Knowledge And Decisions

Regulatory agencies in general have the legal right to exclude firms from entering the industry they regulate. This is a property right worth billions of dollars. The members of the commissions are not allowed to sell this right, but they can dispense it in ways that make their job easier, or their individual fortunes more secure as later employees of the firms they currently regulate. Favoritism to incumbents is a perfectly rational response to such incentives, however inconsistent with the public interest. The only legal guidelines are that entry of firms into the regulated industry must serve the “necessity and convenience” of the public. The regulatory agency determines how many firms are “needed” to serve the public. The idea is that there are quantitative, objective “needs” determinable by third party observers — as distinguished from the economic reality of varying quantities and qualities demanded according to varying costs. But the “need” for railroad service, for example, is “measured in physical rather than economic terms” so that “as long as existing carriers are physically capable of performing a particular service, prospective competitors are to be denied entry — even if their service is cheaper, better, and more efficient.”³⁵ Similar policies are followed by other regulatory commissions.

Because the right to operate in a regulated industry is a valuable property right available at virtually zero cost, the claimants’ demand always exceeds the supply, even when only incumbents are allowed to compete. It is to the regulatory agency’s political advantage to satisfy, or at least appease, as many incumbents as possible — which is to say, to distribute these operating rights widely, and therefore thinly. Thus legal rights to engage in interstate trucking are spread so thin that they are often rights to operate in only one direction — a “carrier between the Pacific Northwest and Salt Lake City may haul commodities eastbound, but not westbound,”³⁶ for example — thereby doubling the cost to consumers, who must pay enough freight charges to cover the cost of the truck both ways. Sometimes the right to carry goods between two points does not include the right to pick up and deliver at points in between, so that again the cost of the service is made artificially high by not allowing it to be shared by as many customers as possible. However economically costly this is to the country, it makes perfect political sense as a means of spreading a given amount of patronage as widely as possible to mollify as many constituents as possible.

Since the general public knows little or nothing about such regulatory agencies, their interests are a politically negligible consideration. Whatever the individual morality or intentions of regulatory commissions, the systemic factors leading to such results are (1) the vast disparity in cost of knowledge per unit of benefit as between the public and special interest groups, and (2) the appointment rather than election of commissioners, so that no political competitor has a high personal or organizational stake in informing the public of incumbent commissioners’ misdeeds. Political as well as economic competition has been restricted or eliminated. Mollifying as many constituents as possible means not only protecting incumbents from prospective competitors; it means protecting high-cost (inefficient) incumbents from unrestricted competition from low-cost (efficient) incumbents, who could otherwise undercut their prices, taking away their customers, and driving them toward bankruptcy. Rather than quietly enter bankruptcy courts, such higher cost firms are more likely to noisily enter the political arena, probably through the congressional committee controlling the powers and appropriations of the regulatory commission in question. It is politically prudent for the commission to buy “insurance” against such problems — at costs externalized to the public — by maintaining a minimum level of prices designed to insure survival of the highest-cost firms. Lower-cost firms therefore earn more profits per unit of sales but are prevented from completely destroying the high-cost firms. In short, there is something for everybody, which is a politically more viable situation than the “cutthroat” or “ruinous” competition which regulatory agencies constantly guard against.