external political support f r o m elected o f f i c i a l s and interest groups. Fourth, e f f e c t i v e leaders use their public relations skills to publicize agency successes and spin agency failures. E f f e c t i v e leadership also has a strong situational component. For e x a m p l e , Caspar W e i n b e r g e r d e v e l o p e d a reputation as a consummate leader during his tenures at the Federal Trade Commission ( F T C ) and the O f f i c e o f M a n a g e m e n t and Budget ( O M B ) . B y the end o f his stint as R o n a l d R e a g a n ' s d e f e n s e secretary, however, this reputation had been changed to that o f a spendthrift w h o had lost control o f the agency he was directing (Stockman 1986).

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Administrative leadership can also play a large role in determining the locus of regulatory d e c i s i o n m a k i n g . A strong and e f f e c t i v e agency head can stave off attempts by elected officials to infringe upon agency autonomy, even during periods of high salience. Similarly, a strong and effective agency head will be able to preserve the boundaries of a particular policy subsystem under salience pressure while directing bureaucratic discretion in such a way as to not draw the ire of elected officials or p o w e r f u l clientele groups. In short, strong administrative leadership may be able to expand agency autonomy under favorable conditions and preserve a greater d e g r e e of agency a u t o n o m y under adverse conditions, w h e r e a s w e a k and/or ineffective leadership will be able to accomplish none of the tasks identified above and will likely be ineffective at extending or p r e s e r v i n g agency autonomy. U n d e r conditions of weak leadership, regulatory decisions are more likely to be m a d e in a c c o r d a n c e with s u b s y s t e m s theory (particularly the transitory or competitive coalition variety) or principalagent theory.

CONCLUSION We began this chapter by asking: How do we explain regulatory c h a n g e ? As this chapter suggests, there is no single "theory of regulation" that can sufficiently explain regulatory politics. In the field of regulatory studies, blind adherence to theoretical parsimony has far too often resulted in the acceptance of m o d e l s that rest on highly q u e s t i o n a b l e s i m p l i f y i n g assumptions (see Worsham, Eisner, and Ringquist 1997). O c c a m ' s razor has been used f a r too o f t e n to surgically r e m o v e organizations and politics f r o m the analysis of regulation. Finding that the bureaucratic politics, subsystems, and principal-agent p e r s p e c t i v e s each have their strengths and their limitations, we c h o o s e to work at their theoretical intersection. Not only will this approach allow us to consider a wider variety of variables when examining contemporary regulatory politics, it will also help us clarify our own u n d e r s t a n d i n g of the relative merits of the theoretical perspectives and the inclusive strategy we h a v e adopted. We will return to these issues in the c o n c l u d i n g c h a p t e r herein. B e f o r e stepping into our analysis of c o n t e m p o r a r y regulation, it is u s e f u l to place t h i n g s in a broader context. We turn to this context now.

NOTES 1. Downs frequently uses the word bureaucracy organizational entity.

to refer to bureaucrats and the

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2. T h e f o l l o w i n g is b a s e d o n t h e w o r k of P a u l S a b a t i e r a n d H a n k J e n k i n s Smith (1993) and James Thurber (1991). Thurber would probably add a fourth political v a r i a t i o n , d i s i n t e g r a t i n g c o a l i t i o n s . 3. W e h a v e a r g u e d e l s e w h e r e that this e f f o r t is b e t t e r p o r t r a y e d as an a t t e m p t at i n f l u e n c e r a t h e r than c o n t r o l ( W o r s h a m , E i s n e r , a n d R i n g q u i s t 1997). F o r e a s e of p r e s e n t a t i o n a n d c o n t r a s t a m o n g t h e t h r e e a p p r o a c h e s d i s c u s s e d in this c h a p t e r , w e are c h o o s i n g to i g n o r e o u r o w n a d v i c e a n d s p e a k of s u c h e f f o r t s in t e r m s of c o n trol.

3 A Brief History of Contemporary Regulatory Politics

T h e regulatory debates of the past several decades have been intertwined with larger controversies over the role of the state in the economy. Does government have the responsibility to force corporate accountability? Should it promote clean air or worker safety, goods that are systematically neglected by the market? T h e answers to these questions require trade-offs between the d e m a n d s for environmental protection, for example, and economic growth. Skepticism over regulation has peaked during d o w n t u r n s in the business cycle, giving rise to debates over how the " r e g u l a t o r y b u r d e n " inhibits investment and g r o w t h . As these larger debates have evolved, others have focused on regulatory decisionmaking at the agency level. Should agencies p r o m o t e e f f i c i e n c y by adopting costbased decision criteria (e.g., cost-benefit and cost-effectiveness analysis), p e r f o r m a n c e indicators, and incentive-based regulatory d e s i g n s ? Should agencies be required to f u n d the participation of groups that are materially affected by policy but lack the financial wherewithal to m a k e their positions h e a r d ? This c h a p t e r presents an o v e r v i e w of regulatory history. 1 A f t e r a brief e x a m i n a t i o n of regulatory policy b e f o r e the c o n t e m p o r a r y era, the chapter explores the rise of the new social regulation in the 1960s and 1970s and the deregulation and reform initiatives of the 1970s through the 1990s. We conclude with an examination of the 1990s, when President C l i n t o n ' s support for a regulatory revitalization was t e m p e r e d by earlier regulatory reform debates and a new Republican Congress.

•

R E G U L A T I O N B E F O R E T H E C O N T E M P O R A R Y ERA Our overview of regulation begins in the 1880s. It was at this time that a w a v e of federal regulations began, one that would c o n t i n u e f o r the rem a i n d e r of the Progressive Era. In 1887, C o n g r e s s p a s s e d the Interstate

35

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C o m m e r c e A c t , c r e a t i n g the Interstate C o m m e r c e C o m m i s s i o n to r e g u l a t e railroads. A recent S u p r e m e Court decision invalidating state-level railroad r e g u l a t i o n c r e a t e d a v a c u u m that c o u l d be filled o n l y b y f e d e r a l l e g i s l a tion. T h e act d e c l a r e d that "all c h a r g e s m a d e f o r any s e r v i c e s r e n d e r e d . . . shall be r e a s o n a b l e and j u s t . " It also p r o h i b i t e d a n u m b e r of s p e c i f i c p r a c t i c e s d e e m e d d i s c r i m i n a t o r y and r e q u i r e d that all r a i l r o a d s p u b l i s h their rate a n d f a r e s c h e d u l e s and s u b m i t t h e m to the I C C . A l t h o u g h the C o u r t u l t i m a t e l y d e t e r m i n e d that the act failed to p r o v i d e the I C C with the authority to set m a x i m u m rates, new legislation (the H e p b u r n A c t of 1906) explicitly p r o v i d e d this power. T h r e e p o i n t s about the I C C are worth noting. First, a l t h o u g h C o n g r e s s d e t e r m i n e d that the rates should be " r e a s o n a b l e a n d j u s t , " it failed to p r o vide an o p e r a t i o n a l d e f i n i t i o n of these v a g u e t e r m s , thereby d e l e g a t i n g to the I C C the responsibility of m a k i n g this d e t e r m i n a t i o n . S e c o n d , a l t h o u g h the I C C h a d n o s p e c i f i c i n f o r m a t i o n on h o w to d e t e r m i n e rates, it ultimately set rates to reflect costs, thereby creating m a r k e t l i k e o u t c o m e s . A n y other o p t i o n w o u l d h a v e been quite p r o b l e m a t i c . G i v e n the high levels of i n v e s t m e n t a n d the e c o n o m i e s of scale in rail t r a n s p o r t a t i o n , the i n d u s t r y h a d m a n y of the characteristics of a natural monopoly. T h i r d , the I C C w a s the first federal a g e n c y to take the f o r m of an i n d e p e n d e n t regulatory c o m mission (IRC). A n I R C is f o r m a l l y run by a c o m m i s s i o n c o n s i s t i n g of an odd n u m b e r of c o m m i s s i o n e r s ( u s u a l l y f i v e or s e v e n ) , s e r v i n g s t a g g e r e d t e r m s . T h e c o m m i s s i o n s m u s t be f o r m a l l y bipartisan, with no m o r e than a s i m p l e m a j o r i t y r e p r e s e n t i n g o n e party. A l t h o u g h the p r e s i d e n t a p p o i n t s c o m m i s s i o n e r s , the e x t e n t of p r e s i d e n t i a l p o w e r is c h e c k e d by l i m i t a t i o n s on rem o v a l , the s t a g g e r e d nature of a p p o i n t m e n t s , and c o n g r e s s i o n a l e f f o r t s to p r o t e c t a g e n c y i n d e p e n d e n c e . T h e I R C is an i n t e r e s t i n g o r g a n i z a t i o n a l f o r m b e c a u s e it c o m b i n e s q u a s i - e x e c u t i v e , quasi-legislative, and q u a s i - j u dicial p o w e r s . V a g u e r e g u l a t o r y m a n d a t e s (e.g., " r e a s o n a b l e and j u s t " rates) w e r e given substantive m e a n i n g through the p r o c e s s of rule-making, a legislative f u n c t i o n . O n c e an IRC promulgated a rule b a c k e d by the f o r c e of law, it w o u l d i d e n t i f y violators and begin e n f o r c e m e n t p r o c e e d i n g s , an e x e c u t i v e f u n c t i o n . Finally, d i s p u t e s would be r e s o l v e d t h r o u g h the adjudication p r o c e s s c o n d u c t e d w i t h i n the I R C by a d m i n i s t r a t i v e law j u d g e s . A l t h o u g h this c o m b i n a t i o n of p o w e r s violates separation of p o w e r s , it w a s d e e m e d a c c e p t a b l e b e c a u s e this new organizational f o r m was b e l i e v e d to p o s s e s s the f l e x i b i l i t y and c o n c e n t r a t i o n of b u r e a u c r a t i c e x p e r t i s e n e c e s sary to a d d r e s s s o m e of the m o r e c o m p l i c a t e d r e g u l a t o r y p r o b l e m s . In 1890, C o n g r e s s p a s s e d the S h e r m a n A n t i t r u s t A c t , the l e g i s l a t i v e f o u n d a t i o n of the n a t i o n ' s c o m p e t i t i o n policy (see C h a p t e r 4 ) . By p r o hibiting m o n o p o l i z a t i o n and c o n s p i r a c i e s to m o n o p o l i z e , antitrust w a s des i g n e d to p r e s e r v e m a r k e t s ( s e e C h a p t e r 1). A l t h o u g h a n t i t r u s t c o u l d be

