Reason Magazine - Contributors

Fly Away

info@reason.com (Robert Poole) info@reason.com (Benjamin Dachis) — Sat, 01 Mar 2008 00:57:00 EST

Nearly everyone who has traveled by air through New York during the last few years has sat idly in an airplane waiting impatiently to take off. These delays are not the inescapable result of too many people wanting to fly through New York. The fault lies with airlines’ scheduling too many flights during peak times.

The problem arises from the failure of airports to properly price access to runways. Instead of having to pay an economically meaningful amount of money to use a congested airport during its busiest hours, companies pay an arbitrary fee based on how much their airplane weighs.

A new study from the Reason Foundation, the organization that publishes this magazine, proposes a solution: market-based congestion pricing. The study argues that prices for runway use that vary by time period, rather than aircraft size or weight, would significantly reduce delays, spread out peak demand to make better use of airport capacity, and encourage the use of larger planes on some routes. These changes, the study says, would reduce congestion and delays while allowing the same number of passengers to fly to their destinations every day.

William F. Buckley, Jr., RIP

info@reason.com (Robert Poole) — Wed, 27 Feb 2008 16:30:00 EST

I received the news of Bill Buckley's death with a great sense of loss. No, he was not a major intellectual influence on my becoming a libertarian. I have to credit Robert Heinlein and Barry Goldwater and Ayn Rand for that. But since for most of us libertarianism as an intellectual and political movement has been an offshoot of conservatism, Buckley in truth was a great enabler.

By creating National Review in 1955 as a serious, intellectually respectable conservative voice (challenging the New Deal consensus among thinking people), Buckley created space for the development of our movement. He kicked out the racists and conspiracy-mongers from conservatism and embraced Chicago and Austrian economists, introducing a new generation to Hayek, Mises, and Friedman. And thanks to the efforts of NR's Frank Meyer to promote a "fusion" between economic (free-market) conservatives and social conservatives, Buckley and National Review fostered the growth of a large enough conservative movement to nominate Goldwater for president and ultimately to elect Ronald Reagan.

I only heard Buckley in person a few times. The first was when he spoke at MIT, as part of an ongoing lecture series, probably in 1963. As a National Review subscriber (what else was there for a budding libertarian?), of course I went. I was not overwhelmed, being puzzled at why he devoted time to criticizing some fellow I'd never heard of (Norman Mailer). But there was no question of his wide-ranging knowledge and command of the language.

I was far more impressed years later, as Buckley held court every week on his long-running PBS series Firing Line. Charming and witty, he engaged his guests in intellectual colloquy or combat, as the case might warrant. Those programs were a feast for the mind, the likes of which hasn't graced the airwaves since Firing Line's demise.

Some commentators dubbed Buckley a "libertarian conservative," and in the broadest sense, I guess that was true. Though he seldom let National Review deviate from his own Catholic social issues positions (especially on banning abortion), Buckley courageously took a stance against drug prohibition, making common cause on that issue with Friedman and other libertarians. And that enlightened view seemed to survive Buckley's retirement as the magazine's editor in chief (as one hopes it will survive his demise).

And despite those Catholic social views, Buckley was always far more cosmopolitan and sophisticated about sex, drinking, dining, and other human pleasures than his fellow-travelers among today's religious right. That helped make Buckley-style intellectual conservatism more acceptable in salons, boardrooms, and the corridors of power. And the fact that William Buckley could maintain genuine friendships with people such as socialist John Kenneth Galbraith and gay anti-communist activist Marvin Liebman says a lot about his open-mindedness and tolerance.

Good-bye, Bill Buckley—and thank you.

Robert Poole is director of transportation studies at the Reason Foundation and a former editor of reason.

Life in the Slow Lane

info@reason.com (Robert Poole) — Thu, 08 Nov 2007 07:38:00 EST

Americans are going to be driving on toll roads a lot more in the years ahead. One of the least pleasant experiences of this form of travel is the toll booth. But it doesn't have to be this way. We can, if we want, get rid of every toll booth and toll plaza in the country.

Technology is leading the way. First came windshield-mounted transponders, like the Northeast's E-ZPass, Florida's SunPass and California's FasTrak. Transponders were first introduced merely to speed up passage through toll booths. Then engineers figured out they worked fine at highway speeds, and that plazas could be eliminated for "open-road" tolling of vehicles with transponders. Only cash-payers, off to the side, would have to queue up. This transformation has been completed on the Illinois Tollway system and is under way on Florida's Turnpike and a number of others.

Engineers are now developing new toll roads from scratch that are entirely cashless. On the Melbourne CityLink in Australia and the new toll motorway system in Santiago, Chile, you either pay by transponder, or you call in and register your license-plate number for certain days when you plan to use the toll road. They bill you when their video cameras pick out your plate number.

And in Toronto, Canada, you can drive onto Highway 407 with no transponder and no reservation. They will simply video your license plate and send you a bill. The 407 has had this system since 1997. It is one of the world's most successful new toll roads.

Why do away with toll booths? No more delays, accidents and pollution caused by long lines of waiting cars. No more need for large swathes of land for toll plazas, making it possible to fit toll roads into tight corridors where congestion relief is needed. Lower payroll costs, no buildings and no cash "shrinkage" (i.e., theft) by collectors.

Today there are only a handful of no-cash toll roads in the U.S. The half-dozen high-occupancy toll lanes now operational in California, Colorado, Minnesota, Texas and Utah are all cashless, as they have to be to make use of market pricing, with toll rates changing to reflect periods of higher and lower demand. So is the recently built Westpark toll road in Houston and Tampa's new elevated express toll lanes on the crosstown expressway. Several new toll roads in Texas are being planned as cashless, and so are planned HOT lanes in northern Virginia, Miami, Dallas and elsewhere. But I've been able to identify only two existing toll-road systems that have made firm plans and set deadlines for getting rid of all toll booths: the North Texas Tollway Authority in Dallas and the Miami-Dade Expressway Authority.

Why isn't everybody doing this, since the technology works and has been proven overseas? There are legitimate concerns to be weighed. Unless the toll road already has high transponder market share, some fraction of cash customers may simply stop using the toll road if the cash option is eliminated. There are also real costs (staffing and technology) involved in video license-plate recognition and billing. And there is the problem of what to do with all the now-redundant toll collectors, especially if they are unionized.

It is not coincidental that the pioneers in cashless tolling have been investor-owned toll road companies: the 91 Express Lanes in California, Highway 407 in Toronto, the Cross-Israel Highway, the Melbourne CityLink and Santiago's toll motorways. All of these cashless toll roads were developed by private companies under long-term public-private concession agreements.

It is also not coincidental that the public-sector toll agencies in Florida and Texas going cashless are among the most businesslike and entrepreneurial, in a public-sector industry that has historically been very conservative and in some states highly politicized.

To a company whose business is offering its customers high-quality mobility (and to public toll agencies that think and operate like businesses), going cashless and boothless is a no-brainer. One of the very first actions taken by the companies that leased the Chicago Skyway in 2005 and the Indiana Toll Road in 2006 was to introduce electronic toll collection.

Elsewhere one can sense the first stirrings of change. In recent weeks, the Port Authority of New York & New Jersey, the Massachusetts Turnpike Authority and Denver's E-470 toll agency have all announced studies of going cashless. The new North Carolina Turnpike Authority is seriously considering developing its new toll roads without any toll booths or plazas.

I'm confident that the growing number of private-sector toll companies can be counted on to put their customers' interest first, by eliminating cash tolling. Since most U.S. toll roads are still operated by public-sector agencies, however, voters should demand that they phase out toll booths and toll plazas by a date certain -- a decade from now should be plenty of time.

Mr. Poole is director of transportation studies at the Reason Foundation. An engineering graduate of MIT, he has advised the U.S. Department of Transportation and a number of state DOTs.

The rest of this column appeared in the Wall Street Journal, where you can read it now.

Show on the Road

info@reason.com (Robert Poole) — Mon, 05 Mar 2007 11:43:00 EST

The Wall Street Journal

Lou Dobbs recently griped on his popular CNN show that parts of the Interstate highway system "built with your tax dollars are now being sold to the highest bidder. And incredibly, it's being done with the federal government's encouragement." Worse, according to America's loudest economic nationalist: "Some of the leading bidders: foreign investors."

I was interviewed for this segment and pointed out, helpfully I thought, that a Spanish company sinking $7 billion into new highways in Texas, meanwhile creating thousands of U.S. jobs, is the very antithesis of protectionists' dreaded "outsourcing." But that tidbit was left on the cutting-room floor.

