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I hate to start out this module on a negative note, but the picture above reminds us that the question of if and how government should regulate business can be a matter of life and death.  On September 12, 2008 a Metrolink commuter train collided head on with a freight train in Los Angeles.  Twenty-five people lost their lives.  The collision will be the subject of our discussion board and will frame the debate regarding government regulation of business.

This module represents a significant transition point in the course.  During the first four modules we studied the tools that we will now apply to the rest of the course.  The BGS model, the power of business and its critics and the role of politics in regulation are all subjects that we will synthesize in understanding the topic of how government impacts business.

 

The module begins with the successful 2010 launch of a SpaceX rocket. While overcoming the earth’s gravity was an impressive feat for a privately held company, so too was overcoming the morass of

regulations imposed by the Office of Commercial Space Transportation in order for SpaceX to receive a launch permit. The SpaceX story sets the tone for the remainder of the module.

Regulations, such as those prohibiting any launch that poses a risk of public casualties greater than one in 30 million, make it impossible for all but the most highly capitalized businesses to enter the field. Rules like these draw the ire of businesses and the public for creating so much “red tape” and are often cited as the cause for the decline of American industry. On the other hand, if the second stage of the SpaceX rocket were to crash through

the roof of a school, the same critics would ask how the government could let such a tragedy occur.

 

 Module Five explains how the current regulatory environment came about and how regulations are made today. While most students were taught civics class that elected federal and state representatives pass all laws, this is simply not the case. Today, the vast majority of regulations, which have the force of law, are promulgated by administrative agencies. Empowering appointed officials to enact laws has obvious implications in a democracy. Is it better for a panel of scientists or Congress to set acceptable odds on space-related casualties? While elected officials, influenced by corporate money, might set the bar too low, it is reasonable to argue that one in 30 million is too high, given that the

probability of dying in a plane crash (also a regulated activity) is far more likely—say one in

11 million (Ropeik, 2015)

 

In any event, despite the promises of nearly every contemporary U.S. president, government regulation is here to stay; therefore, it is crucial that business leaders understand the process of how regulations are created and how they can influence the process. It is

important to note that in addition to the federal government, every state regulates business through a rule-making model that is similar to the federal process.

 

Understanding why government has historically regulated business is a key first step in influencing the regulatory process. A business model that falls into one of the following 2 MBA 665 Module Five

categories should brace itself for government impacts. There are at least four reasons, including:

 

Natural monopolies. Unlike the production of soft drinks or jeans, it is difficult and probably undesirable for a half-dozen firms to generate and sell electricity to the residents of a city.

When one company supplies an entire market without competition, government has historically regulated the industry.

 

Destructive competition. The story of Standard Oil covered in Module Two demonstrated how government can be motivated to regulate when it perceives business practices that are

designed to destroy competition. While cutting prices below the cost of production may be good news for consumers at first, it can cost them in the long run when competition has been removed from the market.

 Externalities. When the costs of production are shifted from those who make the profit to another group such as society, an externality is created. Remember the story of James

Duke and American Tobacco Company? Duke made millions selling cigarettes; however, society today spends more than $300 billion annually addressing the health effects caused by smoking (CDC, 2015).

 

Social engineering. Aside from these justifications, politicians cannot help themselves from

attempting to regulate, incentivize, and penalize business and individuals in order to obtain social and political objectives. The line between social engineering and controlling externalities can be a fine one; waiting at a metered on ramp while carpools sail by onto the freeway can be a prudent regulation to control the externalities of global warming or a social goal of promoting mass transportation, depending on your worldview. Limiting the size of

soft drinks that can be sold at fast-food restaurants can be seen as a visionary way to account for the burden that society carries for obesity caused in part by soft drinks, or it can be seen as an intrusion into personal choice.

Again, the topic is addressed from the now familiar historical perspective. As a young nation, the United States was committed to promoting business. The Commerce Clause, for example, gave Congress the ability to supersede states when businesses crossed state lines. This power was initially wielded in promotional ways, such as providing huge subsidies for the construction of turnpikes, canals, and railroads. That investment soon paid off, but created other problems. Businesses grew in size and influence, eventually threatening to choke competition. Business critics picked up on the story and society became duly outraged; the Sherman Antitrust Act followed.

Decades later the Great Depression and Franklin Roosevelt’s New Deal ushered in a new philosophy of the BGS model. Massive unemployment provided a fertile ground and popular

sentiment to support the intervention of government into business. Our current regulatory environment traces its roots to the New Deal. Following the Second World War, the nation

became more prosperous. When everyone has a job, society can focus on other issues, such as why asbestos mine workers seem to develop cancer or why Lake Erie caught fire. Somewhere in the regulatory process, the snail darter and foolproof space launches entered into the regulatory picture.

 

Boom and bust economic cycles will follow, and government regulation (and even government incentives) will follow as well. Rather than predicting the next business cycle and the government impacts that will follow, business leaders should be equipped with the tools to understand the regulatory process and how to impact it.

References

Centers for Disease Control and Prevention. (2015, April 15). Fast facts: Costs and expenditures. Retrieved

from http://www.cdc.gov/tobacco/data_statistics/fact_sheets/fast_facts/

Ropeik, D. (2006, Oct. 17). How risky is flying? NOVA. Retrieved from

http://www.pbs.org/wgbh/nova/space/how-risky-is-flying.html