A BRIEF HISTORY

37

j u s t i f i e d o n e c o n o m i c g r o u n d s , it was u n d e r s t o o d as h a v i n g p o w e r f u l p o litical d i m e n s i o n s as well. Legislators believed that the large b u s i n e s s enterprises and trusts that m a d e up the e m e r g i n g industrial e c o n o m y c o n s t i t u t e d so great a c o n c e n t r a t i o n of p o w e r as to r e q u i r e g o v e r n m e n t to i n t e r v e n e and f o r c e a c c o u n t a b i l i t y . A l t h o u g h t h e S h e r m a n A c t w a s e n f o r c e d by the D e p a r t m e n t of Justice ( D O J ) , d i s s a t i s f a c t i o n with the n u m ber of p r o s e c u t i o n s ( a n d the o f t e n c o n v o l u t e d d e c i s i o n s of the S u p r e m e C o u r t ) led C o n g r e s s to pass the Clayton Antitrust A c t of 1914, w h i c h identified s p e c i f i c practices that were believed to c o n t r i b u t e to the c r e a t i o n of m o n o p o l y p o w e r . T h e F e d e r a l T r a d e C o m m i s s i o n A c t ( F T C A ) , p a s s e d in the s a m e year, c r e a t e d a n e w I R C , the F e d e r a l T r a d e C o m m i s s i o n . A s a result, in antitrust, as in so m a n y other regulatory issue areas, the e x i s t e n c e of m u l t i p l e r e g u l a t o r s w o u l d b e c o m e a p e r m a n e n t f e a t u r e , t h e r e b y g i v i n g rise to o n g o i n g c o n c e r n s over r e d u n d a n c y and c o o r d i n a t i o n of e n f o r c e m e n t actions. A l t h o u g h the F T C and the ICC were the f l a g s h i p r e g u l a t o r y a g e n c i e s of the P r o g r e s s i v e Era, other m a j o r regulatory initiatives w e r e i n t r o d u c e d d u r i n g t h e s e d e c a d e s . In 1906, C o n g r e s s p a s s e d the P u r e F o o d a n d D r u g Act, vesting r e g u l a t o r y authority over f o o d additives and p h a r m a c e u t i c a l s in an o f f i c e of the U S D A , an entity that w o u l d u l t i m a t e l y e v o l v e into the F D A . T h e s a m e year, c o n s u m e r p r o t e c t i o n r e g u l a t i o n s w e r e e x t e n d e d t h r o u g h the M e a t I n s p e c t i o n Act, thereby giving the U S D A the r e s p o n s i bility f o r i n s p e c t i n g m e a t sold in interstate c o m m e r c e . T h e F e d e r a l R e serve was created in 1913 to regulate the n a t i o n ' s f i n a n c i a l s y s t e m by est a b l i s h i n g r e s e r v e r e q u i r e m e n t s and serving as a l e n d e r of last r e s o r t f o r m e m b e r banks. By the e v e of World War I, then, a r e g u l a t o r y structure h a d been put in place that w a s r e c o g n i z a b l y m o d e r n . D u r i n g World War I mobilization, the g o v e r n m e n t had a s s u m e d a r e g ulatory p o s t u r e a c r o s s the e c o n o m y through a g e n c i e s such as the War Ind u s t r i e s B o a r d a n d the F o o d A d m i n i s t r a t i o n (see C u f f 1973). In an e f f o r t to p r o m o t e m a x i m u m p r o d u c t i o n for the war e f f o r t , the m o b i l i z a t i o n a g e n cies p r o v i d e d a s s i s t a n c e in s t a n d a r d i z i n g p r o d u c t i o n a n d p r o m o t i n g the d i s s e m i n a t i o n of e f f i c i e n c y - p r o m o t i n g i n n o v a t i o n s . T h i s e x p e r i e n c e a n d associationalist d o c t r i n e s that e n v i s i o n e d a g r e a t e r r o l e f o r t r a d e a s s o c i a tions w o r k i n g u n d e r the s u p e r v i s i o n of g o v e r n m e n t a g e n c i e s c o l o r e d the r e g u l a t o r y r e c o r d of the 1920s. A n u m b e r of a g e n c i e s , i n c l u d i n g the D e p a r t m e n t s of C o m m e r c e a n d Interior, the U S D A , the F T C , a n d the I C C , p r o m o t e d b u s i n e s s s e l f - r e g u l a t i o n with a m i n i m u m of direct g o v e r n m e n t i n t r u s i o n ( s e e H a w l e y 1981). In s o m e c a s e s , this w a s f a c i l i t a t e d by n e w r e g u l a t o r y l e g i s l a t i o n . T h e I C C , f o r e x a m p l e , a s s u m e d a very d i f f e r e n t p o s t u r e f o l l o w i n g the p a s s a g e of the T r a n s p o r t a t i o n A c t of 1920, w h i c h directed the a g e n c y to set minimum rather than maximum rates ( H u n t i n g t o n 1952).

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As the nation fell into the Great Depression during the 1930s, policym a k e r s searched f o r s o m e m e a n s of promoting e c o n o m i c recovery. Because the potential role of fiscal policy was poorly understood, policym a k e r s sought to introduce e c o n o m i c stability through regulatory initiatives (see Eisner 1995: chap. 6). Thus, the Banking Act of 1933 imposed a n u m b e r of r e f o r m s on the banking industry, mandated the separation of commercial banking (i.e., deposit taking and loan making) and investment b a n k i n g ( u n d e r w r i t i n g and dealing in corporate stocks and bonds), and created the Federal Deposit Insurance Corporation (FDIC) to insure deposits. B e t w e e n 1933 and 1935, the National Recovery Administration ( N R A ) a t t e m p t e d to regulate corporate activity on an e c o n o m y wide basis. T h r o u g h a network of code authorities representing c o m m e r cial interests by line of business, codes were written to regulate the amount that could be produced, the flow to market, prices, and labor relations. At the same time, the U S D A introduced regulations for the f a r m e c o n o m y through its Agricultural A d j u s t m e n t Administration, which sought to elevate farm incomes by introducing voluntary production controls and providing participating f a r m e r s with various i n c o m e supports, such as loans and direct payments. T h e N R A was declared unconstitutional in 1935; key provisions of the agricultural recovery legislation fell victim to the Court the next year. Although the agricultural program was retained under new legislation, the N R A ceased to exist. However, the Roosevelt administration promoted a number of new regulatory initiatives designed, once again, to stabilize the economy. The Securities and E x c h a n g e Commission (SEC) was created in 1934 to regulate the stock e x c h a n g e s and the issuance of corporate securities. That same year, Congress passed the National Housing Act, a mechanism for providing federal charters for savings and loans (S&Ls) and for creating the Federal Savings and Loan Insurance Corporation (FSLIC) to insure deposits in S & L s . T h e Federal C o m m u n i c a t i o n s Act of 1934 established the Federal C o m m u n i c a t i o n s Commission ( F C C ) to regulate radio broadcasting, telegraphs, and telephony. T h e National Labor Relations Board was created in 1935 to regulate industrial relations by guaranteeing the right of workers to organize in unions, prohibiting various devices used in the past to limit unionization, and creating a system of collective bargaining. The Motor Carrier Act of 1935 subjected interstate trucking to the regulation of the ICC. The Civil Aeronautics Act of 1938 extended regulation to air transportation, creating the Civil Aeronautics Authority (renamed the Civil Aeronautics Board [CAB] in 1940). By the end of the N e w Deal, the regulatory state had e x p a n d e d dramatically. S o m e m e m b e r s of the New Deal were concerned that the new regulatory structures w o u l d promote a transfer of wealth to the regulated at the cost of c o n s u m e r s while creating economic bottlenecks that would

A BRIEF H I S T O R Y

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limit economic dynamism. Expanded antitrust prosecutions were initiated in the late 1930s in hopes of eliminating some of these bottlenecks. However, World War II quickly drew attention away f r o m these concerns. In the two decades immediately following the war, the regulatory system would look much as it had at the end of the New Deal. However, the critics of regulatory p e r f o r m a n c e would b e c o m e increasingly vocal, giving voice to some of the capture theories presented in Chapter 1. Increasingly, analysts charged that the agencies that were directed to act in the "public interest" had been captured by powerful economic interests and were using regulations to extract monopoly rents and prevent entry into their industries. T h e costs to consumers and the impact on the d y n a m i s m of the U.S. e c o n o m y would b e c o m e increasingly salient once c o m b i n e d with poor economic performance in the late 1970s.

T H E RISE O F T H E N E W SOCIAL R E G U L A T I O N A convenient distinction can be drawn between economic and social regulation, as noted in Chapter 1. Although there were social regulations in the Progressive Era (e.g., the Pure Food and Drug Act and the Meat Inspection Act of 1906), they were a minor part of the story. T h e 1960s and 1970s, in contrast, witnessed the rapid introduction of social regulation and the creation of new agencies such as the Occupational Safety and Health Administration, the Environmental Protection Agency, and the C o n s u m e r Product Safety Commission (CPSC). Given the concentrated costs and diff u s e b e n e f i t s associated with social regulatory initiatives, it is a w o n d e r that key pieces of legislation were ever passed. Even if skilled political entrepreneurs might be successful in promoting these kinds of acts on occasion, they do not o f f e r the kinds of electoral returns that attract elected officials. There are two features of the period that help explain the results. First, the period in question witnessed the rapid expansion of the interest group universe, particularly with respect to consumer and environmental groups ( S c h l o z m a n and Tierney 1986). Many activists were drawn to public advocacy as a result of the modern muckraking of Ralph Nader or their experiences in the civil rights and antiwar movements (Berry 1984: 16-45). Second, however, participants were motivated by the New L e f t ' s critique of capitalist democracy, which invested their activism with theoretical significance (see Eisner 1993b: 118-133; Harris and Milkis 1996). The New Left (see M a r c u s e 1964; Reich 1970; D o m h o f f 1970) rejected the domination of large corporate, military, and g o v e r n m e n t a l b u r e a u c r a c i e s that promoted conformity and subverted human rights and environmental quality to the demands of capitalism. It called for an affirmation of the individual,