Mr. Dobbs and others are riled up, but the public-private toll road partnerships sweeping the nation promise to revitalize our highway system. It's a seismic shift in the way roads are financed and managed -- the biggest change since the launch of the Interstate system 50 years ago. In these deals, investor-owned companies pay for the right to design, finance, build, operate, maintain and rebuild an existing or new toll road. In return they get the right to collect tolls on the road for 50 to 99 years.

Headlines may scream "New Jersey Turnpike for Sale!" but highways are not "sold" under these concessions. The government still owns the roads and the contracts spell out exactly what the company can -- and must -- do. The deals (whether for a new or existing road) typically include limits on allowable toll increases and rates of return, maintenance requirements, etc.

Private roads aren't exactly new: In the 19th century, private toll roads provided much of England and America's pre-auto-era highway capacity. Public-private toll road partnerships were rediscovered in France, Spain and Italy during the 1960s and '70s as the main method for building nationwide toll motorway systems.

The re-emergence of this model in the U.S. has been driven by a transportation system burdened with pork projects and funded by gas taxes that fail to keep up with construction and maintenance costs, let alone travel demand. From 1980 to 2000 highway travel increased 80% and the number of drivers rose by 30%, but highway capacity grew by just 2%.

Woefully short of funds, states are turning to the private sector. But private capital will only invest in projects people or shippers are willing to pay tolls to use. Money is therefore directed to routes and roads most appealing to users, not according to the agendas of pork-happy politicians.

State and city governments are also realizing that they are sitting on billions in untapped assets. Chicago's Democratic Mayor Richard Daley moved first, leasing the 7.8 mile Chicago Skyway for $1.8 billion in 2005. The Spanish-Australian consortium leasing the road quickly improved traffic flow by installing state-of-the-art electronic toll collection equipment.

Republican Gov. Mitch Daniels leased an Indiana toll road for $3.8 billion and is working to partner with the private sector on a new one that would connect several counties. Democratic Gov. Ed Rendell may lease the Pennsylvania Turnpike, while his Democratic cohort, Gov. Jon Corzine, is considering the same for New Jersey's.

While states are trying to reduce congestion and build roads without raising taxes, we can never underestimate the federal government's power to stop progress dead in its tracks. At a recent hearing on toll road public-private partnerships, Oregon's Democratic Rep. Peter DeFazio mused that "the federal government may have to step in" if the leasing of existing toll roads continues.

Congress would be wise to get out of the way and let a crucial experiment play out, in which some states embrace the new approach and others don't. In 10 years, we'll all be able to see whose highways resemble packed parking lots, and which states have booming economies because they're moving goods on free-flowing roads.

Mr. Poole is founder of the Reason Foundation and director of its transportation studies.

Transportation Security Aggravation

info@reason.com (Robert Poole) info@reason.com (Jim Harper) — Tue, 01 Mar 2005 00:00:00 EST

In the wake of the 9/11 terrorist attacks, air travel has gone through a disruption whose effects are still being felt: continuing fear and anxiety on the part of passengers and airlines alike, the creation of a massive new federal bureaucracy of doubtful efficiency and efficacy, and airport hassles that were once unimaginable and now seemingly intractable, to name just a few. More than three years after the worst terrorist attacks on American soil, the best way to balance passenger safety, privacy, and convenience is far from settled.

In December 2004, reason invited Robert W. Poole Jr. and Jim Harper to debate and discuss the best policy for secure air travel. Poole is director of transportation studies at the Reason Foundation and a former editor of this magazine. Harper is director of information policy studies at the Cato Institute and editor of Privacilla.org, an online think tank dedicated to privacy
issues. Comments can be sent to letters@ reason.com.

Steps Toward Sensible Airline Security

Robert W. Poole Jr.

Against a comprehensive terrorist threat whose true dimensions are necessarily unknown, a free and open society has endless points of vulnerability. Attempting to "harden" all likely targets is a losing strategy--and a recipe for bankruptcy. But airplanes are very fragile, and if airliners were left unprotected and were thus subject to frequent destruction, a commercial airline industry would be unlikely to survive, with enormous negative consequences for mobility and our economy. Hence some degree of defense seems wise in the case of commercial aviation.

The single most effective thing that's been done in this regard is to retrofit much stronger cockpit doors, to deny terrorists access to pilots and controls should they manage to get on board. But the rest of aviation security policy is an inconsistent mix of overkill and underprotection. Mandating 100 percent inspection of checked bags for explosives, but not of carry-on bags, makes no sense. Neither does inspecting 100 percent of passengers for metal but not for explosives. Likewise, why inspect 100 percent of bags but not the cargo that flies alongside them?

Current security policy toward passengers and their bags operates as if every person and every bag were equally likely to pose a threat. The costs imposed--both wasted time from showing up an hour early and the hassles and indignities of screening--are very large. But the only alternative (short of doing nothing, which would make planes too attractive as targets) is to base airport security policy on known or expected risk, targeting inspection resources where they are most likely to make a difference.

One way to do this is to encourage a fraction of travelers to volunteer for pre-clearance. By getting the equivalent of a security clearance and an ID card that proves the person who shows up at the airport is the person who was cleared, such "registered travelers" and their bags could bypass most of today's intrusive screening. The other end of the risk continuum includes those about whom virtually nothing is known and those who, based on intelligence information, pose a possible risk. If those people can be identified, they can be subjected to screening somewhat more rigorous than what is today applied to all air travelers (e.g., the backscatter X-ray machines that see through clothing). With those policies in place for the low-risk and high-risk groups, those in the middle (most ordinary, nonfrequent fliers) could be screened in a manner similar to that in which we all were prior to 9/11.

We also need to fundamentally rethink the function of the Transportation Security Administration (TSA). Although the TSA is charged with protecting all forms of transportation, it devotes the vast majority of its staff and budget to airlines, presumably because Congress overreacted to 9/11. Yet cargo containers entering our ports and crossing our borders are also potential threat vectors, and railroads carrying hazardous chemicals are also vulnerable targets. So TSA ought to do a serious analysis of where America could get the most bang for our bucks in transportation security, and recommend changes to Congress accordingly. That would likely mean much less emphasis on airlines and somewhat more emphasis on other modes.

The other major problem with the TSA is its built-in conflict of interest. As created by Congress, TSA is both the security policy maker/regulator and a major provider of security screening services. That's as unwise as it was to put the now-defunct Atomic Energy Commission in charge of both promoting and regulating nuclear power. The TSA should be divested of its service provision role as part of refocusing its mission on security policy for our entire transportation system.

Airport security should become the responsibility of each airport owner, as it is in Europe, under TSA oversight. Today the TSA screens bags and passengers, but the airport controls access to the tarmac, secures the airport perimeter, and carries out other security functions, resulting in a needlessly fragmented system. Airport security would be more coherent if it were no longer divided in this way. A single security staff, reporting to the airport director, could be cross-trained in a number of functions. This approach would make it easier to beef up staff in screening lanes during peak periods, with the extra people going off to do other security jobs when traffic is lighter instead of standing around. And as in Europe, airports should be free to hire certified private security firms to perform these services.

In short, airline security needs to be rethought from the ground up, along with the rest of transportation security. The kinds of risk-based policies that are partially in place for cargo need to be applied to airline passengers as well. That change would concentrate limited security resources where they will do the most good, reducing the hassle factor for a large majority of air travelers.

Kill the TSA, Don't Reform It

Jim Harper

It is correct that airline security should be rethought from the ground up. But ground-up rethinking should really start at the ground. The TSA should be eliminated, not refocused.

Most arguments for federal government involvement in transportation security follow a logic that is not logic at all. Usually thoughtful policy experts utter things like: "I just think there is a federal role. I mean, look at what happened."

Robert Poole's justification for government provision of security to private industry is better: Airplanes are uniquely fragile, he says. But this logic proves too much. Yes, 9/11 demonstrated aviation's vulnerability. But a successful attack on a shopping mall, the food or water supply, chemical manufacturing, or any other target would make those institutions seem uniquely fragile too. All infrastructure and systems have important weaknesses. If the premise for federal authority were vulnerability, it would be boundless.

TSA security measures have been inconsistent and mindlessly reactive. This is because bureaucracies are poor at assessing and balancing risk. They are much better at surfing public opinion and following political cues. Witness the TSA's obsession with small, sharp things early in its tenure and the shoe fetish it adopted after Richard Reid demonstrated the potential hazards of footwear. This is not a foresighted, research-based, risk-assessing organization.

