Regulation in the States

Vol. 14 No. 6 (June 2004), pp.465-468

REGULATION IN THE STATES by Paul Teske. Washington, DC: The Brookings Institution, 2004. 272pp. Cloth $52.95. ISBN: 0-8157-8312-4. Paper $22.95. ISBN: 0-8157-8313-2.

Reviewed by Tracy Lightcap, Department of Political Science, LaGrange College. E-mail: tlightcap@lagrange.edu

When I was asked to review Paul Teske’s REGULATION IN THE STATES, I approached the assignment with enthusiastic anticipation. A comparative empirical study of state regulation, based on a sound theoretical footing, has been a crying need in the fields of public administration, state and local government, and comparative state law for years. I was not disappointed by Teske in most areas of concern to scholars of these subjects. He provides us with a sound theoretical framework for analyzing state regulation, a series of useful historical overviews of different areas of state regulation, and groundbreaking comparative empirical analyses of factors influencing each area. These, in turn, lead to useful conclusions concerning influences on regulatory policy in the states and interesting speculations on the course of regulatory reform in the future. All this is to the good. Unfortunately, there appear to be some editing problems in some chapters in the book, particularly in the presentation of the empirical results. The inconsistencies involved appear relatively minor and do not substantially affect Teske’s empirical conclusions or his conclusions concerning regulatory reform, but I sometimes found myself less sure of his analysis than I would wish. However, discussing these difficulties should wait until I have said something about this book’s many merits.

Theoretically, REGULATION IN THE STATES uses a familiar market failure approach, predicating the need for regulation on the existence of monopoly power, asymmetric information, and externalities. The typology of market failures gives Teske a ready-made framework for classifying state regulatory efforts. He links monopoly regulation to the regulation of public utilities, the presence of asymmetric information to the regulation of service industries and professions, and external effects to environmental regulations. This method of classification is both parsimonious and sensible, but it has its dangers.

As those reading this review will know, regulation is a sore spot for mainstream economists. The models they use are predicated on Walrasian ideas concerning the homeostatic tendency of markets to clear when conditions approximate perfect competition. From this standpoint, governments must be seen as, at best, necessary encumbrances. Whether thought of as the “watchman state” of the Chicago school or the risk management mechanism of the neo-classical consensus, governments and their regulations can only be justified as a substitution for market mechanisms when markets substantially fail. In addition, that substitution should encompass as far as possible the use of [*466] officially created psuedo-markets to maximize personal choice and, consequently, social efficiency. Needless to say, such a framework leaves little room for the study of regulatory regimes, except as necessary evils that are constantly in danger of degenerating into “rent-seeking” arrangements against the commonweal.

Teske has avoided this “market trap” by explicitly including political factors in his explanations of regulatory policy. As he says, this recognizes that an approach from political economy is more likely to aid us in analyzing what governments actually do and what actually affects their decisions. It further sets the stage for a series of illuminating tests of differing views of institutional influences on regulatory action. Specifically, the analyses in the text provide useful distinctions between classic “agency capture” – regulation is a rent-seeking exercise dominated by organized interests – and “public interest” – regulation is a tool to weigh business and consumer interests to reach equitable results in the face of market failure – explanations for regulations in different areas. It is high time for a comparative analysis of state regulatory regimes testing these kinds of propositions. Building hypotheses on the relative effects of different factors supporting conflicting viewpoints reveals the considerable sophistication in research design behind this effort.

Now I must turn to the actual research which forms the core of the book. Following his theoretical framework, Teske provides us with empirical studies of telecommunications and electric utilities regulation (natural monopolies), insurance, savings and loan, and hospital certification regulation (asymmetric information), regulation of the legal and medical professions (asymmetric information), and clean air and groundwater protection regulation (externalities). Most of these chapters have been co-written with junior colleagues and represent a commendable effort by all involved. Normally, I would have expected to find a short overview of the regulations in each area in the states, then a smooth segue to the actual results. Instead, Teske and his colleagues provide us with short histories of the state role in regulating each of the concerned areas. Usually, this involves relating a complicated story of federal and state interaction in establishing regulatory policy. None of these would qualify as more than an introduction to the actual sequences involved, but reading and comparing them was almost as useful to me as the empirical studies they preface.

That brings me to those studies. The theoretical scheme I mentioned earlier guides the hypotheses in each chapter; economic factors and those representing political environments and institutions are combined to test relationships suggested by the capture and public interest theories of regulation. The data collection efforts made by Teske and his associates deserve special praise, before anything further is said. I was taken aback by the scope and complexity of the datasets. Pooled cross-sectional time series and event history designs predominate, and the effort involved to find and code some of the indicators over time must have been daunting.