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the creation of so-called parallel institutions to contest the p o w e r of the corporate state and provide the basis for a more participatory democracy. New policies were necessary to increase corporate accountability and protect the environment, workers, and consumers. As one might imagine, those who accepted the New L e f t ' s vision of participatory d e m o c r a c y were attracted to the Nader exposés and the acc o u n t s of agency capture by Marver Bernstein (1955), Gabriel K o l k o (1963), and Grant McConnell (1966). If existing regulatory institutions were d e s i g n e d or had evolved to protect the regulated by g u a r a n t e e i n g profits and preventing competition, new policies had to be combined with new administrative f o r m s . Certainly, the historical record suggested that the independent regulatory commission was destined for capture and rigidity. But the problems could also be connected to an excessive delegation of authority that d i f f u s e d accountability and located policymaking authority in the agencies that were more receptive to the demands of regulated interests (see Lowi 1979; Davis 1969). If new regulatory initiatives were to be successful, it was argued, it would be necessary to design institutions to minimize the potential for capture or direct political control, maximize the opportunities for participation, and severely constrain bureaucratic discretion. Thus, Congress placed O S H A in the Department of Labor (DOL); the EPA was established as an independent agency. While the C P S C was created as an IRC (a political response to N i x o n ' s efforts to assert control), there were a n u m b e r of features designed to promote high levels of participation (see M o e 1989). The rule-making processes at the new agencies were far more complicated than required under the Administrative Procedure Act (see B r y n e r 1987), including multiple layers of review and ample opportunities f o r group input. By design, agencies implemented intervenor f u n d i n g programs to subsidize the participation of interests that lacked the necessary resources (Boyer 1981). At the CPSC, a unique o f f e r o r process was put into e f f e c t that c o m p l e t e l y opened the standard-setting process to m a x i mize participation (see Chapter 9). In addition, key regulatory initiatives of the period guaranteed citizens the right to sue agencies to force the execution of nondiscretionary duties. H e n c e f o r t h , advocacy groups would m a k e f r e q u e n t r e c o u r s e to the courts to force compliance with the law (Melnick 1983: 9 - 1 3 ; see also Stewart 1975). The new regulatory legislation also placed severe limits on bureaucratic discretion through detailed legislation. These efforts at programmed implementation led legislators to establish detailed timetables despite the fact that the goals of policy were unachievable under existing technology. In the end, institutions designed to p r o m o t e m a x i m u m participation and minimal bureaucratic discretion were combined with regulatory m a n dates that required a heavy reliance on social scientific and scientific

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expertise. The problems addressed by the new social regulation were highly complex and could not be addressed without detailed analysis. Paradoxically, regulatory mandates consciously designed to minimize delegation addressed such complex issues as to require delegation to scientific and social scientific experts in the agencies. Institutions consciously designed to maximize participation reduced regulatory responsiveness by embroiling agencies in protracted hearings. Although institutions were consciously designed to reduce the influence of regulated parties, the need to muster scientific and social scientific expertise to effectively support one's regulatory recommendations created but another financial barrier to entry that limited the practical impact of the formal procedural guarantees.

D E R E G U L A T I O N A N D REGULATORY R E F O R M The regulatory victories were not the only legacies of the 1970s. Economic stagflation, the combination of inflation and low growth, became one of the most salient problems of the decade. Critics of regulation identified stagflation as an important window of opportunity. By drawing an explicit connection between regulatory excess, on the one hand, and inflation and low growth, on the other, they might be successful in forcing retrenchment, even if the empirical record linking their independent and dependent variables was thin. As one might expect, advocates of free markets drew freely on the older literature of regulatory capture and the economic theory of regulation (Stigler 1971; Posner 1974; Peltzman 1976). If the established regulatory agencies were, in reality, public cartel managers who were conspiring with the regulated to impose monopoly rents, there was reason to withdraw their legal authority and revitalize markets. While this argument was made repeatedly by free market economists, it was also articulated by consumer advocates, who—as noted earlier—saw little justification for extending the lives of such agencies. Deregulation quickly became a central feature of the decade's politics. This odd alliance of free-marketeers and consumer advocates broke down, however, once attention turned to the new social regulations. Certainly, regulatory critics contended, the correlation of the unprecedented cost of the new social regulations and stagflation was not simply the product of chance. Critics argued that regulatory reform was a necessity: agencies should be required to consider explicitly the economic costs and benefits of their actions. In some cases, it was argued, this should take the form of cost-benefit analysis. By forcing policymakers to identify and monetize the costs, benefits, and externalities, they could arrive at a better judgment as to whether their activities were actually contributing to social welfare. In response, advocates of regulation noted that the problems

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of c o s t - b e n e f i t analysis w e r e legion, particularly in the area of social regu l a t i o n , w h e r e it is i m p o s s i b l e to i d e n t i f y and a s s i g n m o n e t a r y v a l u e to m a n y b e n e f i t s b e c a u s e they are expressed in probabilistic t e r m s and o c c u r in a distant f u t u r e . In contrast, costs are i m m e d i a t e , c o n c e n t r a t e d , a n d t h u s p r o v i d e clear incentives f o r mobilization. It was f e a r e d that the a p p l i c a t i o n of c o s t - b e n e f i t analysis w o u l d stack the deck against e n v i r o n m e n t a l q u a l ity and w o r k p l a c e safety. S o m e s u g g e s t e d that cost-effectiveness analysis w a s m o r e a p p r o p r i a t e in social regulations, since o n e w a s not r e q u i r e d to m o n e t i z e b e n e f i t s . O n e m i g h t argue that the d e t e r m i n a t i o n of what w e w a n t to m a x i m i z e is a political one; h o w we p u r s u e these v a l u e s m i g h t be s h a p e d by c o n s i d e r a t i o n s of cost. Critics were wary, h o w e v e r , and v i e w e d r e g u l a t o r y r e f o r m in any of its m a n i f e s t a t i o n s as a T r o j a n h o r s e d e s i g n e d to deliver d e r e g u l a t i o n instead. D e s p i t e the c o n c e r n s , r e g u l a t o r y r e f o r m b e c a m e a n o t h e r i m p o r t a n t f e a t u r e of the 1 9 7 0 s — o n e that c o n t i n u e s to the p r e s e n t day. C o n c e r n s o v e r the costs of the n e w e n v i r o n m e n t a l p r o t e c t i o n r e g u l a t i o n s w e r e u s e d by P r e s i d e n t N i x o n to j u s t i f y the creation of an interagency q u a l i t y - o f - l i f e rev i e w p r o c e s s in 1971. A g e n c i e s were required to s u b m i t s i g n i f i c a n t rules to the O M B thirty d a y s b e f o r e the a n n o u n c e m e n t of r u l e - m a k i n g in the Federal Register, along with analyses i d e n t i f y i n g the goals of policy, the a l t e r n a t i v e r e g u l a t o r y a p p r o a c h e s c o n s i d e r e d , the c o s t s a n d b e n e f i t s of e a c h , and the j u s t i f i c a t i o n for the a g e n c y ' s s e l e c t i o n (see E a d s a n d Fix 1984: 48). G e r a l d Ford built on this legacy when he created the C o u n c i l on W a g e and Price Stability ( C O W P S ) to monitor e v e n t s that could c o n t r i b u t e to inflation. T h e " i n f l a t i o n impact s t a t e m e n t , " as e s t a b l i s h e d u n d e r E x e c u t i v e O r d e r ( E O ) 11821, b e c a m e the central d o c u m e n t in the r e v i e w of g o v e r n m e n t activity. A g e n c i e s in the e x e c u t i v e b r a n c h w e r e r e q u i r e d to c e r t i f y that they had c o n s i d e r e d the potential i n f l a t i o n a r y i m p a c t of n e w rules and regulations. T h e O M B instructed agencies to c o n d u c t a c o s t - b e n efit analysis of rules that w o u l d impose costs of $ 1 0 0 million or m o r e , or i m p a c t on productivity, e m p l o y m e n t , the supply of key raw materials, and e n e r g y c o n s u m p t i o n . C O W P S r e v i e w e d these inflation i m p a c t s t a t e m e n t s , a l o n g with the C o u n c i l of E c o n o m i c A d v i s e r s ( C E A ) and the O M B (Ball 1984: 5 1 - 5 4 ; M c G a r i t y 1991: 1 8 - 1 9 ) . President Carter c o n t r i b u t e d to regulatory r e f o r m w h e n he created the R e g u l a t o r y A n a l y s i s and R e v i e w G r o u p ( R A R G ) in J a n u a r y 1978. R e p r e sentatives of several e x e c u t i v e agencies sat on R A R G , w h i c h was h e a d e d by a c o m m i t t e e including a m e m b e r of the C E A , the O M B , and t w o a d d i tional agency r e p r e s e n t a t i v e s . A l t h o u g h R A R G r e v i e w e d r e g u l a t i o n s with an i m p a c t of $ 1 0 0 m i l l i o n per year, it concentrated on a small n u m b e r of r u l e s each y e a r and s u b j e c t e d t h e m to m o r e d e t a i l e d e x a m i n a t i o n . U n d e r E O 12044, C a r t e r e s t a b l i s h e d as a d m i n i s t r a t i o n p o l i c y that r e g u l a t i o n s " s h a l l be as s i m p l e and c l e a r as p o s s i b l e . T h e y shall a c h i e v e l e g i s l a t i v e

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goals effectively and efficiently. They shall not impose unnecessary burdens on the economy, on individuals, or public or private organizations, or on state and local governments." The executive order also required that agencies compile a regulatory analysis for all significant rules, comprised of a statement of the p r o b l e m , a discussion of alternative responses, an economic analysis of these alternatives, and a detailed justification of the agency's final decision. Carter prescribed cost-effectiveness as the proper analytic m e t h o d . T h e administration directed agencies to provide maxim u m opportunities for participation in the regulatory process, mandating advance notice of proposed rule-making, open hearings, and a minimum of sixty days for public c o m m e n t (see Gerston, Fraleigh, and S c h w a b 1988: 4 4 - 4 8 ) . In hopes of m i n i m i z i n g regulatory redundancy and conflicts, Carter created the Regulatory Council in October 1978. The mission of the council was to compile a regulatory calendar and provide a context in which regulators f r o m the executive branch and independent agencies could discuss their initiatives, explore the potential conflicts with existing regulations, and pool experience (Eads and Fix 1984: 6 1 - 6 2 ) . The regulatory reform initiatives of the 1970s were limited by some common problems. First, agencies had a great deal of discretion in compliance. Although each administration defined what constituted a significant regulation, agencies were responsible for identifying these regulations and initiating the process. Second, although reformers hoped that cost-benefit or cost-effectiveness analysis would provide an analytical f r a m e w o r k for decisionmaking, regulatory analyses often occurred after all m a j o r decisions had been made. Finally, the review processes failed to provide the O M B or any other body with the tools necessary to prevent the promulgation of a rule that failed to meet the cost-based analyses (see Eisner 1994: 105). Nevertheless, these initiatives elevated economics in status relative to the legal discourse that had for so long dominated the regulatory process. This ascendance of e c o n o m i c s in agency decisionmaking would find its ultimate expression in the 1980s (see Tolchin and Tolchin 1983). Congress supported the regulatory reform efforts of the decade by passing two key pieces of legislation designed to reduce the regulatory burden. The Regulatory Flexibility Act of 1980 amended the Administrative Procedure Act to require that regulators examine alternatives designed to reduce burdens and/or enhance benefits to small entities. It also mandated the review of rules every ten years. The Paperwork Reduction Act of 1980 required agencies to justify their collection of information by establishing the need and intended use of the information, estimating the burden that the collection would impose, and showing that they had adopted the least burdensome way to gather the information. It provided the O M B with the broad power to review requests made by government agencies for information and reports from businesses and individuals (Weiss 1981; G A O 1996a).

