CHAPTER 1
Introduction: The Problem of Industry Influence
The policies and behavior of federal regulatory agencies are of critical significance to the economy. To varying degrees, regulation controls: the prices and price structures for energy, communications, loans, agricultural products, and transportation; the safety and healthfulness of food, medicines, automobiles, airplanes, and consumer products generally — as well as of the workplace; the fairness and honesty of advertising and commercial practices; the structures of economic markets; and the quality of the environment — just to mention some prominent examples. Despite recent substantial deregulation of certain industries, principally where regulation served to protect producers from competition, the pervasive significance of regulation seems certain to persist and even grow.
In administering regulatory controls, the agencies typically exercise vast discretion, based on broad and ambiguous statutory guidelines. Licensing agencies, for example, have often been instructed merely to select licensees as required by "the public interest, convenience, and necessity." The Food and Drug Administration (FDA) is to allow marketing of drugs only when they have been proven to be "safe and effective"; the agency must decide for itself how safe is "safe" and what will count as proof. Obviously, given the nature of their activities and the discretion with which they act, the performance of regulatory agencies can be enormously consequential.
Correctly or not, assessments of regulatory agencies' performance have ranged, for the most part, from inadequate to deplorable. Critics have charged the agencies with many failings, and there have been few defenders. Among the most common and serious criticisms is that which accuses regulatory agencies of persistently serving the interests of regulated industries to the neglect or harm of more general, or "public," interests. Such behavior is variously referred to as "clientelism," "agency capture," or "producer (or industry) protection." Regardless of name, the accusation implies excessive regulated industry influence on regulatory agencies.
Judging the validity of this accusation with respect to particular agencies can become quite complex and uncertain. That is because an allegation of industry influence usually rests on an (often unstated) assumption about what the agency would have done in the absence of industry influence — an assumption that tends to derive from what the critic thinks should have been done. Because there will sometimes be disagreement about what "the public interest" requires, there will be disagreement about where industry influence has occurred.
The extent of these disagreements varies according to the policy questions involved. Thus there is virtual consensus among independent commentators that the Interstate Commerce Commission (ICC), the Civil Aeronautics Board (CAB), and the Federal Maritime Commission (FMC) have used rate-setting and entry-regulating power in such ways as to prevent or reduce economic competition in regulated industries to the detriment of consumers and the benefit of regulated firms. The Federal Communications Commission (FCC) and the ICC, among other agencies, have obstructed the introduction of new technologies that threatened the positions of favored industries — again quite clearly damaging general interests.
In other areas, especially consumer and environmental protection, it has often been claimed that agencies, even though imposing some constraints, have deferred to industry interests in minimizing regulatory costs and burdens, and have failed therefore to secure the degree of protection permitted by their authority and preferred by most people. For example, the Food and Drug Administration (FDA), Environmental Protection Agency (EPA), National Highway Traffic Safety Administration (NHTSA), and Occupational Safety and Health Administration (OSHA) are sometimes accused of setting lax standards for industry conduct, being negligent or tardy in enforcing them, and ignoring hazards and problems within their jurisdictions for inordinate periods. It is not argued that these agencies have benefited industry in the strong sense, applicable to some agencies, of making industry better off than it would be in the absence of regulation. It is asserted that constraints imposed have been substantially less than are needed.
Others, however, including analysts independent of regulated industries, argue that the protection offered by these agencies has been, not merely sufficient, but excessive. They note that most of the cost of consumer and environmental protection regulation must ultimately be borne by the public in the form of higher prices, loss of product attractiveness, disincentives to product innovation, and so on, and they argue that regulatory agencies have not taken these costs adequately into account. In short, not only regulated industry, but the public as well, would be better off with reduced regulatory constraint.
Thus, there are some agencies (ICC, CAB) that have generally been considered highly responsive to regulated industry, and others (FTC, FDA) about which there would be sharp disagreement on the extent of industry influence.
Ideally, this confusion would be replaced by objective analysis. It would be very useful to be able to measure the output of regulatory agencies with regard to the resulting distribution of costs and benefits to regulated industries and the general public. Together with similar estimates about possible policies that were not adopted, this would permit discovery of the "revealed preferences" of the agencies as between industry and general interests. This would provide a much firmer basis than is presently available for inferences about the extent and circumstances of industry influence.
Unfortunately, such comprehensive and objective analysis is usually infeasible, for several reasons. In the first place, regulatory decisions do not necessarily present neat conflicts with a clear and homogeneous "public interest" on one side, pitted against a "regulated industry interest," also clear and homogeneous, on the other. Instead, both sides may be divided into conflicting subgroups or otherwise have ambiguous interests in an issue; and coalitions may cut across the industry-public cleavage. For example, if automakers are required to install air bags as passive restraints in all cars produced for the domestic market, some members of the public presumably are benefited by the increased safety, but others might consider themselves worse off because of the substantial passed-through cost increment (especially those who were quite willing to use the inexpensive seat belt). Even the automobile...
