Is It the Dawn of the Reregulation Era?

Regulation has been a dirty word in business—and in Washington—for decades. But government oversight is looking a lot better lately

By Michael Mandel

The 30-year era of deregulation came to a sudden and surprising end on Sept. 16. Late that evening the Federal Reserve extended $85 billion to take an unprecedented 80% stake in American International Group (AIG) in order to save the floundering insurance giant. Less than two weeks earlier, Treasury Secretary Henry M. Paulson Jr. had announced that the federal government was taking over Fannie Mae (FNM) and Freddie Mac (FRE), the colossal mortgage agencies. Suddenly the U.S. financial sector could not survive without government help.

Since the long-ago days when Jimmy Carter was President, regulation has been a dirty word in Washington. Politicians of both parties vied to see how much of the economy they could free from the oppressive yoke of government control. The deregulation movement started when Carter signed the Airline Deregulation Act of 1978. Later, as it spread from energy to trucking to telecommunications to financial services, the rallying cry was the same: Less regulation, more growth.

But the implosion in financial services—until recently seen as the shining example of U.S-style free market capitalism—is the definitive sign that deregulation has lost its allure. In areas ranging from food safety to airlines to trade, increased government supervision is becoming acceptable to business as well as to voters. "Over the past couple of years, the mood has changed," says Chris Waldrop, director of the Food Policy Institute at Consumer Federation of America. "What's possible has expanded."

The Candidates Weigh In

Indeed, both consumer and industry groups have come out in favor of giving the Food & Drug Administration stronger authority to monitor food safety. The shift toward reregulation is reflected in the Presidential campaigns. Back in March, Senator John McCain (R-Ariz.) said: "I'm always for less regulation" and referred to himself as "fundamentally, a deregulator." But in a Sept. 16 speech the Republican nominee adopted a far different approach: "Under my reforms, the American people will be protected by comprehensive regulations." On the same day, the Democratic nominee, Senator Barack Obama, (D-Ill.) who has argued much more aggressively about the need to bolster regulation, stepped up his rhetoric as well: "It's time to get serious about regulatory oversight," he said.

The implication: "We're moving in the direction of more regulation," says Tom Gallagher, who analyzes Washington policy at International Strategy & Investment. "The direction is locked into place; the only question now is magnitude." That's a big change. Over the past three decades, the U.S. economy has more than doubled in size , and the private workforce has grown by 70%. Yet overall, outside the Defense Dept., the executive branch employs about the same number of people today as it did in 1978. What's more, many regulatory agencies in Washington have even shrunk. Since 1977 the budget of the Environmental Protection Agency has fallen by nearly 40% in real terms. Financial industry regulation hasn't kept up, either. Despite the vastly increased complexity of the financial sector, the number of employees working at the Federal Reserve, including the regional Fed banks, has decreased since 1990.