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In addition to regulatory reform, the 1970s also brought w a v e s of deregulation. E c o n o m i c regulations were, in many cases, phased out. Alternatively, market-based r e f o r m s were introduced to reorient regulation. Deregulation was not completely separate from regulatory reform. Regulators who encountered economic arguments from the O M B and other executive review organs (and, increasingly, the courts!) searched for ways to internalize the debates within their agencies. A host of agencies (including the Justice D e p a r t m e n t ' s Antitrust Division, the FTC, the S E C , the ICC, the F C C , the EPA, and C A B ) established or enlarged economics and policy staffs or offices. Economists and policy analysts often b e c a m e important internal advocates for deregulation (see Eisner 1994: 107-109). As a result, in some cases, deregulation found its origins in agency actions that were subsequently a f f i r m e d and extended by legislation (e.g., the Airline Deregulation Act of 1978, the Motor Carrier Act of 1980, the Depository Institutions Deregulation and Monetary Control Act of 1980). While the detailed history in each case is complicated, as a generalization the results r e f l e c t e d the intersection of academic debates on the e c o n o m i c s of regulation, bureaucratic activism, and congressional action (see Derthick and Quirk 1985). Deregulation affected virtually every sector of the economy that had come under economic regulation. Commercial aviation, commercial banking, natural gas, railroads, securities underwriting and brokering, telecommunications, and trucking would never be the same.

A REAGAN-BUSH R E V O L U T I O N IN REGULATION? Ronald Reagan made the battle against regulation a central plank of his economic recovery program, explicitly linking the regulatory sprawl of the 1970s with stagflation. The Reagan agenda in regulation had clear goals: to prevent the introduction of new regulations that could not be justified by cost-benefit analysis and to revoke or revise existing regulations that circumvented the market. The means of accomplishing these goals were also clearly defined. First, regulators would be subjected to intensified regulatory oversight centralized in the O M B — a continuation and culmination of earlier reform efforts. Second, regulatory agencies would be forced to endure new and often crippling budget constraints. Third, loyalists would be placed in management positions within the agencies to further the president's regulatory goals. Let us examine this strategy in somewhat greater detail. One of R e a g a n ' s first acts upon assuming office was to create the President's Task Force on Regulatory Relief under the chairmanship of the then vice president, G e o r g e Bush. The task force was given a large mandate: to take a broad view of existing and proposed regulations to determine w h e t h e r they contributed net social benefits. In the process, it was

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to identify the regulations that imposed the greatest regulatory burden. One month after the creation of the task force, Reagan issued E O 12291, which imposed a sixty-day freeze on pending regulations and final rules so that the task force could examine their economic impact. By August 1983, the task force had identified 119 regulations deemed ripe for review. In the end, seventy-six were revised or struck f r o m the books altogether (Andrews 1984: 7 3 - 7 4 ; Clark 1981). Executive O r d e r 12291 not only imposed a freeze, it imposed a new process for regulatory review. The order clearly stated the administration's c o m m i t m e n t that "regulatory action shall not be taken unless the potential benefits to society for the regulation outweigh the potential costs." To this end, all executive branch regulators were required to compile a regulatory impact analysis (RIA) for all m a j o r significant rules. T h e R I A s were to be based in cost-benefit analysis (recall that Carter's E O 12044 had directed agencies to c o n d u c t c o s t - e f f e c t i v e n e s s analysis). Under E O 12291, the O M B was e m p o w e r e d to flag any regulation as requiring review. At the same time, it could wave the RIA requirements. Agencies that failed to file RIAs or failed to incorporate the O M B ' s c o m m e n t s into the rule-making package were prohibited f r o m proceeding toward rule-making. Appeals to the O M B ' s decisions could be made to the Task Force on Regulatory Relief, an entity with a clear antiregulatory bias. T h r e e impacts of the R e a g a n regulatory reform activities are worth noting. First, as a result of O M B regulatory clearance, the pace of regulation fell dramatically. T h e O M B was serving quite consciously as a bottleneck in the regulatory process. Second, the new internal review requirements were imposed in an e n v i r o n m e n t of shrinking budgets, thereby diverting f u n d s f r o m e n f o r c e m e n t . Finally, agencies c o m m o n l y reacted to the enhanced status of economic analysis in the regulatory process by creating or further expanding internal policy offices and explicitly integrating economics into the policy process. In addition to intensified regulatory oversight, agencies were forced to weather budgetary retrenchment, particularly during Reagan's first term of office. Here, the budgetary figures paint an unambiguous picture. In real inflation-adjusted terms, the reductions in budgets between 1980 and 1988 were 44.8 percent for the C P S C , 39.4 percent for the EPA, 8.7 percent for the FCC, 25.6 percent for the FTC, 34.1 percent for the Antitrust Division, and 12 percent for O S H A . In each of these cases, dramatic budget reductions forced staffing cuts. In some cases, such as the EPA and the CPSC, the loss of personnel and the poor morale it inspired were close to disabling. The final element in the Reagan regulatory strategy was to place loyalists into m a n a g e m e n t positions where they might exercise greater control over the pace of regulatory g r o w t h at the agency level. T h e y also c o m monly implemented reorganization plans that placed greater power in the

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h a n d s of a d m i n i s t r a t i o n a p p o i n t e e s and c o n s o l i d a t e d o f f i c e s f o l l o w i n g the staff r e d u c t i o n s f o r c e d by the b u d g e t c u t s (see E a d s a n d Fix 1984: M O M S ) . In m a n y c a s e s , the n e w r e g u l a t o r y m a n a g e r s shared an e x p e r t i s e in e c o n o m i c analysis and applied this e x p e r t i s e to m a k e certain that the a g e n c i e s w o u l d b r i n g their a c t i o n s into line w i t h e c o n o m i c theory. In t h e s e c a s e s , the n e w e x e c u t i v e s o f t e n p r o m o t e d e c o n o m i c p r o f e s s i o n a l i z a t i o n of their a g e n c i e s and the integration of e c o n o m i c analysis in each stage of r e g u l a t o r y d e c i s i o n m a k i n g . In o t h e r c a s e s , the e x e c u t i v e s s i m p l y s h a r e d a strong a n t i r e g u l a t o r y p o s t u r e that w o u l d a l l o w t h e m to p r e v e n t a c o n t i n u a t i o n of old e n f o r c e m e n t p a t t e r n s (e.g., A n n e G o r s u c h - B u r f o r d at the EPA; T h o m e A u c h t e r at O S H A ) . In s o m e c a s e s , o b s t r u c t i o n i s m o f t e n attracted the attention of C o n g r e s s and the m e d i a , e m b r o i l i n g the a g e n c i e s in controversy.

A Kinder, G e n t l e r Regulation G i v e n his t e n u r e as head of the P r e s i d e n t ' s Task F o r c e on R e g u l a t o r y R e lief, m a n y e x p e c t e d G e o r g e B u s h to c o n t i n u e the w a r a g a i n s t r e g u l a t i o n o n c e he a s s u m e d the p r e s i d e n c y . Yet, on the c a m p a i g n trail, he p r o m i s e d more e n v i r o n m e n t a l p r o t e c t i o n in the areas of acid rain, toxic wastes, and w e t l a n d s p r e s e r v a t i o n . C r i t i c s of r e g u l a t i o n w e r e r e l i e v e d w h e n o n e of B u s h ' s first p r e s i d e n t i a l acts w a s to t a k e the f u n c t i o n s that h a d been ass i g n e d to the Task F o r c e on R e g u l a t o r y R e l i e f a n d g i v e t h e m to a n e w P r e s i d e n t ' s C o u n c i l on C o m p e t i t i v e n e s s , h e a d e d by Vice P r e s i d e n t D a n Q u a y l e . T h e elation d i s a p p e a r e d , h o w e v e r , w h e n there w e r e c l e a r indicat i o n s that r e g u l a t o r y r e f o r m w a s not g o i n g to r e c e i v e the e m p h a s i s m a n y had e x p e c t e d . T h e council l a n g u i s h e d w i t h o u t internal structures or a f u l l time staff until July 1990. M o r e o v e r , B u s h ' s c h o i c e to head the O M B ' s O f f i c e of I n f o r m a t i o n and R e g u l a t o r y A f f a i r s ( O I R A ) r e m a i n e d stalled in the S e n a t e as D e m o c r a t s e x t r a c t e d p a y m e n t for the role O I R A had p l a y e d during the R e a g a n years. W h e n late in 1989 and into 1990 a d m i n i s t r a t i o n critics b e g a n writing articles about " r e - r e g u l a t i o n " u n d e r Bush, the council rec e i v e d s t a f f i n g s u p p o r t and b e c a m e far m o r e active. F u n c t i o n i n g u n d e r the a u t h o r i t y of R e a g a n ' s E O 12291, the c o u n c i l f o r c e d e x e c u t i v e b r a n c h a g e n c i e s to subject their p r o p o s e d r e g u l a t i o n s to c o s t - b e n e f i t analysis at an early stage in the p r o c e s s — w i t h r e s u l t s that w e r e p a r t i c u l a r l y d i s t u r b i n g f o r the EPA (Victor 1991). Late in 1991, m o r e c o v e r a g e on the B u s h record in r e g u l a t i o n was rel e a s e d , i n c l u d i n g a National Journal c o v e r story that l a b e l e d B u s h the " r e g u l a t o r y p r e s i d e n t . " A s J o n a t h a n R a u c h ( 1 9 9 1 ) h a s d e t a i l e d , the Federal Register had g r o w n a l m o s t 14,000 p a g e s longer than it had been in the final year of the R e a g a n presidency. A d j u s t e d f o r inflation, regulation was c o s t i n g 2 2 p e r c e n t m o r e than it had d u r i n g the f i n a l y e a r of the C a r t e r

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presidency. In an effort to reverse this trend, Bush introduced a ninety-day moratorium on new regulations in his 1992 State of the Union speech. During the ninety days, regulations deemed pro-growth were to be accelerated, whereas those that were deemed to impose a "substantial cost on the economy" were to be examined to determine whether they were costbeneficial, whether they were sufficiently flexible, whether they adopted market mechanisms, and whether they were clear enough to avoid litigation. The moratorium was coordinated by White House counsel C. Boyden Gray and CEA chairman Michael Boskin, with the "Quayle Council" reviewing regulations with the support of OIRA. To critics, the moratorium seemed to be little more than a political ploy designed to appeal to conservative Republicans who questioned Bush's conservative credentials. After all, a moratorium had made more sense after the Carter presidency than at a point when the Republicans had controlled the executive branch for eleven years. Moreover, the review mandated by Bush could have been conducted under the Reagan executive orders (Victor 1992; Kolb 1993: 73-78). In the end, Bush can be best described as having a "regulatory schizophrenia," as one of his former advisers notes (Kolb 1993: 70). The same president that created the President's Council on Competitiveness and imposed a regulatory moratorium was an active participant in shaping two of the most expensive regulatory statutes in the nation's history: the Americans with Disabilities Act of 1990 and the Clean Air Act (CAA) of 1990. This latter piece of legislation, which earned the scorn of regulatory critics, was described by Bush as "the most significant air pollution legislation in our nation's history" and by White House counsel Gray as "the most sweeping environmental statute in the history of the world" (Mervin 1996: 96). In fact, many regulatory agencies (including the EPA, OSHA, and the FTC) entered a period of mild revitalization and budgetary growth under the leadership of Bush appointees who were far more committed to active regulation than one would have imagined, given Bush's role in the Reagan deregulation efforts.

