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Because of the significant role that the banking and airline sectors play in the US economy, shifts in government policy and deregulation of their activities inevitably have far-reaching implications for the respective industries. Before we proceed, it is important to note that deregulation is the mechanism by which the government removes regulations on businesses in order to make it easier to do business, while regulation is the process by which governments impose constraints in order to regulate and ‘tame' the activities of companies. Since the year 1903 the airline industry has been under the regulation of the Civil Aeronautics Board (CAB) up until 1978 when the industry was relieved off the restrictions when the Airline deregulation Act of 1978 was effected. The main reason for regulation of the airline industry was to ensure safety for the passengers by putting up certain standards, requirements and qualifications that the machineries and rescue personnel were supposed to maintain. The other reason was so as to facilitate the economic stability of the sector. (Bier, Joosten, Glyer, Tracey, & Welsh, 2003)
On the other hand reasons that led to continued regulation of the banking industry include control over the influence of the banking industry on the economy, protection of the interest of the citizens among others. As a result this paper aims at unraveling the effects of regulation and deregulation of both industries on the economy and on the pillar factors that affect the respective industries.
Effects of regulation in the airline industry
Regulations in the airline industry, done by the Civil Aviation Board (CAB) limited the power that airlines had in investment and operational decisions. The restrictions limited the entry of new firms into the industry and controlled the prices offered. Control of the operation decisions of the airlines was detrimental to the growth of the industry since they could not improve on the quality of their services due to the limited budget. In the same way the fixed prices also led to low volumes of sales since most consumers could not afford the high cost of transportation. Low sales led to low income thus the economic growth therefore did not stand a chance of growing.
Since the CAB had control over operational decisions, it controlled the routes that the airlines operated. Airlines were forced to operate in areas which were uneconomical due to the high cost of fuel and low income from the said areas. Low income and the high cost of operation made it impossible for airlines to survive, leading to the collapse of some airlines. Such cases led to the instability of the airline industry, thus an unstable economy (McEachern, 2009)
As a result of need for consumer and operators’ safety, the safety act was one of the most significant regulations that sought to maintain the confidence and safety of consumers using the air transport. Increase in confidence led to increase in sales, increasing the income thus boosting economic growth. As a result of the restrictions on entry and operation decisions, airlines did not get the opportunity to come together for to form a hub and spoke. Hub and spoke is where by chosen airports were used as a point of connection between passengers from all over the world .Consequently, there was limited efficiency in the way the airlines scheduled their flights , hence reducing the number of flights, like so there was reduction in income collected and eventually slow growth.
Effects of regulation in the banking industry
Changes and implementation of new restrictions meant to regulate the industry affect the stability of the banking industry eventually affecting the economic growth of any economy. Regulation on bank limits innovation and growth of new products, thus hindering the growth of the banking industry as it limits them from engaging in more profitable activities. In this way, they are limited to engage in more profitable activities hence preventing growth in the economy. Moreover, the entire process of regulation is an expensive affair for the government. In 2008 $1.75 trillion in 2008 was budgeted for to take care of the process of regulation. Alternatively, this money would have been used for profit making activities which would increase the country’s gross domestic product leading to growth of the economy. As a consequence, regulations slow down economic growth.
Strict regulations by governments that dictate high starting capital due to licensing, limit the entry of new firms into the market which leads to minimal competition in the industry. Lack of competition, makes room for reduced industrial growth, since the existence firms tend to get to a comfort zone and lack motivation to invent new products, stagnation eventually affects economic growth since the gross domestic product also remains at the same position. In the same line strict regulations limit the thriving of foreign investors in the industry. This leads to unstable international relations with other countries leading to lack of confidence in the foreign countries, which keeps them from bringing in investments in the country thus limiting the growth of the economy.