As I came to the analysis of results, however, I found myself facing difficulties. Some chapters of the book [*467] have more inconsistencies in their presentation and analysis of the empirical models than they should. As I said before, most of the conclusions in each chapter are still valid, but I was left doubtful at times about the analysis itself. An example of what I mean should suffice. In Chapter Four on telecommunications regulation, Teske presents a model explaining the ratio of residential telephone rates to business rates. One set of hypotheses is that a lower ratio, favorable to consumers, would be likely if public utility commissions are administratively independent. This is measured by two indicators, dummy variables distinguishing states with independent commissions and states where the commissions are arms of the state legislature. The expectation is that independent commissions would be more consumer-friendly and that commissions dependent on state legislatures could shift either way. Only the reported coefficient for commissions as arms of legislatures is statistically significant. Further, given the range of the dependent variable, this indicator shows a strong substantive effect leading to higher consumer rates. Despite these reported results, however, this theoretically interesting finding is not analyzed in the text. Enough of this kind of slip was found at different points in the book to make me feel unsure of my ground at times. However, the actual conclusions in each chapter had sufficient support to sustain them, despite the editorial problems.

Teske’s summary of his findings concerning factors affecting state regulatory policy is interesting. The most salient is that, while agency capture does appear to be a factor in some cases (regulation of the legal profession is the best example), it is far less likely to be determinate than might have been anticipated. Instead, interest group influence is pluralistic with competing interests counteracting each other. The clearest instance of this is groundwater monitoring policy, where manufacturing and agricultural interests show significant and counteracting effects, but similar findings are reported in several areas.

Second, Teske finds that the character of a state’s politics and the institutional features of its policymaking bodies have substantial effects on regulatory decisions. Specifically, the role of state legislatures in providing oversight of the regulatory process showed fairly consistent effects over many areas of policy, usually to the favor of consumer interests. Agency independence was also important, but in a slightly different way. Teske presents evidence that more autonomous bureaucracies actually do seem to be weighing the interests of regulated industries and consumers much as public interest views of regulation would predict. At least, there is reason to believe that in more technical fields agencies have been able to carve out niches that make either political manipulation by legislatures or agency capture more difficult—an encouraging finding indeed.

Teske ends his presentation with a series of speculations concerning regulatory reform. Guided by his empirical findings, Teske’s suggestions here show a refreshing absence of the normative cant that so often characterizes such work. Given the substantial role of state legislatures in regulation at the state level, he recommends enhancing [*468] legislative professionalism, more transparency in the oversight of regulatory policy, and reducing (if possible) the influence of organized interests on campaign financing. For the agencies themselves, Teske recommends a similar prescription: increased resources and the centralization and professionalization of regulatory functions to further thwart capture. While a lack of significant findings in many areas of regulation limits Teske’s capacity to analyze the role of governors, he has some interesting things to say about the increasing role of attorneys general and the state courts in the regulatory process as well. Teske concludes with a short exposition on the continuing tension between the inconsistent ideologies dominating American politics and attempts by state and federal governments to respond to them. The role of the states in regulating American society, however, will probably continue to be strong as “California effects” become more prominent and technological change creates new regulatory opportunities.

As you can probably tell, I think this is a book worth reading. The topic is important, the research is interesting and counterintuitive, and the conclusions are valuable and driven by the research findings. I think REGULATION IN THE STATES would be a useful starting point for learning about research in the entire area of state regulation, suitable for graduate student and interested scholar alike. (Indeed, Teske’s research bibliography is almost worth the price of the book.) Even those expert in the particulars of the different regulatory areas presented here should find the theoretically consistent comparisons of factors affecting state regulatory regimes across the board interesting. A revised edition addressing the occasional editorial problems would be even more useful.

I have one regret. As I said earlier, Teske places his theoretical presentation within a market failure framework. There is an opportunity missed here—an opportunity to test contrasting overall theoretical frameworks for explaining regulation. There are other ways of theorizing regulation besides market failure, and they are tied closely to the “public interest” perspective Teske cites. Specifically, he could have contrasted explanations based on market failure to those drawn from the new economic sociology that focuses on the interactive effects of economic, social, and political institutions on regulation (Edelman 2004). Teske’s empirical investigations are, in fact, an excellent example of this approach. I know there is nothing more tedious than trying to justify bucking conventional wisdom, a wisdom that, if his earlier work is any gage, Teske largely agrees with. Still, I was reminded more of Commons than Freidman as I read his book. Perhaps this challenge will be taken up in the future by either Teske or another scholar.

REFERENCE:

Edelman, Lauren B. 2004. “Rivers of Law and Contested Terrain: A Law and Society Approach to Economic Rationality.” 38 LAW AND SOCIETY REVIEW 181-198.

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