Highly effective, nonregulatory systems exist to analyze and respond to risk. They operate well, though not perfectly, when they are allowed to. They start with the tort system, which places responsibility for avoiding foreseeable harms with the parties in the best position to avoid them. Through insurance contracts, businesses in every sector of the economy spread risk and often purchase expert advice on loss avoidance.

An obvious question: If these systems are so good, how did they fail us on 9/11? Unfortunately, no one had seriously contemplated that airplanes might be commandeered and used as missiles. Our private-sector risk avoidance systems are good but not perfect. No real-world system--public or private--foresaw the 9/11 terrorists' actions, so audacious in planning and so lucky in execution.

Things always seem more foreseeable in hindsight. And the airlines recognized after 9/11 that some court somewhere might heap bankrupting liability on them by finding that the attacks and their results were predictable. Moving swiftly to capitalize on emotion and patriotism, the airlines sought to shield themselves from liability, acquire an infusion of taxpayer dollars, and push their security obligations onto the government.

Hence the impossibly murky airline security system we have today. Lines of authority are unclear. Lines of passengers are long. Rules are unclear. Responsibility is unclear.

Airlines should be given clear responsibility for their own security and clear liability should they fail. Under these conditions, airlines would provide security, along with the best mix of privacy, savings, and convenience, in the best possible way. Because of federal involvement, air transportation is likely less safe today than it would be if responsibility were unequivocally with the airlines.

The costs of the status quo are tremendous. Taxpayers are funding another new and sure-to-grow bureaucracy. Air travel has rebounded, but certainly not to the levels it should have reached by now. Thousands of would-be travelers are staying away. Those who do travel are wasting millions of hours per year standing in lines. And they are shedding dignity by the bushel as they undergo compulsory frisking by TSA law enforcers.

The air travel industry is already beginning to figure out the bad bargain they struck when they pushed their security responsibilities onto the government. But they will not take into account another tremendous cost of abandoning their responsibility: erosion of civil liberties.

The same policy experts who see a federal role in airline security "just because" seem not to see that the TSA's airport security procedures are an unconstitutional search and seizure within the meaning of the Fourth Amendment. Intrusions on the individual right to be free of search and seizure are allowed, but they must be reasonable. The TSA stops everyone without regard to individualized suspicion. Either that policy is unreasonable, or every search is reasonable in the era of terrorism. Let's hope it's not the latter.

Allegedly to reduce the incidence and intrusiveness of such searches, the government is pressing forward with plans to do background checks on travelers, again without regard to suspicion. The reviled Computer Aided Passenger Pre-Screening System, better known as CAPPS II, has been renamed Secure Flight, but it still relies on searching databases of information about travelers. National ID legislation to streamline and strengthen this process passed at the end of the 108th Congress. These erosions of liberty result directly from the government's acquisition of the airlines' role in securing their operations.

When security is provided by the airlines, searches and background checks can be a condition of travel because constitutional restrictions do not apply to private actors. Airlines, eager to retain customers, will provide security in the least offensive and intrusive way consistent with the highest levels of safety. This may well include special lines with faster service for travelers who have undergone background checks. But only if security is private can we be assured that this choice will remain a genuine choice and not become mandatory.

There is no realistic business model in which airlines would skimp on security. Because of 9/11, the threats are now well recognized. The tort liability would be devastating if an airline failed to harden its defenses against threats, known or imagined, in light of the new knowledge. If an airline were inclined to go lax on security, hoping for the best rather than working to guarantee it, its insurers would quickly step in to correct it.

Businesses throughout our economy have taken a fresh look at their security procedures in light of the terrorist threat. Without fanfare or tremendous expense, likely targets of terrorist attack are being hardened. This is a winning strategy. Indeed, maintaining security as a private responsibility is the only acceptable strategy--unless we plan to destroy American life in order to save it.

Government's Essential Role in Travel Security

Robert W. Poole Jr.

Jim Harper and I agree on several points. But we appear to differ on a fundamental one: the need for government involvement in aviation security.

This need stems from the underlying fact that America (indeed, the whole West) is engaged in a war not of our choosing. Islamist terrorism is a deadly global threat, different in nature from that of Soviet communism but no less global and ongoing. And since Job No. 1 of government is national defense, it is very properly involved in defending Americans against this diffuse but deadly enemy.

In my opening comments, I noted the limitations of target hardening as a defensive strategy against terrorism. Operations researcher Manuel Trajtenberg of Tel Aviv University has applied game theory to the war between terrorists and society. Terrorists have to decide whether or not to strike and, if so, which targets to hit. Potential targets must decide how much to invest in their own security. And government decides what and where to invest in fighting terrorism. In his model, Trajtenberg compares two different government approaches: fighting terrorism at its source or hardening particular targets. Applying plausible numbers to his model, he finds that the former strategy is hundreds or thousands of times more effective than protecting individual targets.

So when I said that aviation security needs to be rethought from the ground up, it was with this kind of analysis in the background. In my view, the most important thing the federal government can do to counter terrorism is to find and kill the terrorists. That, in turn, depends on extensive intelligence work. And that provides the key to rethinking the role of whatever federal entity exists (call it the TSA or simply X) to address terrorist threats here at home.

The TSA or its replacement should be primarily an analytical agency, one that uses intelligence information to sort out and prioritize the terrorism risks facing America on its own territory. Only a federal entity with full access to comprehensive intelligence information can be in a position to carry out such analyses and make intelligent recommendations as to what kind of target hardening provides sufficient deterrence against such large potential losses as to be worth the investment.

Harper puts great stock in the role of insurance as a way of both incentivizing efficient levels of target hardening and of coping with the risks of loss from such events. I agree but must point out a huge caveat: If a risk is unquantifiable, it is uninsurable. In the wake of 9/11, aviation terrorism coverage was simply not available. Nobody in the insurance (or airline) business could quantify the risks, so nobody would offer a policy. Today, after three years of government efforts, however ham-handed, to strengthen aviation security, some very expensive coverage is starting to be available.

The TSA that Congress created is a far cry from what I'd like to see. To begin with, the failure of airport screening to prevent the 9/11 attacks stemmed directly from the Federal Aviation Administration's failure to define any sort of meaningful performance or training requirements for airport screeners. In a gross overreaction, Congress stampeded into nationalizing the screening industry while tripling screening's cost and making it far more intrusive. Yet after more than two years of full TSA operation, the agency has yet to demonstrate that the quality of screening is any better than it was pre-9/11. Thus far it has even failed at the most inherently governmental aspect of its aviation security task: providing real-time access to comprehensive intelligence information to identify people who pose a risk to aviation.

Harper and I agree that it is wrong for the TSA to "stop everyone without regard to individualized suspicion." Yet in his very next paragraph he undercuts his own position by opposing efforts to identify air travelers who may pose a threat. There are only two ways of dealing with the needle-in-a-haystack problem of finding would-be terrorists among millions of airline passengers: Either screen every passenger and piece of luggage rigorously, without regard to individualized suspicion, or use information to sort out passengers on the basis of risk. The latter approach is basic to every kind of police and security work, and it is the only policy that makes sense, from both an economic and civil liberties point of view.

But how would it work? As I mentioned in my first contribution, those who volunteer for pre-clearance constitute one low-risk group, needing little if any screening. Those showing up on serious, comprehensive watch lists constitute a high-risk group, needing rigorous screening. Individualized information is needed to sort people into both of these groups. What about somebody who shows up at the airport with no ID, or whose ID cannot be verified in any way? Common sense says he's a possible high-risk group member, certainly compared to someone with, say, a substantial credit history. This is a complex issue, but Harper's dismissal of efforts such as Secure Flight that would verify a traveler's identity is inconsistent with his position that travelers should receive more than cursory airport screening only when there are grounds for "individualized suspicion."

Much of what today's TSA does, including the airport screening that accounts for the bulk of its work force, should be done by private firms, working for the airport owner. And "registered traveler" programs can and should be run by airlines and their contract service firms as a benefit for their frequent fliers. But the core of aviation security involves making use of intelligence to identify terror threats, make aviation security policy, and provide the individualized information necessary for a risk-based security system to function. Those tasks are inherently governmental, a vital part of national defense in the war against terrorism.

Security Is Better Private

Jim Harper

In a Fall 2004 article for Regulation magazine, "A False Sense of Insecurity?," Ohio State political scientist John Mueller, a national security expert, pointed out that terrorism is minimally destructive compared to other dangers. Terrorism does most of its damage through hasty, ill-considered, and overwrought reactions.

In almost all years, the total number of people who die at the hands of international terrorists anywhere in the world is not much more than the number who drown in bathtubs in the United States. Since the State Department began counting, about the same number of Americans have been killed by terrorism as by lightning, accident-causing deer, or severe allergic reactions to peanuts.