Introduction of the Dodd-Frank Wall Street reform and Consumer protection Act of 2010 was intended to increase the stability of the financial position of the banking industry so as to avoid repetition of the 2008-2009 bank crises which led to the collapse of the industry. The effects of the act are divided into 5 main sets. The first set is the clear wins which states that the act has successfully led to economic growth and financial stability. The clear wins are attributed to the entry of derivatives market, increase of capital requirements which limits the level of risky businesses firms engage in as well as ensuring customer protection. The next set is that of clear losses where restrictions such as that of requiring the Federal Deposit Insurance Corporation’s (FDIC) to request for authorization from congress have led to financial instability and reduction in economic growth. The other set is the costly tradeoffs where by it becomes costly for the banks to affect some rules thus limiting their operations leading to financial instability thus reduction in economic stability. The last two steps are the unfinished business and too soon to tell which looks at some of the aspects the act is yet to improve on. (Peirce & Broughel, 2012)
A study in the ‘Journal of economic growth’ shows that federal regulations have reduced economic growth since 1949-2005 by 2% each year. Generally, it is clear that increased regulations slow down the economic growth.
Effects of deregulation in the airline industry
After much out cry from the airline owners on the involvement of the government in the industry, the Airline deregulation act was enforced. Government control over airline operations was eradicated. Air line routes, flight fares and quality of services were left fully to the discretion of the airlines. Therefore there was entry of new firms in the market which led to increased competition thus airlines improved the quality of their services. Moreover increased competition led to a reduction of flight prices and increase in sales for the industry as whole. Eventually there was a huge improvement in the income and profits which led to a more promising effect on the economy of the country (Morrison & Winston, 1986)
After deregulation airlines were able to develop the hub and spoke system that facilitated efficiency in flight schedules, increased flights and reduced operation cost. Deregulation also opened up air travel to the public and allowed for the airlines to choose freely on the routes they wanted to cover. Freedom of routes however marginalized those areas that were too far and did not provide high amounts of income. The effects of deregulations how did more good to the industry compared to regulation.
Effects of deregulation in the banking industry
Deregulation of banks over the years has also brought with it significant changes which include increase in competition in the industry leading to increased consumer products and better services to the customers. Competition has also led to innovation to enable the banks to survive in the competitive markets, which leads to an increase in cash flow as a result of profitable products hence increase in the gross domestic products hence leading to a growth in the economy.
Deregulation also allowed financial institutions to offer different services such as insurance services, banking services, mortgages and loan services .Initially, the regulations prohibited banks from selling securities hence the reduction in securities as I had mentioned earlier. Since 1999, it has become possible for banks to engage in insurance and securities business after the enactment of the Gramm-Leach- Bliley thus increasing business activities leading to an increase in economic growth. Additionally, deregulation brought down the geographical barriers that limited the entry of international banks into the market. Entry of international banks led to improvement of in international relationships thus encouraging trade agreements between countries facilitating growth of the economy (Tatom, 2010)
It is clear that major regulation and deregulation changes in both countries have led to significant changes in growth of the industries themselves and the economy at large. It is also important to acknowledge that these changes have helped to shape the structure of the industries and to test their resilience in harsh and unfriendly conditions.
The main reasons for regulation of both industries was meant to bring good to the industries, it is however clear that regulation did more bad than it did good. Regulation of both industries slowed down the growth of the industries. Control of air routes in the airline industry for instance significantly led to slowed growth while control of entry of international banks into the market reduced growth of the banking industry due to low competition. However it is also important to notice that both industries are very crucial in any economy and it’s not possible for the companies to operate without government interventions. Free operating markets lead to consumer exploitation and unstable economies.
I therefore think it is important for all stake holders i.e. the government and the above industries to work together so as to come up with regulations and restrictions hat favor both sides and provide safe and conducive environments for the industries. To achieve this, they need to come to a memorandum of understanding on those restrictions that can be done away with and bring in those that are in the best interest of both stake holders. Moreover they also need to consider the end consumer and the effects that some restrictions have on them.
Bier, V., Joosten, J., Glyer, D., Tracey, J., & Welsh, M. (2003). Effects of Deregulation on Safety : Implications Drawn from the Aviation, Rail, and United Kingdom Nuclear Power Industries. Boston.
McEachern, W. A. (2009). Economics : a contemporary introduction. Mason.
Morrison, S., & Winston, C. (1986). The Economic effects of airline deregulation.
Peirce, H., & Broughel, J. (2012). Dodd-Frank : what it does and why it's flawed. Arlington.
Tatom, J. A. (2010). Financial Market Regulation : Legislation and Implications. New York.
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