Regulation and Its Reform

by Stephen G. Breyer

This book will become the bible of regulatory reform. No broad, authoritative treatment of the subject has been available for many years except for Alfred Kahn’s Economics of Regulation (1970). And Stephen Breyer’s book is not merely a utilitarian analysis or a legal discussion of procedures; it employs the widest possible perspective to survey the full implications of government regulation―economic, legal, administrative, political―while addressing the complex problems of administering regulatory agencies.

Only a scholar with Judge Breyer’s practical experience as chief counsel to the Senate Judiciary Committee could have accomplished this task. He develops an ingenious original system for classifying regulatory activities according to the kinds of problems that have called for, or have seemed to call for, regulation; he then examines how well or poorly various regulatory regimes remedy these market defects. This enables him to organize an enormous amount of material in a coherent way, and to make significant and useful generalizations about real-world problems.

Among the regulatory areas he considers are health and safety; environmental pollution, trucking, airlines, natural gas, public utilities, and telecommunications. He further gives attention to related topics such as cost-of-service ratemaking, safety standards, antitrust, and property rights. Clearly this is a book whose time is here―a veritable how-to-do-it book for administration deregulators, legislators, and the judiciary; and because it is comprehensive and superbly organized, with a wealth of highly detailed examples, it is practical for use in law schools and in courses on economics and political science.

Genres: Law

486 pages, Paperback

First published January 1, 1982

About the author

Stephen Gerald Breyer is a retired Associate Justice of the U.S. Supreme Court. Appointed by Democratic President Bill Clinton in 1994, and known for his pragmatic approach to constitutional law, Breyer is generally associated with the more liberal side of the Court.

Following a clerkship with Supreme Court Associate Justice Arthur Goldberg in 1964, Breyer became well-known as a law professor and lecturer at Harvard Law School starting in 1967. There he specialized in the area of administrative law, writing a number of influential text books that remain in use today. He held other prominent positions before being nominated for the Supreme Court, including special assistant to the United States Assistant Attorney General for Antitrust, and assistant special prosecutor on the Watergate Special Prosecution Force in 1973.

In his 2005 book Active Liberty, Breyer made his first attempt to systematically lay out his views on legal theory, arguing that the judiciary should seek to resolve issues so as best to encourage popular participation in governmental decisions.

Reviews

[Nicholas Najjar · Rating 3 out of 5]

Regulation. A word that conjures images of bureaucratic red tape, a centralized system of control, and rules. Lots and lots of rules. But what is regulation? What purpose does it serve? What role can it play in society? This book takes aim at those questions and formulates a thesis and framework to analyze regulation in contemporary America. Stephen Breyer, a former Justice of the United States Supreme Court, is a scholar on issues of administrative law, political science, and economics. All of those topics are discussed in this book. I found it to be dense but enjoyable; certain chapters more interesting and convincing than others but, overall, the book is an important resource for those concerned with administration of our nation’s government despite it being published over 40 years ago.



Breyer spends the first few chapters discussing what regulation is (historically and in the modern day) and what justifications are used to support regulation. Regulation is needed when a marketplace cannot deal with its own structural problems. Some argue, and Breyer discusses, that regulation is needed to curtail monopolies, limit “spillover” externalities, provide adequate information to buyers, and prevent excessive competition in a certain market. Breyer identifies these rationales and defines them as a way to contextualize the issues he writes about.



I thought Breyer’s discussion of predatory pricing as justification for regulation was compelling. People often cite predatory pricing as one of the biggest reasons for regulating a certain market; on its surface it appears to be a straightforward and simple concept but it is often misunderstood. Predatory pricing makes sense for a business/firm only if (1) it believes it is so much stronger than its competitors that it can outlast them while incurring losses, and (2) entry barriers are high enough so that the predator can raise its prices and recoup its losses before other firms, attracted by the high profits, tries to enter the market. The second prong is often overlooked by individuals, but it is what makes predatory pricing such a difficult and dangerous practice for the firm who is considering engaging in it. I personally believe this rationale is unconvincing.



The next few chapters in Part I examine the different schemes of regulation. Cost-of-service ratemaking, standard setting, historical price setting, public interest allocation, entry control, and historical allocation. Each scheme is defined and the benefits and issues for each are discussed. I personally enjoyed the standard setting and cost-of-service ratemaking chapters, the latter involves the regulator determining the “Revenue Requirement” (the “cost of service”) which reflects the total amount that must be collected in rates for the firm(s) (usually utilities and energy companies) to recover costs and earn a reasonable return. This involves a formula: (Rate Base) x (Allowed Rate of Return) = Required Return + (Operating Expenses) = Revenue Requirement. The complexity involved in determining the rate base alone and the fluctuating nature of operating expenses presents an incredibly difficult (nightmare) task for the regulators. Financial data needs to be consulted, taxes reviewed, income information produced, and different costs analyzed. Standard setting as a regulatory scheme is more qualitative where cost-of-service ratemaking is quantitative which made that chapter more digestible. There is a lot of information in these chapters, and it can be overwhelming at times, but I still found them interesting. Each scheme has its own issues, and no single form of regulation can be applied to an industry; there must be overlap and development between the different schemes.



Part II of the book uses different markets to analyze the “mismatch” in that market with the regulation that is being used to control its conduct. I thoroughly enjoyed his two chapters on the airline and trucking industries. Breyer writes that these markets are competitively structured and that too much regulation has the opposite effect which the regulation seeks to inhibit. Take the airline industry as an example, the Civil Aeronautics Board (“CAB”) set price rates and instituted severe entry controls on the market. Breyer argues that implementing these schemes against a competitively structured market hindered its growth and the ordinary consumer was put at a distinct disadvantage. Consumers were provided with too much (yes, too much) service and were forced to pay higher prices because of that. It was virtually impossible for new airlines to enter the market. The same situation unfolded in the trucking industry where the Interstate Commerce Commission (“ICC”) prevented entry of new firms and set static price rates.



Part III of the book offers alternatives for the classical forms of regulation. Here, Breyer suggests that taxes, disclosures, and subsidies are reforms that could supplement the classical schemes. While these propositions are interesting and Breyer spends a considerable amount of time outlining the principles that could support these alternatives, I was left a bit unsatisfied. He did not set out any adequate cases or examples where these alternative reforms worked. Breyer does not spend enough time examining the causes of regulation, only the justifications, which I think weakens his analysis. He almost exclusively focuses on the market and its failure as the justification of regulation and few substantive causes are discussed. Maybe the causes of regulation are impossible to determine?

However, the book is still very interesting and structured in a unique way with the “mismatch” and “match” format. An important resource no doubt. Administrative law is an incredibly dynamic field and infuriatingly complex at times. We often hear calls from politicians, and want-to-be politicians like Vivec Ramwaswaswamy (?), on how the bureaucracy needs to be gutted and the administrative state dissolved. This is an impossible task. It is also incredibly stupid. The so-called “fourth branch of government” is not going anywhere and it should not, it serves a valuable and essential role in society even if it is flawed.

[Federico · Rating 5 out of 5]

40 years later, this book by Stephen Breyer is unfortunately more relevant than ever, as many countries and sectors are jumping from decades of deregulation to a sudden revival of haphazard regulation. Not to mention the problem of climate change...

Breyer manages to handle very technical examples with admirable clarity and understandable prose. The proper role of the legislative, executive and judicial branches becomes much clearer. Unfortunately in the USA any trace of reason is being eliminated from the system by the Supreme Court, but we can still learn in the rest of the world.