Deregulation Worked

Why America’s Real Problem Is Overregulation, Not Neoliberalism

The 1980s and 1990s feel almost quaint today, yet the deregulation of that era is now widely blamed by populists on both the left and right for many of our economic woes. Rising market concentration is pinned on the deregulation of industry; the 2008 financial crisis is attributed to financial deregulation; and the rise of populism is supposedly the result of free trade agreements hollowing out the Rust Belt.

This narrative, while containing kernels of truth, is mostly wrong and threatens to move the U.S further in the wrong direction. Microeconomic deregulation lowered prices and boosted productivity. Financial deregulation was a mixed bag, but reforms have been destabilizing precisely because finance is so heavily regulated. While globalization certainly produced dislocation, free trade has led to net job creation and enriched consumers.

Meanwhile, the U.S. economy has actually become more regulated since the 1980s—particularly through restrictive zoning codes and onerous occupational licensing laws. The financial sector remains plagued by moral hazard, burdened by red tape, and prone to asset bubbles. And, to paraphrase King George in Hamilton, we’ll miss the system of relatively free international trade once it’s gone—thanks to Trump’s mad trade war.

Raise a Pint to Jimmy Carter

While Reagan is remembered as the “deregulator-in-chief,” it was actually Jimmy Carter who did far more to liberalize the economy. Carter eliminated the Civil Aeronautics Board—a government cartel that once dictated flight routes, schedules, and ticket prices. Since the Airline Deregulation Act of 1978, real airfares have been cut in half, air travel has doubled, and the number of routes has expanded dramatically.¹

Similarly, Carter removed arbitrary regulatory barriers to surface transportation. The Interstate Commerce Commission (ICC), established in 1887 to regulate railroads, had long since become a textbook case of regulatory capture—protecting incumbents, stifling competition, and keeping prices artificially high. Before Carter’s reforms, truckers needed permits to operate and were confined to specific routes, while rail carriers faced strict rate controls and mandates. Deregulation in both industries was followed by increased competition, more traffic, and lower prices.

Carter’s deregulatory streak didn’t end with transportation. He also repealed Prohibition-era restrictions on home brewing. When Carter legalized home brewing, the U.S. had roughly 50 breweries; today, there are more than 5,000.

The End of Oil Price Controls

Perhaps Carter’s most consequential act of deregulation came in 1980, when he finally repealed the federal controls on oil prices first imposed by Nixon and extended under Ford. Those controls had produced chronic shortages, hours-long gas lines, and rationing that came to define the “malaise” of the 1970s. When the controls were lifted, production surged, imports fell, and the real price of oil plummeted—from $34 per barrel in 1981 to $12 by 1986.

That liberalization set the stage for the domestic energy revolution to come. Innovations like hydraulic fracturing and horizontal drilling unlocked vast reserves of shale oil and natural gas that had long been uneconomical to extract. As a result, the United States became the world’s largest producer of both oil and gas, energy prices stabilized, and consumers benefited from lower heating and transportation costs.

Permissionless Innovation

The internet, while not the direct product of deregulation, emerged in an era that prized permissionless innovation: the belief that experimentation should be allowed first and regulated later, if at all. The digital economy grew in a space that was comparatively free from the heavy-handed oversight that burdened traditional industries. That freedom produced one of the greatest explosions of creativity and wealth in modern history.

Even today, the tech sector remains dynamic relative to more regulated parts of the economy. AEI’s famous “Graph of the Century” illustrates this perfectly: prices for goods and services exposed to competition and innovation—like software, electronics, and telecommunications—have plummeted, while those protected by regulation—like health care, housing, and education—have skyrocketed.

Unfortunately, Washington is in danger of repeating old mistakes. Senators Lindsey Graham and Elizabeth Warren have both floated proposals to create a regulator modeled after the old ICC. Reimposing a 19th-century regulatory relic on a 21st-century industry would be a tragic case of forgetting why America led the digital revolution in the first place.

Heads I Win, Tails You Lose

Financial deregulation, by contrast, is a genuine mixed bag. On the one hand, the removal of restrictions on interest rates, geographic barriers, and capital flows made American banks more globally competitive. On the other hand, the Federal Deposit Insurance Corporation (FDIC) and the implicit guarantee of “too big to fail” created a perverse incentive structure: banks could take on excessive risk knowing taxpayers would shoulder the downside.

The Great Recession wasn’t caused by deregulation alone but by the combination of partial liberalization and persistent moral hazard. The 2010 Dodd-Frank Act failed to fix those underlying problems. It layered new rules atop old ones, entrenched the power of big banks, and pushed risk into the unregulated “shadow banking” sector.