T H E C L I N T O N PRESIDENCY: A M I R R O R IMAGE? One might easily attempt to portray the Clinton presidency as the mirror image of the second Reagan term. The presidency was controlled by a Democrat sympathetic to the mandates of key regulatory agencies, and, after the 1994 midterm elections, the Congress was under unified Republican control. As one might expect, this made the political environment conflictive, albeit not nearly as much as during the Reagan administration. Many of the conservative assumptions concerning regulatory policymaking and

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analysis introduced in the late 1970s and 1980s had been accepted by Democrats and advocated by the Clinton administration as part of the larger effort to "reinvent government." During the 1992 presidential campaign, Bill Clinton provided a great deal of evidence that he supported an expansive role for regulatory agencies addressing environmental protection, consumer protection, and workplace safety and health. On the twenty-second anniversary of Earth Day, candidate Clinton promised his audience "a new covenant for environmental progress" with "three priorities: exerting new American leadership to protect the global environment; preserving the quality of our environment here at home; and finding ways to promote innovation and growth consistent with firm environmental goals" (Clinton 1996: 138). His vice presidential selection of A1 Gore, a noted environmental advocate, gave an additional indication of his support for vigorous environmental protection. Similarly, he called for a "new energy policy" premised on "renewable resources and natural gas and energy efficiency" (Clinton 1996: 404). The Democratic Party's platform echoed these themes, noting its commitment to environmental quality and a safe workplace. Upon assuming office, Clinton moved quickly to eliminate the Reagan era regulatory review system. Executive Order 12866 of September 30, 1993, revoked Reagan's EO 12291 and expunged the Council on Competitiveness. While these revocations might have offered hope to regulatory advocates, EO 12866 established a regulatory review process that was not markedly dissimilar from that which existed under EO 12291. Under the new review system, agencies were responsible for conducting analyses justifying all significant regulations (once again, defined as those with an impact of $100 million or more) and submitting them for review to the OMB. The analyses had to identify the problem; determine whether the problem was the result of existing regulations; identify alternatives, "including providing economic incentives to encourage the desired behavior, such as user fees or marketable permits, or providing information upon which choices can be made by the public" and the option of no regulation at all; and "assess the costs and the benefits of the intended regulation and, recognizing that some costs and benefits are difficult to quantify, propose or adopt a regulation only upon a reasoned determination that the benefits of the intended regulation justify the costs." As under EO 12291, OIRA was given the responsibility of analyzing agency submissions and requesting revisions. Agencies were prohibited from publishing in the Federal Register until OIRA had waived its review or completed its review and no corrective actions were required on the part of the agency (§ 1). In an effort to coordinate regulatory actions and minimize duplication, EO 12866 required annual policy meetings in which agency heads would identify their regulatory priorities for the upcoming year. All regulatory

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agencies (including independent agencies) were to submit regulatory agendas to OIRA, which would be combined as a "unified regulatory agenda." In addition, beginning in 1994, each agency was required to submit regulatory plans stating objectives, each planned significant regulatory action, the legal basis for the actions, the need for the action, and a schedule. These plans would then be circulated to all affected agencies, which in turn were directed to submit their comments or concerns to OIRA, which would then seek to eliminate conflicts. Finally, EO 12866 established a Regulatory Working Group consisting of the heads of agencies deemed to have significant regulatory responsibilities. Chaired by the OIRA administrator, the working group would meet quarterly "as a forum to assist agencies in identifying and analyzing important regulatory issues (including, among others [1] the development of innovative regulatory techniques, [2] the methods, efficacy, and utility of comparative risk assessment in regulatory decision-making, and [3] the development of short forms and other streamlined regulatory approaches for small businesses and other entities)" (§ 4[d]). Thus, EO 12866 emphasized the need for regulatory review to reduce redundancies and burdens where possible, although, at the time of this writing, there are serious questions as to whether the Clinton appointees are complying with its provisions (see Weidenbaum 1997). The same themes were articulated as part of the "reinventing government," or REGO, activities during the first Clinton term. On the campaign trail, Clinton had promised to initiate a study of how to reinvent government, headed up by A1 Gore. The idea of reinventing government had been hotly debated during the previous administration, as Bush and his advisers sought to introduce the so-called New Paradigm, whereby government would learn from the private sector and policies would be designed to support community action. Influenced by David Osbourne and Ted Gaebler's Reinventing Government and the communitarianism of Amitai Etzioni, advisers to Bush saw the New Paradigm as a way to counter the claims that the president lacked the "vision thing" (see Kolb 1993: 284, 330). The Clinton administration was far more committed to the venture. Upon assuming office, Gore and a staff of 260 began working on the REGO project. At a press conference on the south lawn of the White House, Gore announced the basic findings of his staff against the backdrop of two large forklifts loaded with government regulations. He noted that the goal was to produce rules that work—rules that are result oriented, customer oriented, free of duplication, and that empower workers. This would require a simplification of process, a reduction in middle management, and an increase in government responsiveness. Gore linked REGO to deficit reduction, noting that it would allow government to eliminate 252,000 bureaucrats and cut spending by $108 billion—a soft figure that the OMB refused to endorse (Drew 1994: 294-295).

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Congress joined in with the administration's efforts to reinvent government, with the passage of the Government Performance and Results Act of 1993 (Public Law [PL] 103-62). The act required executive agency heads to prepare a strategic plan for their agencies, identifying goals for all major activities. These plans, submitted jointly to the director of the O M B and Congress, had to adopt a time frame of at least five years, with threeyear updates. In addition, the agencies were required to prepare annual performance plans that would become part of the president's budget. Each agency was also required to report annually to the president and Congress on the success in achieving the goals presented for the previous year, including "performance indicators, actual program performance, and a comparison with plan goals for that fiscal year." In hopes of stimulating public-sector innovations, the act required the OMB director to "designate: (1) no fewer than ten agencies (representing a range of Government functions) as pilot projects in performance measurement; (2) no fewer than five agencies (selected from agencies in performance measurement pilot projects) as pilot projects in managerial accountability and flexibility; and (3) no fewer than five agencies (selected from agencies in performance measurement pilot projects) as pilot projects in performance budgeting" (PL 103-62, " S u m m a r y " ) . M e m b e r s of the public interest community expressed concerns that agencies would emphasize goals that could be reflected in simple indicators that would, in the end, become more important than the broader public interest (see OMB Watch, December 19, 1997). To be certain, President Clinton made a number of appointments to regulatory agencies that reflected his sympathy for the goals that had been under fire for the previous twelve years. Given the attention paid to the efforts of these appointees in subsequent chapters, we will not summarize their activities or qualifications here. Yet the level of regulatory activity was, in many cases, less than that which had existed under Bush. William Niskanen, chair of the Council of Economic Advisers during the Reagan presidency and a staunch critic of regulation, noted: "Clinton's regulatory record (so far) is better than Bush's. This is the good news. You already know the bad news: the Bush record was awful. The Bush administration imposed more costly, new regulatory legislation than that of any administration since Nixon" (Niskanen 1996: 25). Writing four years into the Clinton presidency, Niskanen noted that the number of pages in the Federal Register (a painfully imprecise indicator of regulatory sprawl) had grown at a 3.2 percent annual rate under Clinton—slightly above the Bush administration, which had restricted growth to 3.0 percent (compared with a 4.5 percent annual decline under Reagan). Real budgetary outlays had grown by 2.0 percent per year, less than half the 4.6 percent annual growth during Bush (but well below the 1.1 percent growth of Reagan). Regulatory staff had grown by 1.2 percent per year under Clinton, almost one-quarter

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the 4.7 percent growth rate of Bush. The Reagan administration had realized a 1.9 percent annual reduction in regulatory staff. Finally, the real regulatory costs imposed per household had grown 0.4 percent per year during the Clinton presidency, compared with a 2.8 percent growth rate during Bush and a 2.7 percent annual reduction under Reagan (Niskanen 1996). While other critics have perceived a greater regulatory expansion under Clinton (see Weidenbaum 1997), there is a consensus that regulation under Clinton was less than one might have expected, given the progressivism of the campaign trail. One might attribute some of the disparity between regulatory promise and p e r f o r m a n c e to Clinton's Democratic Leadership Council centrism. Clinton clearly identified himself as a "New Democrat," a label claimed by politicians who believe that some core Democratic values may be best pursued through private-sector activities and market forces. Yet Clinton's regulatory record may be a product of three additional factors. First, the Reagan-Bush years may have effectively changed the terms of the regulatory debate; the questions that had animated the policy discussions in the late 1970s were no longer being asked. A new consensus was firmly in place that recognized the legitimacy of considering economic impacts. Second, the dramatic cuts in regulatory budgets during the Reagan presidency and the deprofessionalization of many agencies may have made them less capable of returning to an activist posture. Both of these issues will be examined in more detail in the case studies in Part 2. Third, the president does not act in a political vacuum. In regulation, as in so many other domestic policy arenas, he must operate as part of the system of separate institutions sharing power (Neustadt 1980: 26). Even if Clinton had sought to return to a high level of regulatory activism, the new Republican majority in Congress would have made that impossible. To conclude our examination of contemporary regulatory politics, let us turn to the Republican majority and its actions in the 104th and 105th Congresses.