Mueller's point: Terrorists can be defeated simply by not becoming terrified. We pay no homage to the victims of 9/11 and their families if we allow hyperbole and fear to overcome reason. The "deadly global threat" of Islamist terrorism cited by Robert Poole has so far proven far less deadly to Americans than, say, overeating.

This is not to say that the terrorist threat is not serious. There are undoubtedly groups plotting out there who wish to build upon the spectacular luck of the 9/11 terrorists.

But the threat should be kept in perspective. The so-called war on terrorism calls for neither (further) suspending the limits on the federal government nor (further) blurring the line between private and public responsibility. Indeed, each of our major points of contention is resolved by keeping in mind the proper roles of government and the private sector.

On target hardening, Poole takes the thrust of Manuel Trajtenberg's study and concedes that the proper role of government is to find terrorists and stop them, leaving target hardening to the owners of targets. The study did not conclude that target hardening should not be done--only that the most effective way to prevent terrorism is by acting against terrorists. Strengthening targets is not a zero-sum game, of course: Raising the difficulty of one attack does not lower the difficulty of another.

Corporations cannot pursue, arrest, or kill terrorists. That is what governments do. Concomitantly, governments lack the institutional knowledge to effectively harden private infrastructure, and they lack the incentives to properly nest security programs with business operations, customer service, and profitability.

Corporations can and must recognize the threat of terrorist acts and harden their infrastructures, both in the interest of business continuity and to avoid liability. Governments can and should collect and selectively share intelligence that suggests plausible threats to private infrastructure. This is a role not for a TSA but for true intelligence agencies.

On ID-based security, Poole places a great deal of stock in efforts to identify air travelers who may pose a threat. Many others do too. Surprisingly little analysis has gone into whether and how identification would work as a security measure against terrorism. But there is certainly a role for identification as part of a security mix. The question is whether the TSA, or the airlines, should assess individuals' propensity for dangerous acts.

The constitutional rights we all enjoy uniquely disable governments in the United States from investigating people who engage in nonsuspicious behavior such as air travel. There's a good reason for that. Our success as a nation, both economically and spiritually, derives from our freedom.

No such impediments exist in the private sector. Airlines should be free to make background checks a condition of travel. They should offer quicker security screening to those who open their lives to inquiry and require closer scrutiny of those wishing to travel anonymously. Having taken this role from the private sector, the TSA has kept airlines from working out the measures that are consistent with maximal security, customer service, privacy, convenience, and low cost.

Insurers have an important role to play in that process by fleshing out and driving home the airlines' security obligations. It is probably true that the risk of terrorism was unquantifiable in the immediate aftermath of 9/11. Actuaries, like so many others, had to adapt quickly to some new realities.

But since then, the federal government has done nothing but undermine the natural risk-prevention and risk-spreading processes of which insurance is a part. Imagine trying to insure a property against the risk of theft when the owner of the property is not responsible for locking the house. Imagine further that the homeowner could not take independent steps to secure the house from theft but had to seek regulatory permission to do so.

The Terrorism Risk Insurance Act passed in late 2002 was an industry sop just like the airline bailout. Cato Institute scholars noted early that year that Marsh and McLennan, the world's largest insurance broker, had formed a new subsidiary just days after September 11, 2001, to "sell insurance to corporate customers at sharply higher rates." The chief executive officer of XL Re, a Bermuda insurer, had told an industry conference, "The opportunity out there is tremendous." And The New York Times reported on December 17, 2001, that the industry looked so attractive that new money was pouring in to start new companies and expand existing operations. "[I]t is hard to remember a time when prospects looked better" for the commercial insurance industry, concluded the Times.

If you assume, as Poole does, that the federal gov-ernment should provide security to private industry,
then the role for the federal government does seem quite prominent. But the relative strengths of private and public actors suggest a greater role for airlines and a smaller role for government in the provision of air security. When
the costs to civil liberties are included, the case against
gov-ernment-provided security becomes overwhelming.

Most of the air security reforms Robert Poole recommends are intelligent and well taken. We are more likely to see them implemented when responsibility for air security is returned to its rightful place.

Screen Based on Risk

Robert W. Poole Jr.

Jim Harper and I seem to agree on quite a lot. In my latest Aviation Security Update newsletter, I commended John Mueller's Regulation article about exaggerated fear of terrorism. Far too much of the congressional and media response to 9/11 and Osama bin Laden has been based on hyperbole. But I do believe we are engaged in a war against deadly enemies, who must be fought not with costly feel-good measures but with intelligence work, interdiction, selective target hardening, and beefed-up disaster response capabilities.

I agree that target hardening ought to be the responsibility of each property owner, relying on advice and information from a federal agency that generates and uses comprehensive, up-to-date intelligence information. This is largely the case today when it comes to such targets as malls, office buildings, sports facilities, electric utilities, highways, ports, and railroads. Airports and airlines are unique in having been singled out for both significant new regulation and large federal funding. As I've been pointing out in my newsletter for the last several years, this stems not from any careful assessment that aviation is the most likely future terrorist target but from congressional overreaction in the weeks following 9/11.

Harper and I also agree on the role of insurance, both in helping to spread risks and in motivating protective measures. It's encouraging to see the insurance industry coming to grips with terrorism risk (see, for example, Gordon Woo's article, "Understanding Terrorism Risk," in the January 2004 issue of The Risk Report).

Where Harper and I are farthest apart is on the role of government in what he calls "ID-based security." In his response, Harper fails to address the choice between treating every passenger the same, as most privacy advocates have been demanding, or singling out only "suspicious" passengers for serious scrutiny. Since the public demands some degree of passenger screening, the "privacy" position entails putting every passenger through intrusive hassles at enormous cost. The alternative, which I favor, is to screen passengers based on their estimated risk levels, and that requires verifying their identities and checking up-to-date watch lists.

This is a job best suited to a federal agency with full and complete access to intelligence information. You don't want that kind of information appearing on the screens of thousands of reservations and check-in clerks (and perhaps leaking out who knows where). Nor should we publicize the factors used in deciding on the risk estimate for a given passenger, which would give Al Qaeda a guide to beating the system. The TSA's much-delayed Secure Flight system will do this job for the airlines, and it's appropriate that it do so. It's also appropriate that the TSA grant "clearances" to those accepted as members of airline-run registered traveler programs; after all, who else has the intelligence information to make such decisions?

Government has a limited role to play in aviation security. It's not the grandiose role spelled out by the Aviation and Transportation Security Act of 2001, but it's a vital role in helping the private sector protect its customers and facilities against terrorist attacks.

Taking Security Into Private Hands

Jim Harper

When debating someone as reasonable and thoughtful as Robert Poole, the most difficult struggle is to maintain points of disagreement. The threat of new terror attacks, we agree, should not lead to excessive reactions, but to carefully thought out measures. Private owners of potential terrorist targets are best suited to harden their infrastructure against attack. The tort system and insurance markets are best for assigning responsibility, for weighing and reducing risk, and for apportioning any loss.

The remaining issue--ID-based security --is a difficult one. In ordinary dealings, identifying someone has powerful effects. People who know they are known are also aware that they can be held accountable. Their bad acts may bring them social ostracism, exclusion, or civil and criminal liability.

But terrorists are not accountable to worldly justice. Identification does not restrain them this way.

The other reason for identification is to match people against lists of known terrorists and suspects. This appears to be the basket in which Poole would place his security eggs. A federal agency with "full and complete access to intelligence information" could determine the risk presented by passengers, he says, selecting those appropriate for extra screening.

But there will never be a perfect watch list, making the recipe for defeating such an approach very simple: Live quietly and fly occasionally. Once assured of being in a low-risk category, the terrorist can act.

ID-based security is intuitive but deeply flawed. It may supplement, but it will never replace, the proper focus for securing private infrastructure: assessing and addressing the tools and methods terrorists may use.

ID-based or not, the homogeneity of government-provided security can assist those planning a terrorist attack. "Blame" can be spread far and wide, of course, but the uniformity of federally regulated airline security surely helped smooth the 9/11 killers' planning. They knew that, regardless of what airline they chose, they would pass through similar metal detectors and receive similar secondary screening. They knew they would not meet additional security elsewhere in the airport. They knew the cockpits on all the planes would have similar doors. They knew the pilots would not be armed.

A heterogeneous, fully private airline security system would have raised the difficulty level and could have frustrated planning for the 9/11 attacks. Airlines and travelers should be extremely leery of the security and protection offered by government agencies and officials. The veneer of security that comes with officialdom is thin.

