Regulation of American Business; J. Swearingen

REGULA TION OF AMERICAN BUSINESS I PROPOSE TO TELL what amounts to a modern-day ghost story. The specters in question are the ,manifold and proliferating regulatory agencies of the federal govern ment, whose existence was not contemplated by our Constitution and whose all-pervasive powers and activi ties go largely unrealized today by the average citizen. Too many of our people are going more or less blithely through life under the misapprehension that the country is being governed pretty much according to the original ground rules. I am not at all sure that a little knowledg,e in this instance is merely dangerous. It could prove to be fatal. Those who think that the federal government is made up primarily of an executive and a legislative branch, with an independent judiciary standing by as an im partial arbitrator, have lost touch with reality. Such peo ple dwell in wonderland. And while the wonderland ·may have unquestioned origins in the concepts under which Mr. Swearingen is President of the Standard Oil Company of Indiana. This article is from an address before the Rotary Club of Los Angeles, February 28, 1962.

116 -REGULATION OF AMERICAN BUSINESS 117 this nation was wisely created, it is nevertheless a land of fantasy in terms of the facts of life in 1962. What has actually happened is that, starting in 1887 with the creation of the first federal regulatory commis sion-the Interstate Commerce Commission-we have witnessed the step-by-step development of a fourth branch of government. Today it embraces over sixty independent federal agencies with approximately 400, 000 employees and atotal annual budget of around $10 billion. Should any of you wish to examine this intri cate structure in more detail, I refer you to the United States Government Organization Manual, which devotes 236 pages to the subject. The results of this mushrooming process are in many ways astounding. We have arrived at the unhappy point at which the Cyclopean eye of some almighty regulatory agency is upon us when we buy or sell, ship or receive, hire or fire, grow or manufacture, save or spend, drink or diet, profit or lose, talk or listen.

Furthermore, many of these regulatory agencies exer cise unusual powers in that they first promulgate regu lations which have the force and effect of law, then en force them, and later adjudicate them. Still another facet of this complex regulatory process that deserves mention is that the commissioners of the various agencies who exercise such control over our eco nomic and social system are nonelective officials, many of whom, while theoretically responsible to the Congress, are in large measure of fact responsible to no one in particular.

118 JOHN E. SWEARINGEN To complicate the situation further, many of the peo ple who actually prepare the regulations, enforce and adjudicate them, are lower-level staff personnel whose role and deliberations in decision-making are almost impossi ble to determine. Yet their philosophy and judgments are reflected in conclusions affecting the daily lives of all of us. When we add to this already seething cauldron the frequent lack of clearly-defined areas of jurisdiction be tween various regulatory bodies, we arrive at a final mix ture of widespread confusion as to precisely what a busi nessman or a corporation properly can or should do, as to what body has legitimate authority to make and enforce decisions regarding such conduct, and as to where one can effectively turn for appeal from a ques tioned ruling. FTC Threatens Competition My own company has had sufficient firsthand experience with this process to give us a certain status as experts on what the results of such a system can be. Let me give you just one example of what can happen in the busi ness area.

This problem originated in the 1930's, at a time when competition was especially rugged, and our competitors began trying to win over some of our best wholesale cus tomers in Detroit by offering them a lower price on gaso line for resale. When several of our most important wholesalers actually started to buy from competitors, REGULATION OF AMERICAN BUSINESS 119 our company finally agreed to meet this threat by match ing part or all of the reductions our competitors had offered. The result was a complaint from the Federal Trade Commission, issued on a chill November day in 1940, that our action constituted unfair discrimination and amounted to an unlawful injury to competition. As the Commission saw it, either we should not have re duced the price to these particular wholesalers, or we should have reduced it to everyone in the area to whom we were selling-including all retailers. We pointed out that neither of these two courses was at all reasonable. Unless we met the competitive price, we would have lost these jobbers as customers, and they would have received the lower price anyway. On the other hand, had we lowered prices to everyone, market ing in Detroit would have become uneconomic. The com pany would have lost money, and, what's ,more, our gen eral price level in Detroit might have been so low that we could conceivably have been charged with trying to destroy competition there.

The case finally got to the Supreme Court, which ruled on it in 1951, agreeing with our contention that meeting competition in good faith is an absolute defense to a charge of price discrimination. Eleven years may strike you as a long time to wait to find out whether a common business practice is or is not permissible, but this was only phase one. In the second round of litigation, the FTC then sought to demonstrate that we had not acted in "good faith" in meeting our competitors' price. Once again, we started 120 JOHN E. SWEARINGEN to climb up the ladder to the Supreme Court, which once again decided in our favor, but not until early in 1958. In our judgment, the net effect was to preserve a com petitive system for American business, but it took 17 costly and trying years of litigation to do it. And, to preserve our right to compete, we had to fight off a fed eral agency originally established to insure the continu ance of effective competition.

I give you this case history only as an example of the extent to which we are all wandering in a regulatory maze. If we had realized at the time we reduced our price to a handful of gasoline wholesalers in Detroit that this defensive action would lead straight to nearly two decades of litigation, I suspect we might have weighed the matter in a somewhat different light-although I doubt we would have altered our actions, which we con sidered fully justified. Nevertheless, I submit that this is the kind of thing that can give any responsible businessman nightmares at high noon. In our instance, the continuing threat to our ability to compete also threatened the interests of our thousands· of stockholders and employees. And lest any of you be tempted to assume that this is the extreme to which an individual or a corporation is likely to be forced, let me give you my sorrowful as surance that it is little more than a taste of what lies ahead unless the,. course of events can somehow be changed.