Regulation After the "Contract with America" The 1994 midterm election was a devastating event for anyone who believed that the Clinton victory two years earlier had marked a return to unified Democratic Party rule. Following the 1992 election, the Democrats continued to dominate the H o u s e of Representatives (258:176) and the Senate (57:43). The 1994 elections placed both chambers under Republican control, albeit by relatively slim margins of 230 to 204 in the House and 53 to 47 in the Senate. What made matters worse is that two Democratic incumbents in the Senate and thirty-five Democratic incumbents in the House were defeated, whereas no Republican incumbents suffered this fate. The House Republicans ran on the basis of the "Contract with America,"

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a platform that promised to alter dramatically public-sector governance and the role of the state in the economy and society. The contract promised the passage of the Job Creation and Wage Enhancement Act, consisting of "small business incentives, capital gains cut and indexation, neutral cost recovery, risk assessment/cost-benefit analysis, strengthening the Regulatory Flexibility Act and unfunded mandate reform to create jobs and raise worker wages." While voters may have had scant knowledge of the contract's provisions, public sentiment clearly supported any platform devoted largely (seven of the ten planks) to reducing the role of government. Data from polls taken on the eve of the election is presented in the Roper Center's publication, America at the Polls, 1994 (Ladd 1995: 26-27). Some 66 percent of those polled identified government as the problem, not the solution. Another 80 percent saw the government as run for the benefit of special interests, not the people. Only 22 percent believed that you could trust the government to do what is right most or all of the time. To the extent that the Contract with America promised to scale back on government and increase its efficiency, accountability, and responsiveness, it found a ready constituency. The House introduced the Job Creation and Wage Enhancement Act of 1995 (HR 9) during the first 100 days of the 104th Congress. This large bill was separated into several divisions, the most important being the Private Property Protection Act of 1995, the Regulatory Reform and Relief Act of 1995, and the Risk Assessment and Cost-Benefit Analysis Act of 1995. The Private Property Protection Act required the federal government to compensate property owners when regulations had diminished the fair market value of their property by 20 percent or more and required that the government actually purchase any portion of the property that had lost more than 50 percent of its value. This legislation, designed to limit government takings, also established a procedure for compensation and required that agencies limiting the use of property give notice of these procedures to the property owners. The Regulatory Reform and Relief Act was divided into two titles. Title I, "Strengthening Regulatory Flexibility," authorized small businesses to petition for judicial review of rules when (1) an agency certified that the rules would not have a significant impact on a substantial number of small businesses or (2) the agency prepared a final regulatory flexibility analysis. The courts, in turn, were authorized to order an agency to prepare a final regulatory flexibility analysis if it was determined that the agency's certification that the rule would not have a significant impact on small entities was "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." The courts could also order the final regulatory flexibility analysis if it was determined that the earlier analysis violated proper procedure. Title II amended the Administrative Procedure

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Act to specify that a "major rule" was one that would have an annual economic impact of $50 million or more, result in a major increase in costs, or have "significant adverse effects on competition, employment, investment, productivity, innovation," or U.S. competitiveness. Under Title II, agencies were required to publish their intention to engage in major rulemaking at least ninety days before publication of the general notice. In addition, a hearing and extended comment period would be required if more than 100 persons made the request. Each agency would have to complete RIAs for major rules, and no major rule could be adopted until the OMB had approved or commented on the analysis. Finally, the agency was to be certain that the rules and RIAs were written in a "reasonably simple and understandable manner." The Risk Assessment and Cost-Benefit Act addressed the use of risk analysis and cost-benefit analysis at several agencies (including the EPA, OSHA, the FDA, the CPSC, the Nuclear Regulatory Commission [NRC], the National Oceanic and Atmospheric Administration, and the USDA). Under the legislation, the affected agencies would be required to apply standard principles to assure the objectivity and inclusiveness of all significant risk-assessment documents. The president would be responsible for issuing specific guidelines for risk assessment and characterization. In addition, each agency would be required to develop strategies for training their risk-assessment staffs and reporting on the issue periodically to Congress. The OMB would be required to sponsor a comparative risk analysis to rank various health, safety, and environmental risks, making it possible to evaluate risk-management decisions in the agencies with risks routinely accepted by the population. The legislation also required federal agencies to conduct cost-benefit analyses of major rules involving risk analysis. The new principles were also to be used to review and revise prior risk assessments and characterizations. The Job Creation and Wage Enhancement Act of 1995 quickly passed the House of Representatives on March 3, 1995, sending a shock wave through the regulatory community. The detailed risk-assessment and costbenefit requirements, the extension of the rule-making process, and the multiple venues for review and appeal promised to mire regulatory agencies in a procedural quagmire (Benenson 1995a, 1995b). In the end, HR 9 was reported to the Senate, where it quickly became the victim of presidential politics. Bob Dole, the Senate majority leader, embraced the legislation in hopes of winning greater support within the conservative wing of the Republican Party. Democrats, in turn, used parliamentary maneuvers to kill the legislation. Other bills also languished in the Senate when it became clear that the narrow Republican majority was incapable of preventing filibuster (Freedman 1995; Gruenwald 1995). Despite the failure of many key provisions of the Contract with America legislation, what is surprising is

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how many of the regulatory reform proposals actually emerged from the legislative process and were signed into law. Let us review several of the key statutes. In March 1995, Clinton signed the Unfunded Mandates Reform Act (PL 104-4), designed to prevent Congress from passing laws that impose mandates on private-sector actors or other levels of government without appropriating the funds for their implementation. Many social regulatory policies have, in the past, required state governments to bear implementation duties without providing funds. Under the act, the Congressional Budget Office (CBO) has to analyze bills that would impose a significant burden (defined as $50 million or more to state, local, and tribal governments; $100 million to the private sector). Analyses would have to include "a qualitative, and if practicable, a quantitative, assessment of costs and benefits anticipated from the Federal mandates (including the effects on health and safety and the protection of the natural environment)" (§ 423[c]). If the analysis is not conducted, the bill is automatically subject to a point of order on the floor of the chamber. Moreover, a point of order is automatic if the bill exceeds the above-mentioned thresholds and Congress fails to provide funding (§ 425[a]). Congress also passed a reauthorization of the Paperwork Reduction Act in 1995 (PL 104-13), which was signed into law in May (see Ponessa 1995). As noted above, this act, originally passed in 1980, was designed to reduce the paperwork burdens placed on the private sector. Since paperwork requirements are some of the greatest costs associated with regulation, critics of regulation who wanted to increase government accountability deemed the reauthorization of this act important. The act expands electronic information dissemination and requires agencies to reduce the hours required to comply with paperwork by 40 percent by 2001, under the direction of the OMB's OIRA. If successful, this act would reduce the economic burden by some $80 billion annually. Given that the paperwork burdens increased after the passage of the 1980 act, these savings may be slow to come (see Shanahan 1997). Congress passed the Small Business Regulatory Enforcement Fairness Act of 1996 (PL 104-121), which was signed by the president in March 1996. The act established a number of protections for small businesses that might be adversely affected by regulation. Subtitle A, "Regulatory Compliance Simplification," requires agencies to publish compliance guides for small businesses for rules that require a regulatory flexibility analysis. The act also requires agencies to answer inquiries regarding compliance through the creation of a program explicitly for this purpose. Section 413 amended the Small Business Act to require that small business development centers provide information regarding regulatory requirements. Subtitle B, "Regulatory Enforcement Reforms," requires the Small Business Administration to create a Small Business and Agriculture Regulatory Enforcement

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Ombudsman and a Small Business Regulatory Fairness Board in each regional office comprised of "owners, operators, or officers of small entities." The boards will meet annually with the ombudsmen and report "on instances of excessive enforcement actions taken against small businesses." The act also requires all agencies regulating small entities to create, within one year, a program "for the reduction and possible waiver of civil penalties for violations of a statutory or regulatory requirement by a small entity." Subtitle C, "Equal Access to Justice Act Amendments," requires the award of defense fees and adjudication costs "in which the demand of a regulatory agency against a small entity is found to be substantially excessive and unreasonable." PL 104-121 also amended the Regulatory Flexibility Act by requiring that proposed and final interpretive rules involving the internal revenue laws be accompanied with initial and final regulatory analyses. It also required that the final analyses explicitly identify the number of small businesses affected, the compliance requirements imposed, and the steps taken to minimize the economic impact. The amendments also increased the demands on agencies by requiring that their determinations of impact be backed with analysis. The law requires that the EPA and OSHA provide small businesses (through the Small Business Administration) information regarding the impact of a proposed rule on small businesses prior to the publication of an initial regulatory flexibility analysis. It also requires the agencies to use a review panel consisting of small business representatives to collect information on the impact of a proposed rule and solicit recommendations, all of which would become part of the rule-making record. Subtitle E of PL 104-121 also included new provisions for congressional review. The act subjected rules to congressional review by establishing that before a rule can take effect as a final rule, the agency must submit to both chambers (and the Comptroller General Office) a report containing, among other things, the agency's determination of whether the rule is a major rule and a cost-benefit analysis for all such rules. The act explicitly prohibits a rule from taking effect "if the Congress passes a joint resolution of disapproval." It also prohibits agencies from reissuing a disapproved rule in substantially the same form. Of course, the president can veto the joint resolution, and a rule can be exempted if the president notifies Congress in writing that it is "(1) necessary because of an imminent threat to health or safety or other emergency; (2) necessary for the enforcement of criminal laws; (3) necessary for national security; or (4) issued pursuant to any statute implementing an international trade agreement." Additionally, the act prohibits judicial review of determinations made under this title (PL 104-121, "Summary"). The Omnibus Appropriations Act of 1997 (PL 104-208) required the OMB to establish a regulatory accounting system to track the costs and benefits of significant regulations (once again, those with an annual impact

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of $100 million or more). More important, the act required the OMB, no later than September 30, 1997, to submit to the Congress a report providing estimates of the total annual costs and benefits of federal regulatory programs. The analysis has to include an assessment of the direct and indirect impacts of federal rules on the private sector, state and local government, and the federal government. The OMB director has to make recommendations (reflecting public comments) "to reform or eliminate any Federal regulatory program or program element that is inefficient, ineffective, or is not a sound use of the Nation's resources." There are expectations that this could become an annual requirement, placed as it was within an appropriations bill. The effect could be to force by statute the OMB to adopt a deregulatory posture that it had adopted in the 1980s as a result of the president's agenda. Critics of the Contract with America have created the impression that the Republican juggernaut was effectively defeated following Clinton's "E-squared, M-squared" strategy of the summer and fall of 1995, whereby the administration mobilized interests and used the media to question what would occur to the environment, education, Medicare, and Medicaid under the contract (Walker 1996: 338; Weisman 1996b). As the legislative accomplishments of the 104th and 105th Congresses suggest, however, this impression was not entirely correct. Most of the successful initiatives were less extreme than those initially proposed. However, the changes in the regulatory state promise to be significant. Through the measures listed above, Congress has sought to impose ever tighter control over regulatory agencies by requiring a more thoroughgoing application of cost-benefit analysis, heightening agency accountability to Congress through greater reporting requirements and congressional review, and increasing agency consideration for the impact of their decisions on key constituents who have traditionally borne a large share of regulatory compliance costs. Given the Republican Congress's ongoing fascination with regulatory reform, there is little reason to believe that these efforts have drawn to a close.

