President Obama’s Competition Executive Order Could Benefit from a History Lesson

April 19, 2016

President Obama issued a new executive order on Friday aimed at promoting competitive markets.

Promoting competitive markets and ensuring that consumers and workers have access to the information needed to make informed choices must be a shared priority across the Federal Government. Executive departments and agencies can contribute to these goals through, among other things, pro-competitive rulemaking and regulations, and by eliminating regulations that create barriers to or limit competition. Such Government-wide action is essential to ensuring that consumers, workers, startups, small businesses, and farms reap the full benefits of competitive markets. (Sec. 1)

The order asks federal agencies to “identify specific actions that they can take in their areas of responsibility to address undue burdens on competition,” and, by May 15, 2016, submit to the Director of the National Economic Council (NEC) an initial plan “to promote competition, arm consumers and workers with the information they need to make informed choices, and eliminate regulations that restrict competition without corresponding benefits to the American public.”

Competition is Good for Consumers

This is a welcome announcement. As the Council of Economic Advisors (CEA) issue brief accompanying the order notes, “a long line of economic literature argues that competition among firms benefits consumers via lower prices.” This was most evident from the U.S. experience in the 1970s and 1980s, when bipartisan efforts across all three branches of government eventually led to the abolition of whole agencies such as the Civil Aeronautics Board (CAB) and the Interstate Commerce Commission, and removal of unnecessary regulation in several previously-regulated industries, with resulting improvements in innovation and consumer welfare.

Deregulation Enables Competition

Unfortunately, the brief does not mention this historical experience nor acknowledge that the government action that brought about these gains for consumers was deregulation. A White House blog post by CEA chairman Jason Furman, and NEC chairman Jeffrey Zients refers to the phone company’s monopoly prior to 1980, but not the government’s role in creating and maintaining that monopoly. Nowhere in either the issue brief or the blog post is deregulation mentioned.

The CEA-NEC issue brief misses an opportunity to remind us what we learned the hard way—that regulation of private sector prices, entry, and exit tends to benefit the regulated industries, often at the expense of consumers. Scholars and policy entrepreneurs of the 1970s and 1980s showed that, rather than offer a cure for “natural monopoly,” economic regulation was the principal cause of some quite unnatural monopolies. The removal of economic regulation in the telecommunications and transportation sectors increased consumer choice and aligned service quality with customer preferences. Competitive markets have generated real gains—and not just reallocated benefits—for consumers and for society as a whole, while markets have evolved in beneficial ways that were not anticipated prior to deregulation.

Resurgence of Anticompetitive Regulation

Recent years have seen a resurgence of economic regulation, which may be contributing to the decline in competition and innovation that the issue brief decries. Regulations under the Affordable Care Act and Dodd-Frank Act, for example, limit prices, control entry, and constrain service quality. The flurry of standards mandating the energy-efficiency of appliances and fuel-economy of vehicles restricts consumer choices. And, many would argue that Federal Communications Commission’s net neutrality rules and the Department of Labor’s fiduciary rules—two areas that Furman and Zients highlight as illustrating the “pro-competition progress” on which the executive order will build—are indeed anticompetitive, limiting the arrangements that could emerge from competitive markets, and potentially harming innovation

Focus on Removing Anticompetitive Regulations

As the agencies develop their plans pursuant to the executive order, they should identify where their own regulations limit competition and constrain the ability of willing buyers and sellers to enter into agreements. The late Alfred Kahn, who did more than any other economist to promote competition and deregulation in the 1970s, was asked as Chairman of the CAB to describe what the airline industry would look like once it was deregulated. He responded, “if I knew what was the most efficient and rational arrangement, I’d continue to regulate,” adding that a major benefit of competition is that it produces unexpected outcomes. We can only hope that some regulators have the good sense to respond to President Obama’s new executive order this way.