That shadow sector—encompassing hedge funds, private equity, and money market funds—now accounts for nearly half of global financial assets. While often more innovative and efficient, it also operates largely outside traditional regulatory frameworks, making crises harder to predict and contain. In other words, Washington’s attempt to make finance safer has simply moved the risk elsewhere, into a murkier and less transparent system.

The Unsung Triumph of NAFTA

Although protectionists have maligned the North American Free Trade Agreement (NAFTA), the 1994 trade agreement has been a net positive for the U.S. economy. Increased competition from NAFTA caused job losses in some inefficient sectors—like manufacturing, textiles, and electrical appliances—but those were far outweighed by gains elsewhere. Roughly 5.4 million jobs were created while about 662,000 were lost as a direct result of the agreement. In other words, NAFTA created eight jobs for every one job it destroyed.

Trade between the U.S., Canada, and Mexico now supports 17.7 million American jobs and has more than tripled since NAFTA was enacted. The agreement diversified consumer options, driving down prices and expanding supply chains. It even changed the American diet—introducing a steady stream of fresh produce like strawberries, bell peppers, mangos, and avocados, previously limited by import barriers.

NAFTA also revitalized parts of the industrial Midwest. The auto industry, in particular, thrived under regional supply integration. The Boston Consulting Group estimated that repealing NAFTA would have cost the auto industry $10 billion and 50,000 jobs. Trade with Canada and Mexico now accounts for more than 5% of GDP in states like Texas, Kentucky, and Indiana, and up to 25% in Michigan. Altogether, trade with NAFTA partners represents roughly 6% of the entire U.S. economy.

In short, free trade didn’t hollow out America—it made it richer, more resilient, and more globally connected.

The U.S Economy Is Still Overregulated

Despite the deregulations described above, the U.S. economy as a whole has become much more regulated over the past fifty to sixty years.

The Code of Federal Regulations has tripled in length since 1969—from roughly 60,000 pages to more than 180,000 by 2019. Regulatory agency budgets have ballooned from about $10 billion to $70 billion (in constant dollars), and their staffs have swelled from 80,000 employees to over 230,000.

Local and state rules have followed the same pattern. Between 1969 and 2010, zoning and land-use litigation exploded: zoning cases rose from around 750 to more than 2,300, and land-use disputes from 180 to nearly 900. Restrictive zoning in high-demand cities has throttled housing supply, driven up rents, and pushed workers farther from economic opportunity. One study featured in The Economist estimates that if three cities (New York, San Francisco, and San Jose) had zoning laws as flexible as the median American city, this country’s GDP would be nearly 9 percent higher.

Occupational licensing tells a similar story. In 1950, only one in twenty American workers needed a license to do their job; by 1979, it was one in ten; today, it’s roughly one in three. Hair braiders, florists, manicurists, and even tour guides must now navigate elaborate licensing regimes that do little to protect consumers but a lot to protect incumbents.

Ironically, the much-maligned neoliberal deregulations of the 1980s and 1990s offer us an important lesson for today. A bipartisan effort to eliminate bottlenecks across key sectors has the potential to make the U.S economy much stronger and more dynamic.

1. Despite this move in the right direction, the airline industry is still overregulated. Only one major airport (in Denver) has been built since 1978 due to NIMBY opposition. Federal law still requires that Americans maintain a certain ownership share of domestic airlines, and foreign competition remains restricted. By contrast, the European Union allowed full cabotage in 1997, meaning any commercial carrier could operate routes within another member state. This policy spurred competition, lowered airfares, expanded route networks, and gave rise to low-cost carriers such as Ryanair and easyJet, which revolutionized short-haul travel across Europe.

Unlike the United States, most airports in Europe are privately owned or operated under public-private partnerships. Privatization has encouraged greater investment in terminals, runways, and passenger amenities, while aligning airport incentives with traveler satisfaction rather than bureaucratic compliance. Competition among privately run airports has driven improvements in efficiency and customer service, and many now operate as profit-generating enterprises that reinvest earnings into expansion and modernization. The result is a more dynamic, responsive, and financially sustainable aviation infrastructure than America’s aging, municipally run system.

Even air traffic control remains a bureaucratic relic. The Federal Aviation Administration still relies on paper flight strips—a practice abandoned decades ago in other advanced countries. When Canada privatized its air traffic control in 1996, flight times shortened, delays dropped, safety improved, and fuel costs fell. Employment in air traffic control decreased, which is precisely why American unions have fought similar reforms. The Government Accountability Office found that commercialized ATC systems in Australia, Germany, New Zealand, and the U.K. all cut costs, increased investment, and maintained or improved safety.