CONCLUSION The contemporary history of regulatory politics is in many ways paradoxical. The wave of new social regulatory initiatives in the 1970s expanded the regulatory state to dimensions previously unimaginable. As consumer, environmental, and labor advocates celebrated their victories, critics of regulation successfully used the window of opportunity opened by stagflation to introduce regulatory reform and deregulatory initiatives, efforts that accelerated during the 1980s, as one would have expected, given the Reagan administration's antipathy for government. Yet the greatest achievements of

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the Reagan and Bush presidencies were achieved as efforts were made to use the bureaucracy to control regulatory sprawl. The OMB, armed with executive orders, forced agencies to adhere to cost-benefit analysis in regulatory decisionmaking. For good or ill, the result was a dramatic reduction in regulatory activism. The 1990s witnessed a continuation of OMB control under Clinton's EO 12866. The continuation of regulatory review is a testament to the changing contours of the policy debates. What had once been a serious point of contention—that cost-benefit analysis had a role in regulatory review—was now part of a consensus that cut across parties. Moreover, as the above discussion reveals, the Republican majority in the 104th and 105th Congresses made substantial progress in providing a statutory foundation for the kinds of reforms that had previously been a product of presidential control. As we turn to the case studies of regulation in Part 2 of this book, we will discover that beneath the apparent consensus, there were significant departures during the Clinton presidency—and, indeed, during the Bush presidency. While presidential and congressional politics are an important part of the story, it is virtually impossible to understand the evolution of regulation in the contemporary period without focusing on the activities within the individual agencies. We turn now to this examination.

NOTE 1. For a more detailed e x a m i n a t i o n of regulatory history, see Eisner 1993b.

Part 2 Contemporary Regulatory Policies

4 Regulating Market Competition

Regulatory policy is often justified as a m e a n s of preventing or compensating f o r market failure. T h e existence of monopolies, oligopolies, and cartels threatens the f u n c t i o n i n g of markets, as do f o r m s of behavior that may be used to limit m a r k e t entry. Antitrust policy directly addresses these issues by regulating corporate organization and conduct. B e y o n d the e c o n o m i c rationale, antitrust has strong political d i m e n s i o n s (Pitofsky 1979; A d a m s and Brock 1986). Historically, antitrust has been understood as one means of limiting the concentration of economic p o w e r that may be quickly translated into political power. At the same time, it preserves small business, local o w n e r s h i p , and individual e c o n o m i c opportunities that might otherwise be foreclosed. In its promotion of decentralization and accountability, antitrust policy is an expression of American political values. As Walter A d a m s notes, the antitrust laws "are founded on a theory of hostility to the concentration of power in private hands so great that even a government of the people can be trusted to have it only in exceptional circumstances" (1982: 487).

•

Antitrust policy at the national level f i n d s its origins in the S h e r m a n Antitrust Act of 1890, the Clayton and Federal Trade C o m m i s s i o n Acts of 1914, and several key a m e n d m e n t s . T h e Sherman Act prohibits "conspiracies in restraint of trade" (§ 1) and monopolization or attempts to m o n o p olize (§ 2). At present, Sherman Act violations are deemed felonies and are punishable by prison terms of up to three years and fines of up to $350,000 f o r individual d e f e n d a n t s and $ 1 0 million f o r c o r p o r a t e d e f e n d a n t s . T h e courts may alternatively impose a f i n e of up to twice the gain or loss associated with the activity if it is greater than $10 million. Given the criminal provisions, S h e r m a n Act e n f o r c e m e n t is assigned to the D O J . In addition, provisions f o r private antitrust suits u n d e r the p r o m i s e of treble damages have given rise to ongoing waves of private antitrust litigation. In 1914, Congress passed the Clayton Act to prohibit f o r m s of behavior that

61

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contributed to the creation o f m o n o p o l y p o w e r , thereby m o v i n g the g o v ernment f r o m a prosecutorial to a regulatory posture. T h e act declared illegal price discrimination ( § 2 ) , e x c l u s i v e dealing and tying ( § 3), the acquisition o f "the stock or other share capital o f another c o r p o r a t i o n " ( § 7 ) , and corporate interlocks ( § 8 ) w h e r e the e f f e c t s " m a y be to substantially lessen c o m p e t i t i o n or tend to create a m o n o p o l y in any line o f c o m m e r c e . " Section 4 p r o v i d e d once again f o r the r e c o v e r y o f treble damages and legal f e e s in private litigation. T h e C l a y t o n A c t ' s k e y provisions have been ref i n e d through a f e w m a j o r amendments. T h e R o b i n s o n - P a t m a n A c t

of

1936 a m e n d e d Section 2 to prohibit the p r o v i s i o n or acceptance o f price discounts when unjustified by cost d i f f e r e n t i a l s or when they undermined c o m p e t i t i o n or contributed to m o n o p o l y . T h e C l a y t o n A c t ' s Section 7 was a m e n d e d b y the C e l l e r - K e f a u v e r A c t o f 1950, strengthening the prohibitions against anticompetitive mergers. T h i s amendment was r e i n f o r c e d by the H a r t - S c o t t - R o d i n o Antitrust I m p r o v e m e n t s A c t o f 1976, which created a premerger notification system that a l l o w e d regulators to assess the c o m p e t i t i v e impact and l e g a l i t y o f mergers and g u i d e parties in restructuring the merger in advance rather than seeking legal remedies after the fact. In addition to the C l a y t o n A c t , C o n g r e s s passed the Federal T r a d e C o m m i s s i o n A c t o f 1914, w h i c h created the F T C . T h e o r g a n i z a t i o n and p o w e r s o f the F T C w i l l be discussed in greater detail b e l o w , but it is important to note n o w that S e c t i o n 5 o f the F T C A , as amended by the W h e e l e r - L e a A c t o f 1938, p r o v i d e d the c o m m i s s i o n with a broad grant o f authority by establishing an e c o n o m y - w i d e prohibition o f " u n f a i r methods o f c o m p e t i t i o n in c o m m e r c e and unfair or d e c e p t i v e acts or practices in c o m m e r c e . " T h e c o m m i s s i o n w a s g i v e n the authority to bring c i v i l proceedings against business practices that w e r e not explicitly declared illegal by the Sherman and C l a y t o n A c t s . In addition to the broad Section 5 prohibition, the F T C e n f o r c e s the c i v i l p r o v i s i o n s in the C l a y t o n A c t and its amendments. T h e F T C thus shares e n f o r c e m e n t responsibilities with the Antitrust D i v i s i o n in several areas, including the important m e r g e r regulations and the p r e m e r g e r n o t i f i c a t i o n system established in 1976. T h e m a j o r antitrust statutes e n f o r c e d by the D O J and the F T C are presented in Table 4.1.

ANTITRUST

POLICY

Antitrust has a l w a y s carried a certain base l e v e l o f c o m p l e x i t y . T h e broad prohibitions w e r e d e f i n e d through a rather complicated history o f court decisions that h a v e been d i f f i c u l t , at times, to r e c o n c i l e . T h e Sherman A c t prohibits "restraints o f t r a d e , " yet e v e r y e c o n o m i c transaction c o u l d be v i e w e d as a restraint o f trade insofar as it excludes other potential partners.

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Table 4.1 Major Antitrust Statutes Enforced by the Antitrust Division and the FTC Sherman Antitrust Act (15 U.S.C. §§ 1-7, as amended) Wilson Tariff Act (15 U.S.C. §§ 8-11) Clayton Act (15 U.S.C. §§ 12-27; 29 U.S.C. §§ 52-53, as amended) Antitrust Civil Process Act (15 U.S.C. §§ 1311-1314, as amended) International Antitrust Enforcement Assistance Act of 1994 (15 U.S.C. §§ 46, 57b-l, 1311-1312,6201-6212) Racketeering Influenced and Corrupt Organizations Act (18 U.S.C. §§ 1961-1968) Hart-Scott-Rodino Antitrust Improvements Act of 1976 (15 U.S.C. § 18a, as amended) Webb-Pomerene Act (15 U.S.C. §§ 61-66, as amended) Deepwater Port Act of 1974 (33 U.S.C. §§ 1501-1524, as amended) Defense Production Act of 1950 (50 U.S.C. §§ 2061-2169, as amended) Outer Continental Shelf Lands Act Amendments of 1978 (43 U.S.C. § 1337) Conservation Service Reform Act of 1986 (42 U.S.C. §§ 8201 et seq.) Deep Seabed Hard Minerals Act (30 U.S.C. §§ 1401-1473, as amended) National Cooperative Research and Production Act of 1993 (15 U.S.C. §§ 4301-4306) Interstate Commerce Commission Termination Act of 1995 (49 U.S.C. §§ 1010111917)

T h e lack of s t a t u t o r y p r e c i s i o n h a s f o r c e d the c o u r t s to d e t e r m i n e w h a t kinds of p r a c t i c e s are illegal u n d e r the p r o v i s i o n s of the law and w h e t h e r they s h o u l d be v i e w e d as b e i n g illegal per se or a d d r e s s e d u n d e r a rule of reason. If a given p r a c t i c e (e.g., p r i c e - f i x i n g ) is per se illegal, then p r o s e c u t o r s n e e d only p r o v e a m a t t e r of f a c t to p r e v a i l in c o u r t . In c o n t r a s t , under the rule of r e a s o n , the c o u r t s must a d d r e s s issues of r e a s o n a b l e n e s s , e f f e c t , and intent. T h e kind of e v i d e n c e d e e m e d n e c e s s a r y to a d d r e s s these issues has varied by type of violation and o v e r t i m e . T h e greatest s o u r c e of c o m p l e x i t y in recent y e a r s h a s b e e n the g r o w ing role of e c o n o m i c s . S i n c e the 1960s, e c o n o m i s t s h a v e b e c o m e central p l a y e r s at both a g e n c i e s . A s e c o n o m i c s h a s c o m e to p l a y an e v e r g r e a t e r role, the m o d e l s a p p l i e d in a n t i t r u s t d e c i s i o n m a k i n g h a v e c h a n g e d , ref l e c t i n g c h a n g e s w i t h i n the e c o n o m i c s d i s c i p l i n e a n d the s u b s y s t e m d e bates. W h e n e c o n o m i c s first e n t e r e d the policy p r o c e s s , the field of industrial o r g a n i z a t i o n w a s d o m i n a t e d b y the s t r u c t u r e - c o n d u c t - p e r f o r m a n c e ( S C P ) p a r a d i g m ( W e i s s 1979). U n d e r this f r a m e w o r k , m a r k e t s t r u c t u r e w a s c o n s i d e r e d d e t e r m i n a n t of v a r i o u s f o r m s of c o n d u c t . T h a t is, in highly c o n c e n t r a t e d m a r k e t s with barriers to entry, f i r m s w e r e f a r m o r e likely to e n g a g e in c o l l u s i v e b e h a v i o r . T h e o v e r a l l i m p a c t o n e c o n o m i c p e r f o r m a n c e was d e e m e d to be quite n e g a t i v e , u n d e r m i n i n g social w e l f a r e , econ o m i c e f f i c i e n c y , a n d t e c h n o l o g i c a l d y n a m i s m w h i l e c o n t r i b u t i n g to f u r ther c o n c e n t r a t i o n of e c o n o m i c w e a l t h . T h i s p a r a d i g m s u p p o r t e d e c o n o m i c d é c o n c e n t r a t i o n a n d the e l i m i n a t i o n of vertical a n d h o r i z o n t a l r e s t r a i n t s t h r o u g h v i g o r o u s e n f o r c e m e n t that d r e w on all t h e p r o v i s i o n s of the an-

