deregulation

Tributes are pouring in for Edward M. “Ted” Kennedy, who lost his battle with brain cancer late Tuesday evening at the age of 77. Most tributes to the “Liberal Lion” focus on his accomplishments at expanding government spending and regulation. And indeed, those were the bulk of his achievements.

But for a brief, shining moment, in the mid to late 1970s, Kennedy viewed smaller government as the most compassionate answer in one area of economic life: transportation. Kennedy was the prime mover in Congress behind the airline and trucking deregulation bills that were signed by President Jimmy Carter. He saw the impact of regulation in these industries as protecting entrenched companies from competition, and decided that the liberal, compassionate thing to do was to deregulate to give consumers lower prices and more choices. As the news stories search for all the ways Kennedy’s impact is felt by everyday Americans, one obvious impact is reflected in this headline today on AOL news, “Fall Airfares Starting at $59.”

From the 1930s to the 1970s, the federal government treated interstate airlines as a public utility, setting routes, schedules and fares through the Civil Aeronautics Board. The incumbent carriers had learned to like the system because they were protected from competition on their routes, and the price-setting operated as more of a price floor than a price ceiling. Low-cost carrier Southwest Airlines, which is offering the aforementioned $59 one-way fare and now dominates the airline industry, was confined to intrastate flights within Texas – where the federal government couldn’t reach – for the first eight years after its founding in 1971. (See this tribute to Kennedy today in Southwest Airlines’ blog.)

Some folks may have fond memories of the linen napkins and china plates on airlines in the “good old days” before deregulation when airlines aggressively competed on service because they couldn’t do so on price. But millions of middle-class families and small businesses were locked out of flying because of the high fares and limited service.

Think tanks, academics, and even consumer advocate Ralph Nader began to argue in the 1970s that airline deregulation was a good idea. In addition to problem of high consumer prices, deregulation was also advocated out of a kind of “systemic risk” concern. Railroads such as Penn Central were going bust and being bailed out, and observers feared that airlines would suffer the same fate and cause the same drain on taxpayers if they were not allowed to become competitive and self-sustaining.

But the aviation industry fought against repealing these controls that had long protected it from real competition (And, contrary to popular narrative, this instance of businesses championing regulation out of self-interested motives is not unique. Read Washington Examiner columnist and former CEI Warren T. Brookes Fellow Timothy P. Carney’s brilliant book, The Big Ripoff: How Big Business and Big Government Steal Your Money.). There were other businesses that supported deregulation, notably retailers like Sears that correctly saw that airline and trucking deregulation – which would lower their shipping rates – were part of a package. But the airlines fought hard and had a staunch ally in fighting deregulation in Sen. Howard Cannon (D-Nev.), chairman of the powerful Subcommittee on Aviation of the Senate Commerce Committee.

But deregulation advocates found an ally of their own in Kennedy, who, with the help of young policy aides like now-Supreme Court Justice Stephen Breyer, began to see the egalitarian case for deregulation. Beginning in 1975, Kennedy held hearings on airline and trucking deregulation as chairman of the Senate Judiciary Committee’s Subcommittee on Administrative Practice and Procedure and later the Subcommittee on Antitrust and Monopoly. Kennedy’s opening statement for one of these hearings sounds positively CEI-esque on the detriments of regulation and the benefits of the free market. The senator said, “Regulators all too often encourage or approve unreasonably high prices, inadequate service, and anti-competitive behavior.  The cost of this regulation is always passed on to the consumer.  And that cost is astronomical.”

Scholars Martha Derthick and Paul J. Quirk write in their book The Politics of Deregulation (published by the Brooking Institution – read excerpts here): “Kennedy’s lack of jurisdiction over regulatory legislation may have tended to limit the effect of his activities, but if so this limitation was amply offset by his ability to attract the press and exert pressure on the Senate subcommittees that did have jurisdiction.” The author write that “with Kennedy showing so much interest in pro-competitive regulatory reform, it became very hard for [Cannon] to show none.”

Cannon would hold his own hearings, and in the end, became a co-sponsor of Kennedy’s Airline Deregulation Act of 1978 that passed Congress and was signed by Carter. Kennedy would go on push the Motor Carrier Act of 1980 that deregulated trucking rates and was also signed by Carter. Kennedy would note these deregulatory accomplishments in his base-rousing “Dream Shall Never Die” speech to the Democratic National Convention in 1980, delivered just after he lost the nomination fight to Carter and considered the greatest speech of his career. “While others talked of free enterprise, it was the Democratic Party that acted and we ended excessive regulation in the airline and trucking industry, and we restored competition to the marketplace,” Kennedy intoned. “And I take some satisfaction that this deregulation legislation that I sponsored and passed in the Congress of the United States.”

Kennedy argued in the speech, “The demand of our people in 1980 is not for smaller government or bigger government but for better government.” Deregulation in the airline and trucking sectors, he implied, was an example of “better government.” Open Market bloggers would argue that smaller government is almost always better government, but Kennedy’s pragmatic case for this specific deregulation holds lesson for the regulatory debates of today. As much as deregulation is almost a dirty word and wrongly blamed for the financial crisis, practically no one would really want to go back to the bad old days when Southwest could only offer its low fares in the state of Texas.

CEI President Fred L. Smith Jr. and scholar Braden Cox point out in an entry of The Concise Encyclopedia of Economics that fares on flights have fallen 45 percent in inflation-adjusted terms since airlines were deregulated in 1978. They also cite research by scholars Robert Crandall and Jerry Ellig finding that even when figures are adjusted for changes in quality and amenities, deregulation still saves $19.4 billion per year in passenger costs, and these savings have been passed on to 80 percent of passengers.

The lessons of airline deregulation’s benefits to the common man in terms of lower prices and more choices apply even to issue on which Kennedy was on the other side. Health care consumers would benefit from competition among insurers across state lines, and a federal government bureaucracy that set rates and mandated what insurance companies could and could not cover – even if there were no “public option” – would likely be as bad for consumers as the old Civil Aeronautics Board that Kennedy fought to depower.

And as Smith and Cox pointed out, we should also fight to finish Kennedy’s job of air travel deregulation by allowing foreign carriers to compete on domestic routes and through privatization of airports and air traffic control, which other countries, including ironically Canada, have gone further than the U.S. in achieving. Completing this liberalization would help resolve lingering problems such as flight delays and passengers stuck on the tarmac for an inordinate amount of time, as the private sector could modernize aviation facilities just as the airline industry has adjusted.

In tribute to Senator Kennedy, Open Market urges all legislators to look at his accomplishments in airline and trucking deregulation, and be Kennedy-esque in applying his insights on these issues to the economy at large.

Disclosure: Like million of Americans, I happily fly Southwest Airlines, and I also own shares of its stock.