This is not merely an idle opinion. There is presently before the Congress a proposal to grant to the Federal REGULATION OF AMERICAN BUSINESS 121 Trade Commission new powers even more far-reaching than any seen thus far. In effect, this proposal would empower the Commission to issue a "cease and desist" order at the outset of a complaint, compelling an in dividual or a corporation to discontinue any practice questioned by the Commission. Such an order against our company in 1940 would have left us under a serious competitive disadvantage in a major market for 17 years, pending ultimate vindication. An Interminable List I could with ease present numerous other examples involving only the petroleum industry. There is the in teresting tragedy of errors involving another federal agency-the Federal Power Commission-and the natural gas segment of our industry. Here the situation has be come so complicated that the Commission stated at the end of 1960 that it would not reach a current status in its independent producer rate cases until the year 2043 assuming its staff were to be tripled.

In the meantime, many gas producers are understand ably reluctant to commit their supplies for periods of up to 20 years or more into the future without knowing the price they will ultimately receive for their product. This uncertainty has led, among other things, to in creasing sales of natural gas for industrial use within the producing states, since the pricing authority of the Federal Power Commission is limited to sales of gas moving into interstate commerce. Whatever else can be 122 JOHN E. SWEARINGEN said of this development, it hardly appears to be in the long-term interest of the many residential users of nat ural gas outside the producing states. But while I have mentioned only some of the prob lems facing my own industry, please remember that they are being duplicated at an increasing rate in every area of enterprise in the country. No undertaking can escape them. The railroads have had their share since the turn of the century, under the Interstate Commerce Commission-and many are near bankruptcy. As com mercial aviation developed, a mounting number of ac tivities of the airlines have fallen under the jurisdiction of the Civil Aeronautics Board and the Federal Aviation Agency. We are all familiar with current difficulties in volving the relatively new television industry and the Federal Communications Commission.

There is no need to run down the interminable list. It is sufficient to say that it would be difficult to envi sion any form of enterprise, including· those yet unborn, which can now or could in the future escape the regula tory yoke. If existing agencies should somehow be found to lack authority, I have no doubt that new ones will be promptly created. Neither is there any need to belabor the point that this relentless extension of federal con trol presents a problem of serious dimensions. Please keep in mind also that my comments have been confined largely to a single area of controls over business activity-that of the federal regulatory bodies. While I have singled out this area because the extent of its in fluence is so little comprehended by the public, it is well REGULATION OF AMERICAN BUSINESS 123 to remember that still other regulations and controls emanate steadily from other sources in Washington, while many of these bodies again have their counter parts at the state level.

Well what, you may ask, is the moral of this dismal tale? I am not certain that I am fully qualified to answer that question. Obviously, the situation is studded with morals of various sorts, depending on your viewpoint. We have at issue the steady erosion of individual liberties, the increasing substitution of bureaucratic planning for in dividual decisions in the market place. The whole direc tion in which the world's leading democratic country is moving seems to be involved. It is not easy to say whether the problem is basically one of the theory of government, of economics, of philosophy, or of morality. How much regulation of our private affairs is needed? How much is justified? How much can we undergo without dras tically altering some of our oldest concepts about a free society? What of the Future? Instead of attempting to answer questions of this com plexity, let me rather conclude with a purely pragmatic observation or two in light of the present position of the United States in the world community. I think it is by now no news to any of us that we are in the midst of a gigantic economic struggle with the Soviet Union. In so many words, Khrushchev has declared economic war up on us, and through this means expects to win the world 124 JOHN E.SWEARINGEN for communism without the need for direct armed con flict.

Still another factor to be reckoned with is the emerg ing European Common Market, from which America can expect increasing competition in international trade, the answer to which can only lie in the direction of still greater efficiency and productivity within our own economy. Meanwhile, American business is being looked to as the prime mover in the development of a gross national product of at least $570 billion to develop enough tax revenue to pay the government's bills in the next fiscal year. Unless the pronounced trend toward more and more regulation of more and more matters involved in the daily conduct of business can be halted, it is question able whether American business can retain the necessary freedom of decision and action to meet the challenges which lie directly ahead. If we sit by and permit the in creasing encirclement of business by bureaucratic regu lation, we cannot in all common sense continue to ex pect the fruits of a vitally-needed expanding economy.

As a nation we are at this moment faced with tre mendous responsibilities, both to our own people and to the entire free world beyond. They can never be met without the creative contributions of a dynamic eco nomic sector, yet we stand in danger of witnessing American business being little by little painted into a corner so small that it leaves hardly enough room in which to turn around. To state it another way, what REGULATION OF AMERICAN BUSINESS 125 we're doing is applying pointless regulatory brakes to business in many important ways when we should be try ing to step on the gas. We are surrounded by seemingly numberless regulations of debatable need, uncertain effect, and arbitrary origin. As for the element of public consent to this process, the public hardly comprehends what is taking place. Here, perhaps, lies the greatest danger-the danger that individual initiative will become swamped by govern ment edict before enough people awake to the threat.

In the words of John Stuart Mill, "A state which dwarfs its men, in order that they may be more docile instruments in its hands-even for beneficial purposes will find that with small men no great thing can really be accomplished."