Management & Labor

Spreading Out the Clout

It's difficult to notice dogs that don't bark, as Sherlock Holmes demonstrated more than a century ago. It's also difficult to notice phones that don't ring.
by | April 2004

It's difficult to notice dogs that don't bark, as Sherlock Holmes demonstrated more than a century ago. It's also difficult to notice phones that don't ring. But if you make it through dinner tonight without any unwanted interruptions, you might stop a moment to reflect that you are benefiting from one of the rarities of today's democratic process: a new law that solved a problem--quickly, decisively and to all appearances permanently.

The "Do Not Call" list is working. Some 57 million Americans have placed their home numbers on the no-call registry since the federal law prohibiting most unwanted solicitations took effect last fall. In a national poll released a couple of weeks ago, 92 percent of the respondents said they weren't getting as many junk calls as before. One-quarter said they couldn't remember a single such call in the preceding four months. The number of complaints made to the FCC on this subject is down by 80 percent. And a federal appeals court has dismissed a suit by telemarketers challenging the law's constitutionality.

The whole episode suggests, I suppose, that when a practice is annoying enough, government can be pretty creative in finding a way to stop it. But it also suggests something about the way America practices regulation these days, and the way we are likely to do it for quite a while to come.

The "Do Not Call" law was a product of the states and the federal government--not working together, exactly, but managing to end up in more or less the same place. By the time the federal law went into effect, 37 of the 50 states had passed some sort of statute regulating unwanted telemarketing solicitations. Those were having some effect on abusers, but the effect was limited because telemarketing is a multi- state business and the laws varied in confusing fashion from one jurisdiction to another. So the feds took over the job, compromising among the different state plans to create a national registry, but requiring telemarketers to abide by existing state rules in their home territory.

Essentially the same model was used to deal with spam--unwanted commercial e-mail. By the beginning of this year, 36 states had enacted some form of anti-spam consumer protection law. They created a patchwork of rules difficult to apply for even an honest business operating across state borders. Congress came up with a federal law, weaker than some of the state laws but stronger than others, and putting something in place where legislatures had failed to act.

When I say that this is the way regulation works these days, I mean something like the following: Changes in technology and market forces create problems between consumers and major corporate interests within a sector of the economy. Members of Congress hold hearings and introduce reform proposals, but can't generate the political momentum to proceed further. One by one, the legislatures start passing laws. Eventually a majority of the states have them. There are complaints from businesses that the lack of consistency is costing them money. Eventually Congress, passes legislation that reins in the most activist states but also moves the laggards a couple of steps further.

The do-not-call and spam examples come from the field of communications and advertising, but if you think about the federal system in the past decade or so, you can see the new regulatory approach working in many important areas, involving multi-billion dollar segments of American capitalism.

Congress and the Clinton administration clashed angrily in 1994 over how to regulate the health insurance system, and ended up doing nothing. Besieged by consumer complaints, state legislatures started taking their own smaller steps: setting the ground rules among patients and HMOs and trying to control escalating prescription drug costs. Congress continued debating for almost 10 years, while nearly 40 states enacted measures placing a lid on medication costs or setting up bulk-purchasing plans to save consumers money. It wasn't until 2003 that Congress managed to a pass a Medicare bill including a limited prescription drug reimbursement for seniors.

The rules that apply to regulation apply to de-regulation as well. Congress spent most of the 1990s discussing how it might loosen up the laws on electric power production to generate more supply and lower prices. While the discussion continued, more than 20 states acted. Some of these state deregulation laws were spectacular failures; some of them worked reasonably well. Only last fall, after a brief but spectacular power outage hit much of the Northeast, did a federal measure to modernize important elements of the power system (although not deregulating it) begin to make serious progress toward enactment. It still isn't on the books.

What I draw from all these stories is that when it comes to dealing with the inequities of 21st-century capitalism, Congress is no longer the first or even the most relevant governmental institution we look to. The states play that role. If they play it effectively enough, and the absence of national standards begins to strike interested parties as inconvenient or embarrassing, Congress may get around to legislating on the subject. Or it may not.

Conventional wisdom, particularly among liberals, suggests that this is getting regulation backwards. It's the federal government that should make the rules and the states that should adjust themselves accordingly. Besides, economists frequently argue, state regulation tends to be inefficient and compromised by special privilege. Insurance is an exclusively state-regulated industry, for example, and in the average state legislature, many of the key members of the insurance committees are in the business themselves. Conflict of interest isn't even taken seriously. The funeral industry is state- regulated, and in most states it gets exactly the scrutiny it wants: hardly any at all. There's long been a suspicion among political scientists and liberal activists that state regulatory systems are fatally susceptible to "capture" by whatever interest they are supposed to be overseeing.

What's rare, though, is solid evidence on whether this doctrine of "regulatory capture" describes reality. Are state regulators in fact a soft touch for big corporations and trade associations?

There will never be a simple answer to the "capture" question, but Paul Teske, a public affairs professor at the University of Colorado, has spent the past several years trying to separate fact from speculation. Teske's conclusions have just been published in a book, "Regulation in the States," which traces the measurable effects of state regulatory policy in the areas of communications, electricity, insurance, banking, occupational licensing and environmental policy. It's a highly technical, relentlessly quantitative book, in many places difficult to follow. But if you manage to wade through all the correlation coefficients and regression analysis, you will find that Teske has a compelling thesis about the theory of regulatory capture: It is based on obsolete assumptions about the way American industries are structured.

Capture takes place, in Teske's view, when one company or interest group dominates the politics of an important industry. That industry leader is powerful enough to control any regulatory structure a state chooses to set up. It does so through campaign contributions, leverage over appointments to regulatory commissions and massive publicity efforts. Bell Telephone companies had that kind of power over telecommunications policy in most states before the system was broken up by federal judicial decree in 1973. Doctors had it for most of the 20th century, through the monolithic mechanism of the American Medical Association.

But Teske, after nearly a decade of investigation, argues that this sort of single-interest power has ceased to exist in most crucial sectors of the U.S. economy. These days, state regulation of most industries involves so many distinct interests that the idea of any one of them taking the regulators captive is ludicrous. Traditional telephone companies still exist, and they still plead their case to legislatures and rate commissions. But they have to compete on a given issue with wireless and cable companies, Internet service providers and a host of additional players scrambling for regulatory advantage.

Organized physicians remain a powerful presence in state health care policy, but they have been joined by equally sophisticated representatives of hospitals, insurance providers, pharmaceutical companies and other players too numerous to list. "Simple capture by one group," Teske says, "is not the common pattern anymore...In most industries and arenas, there's a delicate balance of different and competing interests." In many of them, consumers are one of the interests, where they were all but absent from the process a generation ago.

There are some exceptions. Teske found a few vestigial state- regulated industries in which the old monolithic model still applies. It applies in much of the field of occupational licensing, most notably the funeral business, where morticians remain the only organized group with sufficient stake in the outcome to influence the regulatory result. It was true until a few years ago for trucking, in which a cadre of powerful intrastate hauling companies insisted on maintaining archaic rules that prevented new competition from emerging. The era of capture ended when Federal Express and United Parcel Service developed the countervailing clout to get the rules repealed.

To say that state regulators are no longer shills for individual interests is not to say that they do a good job all the time, or even most of the time. Regulators still make bad decisions and bend, on occasion, to improper lobbying pressure. Teske doesn't dismiss the notion that the current system continues to represent the exercise of raw power by private interests--it just happens to be the power of multiple interests, rather than just one.

That may be a form of capture. You can also call it a form of democracy.

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