On the last of the 9/11 planes, passengers learned that the terrorists were flying commandeered jets into buildings. The airline security system had failed these passengers and compliance with the terrorists would not save them. Taking security into their own hands, they charged the cockpit, saving the lives of others if not themselves. This is far from a satisfying example, but it illustrates the better result when security is provided by interested parties with a real stake in the outcome.�

Kill Amtrak Now!

info@reason.com (Robert Poole) — Sat, 01 Nov 1997 00:00:00 EST

Derailed: What Went Wrong and What to Do About America's Passenger Trains, by Joseph Vranich, New York: St. Martin's Press, 272 pages, $24.95

If the pope one morning announced that he had become a Buddhist, it would be big news. Similarly, for a longtime passenger-rail insider to denounce Amtrak as a failure and argue for its liquidation is big news. One hopes, therefore, that Joe Vranich's new book will have a major impact on Amtrak's future.

If ever there were a perfect candidate to pronounce Amtrak a flop, it would be Vranich. Consider his bona fides: former Amtrak public affairs officer, former executive director of the National Association of Railroad Passengers, and later president of the High Speed Rail Association. Vranich has been there, lobbying Congress, building coalitions, reading the GAO reports, giving speech after speech about passenger rail.

Yet Vranich, a self-described "moderately liberal Democrat, the very kind of person who has been Amtrak's strongest defender," is also an honest man. His experiences advocating new kinds of high-tech, high-speed rail brought him face to face with the reality of Amtrak's bureaucratic, status quo corporate culture, its propensity to play games with cost and performance numbers, and its thoroughly politicized nature. And that caused him
to look with more objective eyes not just at Amtrak's increasingly obvious failure but also at the exciting developments happening overseas as more and more rail systems are deregulated and privatized. The result is this book.

Vranich first substantiates his case that Amtrak has failed to produce a meaningful return on the $20 billion (!) in taxpayers' money it has absorbed since its creation in 1971. His catalog of horrors includes Amtrak's dismally low speeds; after $20 billion in "investment," shouldn't riders expect trip times faster than those of the Third World today or the United States in 1952? And how many passengers know that the FDA some years ago imposed a permanent injunction on Amtrak after repeated food safety problems involving Amtrak diners --a penalty never once levied on any airline? Did you know that, just as large fractions of public school teachers send their own kids to private schools, most Amtrak employees go by plane when they go on vacation--even though they get free rail passes?

More important than these colorful facts is Vranich's assembly of solid public policy findings and conclusions. He correctly cites the Congressional Budget Office analysis finding that the Amtrak subsidy per passenger mile is more than 100 times that of other modes of intercity travel--contrary to what pro-Amtrak propaganda typically claims. He reveals that short-distance routes in the Northeast Corridor and California account for half of all Amtrak ridership--with the rest spread out over a politically determined spaghetti plate of hopelessly money-losing long-distance routes. And he understands that monopoly and extensive subsidies are at the root of Amtrak's poor performance.

What's most refreshing about this book, though, is that unlike most calls for Amtrak reform, it doesn't shrink from the logical conclusion of its findings: liquidation. Vranich flat-out recommends that Amtrak be shut down and its assets sold off to satisfy its creditors, ending the 26-year gravy train from federal taxpayers.

As one who believes rail can play some meaningful roles in carrying passengers--and also as a political realist who knows that you can't replace "something" with "nothing"--Vranich then offers a fairly realistic proposal for post-Amtrak passenger service. His plan draws partly on the dramatic rail deregulation and privatization which has been carried out in countries ranging from Britain, Japan, and New Zealand to Argentina, China, and Mexico over the past five years. Except in special cases like New Zealand, these reforms generally don't involve "attempting to privatize entire rail passenger systems, which are costly dinosaurs with no appeal to private investors. Instead, they are electing to abandon long-distance routes and privatize other routes"--generally, by contracting with the private firm that requires the least subsidy.

Vranich's post-Amtrak plan would devolve all responsibility for rail service from the federal government to the private sector, states, and local governments. The Northeast Corridor--the only significant track and right of way Amtrak owns--would be sold or given to the states. To make post-Amtrak train service more viable, the plan would include major deregulation: New passenger rail providers would be exempt from the chains that have bound Amtrak, including the Railway Labor Act (which, among other costly mandates, requires up to six years of severance pay for laid-off workers), the Federal Employers' Liability Act, the Railroad Retirement Act, and the Railroad Unemployment Insurance Act. The rationale? Competing passenger modes--bus and airline--aren't subject to those costly regulations.

I have only two quarrels with this otherwise splendid book. First, based on my research and reading, I am not nearly as optimistic as Vranich about the potential commercial viability of post-Amtrak high-speed rail service. His discussions of the now-abandoned Texas TGV project and the Florida Overland Express (FOX) project now under development accept the promoters' far too optimistic assumptions regarding ridership and costs. A recent analysis of FOX by transportation consultant Wendell Cox points out that, now that Southwest Airlines is providing considerable service in Florida, air fares in the Miami-Tampa and Miami-Orlando markets are 15 percent below what FOX plans to charge, and FOX would deliver slower service for most travelers. More generally, Vranich ignores a recent Federal Railroad Association feasibility study that concluded that the average high-speed rail corridor could cover only 29 percent of its costs from commercial revenue.

Secondly, when it comes to putting together his otherwise excellent post-Amtrak plan, Vranich appears to defer to the conventional wisdom he's previously debunked, to the effect that since airlines and cars get federal subsidies, so should trains. Hence he proposes that post-Amtrak rail be eligible for subsidies via a new federal trust fund making passenger-rail block grants to the states. Yet much of the book has already shown how destructive subsidies have been for Amtrak.

Despite these flaws, this book is tremendously important as Amtrak fights for its continued existence this fall. A major battle will take place over several serious proposals to give Amtrak an entitlement to one-half cent of the federal gasoline tax. As Vranich readily agrees, giving Amtrak such life support would doom any real chance of killing off the terminal patient.

Should you care? After all, in a $1.7 trillion federal budget, what's a billion a year in Amtrak subsidies? Vranich answers that one by quoting journalist Robert Samuelson: "The symbolic importance of ending these unjustified programs overshadows their size. If they enjoy immortality, then the political process is captive to past commitments, no matter how dubious." With Vranich's help, perhaps we can end this dubious commitment.

Inspecting the Inspectors

info@reason.com (Robert Poole) — Fri, 01 Aug 1997 00:00:00 EDT

Flying Blind, Flying Safe, by Mary Schiavo, New York: Avon Books, 373 pages, $25.00

If you've been paying any attention to airline safety during the past year, you could hardly have missed Mary Schiavo. The controversial former inspector general of the U.S. Department of Transportation was a frequent guest on TV talk shows in the wake of the ValuJet and TWA crashes, and advance publicity for her book this spring included a major segment on 60 Minutes and extensive excerpts in Time.

To some, Mary Schiavo is a courageous bureaucracy fighter who has finally told the public the truth about the incompetence of the Federal Aviation Administration. To others, including many aviation veterans, she is a "loose cannon." The truth is that she's some of each. Which makes her book, Flying Blind, Flying Safe, both valuable and frustrating.

Only an outsider-insider like Schiavo could provide ordinary people with authentic accounts of how badly off-track the FAA has gotten in its job of looking after aviation safety. As both a private pilot and a powerful Transportation Department bureaucrat armed with subpoena power, she knew enough to ask the questions that needed to be asked and to find the skeletons in the FAA's closet. But as a woman and a nonmember of the old boys' network of retired generals and admirals who circulate in the FAA's upper echelons, she was able to bring a fresh perspective to this troubled agency.

Thus, this is the first popular book to lift the veil and show air travelers how the FAA really operates. Schiavo shows the agency's corporate culture in action--starting with the administrator's butler, ceremonial office, and unlimited access to cockpit time in the agency's huge fleet of planes. More substantive are her accounts of Inspector General's Office investigations of such safety issues as shoddy FAA inspection practices and the use of "bogus" aircraft parts (parts not made by approved vendors and possibly made of inadequate materials). She provides chilling evidence of an agency whose people all too often simply go through the motions of regulating, but whose overriding concern appears to be throwing a comforting security blanket over air travelers.

Noting the very small number of violations turned up by FAA inspectors (less than 0.5 percent of inspections identified a violation), Schiavo learned that it was routine for the inspectors to call the inspectees in advance to let them know when they were coming. By contrast, special inspections, which used inspectors from other FAA regions, generally turned up far more violations. A number of General Accounting Office reports had criticized FAA inspection practices, but nothing had been done to change things.