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titrust laws. The SCP paradigm reinforced the political goals traditionally associated with antitrust. Over the course of the 1970s, the SCP paradigm lost influence in the antitrust debates. The key difficulty was tied to the assumption that structure was determinate. Critics from the Chicago school of economics made the case that firm size and concentration levels in a particular industry reflected the interplay of market forces and the technology of production (see Reder 1982; Posner 1979; Bork 1978). Applying George Stigler's survival test (1968: 72-74), the best single guide to what should exist is what has survived the competitive process. If large firms characterized an industry, it was because this scale of production provided superior efficiencies to alternative industrial structures. Absent government intervention, competitive forces would force firms to adopt the most efficient scale of production and would eliminate restraints that impeded competition. As one might conclude, the Chicago school supports a more limited range of enforcement actions. There is support for policies against horizontal restraints due to the sizable short-term welfare losses. There remains skepticism regarding the economic justification of efforts to prevent concentration and vertical restraints (see Eisner 1990; Eisner 1991: 90-118). Complexity is only one of the two dimensions shaping regulatory politics: we should also expect official attention to be a product of issue salience. As the salience data on antitrust reveals (see Figure 4.1), coverage of the policy area has varied wildly over the last decades of the twentieth century. Not surprising, the salience of antitrust has increased during periods of negative economic performance, when attention turns to whether corporate practices impede growth or create inflationary biases. Thus, salience peaked in the latter half of the 1970s, when stagflation troubled the American economy. It rose rapidly once again in the period 19821983, when the nation endured the deepest recession since the Great Depression. During such periods, attention turns to the role of policy in returning the economy to a high-growth profile. What is surprising is that the high level of salience is not combined with high levels of negative coverage. Coverage remains largely neutral; negative stories are a fraction of the total stories in any given year.

THE ANTITRUST AGENCIES The antitrust laws are enforced by two agencies: the Antitrust Division of the DOJ and the FTC. Dual regulatory authorities is not unique to antitrust (see, e.g., Chapters 5 and 9). Despite a regulatory division of labor, the FTC regularly brings cases that could be prosecuted under the Sherman Act, relying on the prohibition of "unfair methods of competition" in Section 5 of

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Figure 4.1

65

The Salience of Antitrust

Year

the FTCA. Problems of duplication have been m i n i m i z e d with a liaison arrangement established in 1948 and greater consultation and cooperation (see Higgins, Shughart, and Tollison 1987). Yet the overlapping jurisdiction has led to ongoing calls for a consolidation of antitrust activities in the Antitrust Division, leaving the FTC free to concentrate on consumer protection (see Chapter 9). Let us examine the two agencies separately.

T h e A n t i t r u s t Division The Antitrust D i v i s i o n is under the leadership of an assistant attorney general ( A A G ) , a presidential appointee. For agency management and planning activities, the A A G relies on deputy assistant attorneys general ( D A A G s ) , an o f f i c e of policy planning, an operations office, and the Econ o m i c A n a l y s i s Group. A l t h o u g h the division has been reorganized on a number of o c c a s i o n s in the postwar period, it has typically consisted of one or more litigation units and a number of more s p e c i a l i z e d sections dealing with patents, foreign commerce, and regulated industries. For fiscal year 1996, the Antitrust D i v i s i o n had a budget of $ 8 3 million. A s Figure 4 . 2 reveals, the budget of the division has increased steadily since 1970, albeit in nominal terms. A s with most a g e n c i e s , budgetary growth has failed to keep pace with inflation.

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Figure 4.2

Federal Antitrust Regulation Expenditures

Year I

FTC Antitrust

-DOJ Antitrust |

T h e Antitrust D i v i s i o n is hierarchical in organization (see F i g u r e 4.3). Priorities are f o r m a l l y e s t a b l i s h e d and cases a p p r o v e d by the A A G , w o r k ing closely with the D A A G s . T h e d i v i s i o n ' s f i v e D A A G s c o v e r e c o n o m i c a n a l y s i s ; civil n o n m e r g e r e n f o r c e m e n t and r e g u l a t o r y a f f a i r s ; m e r g e r enf o r c e m e n t and a d m i n i s t r a t i o n ; c r i m i n a l e n f o r c e m e n t ; and international and a p p e l l a t e matters. T h e d i v i s i o n is o r g a n i z e d into nine sections: the A p p e l late Section; the C o m p e t i t i o n Policy Section; the C o m p u t e r s and F i n a n c e S e c t i o n ; the E c o n o m i c L i t i g a t i o n Section; the E c o n o m i c R e g u l a t i o n Section; the F o r e i g n C o m m e r c e Section; the Legal Policy Section; Litigation Section I and II; and the T r a n s p o r t a t i o n , Energy, and A g r i c u l t u r e S e c t i o n . In a d d i t i o n , t h e r e are s e v e r a l task f o r c e s that m a y cut a c r o s s the e x i s t i n g s e c t i o n s . Task f o r c e s e x i s t f o r civil litigation, h e a l t h c a r e , m e r g e r s , a n d t e l e c o m m u n i c a t i o n s . A l t h o u g h the division is a large litigation s h o p s t a f f e d with 3 2 3 a t t o r n e y s , t h e r e is c l o s e i n t e r a c t i o n b e t w e e n the l a w y e r s a n d e c o n o m i s t s at the staff level, e s p e c i a l l y on the task f o r c e s and in i n v e s t i gation and c a s e - s e l e c t i o n p r o c e s s e s , w h e r e they d e v e l o p the legal and econ o m i c d i m e n s i o n s of a c a s e s i m u l t a n e o u s l y . T h e d i v i s i o n o p e r a t e s s e v e n regional field o f f i c e s . Historically, the d i v i s i o n relied heavily on private c o m p l a i n t s as a s o u r c e for its p r o s e c u t i o n s (see W e a v e r 1977). Increasingly, h o w e v e r , it has m o v e d f r o m a reactive to a proactive posture, basing its decision to p r o c e e d on i n d e p e n d e n t a n a l y s i s and d a t a f r o m b u s i n e s s p u b l i c a t i o n s , p r i v a t e

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antitrust cases, SEC filings, premerger notifications, complaints from other agencies, and economic analyses. As the division increased its emphasis on planning, evaluation, and proactive case selection, economists were elevated within the policy processes. Division attorneys, working with staff economists, determine whether a potential case has sufficient legal and economic merits to warrant a formal investigation. The Antitrust Division has significant investigative powers. If there appears to be economic and legal grounds for filing a case after a preliminary examination, it initiates a formal investigation. In civil cases, the division can issue civil investigative demands, a form of administrative subpoena. Civil proceedings are also often filed to achieve regulatory remedies. The court may issue injunctions placing restrictions on the future corporate behavior. However, civil proceedings are rarely brought in response to per se violations because an injunction could only restate what was already fixed in law. Civil cases may be settled via consent decrees that provide relief without the expense, delays, negative publicity, and disclosures of a trial. Since they are inadmissible as prima facie evidence of guilt, the defendant's vulnerability to private action is not altered. For these reasons, the division and the defendant are often eager to negotiate consent decrees, and a majority of civil cases are resolved through negotiated settlement. On the criminal side, the division employs the grand jury system. These investigations are a serious threat: the scope of inquiry is unlimited, and undetected violations may be revealed through discovery. Private parties in treble-damage litigation may use documentary evidence obtained through subpoenas. Criminal proceedings are usually filed in response to activities that are per se illegal, such as price-fixing. Once criminal charges are filed, the accused often enters a plea of nolo contendere rather than marshaling a defense, in the hopes of minimizing the litigation expenses and exposure. A plea of nolo contendere is not an admission of guilt and thus does not increase the vulnerability to private litigation (Eisner 1991: 25-29). The division was given the task of premerger screening in 1976. A l l firms planning to engage in a merger where the parties have combined assets of over $110 million are required to provide information to the two antitrust agencies. The agencies have sixty to ninety days to rule on the merger or request additional information, thus extending the waiting period. To facilitate enforcement, the Antitrust Division (in cooperation with the F T C ) issues merger guidelines that are updated periodically. The guidelines provide an economic framework for merger analysis and a statement of the conditions under which the division might seek to enjoin a merger. Although the division may seek injunctions, a statement of agency intentions usually makes this unnecessary. The division routinely works with corporations to restructure mergers (the " f i x it first" policy). It is common for the division to recommend the restructuring of some portion of one or both enterprises prior to the merger. When time constraints

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69

make this impossible, the division may approve the merger subject to a consent decree requiring subsequent divestiture. T h e Federal Trade Commission As an IRC, the FTC is headed by a five-member, bipartisan commission. Although the agency has been reorganized on a number of occasions over its more than eight decades of existence, at present it is organized along program lines. An organizational chart for the FTC is presented in Figure 4.4. The Bureau of Competition is the FTC's antitrust enforcement arm. It investigates alleged violations of the antitrust laws, prepares and litigates cases, and conducts ongoing research on competition policy issues. The Bureau of Consumer Protection protects consumers against unfair, deceptive, and fraudulent practices by enforcing a number of consumer protection laws and trade regulation rules (see Chapter 9). The Bureau of Economics provides technical support in the development and selection of enforcement actions and compiles information and reports on American industry. The FTC also makes use of a network of ten regional offices. The FTC's budget for 1996 was $100 million. As Figure 4.2 shows, the agency experienced periods of steady budgetary expansion during the early 1970s, followed by periods of sharp decline. The FTCA provided unprecedented investigative powers. Under FTC A Section 6(a), the FTC has the power "to gather and compile information concerning, and investigate from time to time, the organization, business conduct, practices and management of any corporation engaged in commerce." The act provided the FTC with the power to demand of corporations "reports or answers in writing to specific questions, furnishing the Commission such information as it may require" on a host of issues regarding corporate organization and performance. The exercise of these powers is not contingent on evidence of a crime. The FTC can demand information "merely on suspicion that the law is being violated, or even just because it wants assurance that it is not." This power is used regularly, particularly by the Bureau of Economics. The FTC's cases may originate from a number of sources, including private complaints, referrals from the Antitrust Division, business publications, premerger notification filings, and economic market studies. As with the Antitrust Division, a majority of cases historically originated from private complaints. Since the early 1970s, however, the commission has developed a greater capacity to generate cases through economic analysis (see Katzmann 1980a). Prior to initiating formal investigations, potential cases are assessed in screening and evaluation committees. Although these committees are centralized in the Bureau of Competition, Bureau of Economics economists form part of the evaluation team and actively consider the economic merits of the proposed regulatory action.

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