GEORGE VASSILEV
PEIS 101
PROF. PEARSON
GSI: I. ASCHER
08.30.2002
Government regulation in the USA
has grown significantly and continuously both in terms of scale and of scope throughout the country's history.
The colonial tradition: US
law is based on British Common Law, which allows government to regulate both the political and the economic domains. An example of early government intervention in the US
appeared during the production boom in the tobacco industry in the 17th century.
It led to market and social instability, when prices fell dramatically as supply skyrocketed. To quell violence, Virginia's
and Massachusetts' governments tried passing legislation that would set minimum
prices and regulate the entire process of production, collection and distribution of tobacco products. Furthermore, government, both on the federal and the state level expanded its definition of public goods
as it invested in infrastructure construction and almost retained a monopoly on public projects, without subcontracting them
to private enterprise.
Banking: The pervasive tension
between the state and the federal governments was poignantly revealed in the creation of the First and Second Banks of the
US with the effective powers to regulate state chartered banks. The outcome of decades of opposition resulted in a relative centralization of the
banking system and an increased number of federally chartered banks, as opposed to state-run ones.
Scale and Scope: Big government in terms of scale existed since the establishment of the US.
The federal budget has been growing faster than the economy. The centrality of public projects has shifted over the past two
centuries, but they have remained in the domain of public infrastructure; roads, harbours, waterworks, etc. At times of national crises or bank panics and depressions, the GDP share of government expenditure has
risen significantly. The Civil War, the market collapse and the Great Depression,
as well as WWI, WWII, the Cold War and currently the War on Terrorism, have all been reasons for increased participation of
government in the economy and in public life.
The Ratchet Effect illustrates
governmental behaviour in the wake of, during and after such crises. In essence, the level of governmental intervention subsides
as the immediate crisis diminishes, but expenditure does not reach pre-crisis levels because of the created bureaucracy. Hand
in hand with scale increase, comes scope increase. Government constantly keeps
on adding new services and activities, such as compulsory primary education after the Civil War, the Civilian Conservation
Corps during the Great Depression, or the Office of Homeland Security during the current War on Terrorism.
Railroads: The ICC Regulators
are often blamed for being co-opted by the agencies they are meant to regulate. The
ICC was set up to control shipping fares due to the rising political discontent of the agricultural and industrial producers.
According to Kolko, the ICC enforced anticompetitive collusion which the railroads
stood to benefit from. MacAvoy suggests that regulation supported the creation
of voluntary cartels, as a result of which shipping prices were stable. Ulen,
on the contrary, believes that the ICC served neither the interests of the public, nor the ones of the cartels, but rather,
those of the bureaucracy in place, thus increasing the governments share in the economy for its own sake.
Bank Deposit Insurance seemed
to be a good idea but it tempted financiers to cheat and made the public irrationally over-trusting of the banking system.
As the freshly- enriched small agricultural banks were hit by the output crisis of the early 1920s, the bank deposit insurance
schemes proved inefficient and unable to cope. White and Calomiris reveal that branch banking could have been a better approach,
because it would have given banks access to a more diverse pool of debtors.
The New Deal: The scope of government expanded suddenly and dramatically after president Roosevelt's implementation of
the New Deal. Banking was turned over to governmental control, convertibility
and the Gold Standard were suspended, numerous employment plans in the area of public works were spawned, agriculture and
industry were closely monitored and directed. As a result, New Federalism was
put in place which marked a switch of shares of local and state funding with that of federal expenditure. To this day, an
overwhelming majority of services are provided by the federal level of government, a legacy of a continuous process of centralization
and increased intervention of government in the economy, industry, agriculture, and every other conceivable realm of public
life. This is a trend that is not likely to change course in the foreseeable
future.