That leads to another virtue of Schiavo's account: her exposure of the game playing that goes on in the name of congressional "oversight." She recounts several heartbreaking experiences of sharing in advance the details of I.G. investigations with leading House Aviation Subcommittee members, only to be sandbagged at the subsequent hearing by a senior FAA official who'd obviously been tipped off about the findings so he could prepare an obfuscating response. She also recounts grandstanding over FAA issues by members of Congress who had done nothing (and intended to do nothing) to solve the problem.

Schiavo provides a detailed account of the I.G. investigation into the FAA's squandering of $1.6 million to force more than 4,000 senior managers to endure New Age training seminars run by a devotee of a cult-like guru and spiritual "channeler." The seminar manager was ultimately jailed for fraudulent billing, but the responsible FAA managers were given a slap on the wrist.

The book also includes seven chapters of practical safety advice to air travelers, presenting hitherto unavailable information on the relative safety records of specific airlines and types of planes, and generally useful (though overly conservative) advice on minimizing your risks when flying on airlines and using airports. For example, many aircraft accidents are survivable if you can get out quickly, before smoke and fumes kill you. Reserve an aisle seat, as close to an exit as possible--and, if possible, ask at the airport to be moved to an exit row seat.

If the book simply stopped there, Schiavo would have done a great public service. Unfortunately, she goes on to offer well-meaning but dangerous policy advice. Her fundamental mistake is to argue that the FAA should pursue safety literally at all cost. Again and again she castigates the agency for attempting to weigh the possible benefits of proposed safety regulations against the cost they would impose on aircraft makers, airlines, and the traveling public. As she puts it baldly, "The truth is, no one needs government officials to put a dollar value on his or her life, or on the lives of loved ones. We consider ourselves priceless. So should the FAA."

In fact, there's solid economic research showing that most people do not put an infinite value on their lives. Harvard economist W. Kip Viscusi, for example, has shown repeatedly that people will accept risky occupations in exchange for higher pay, putting an implicit value on their lives. Such research has produced a range of values with a midpoint of about $5 million. Yet the plethora of new safety and security procedures recommended by the Gore Commission after the crash of TWA Flight 800 would cost more than $200 million for every life saved, according to estimates by Robert Hahn of the American Enterprise Institute. Safety at all cost is a recipe for national impoverishment.

Furthermore, in some cases regulations intended to save lives can end up actually costing lives. Consider the question of whether airlines should be forced to require that parents put infants in separate child-restraint seats rather than carry them on their laps. The FAA's analysis showed that, by forcing parents traveling with babies to buy another ticket, such a rule would impose an additional $1 billion in airfare expenses on families over a 10-year period. Because of the additional cost, 20 percent of the families would shift to driving, and because of the higher death rate associated with driving, there would be a net increase of 82 infant and adult fatalities over a 10-year period--as a predictable result of imposing this "safety" mandate. But Schiavo, like Ralph Nader, just can't abide this kind of analysis. She would impose any regulation that promises to improve air safety in the smallest degree, regardless of the ultimate cost.

This kind of naiveté about the real world undermines Schiavo's credibility as a reformer. So do the book's factual errors about aviation--misidentifying the SR-71 Blackbird as the SR-171 (no such plane exists), calling Frank Whittle the inventor of rocket (rather than jet) propulsion, calling the Air Transport Association the Airline Transport Association, and so on. These sloppy mistakes give aviation insiders grounds for attacking Schiavo's claim to be knowledgeable enough about aviation to be a reliable critic of FAA mismanagement.

Even worse, Schiavo confuses two aviation funding mechanisms: 1) the 10 percent airline ticket tax, which is sent to Washington as the main source of funding for the FAA's air traffic control and airport grant programs and 2) the $3.00 passenger facility charge, which airports are allowed to impose to fund local improvements. Her entire Chapter 6 is thus a hopelessly confused mishmash which does more to mislead than enlighten the reader.

So what should be done about aviation
safety? Schiavo is right to argue that the FAA's air traffic control system, which accounts for more than two-thirds of its budget and staff, is essentially a high-tech business which should be converted to an independent corporation. That would leave the remaining FAA free to focus on becoming a better safety regulator.

Doing so would require a major overhaul of its corporate culture--but not by throwing out the government-wide requirement for cost-benefit analysis of proposed regulations, as Schiavo proposes. A new layer of top management, recruited from outside the old boys' network, would help, but a fundamental problem would remain. For the FAA has always seen a major part of its job as reassuring the public that all airlines are equally safe, and much of its corporate culture has evolved in response to that premise.

In fact, as Schiavo makes clear, that is not and never has been the case. The major airlines and manufacturers have a powerful self-interest in operating and building safe planes. She recounts how the technical features of the Boeing 777 and McDonnell Douglas MD-11 were beyond the expertise of FAA's certification people; Boeing and M.D. essentially regulated and certified these new planes themselves. As Schiavo notes, "safety may be more important to Boeing than to the FAA or any other government agency....Boeing would destroy its credibility...if it allowed poorly designed planes to leave its hangars." And product liability lawyers would have a field day.

But, contrary to naive free market theorizing, there are parts manufacturers and less reputable airlines out there, willing to spend less on safety and take the chance that they will be able to either beat the odds or somehow escape liability. Consider the comparative 1991-95 accident and incident rates Schiavo cites in Chapter 13. American, Delta, and United had rates of 5.9, 6.3, and 4.7 accidents and incidents per 100,000 takeoffs, respectively, while much criticized ValuJet was only slightly higher at 7.1. Then look at the 15.7 for Arrow Air, 48.9 for Tower Air, 52.9 for Rich International, and 109.4 for Miami Air. Yet the FAA security-blanket approach tells travelers that if an airline meets its minimum standards, it is "safe." Full disclosure of this kind of safety information--as Schiavo recommends and the FAA has now begun to do on the Internet (http://nasdac. faa.gov/internet/)--would permit air travelers to weigh the trade-offs between lower fares and safety levels for themselves.

But what's really needed is a different approach to safety regulation altogether, one that aligns incentives with the desired results. If the regulator's own funds were at risk when safety was neglected, there would be much stronger incentives for both sensible (i.e., cost-effective) regulations and effective enforcement. That's why, after the next several attempts to reform the FAA end in failure, this vital task should be delegated to an arm of the insurance industry. With their own funds at risk, the insurance companies would have a powerful incentive to do the right thing.

Safety on the Fly

info@reason.com (Robert Poole) — Tue, 01 Oct 1996 00:00:00 EDT

This has been a disturbing year for airline passengers. Just before New Year's Day an American Airlines 757 approaching Cali, Colombia, smashed into a mountainside, killing everyone aboard. In May a ValuJet DC-9 plowed into the Florida Everglades, leaving no survivors. Then in July came the explosion of TWA Flight 800, with another 230 deaths. While there is no common causal factor linking these disasters, by the time of the TWA crash politicians were falling all over themselves to argue that the government needs to get tougher on air safety.

Longtime opponents of airline deregulation found the ValuJet crash a convenient opportunity to slam the low-fare airlines that pose the greatest competitive threat to the formerly cartelized major airlines and their high-cost, unionized workers. Another faction consisted of the good-government types who attack the Federal Aviation Administration for a built-in conflict of interest: a statutory duty to "encourage and foster" commercial aviation while regulating its safety.

President Clinton and Transportation Secretary Federico Peña, who last year were taking credit for the billions of dollars saved by air travelers each year thanks to low-fare airlines, did a quick 180-degree turn following the ValuJet crash, ordering the FAA to ground the airline. Despite horrendous crashes, including five accidents in five years for USAir, no major airline has ever been grounded, as ValuJet was on June 17.

Before jumping to conclusions about whether the FAA has been too tough or too lax, it's important to consider the relevant facts. First of all, there's a long history of FAA policy changes driven by fatal crashes. During the 1950s the FAA's predecessor agency, the Civil Aeronautics Authority, resisted implementing radar separation ("positive control" of airspace) until midair collisions in 1956, 1958, 1960, and 1965 got its attention. Virtually every major air safety advance, including ground proximity warning systems in cockpits, was preceded not by a careful weighing of evidence but by a series of crashes, followed by political demands that something be done. The National Transportation Safety Board investigates each accident and makes numerous recommendations, but most of them are not adopted by the FAA.

It's clear that the FAA has refrained from taking actions that might have prevented certain crashes. Advanced ground proximity warning systems that would have given the pilots at Cali three times as much warning are available at $40,000 per plane, but they have not been mandated. For years the FAA has seen in-flight fires caused by hazardous cargo, including oxygen generators like those suspected of causing the ValuJet crash, but has done nothing to improve fire warning and suppression systems or to authorize its inspectors to spot-check cargo for hazards.

