Business Government and Regulation 1 Learning Outcomes 1

Business, Government, and Regulation 1

Learning Outcomes 1. Articulate a brief history of government’s role in its relationship with business. 2. Appreciate the complex interactions among business, government, and the public. 3. Identify and describe government’s nonregulatory influences, especially the concepts of industrial policy and privatization. 4. Explain government regulation and identify the major reasons for regulation, the types of regulation, and issues arising out of deregulation. 5. Provide a perspective on privatization versus federalization, along with accompanying trends. © 2015 Cengage Learning 2

Chapter Outline • • The Pendulum of Government’s Role in Business The Roles of Government and Business Interaction of Business, Government, and the Public Government’s Nonregulatory Influence on Business Government’s Regulatory Influences on Business Deregulation Summary 3

Business, Government, and Regulation • The government tends to become involved in business after serious problems arise, and there has been no shortage of problems. • The first decade of the 21 st century saw the tech stock plunge, and the Enron, World. Com and other scandals. The collapse of the housing market put the economy on the brink of collapse. • That decade swung the pendulum of government involvement in business from minimal to major player. 4

The Pendulum of Government’s Role in Business • The areas in which government regulates change, and its varying roles increase the complexity of its relationship with business. Government can: • Determine the rules of the game • Be a major purchaser with buying power that can affect a business’ or industry’s chances of survival • Strengthen some businesses and weaken others • Create new businesses and industries through subsidization and privatization 5

The Roles of Government and Business • • • For effective management, government’s role as a stakeholder must be understood. What should be the respective roles of business and government in our socioeconomic system? If the role of business were simply production and distribution of goods and services, business would need little regulation. But other goals exist – safe working environment, equal employment opportunities, fair pay, clean air, safe products – which business does not automatically factor into the business decision making process. As a result, it falls to government to ensure those goals are achieved. 6

A Clash of Ethical Systems Business Beliefs Government Beliefs Individualistic ethic Collectivistic ethic Maximizes concession to Subordinates individual self-interest goals and self-interest to group goals and group interests Minimizing the load of obligations society imposes on the individual (personal freedom) Maximizing obligations assumed by the individual and discourages self-interest Emphasizes inequalities of individuals Emphasizes equality of individuals 7

Interaction of Business, Government, and the Public (1 of 2) Government-Business relationship • • Government influences business through regulation, taxation, and more. Business influences government by lobbying, and more Public-Government relationship • • Public influences government through voting and forming special interest groups. Government influences the public with politicking, public policy formation, and other political influences. 8

Interaction of Business, Government, and the Public (1 of 2) Business-Public relationship • Business influences the public through advertising, public relations, and other forms of communication • The public influences business through the marketplace, or by forming special interest groups. 9

Interaction Among Business, Government, and the Public Lobbying Business • Interest groups • Not buying products • Protests Regulations and Other Forms of Persuasion Government • Political Process • Voting • Interest Groups • Contributions • Advertising • Public Relations • Politicking • Political influence Public © 2015 Cengage Learning 10

Government’s Nonregulatory Influence on Business Two major nonregulatory issues • Industrial policy • Concerned with the role of government in a national economy. • Privatization • Whether current public functions (e. g. , public education, public transit, social security, fire service) should be turned over to the private (business) sector? © 2015 Cengage Learning 11

Industrial Policy Industrial policy • Every form of state intervention that affects industry as a distinct part of the economy. • A current trend toward stronger industrial policy is likely to continue while the world economy works to recover from the global financial crisis. 12

Privatization • The process of changing a public organization to private control or ownership. • The intent is to capture the discipline of the free market and a spirit of entrepreneurial risk-taking. • Two functions a government might perform: • Producing a service • Providing a service 13

The Privatization Debate Pro-Privatization • • Government has no comparative advantage in many functions. Government is less efficient and less flexible. Anti-Privatization • Some activities cannot be effectively handled by the private sector. • Privatization produces uneven results in • efficiency gains and cost savings. Privatization works best when the pursuit of profits does not work against broader social goals or public policy. © 2015 Cengage Learning 14

Other Nonregulatory Government Influences Government is: • • • A major employer A standard setter One of the largest purchasers Government influences business by: • • • The use of Subsidies Transfer payments Loans and loan guarantees Taxation Monetary policy Moral suasion 15

Government’s Regulatory Influence on Business • Government Regulation has become the most controversial in the business-government relationship, affecting every aspect of how business functions. • Most people agree that some regulation is necessary to ensure that consumers and employees are treated fairly, and not exposed to hazards, and to protect the environment. • However, businesses also think that regulation has often been too extensive in scope, too costly, and burdensome in terms of red tape. 16

Regulation - What Does It Mean? Regulation • • The act of governing, directing according to rule, or bringing under the control of law or constituted authority. A federal regulatory agency • • • Has decision-making authority Establishes standards Operates principally on domestic business Has members appointed by the President subject to Senate confirmation Has its legal procedures governed by the Administrative Procedures Act 17

Reasons for Regulation Most regulation arises out of a market failure. 18

Types of Regulation 19

Types of Regulation © 2015 Cengage Learning 20

Comparison of Economic and Social Regulation Economic Regulations Social Regulations Focus Market conditions; economic variables People in roles as employees, consumers and citizens Affected Industries Selected (railroads, aeronautics, communications) Virtually all industries Examples CAB FCC EEOC, OSHA, CPSC, EPA Current Trend Had been moving from regulation to deregulation, but fallout from the economic crisis reversed the trend Efforts underway to create an independent consumer financial protection agency 21

Issues Related to Regulation Innovation may be affected – • When corporate budgets must focus on “defensive research” certain types of innovation are less likely to take place. New investments in plant and equipment may be affected – • To the extent that corporate funds must be used for regulatory compliance, they are diverted from more productive uses. Small business may be adversely affected – • Federal regulations can have a disproportionately adverse effect on small firms because of the (lack of) economies of scale. 22

Deregulation Represents a counterforce - aimed at keeping the economy in balance. A continual striving for the balance of freedom and control for business will be best for society. Purpose of Deregulation • Intended to increase competition with hopes for greater efficiency, lower prices, and enhanced innovation. © 2015 Cengage Learning 23

The Changing World of Deregulation • Deregulation which began in the 1980 s had mixed results. • Some prices fell, but more competitors were unable to compete with the dominant firms. • The savings & loan industry crisis cost the government a $124 billion bailout. • Repeal of the Glass-Steagall Act caused the global recession that began in 2008. • The dilemma is how to enhance competition without sacrificing applicable social regulations such as health and safety requirements. © 2015 Cengage Learning 24