On the other hand, when it came to making a (post-crash) decision about ValuJet, there was a case for singling out this airline. ValuJet has amassed the worst accident record in the industry: 4.2 accidents per 100,000 flights. That's three-and-a-half times the 1.2 per 100,000 rate for all low- fare startups. Worse, it's 14 times the 0.3 accident per 100,000 flights for the major airlines. And in its intense scrutiny of ValuJet operations, the FAA found numerous safety lapses, such as inadequate supervision of maintenance contractors and 31 flights by a jet with an inoperative weather radar.

But even those statistics don't necessarily mean ValuJet should have been closed down by the FAA. As consumers, do we want an air safety regulator that takes the economic health of the industry into account, as the FAA is mandated to do, or do we want a safety regulator more like the Food and Drug Administration or the Occupational Safety and Health Administration, one that focuses solely on preventing accidents? Despite the understandable desire for zero accidents, we would not actually want to pay the costs of an all-out effort to attain that goal. There are any number of changes in aircraft design, maintenance procedures, and flight operations that could theoretically increase safety, but at large cost. We need to remember that, even though commuter and low-fare startup airlines have higher accident rates than the major airlines, flying on them is still much less risky than driving. If the FAA forced every possible safety improvement onto airlines, that would raise their costs (and hence airline fares) enough that many of the 47 million people who flew low-fare airlines last year would go back to driving--at higher risk of injury or death.

There are no easy solutions for better air safety. But depoliticizing safety policy making and enforcement would lead to more rational decisions. Congress should remove the FAA's statutory duty to "encourage and foster" commercial aviation, so it won't be reluctant to take costly but sensible safety steps before a spate of crashes. But the FAA should still be required to prove the reasonableness of its regulations in terms of their relative cost per potential life saved, taking into account the potential for more injuries and deaths due to travelers who switch from planes to cars because of higher fares.

A second step would be to remove the FAA's other conflict of interest: its operation of a major component of the aviation system, the air traffic control system. Divesting that system to an independent corporation would put air traffic control at arm's length from the FAA, just as airlines, airports, and aircraft manufacturers are. At least 16 other countries, including Australia, Britain, and Germany, have successfully spun off air traffic control.

Another modest reform would be to require the FAA to publish data on the safety records of individual airlines--both accident rates and violations of air safety regulations. Most of the travelers who currently choose low-fare (but slightly riskier) airlines would probably continue to do so, given the relatively small risk differences and large price differences. But the potential loss of even a small fraction of their customers due to the safety ratings would give those airlines an additional incentive to improve their performance.

These changes would help, but as long as airline safety remains in the hands of a bureaucracy, answerable to politicians, air safety will still be politicized. Its bureaucrats will still have incentives to cover their tails by means of paperwork, which a long history of critical reports from the General Accounting Office makes clear has been a chronic FAA problem. And politicians will still have incentives to overreact in one direction or the other, as we've seen with the ValuJet and TWA situations. Couldn't we design a system with better incentives for rational behavior?

Imagine for a moment that there were no FAA. What would prevent some airlines from cutting corners and taking risks few of us would want to accept? To find an answer, consider who would have the most to lose in such a world. Clearly, it would be insurance companies, who would bear the brunt of the risk. Since no one would operate an airline without insurance, the insurance companies could face ruinous exposure for liability and replacement costs due to an increased number of crashes. Therefore, the insurance industry would have to engage in aggressive loss prevention activities, as insurers currently do in factory safety and fire protection. (There is no federal agency that regulates your local fire department; that is done by the nonprofit Insurance Services Office.)

What would probably emerge is a nonprofit entity, funded by and answerable to the insurance industry, that would set air safety standards. And that would dramatically change air safety incentives. Consider the apparent cause of the ValuJet crash. One of its maintenance contractors improperly labeled hazardous oxygen generators and illegally loaded them aboard the doomed DC- 9. It turns out that the nine different FAA regions have nine different hazardous materials policies-- and none has the authority to open or inspect packages to see if they contain hazardous materials. An FAA memo described this problem well before the ValuJet crash, but no action was taken because nobody's money or job was on the line.

If an insurance safety organization identified such a problem, it would have a strong financial incentive to solve it, in order to prevent future losses. And the airlines would have a financial incentive to comply with the insurance entity's safety standards because doing so would lower their premiums. (Today, airlines typically fight proposed safety requirements because of their cost.) Some airlines might opt for a higher standard than others, seeking the best balance between insurance costs and safety expenditures. They might be rewarded with a published safety rating from the insurance entity, analogous to the Underwriters Laboratories symbol on electrical appliances.

On the other hand, it's unlikely that an insurance safety agency would push standards that imposed exorbitant costs on airlines for minuscule benefits; that would not serve the interest of the airlines, their passengers, or the insurers. But since it would not be in anyone's interest to have planes falling out of the sky, we could expect reasonable, science-based tradeoffs between safety improvements and cost.

An insurance-based system, which would depoliticize airline safety, should be the ultimate goal. Until we can generate support for that route, reforming the FAA by simplifying its role, requiring cost-benefit analysis, and making it publish safety data is probably the best we can do.

Road Warrior

info@reason.com (Robert Poole) — Thu, 01 Aug 1996 00:00:00 EDT

Roads in a Market Economy, by Gabriel Roth, Brookfield, Vt: Ashgate Publishing, 292 pages, $76.95

Over the past 30 years, the federal government alone has spent some $79 billion subsidizing mass transit in a vain attempt to get Americans out of their cars. Yet we have more drivers than ever, and those drivers are driving more miles on average. And despite the large sums spent on carpooling propaganda and facilities over the past decade, the fraction of Americans driving alone to work increased from 65 percent in 1980 to 74 percent in 1990, while carpooling, transit use, walking, and bicycling all declined. Americans prize personal mobility, but we pretty much take our roads for granted-- except when they fail to meet our needs. Unfortunately, they are meeting our needs less and less well. According to the latest tally by the Texas Transportation Institute, Americans wasted $48 billion in 1992 stuck in urban traffic congestion. Potholes and rough pavements take a toll on our cars and trucks that is likely to get worse instead of better. As cars use less gas, the principal sources of highway funding--federal and state taxes of a fixed amount per gallon--are failing to keep pace with our increased driving and the resulting wear and tear on the roads.

All of which suggests that the time is ripe to fundamentally rethink how we provide roads. Longtime transport economist Gabriel Roth has done just that in this provocative new book, published on both sides of the Atlantic. Roth contrasts the management and operation of highway systems with those of the U.S. telecommunication system. In both cases, users employ their own equipment in a network made available by a variety of interconnected providers. As Roth notes, "Both roads and telecommunications are subject to congestion at specific times and places. However, the telecommunications sector--unlike the roads sector--has learned how to avoid the extremes of congestion and over-investment. It does this by adopting pricing rules and investment criteria developed in market economies to make the best use of scarce resources. In a nutshell: those who provide telecommunications services raise prices at periods of peak demand, and the increased revenues generated thereby attract the required additional investment to expand peak-period capacity."

Roth's premise is that we would have much more user-friendly roads if the road system were set up on commercial principles more like the telecommunications system's. Specifically, this would mean that, like telecom companies, road providers should have owners; be financially self-supporting; be treated the same by government, whether investor-owned or government-owned; receive their revenue directly from users (rather than through the government); and operate to common standards, to make interconnection simpler.

Roth explains what we know about the costs of road use, both direct and indirect (accidents, congestion, pollution, etc.), and how to understand these costs in an economically literate manner. He looks at arguments for and against various ways of pricing road use, including the politically contentious issue of how to charge trucks for the greater wear and tear they impose on most roads. He provides an excellent overview of the rapid growth over the past decade of privately financed toll roads in several dozen countries, including the United States.

Roth also reviews the world's experience to date with direct road pricing and is realistic about the political difficulties of introducing pricing where people have become accustomed to thinking of road use as "free." Road pricing generally means charging road users at the time and place of use--in other words, charging tolls. Singapore is the only major city that has attempted "congestion pricing"--a form of road pricing whose aim is to control traffic congestion. Under Singapore's relatively crude system, drivers wishing to enter the central business district during the morning rush hour must buy and display a sticker on the car's window. Drivers of cars without valid stickers are fined.

Today's electronic toll collection technology makes it possible to charge people in real time. A small electronic tag affixed to the car can be "read" by a radio signal as the car passes a toll collection point at normal speed. Depending on the type of account, the fee is charged either to the user's credit card or to the user's account with the toll company. This system makes it easy to charge prices which vary by time of day, permitting more sophisticated forms of road pricing, including congestion pricing. Such fully electronic congestion pricing is now in use on the (private) 91 Express Lanes on the Riverside Freeway in Southern California.

After providing all of this background information, the book's real task is to figure out how to get from where we are now to where Roth thinks we should go. Roth proposes several major reforms to effect this transition. First, states should convert their road systems, on a geographically sensible basis, into user-funded road corporations which, as owners, would have full responsibility for their operation, maintenance, and expansion. Roth envisions a government corporation that would be granted ownership of specific road assets (e.g., all freeways in Los Angeles County) and be fully responsible for operation, maintenance, expansion, and rebuilding (as the roads wear out). The point is to create owners where none real-ly exist today--owners who would obtain revenue from the users (and presumably be held accountable by those users to meet the demand for good service). He envisions those companies operating at arm's length from government, much as do the turnpike authorities that exist in a number of states. Making roads the responsibility of an organization with its own funding sources would make it easier to eventually fully privatize the roads.

Second, Roth recommends that states create dedicated road funds to collect the various road-user charges--some of which might still be gasoline taxes and registration fees--and disburse funds to the road corporations. The money would no longer leak to general funds for transit or other government operations, as occurs today with our highway "trust funds."

Third, because tolls are practical only on high-traffic routes and are difficult to introduce on existing roads, Roth proposes the use of "shadow tolls"--per-vehicle fees paid by the road funds based on actual traffic counts. Fourth, he urges that there be no discrimination between investor-owned and government-owned road corporations. Both would have equal access to shadow tolls, and both would be able to charge actual tolls in addition to the shadow tolls, where congestion warrants direct pricing.

These transition measures are both imaginative and possibly workable. Roth has made a valuable contribution by getting specific about how we could actually move toward a commercial road system. But as always, we face the dilemmas of bringing about radical, long-term change: Will the transition measures become the new status quo that proves even harder to change than our present situation? Will partway measures generate negative reactions that turn people against the underlying principles and block getting to where we really want to be?

Take the conversion of state and county highway departments into government corporations. While this could be a net improvement (especially if there are incentives to privatize the corporations), the closest existing equivalents--state and county turnpike authorities--are not exactly models of entrepreneurial management. Some of them have become notorious political fiefdoms, offering cushy jobs to cronies and major temptations to siphon off cash. I also do not share Roth's enthusiasm for shadow tolls, now being implemented on a set of privately financed highway projects in Britain. Shadow tolls don't provide incentives for better use of roads via pricing. Users never see or feel a shadow toll- -it's purely a financial mechanism.

But those are minor points. This is an important and thought-provoking book. It is bizarre that Americans have so uncritically accepted a central-planning model for our transportation infrastructure, while developing the world's best telecommunication infrastructure using a (largely) free market model. Indeed, one of the unexpected delights of this book is a here-tofore unpublished essay, included as an epilogue, by Milton Friedman and Daniel Boorstin, dating from the early 1950s, proposing both private ownership and market pricing for roads. As usual, Friedman was way ahead of most of the rest of us. Fortunately, with the publication of Gabriel Roth's book, these ideas will gain the kind of hearing they have long deserved.

The Asset Test

info@reason.com (Robert Poole) — Wed, 01 Feb 1995 00:00:00 EST

The GOP sweep of both houses of Congress should make possible what has long eluded free-market proponents: a national agenda for privatizing government functions. After all, the Republicans were elected on a shrink-big-government-and-balance-the-budget platform. And, as mayors and governors across the country are demonstrating, privatization is a proven tool for doing just that.

Wasn't federal privatization tried during the Reagan years? Not really. Despite a lot of rhetoric, nothing much happened until 1987, Reagan's seventh year in office. In that year, Conrail was sold off, the only real asset sale of the entire Reagan years. In 1987, Reagan also created a "privatization czar" post in the Office of Management & Budget (which Bush subsequently abolished) and appointed a President's Commission on Privatization, whose rather tepid report appeared in March 1988, far too late to have any impact.

Besides a lack of presidential leadership, the major obstacle was Congress, which not only vowed to oppose nearly every proposed privatization measure, but on many occasions voted to prohibit the government from even studying such proposals. So with the startling shift of power this fall, think-tank reports from the '80s were being dusted off all over Washington. Rep. Chris Cox (R-Calif.) even proposed the creation of a Privatization Committee in the House.

Thus, it is beginning to look as if the United States might finally join Australia, Britain, France, Germany, Italy, New Zealand, and other democracies in divesting government corporations and assets to the private sector. Over the past decade, nearly $500 billion of state-owned enterprises have been sold off worldwide. The proceeds have been used to reduce current budget deficits, to redeem outstanding bonds and save interest costs, or, in developing countries such as Mexico, to fund otherwise unaffordable public-works projects.

One major component of a federal privatization agenda would be to sell off federal enterprises and assets. No one has ever attempted to assess the possible market value of the government's numerous assets and enterprises. The General Accounting Office lists 45 government corporations (including the well-known Amtrak, Tennessee Valley Authority, and U.S. Postal Service, but also such lesser-known entities as the African Development Foundation, the National Credit Union Administration Central Liquidity Facility, and the Rural Telephone Bank). In addition, there is a whole set of government-sponsored enterprises, such as Fannie Mae, Freddie Mac, and Sallie Mae, most of which already have partial private ownership. Clearly, some of these are viable business enterprises which would command billions of dollars if offered for sale. Others would either have to be radically restructured or liquidated. All told, there are probably scores of billions of dollars to be had by selling off those enterprises that are viable.

In addition, the feds have other assets that could be liquidated. Many federal agencies have loan assets on their books, some of which have been sold over the past decade. There's probably another $100 billion in this category. There are also untold scores of billions of dollars worth of radio frequencies which could be sold off.

Then there are federal lands. Not national parks and wilderness areas, but supposedly income-producing "commodity lands" administered by the Bureau of Land Management and the U.S. Forest Service. A 1989 Reason Foundation study estimated their value at $160 billion. Environmentalists would go ballistic, but in fact some of the most successful examples of ecologically sensitive resource development occur in privately owned commercial forests and wilderness areas owned by environmental groups. Given the feds' dismal record in managing grazing and timber lands, enlightened environmentalists might see net gains in some forms of privatization.

Interestingly enough, the Clinton administration's "reinventing government" people had actually begun moving toward privatization before the November election. They proposed "corporatizing" the air traffic control system and privatizing Sallie Mae, and have begun large-scale auctions of electromagnetic frequencies, expecting to generate over $10 billion. If this faction in the White House gains the upper hand, congressional privatization initiatives may go a lot further than many pundits imagine.

Supporters of privatization at the federal level can look to state and local governments for targets. After all, America's cities and states are also bastions of socialized enterprises. A 1992 Reason Foundation study identified some $227 billion worth of municipal electric, gas, and water utilities; parking garages; airports and seaports; highways and bridges which would be attractive commercial propositions. A fledgling privatization industry has begun emerging in the past five years, both developing new facilities of these kinds using private capital and proposing to buy or lease existing facilities and operate them in a more business-like manner.

Financially strapped governors and mayors have generally been positive about this kind of privatization, seeing it as a way to "mine their balance sheets" by turning relatively unproductive physical assets into financial assets. And various studies have pointed out benefits from converting bureaucratically run enterprises into entrepreneurial ones--market pricing that would encourage more efficient use of freeways and water systems, for example, and technological innovation.

Several barriers have stood in the way, however, barriers which a Congress committed to shrinking big government could easily remove. One type of barrier is limitations imposed either by federal grants or by the tax code. For example, airports which get federal grants face many restrictions on how they can spend not just the federal money but all their income. And no enterprise (such as a water system) funded in part by tax-exempt bonds can enter into a management contract with a private firm for more than five years (thereby ruling out many forms of privatization involving longer-term private investment).

In 1992, President Bush issued an executive order on infrastructure privatization aimed at reducing the first type of barrier, but its provisions have not been enforced and it could be rescinded at any time. Congress could enact an improved version of these provisions into law, giving states and cities greater freedom to sell or lease these socialized enterprises.

The more serious barrier is the lack of a level playing field between taxable and tax-exempt bonds. One of the artificial advantages of municipal utilities is that they can issue bonds exempt from federal (and usually state) income taxes. For example, on $1 billion worth of bond funding, the annual debt service payments would be $20 million greater with taxable private-sector debt. A privatizer must go to heroic lengths in cost-cutting to be able to offset the huge difference in financing costs created by this tax subsidy to the wealthy investors who purchase municipal bonds.

Essentially, there are two ways to level the playing field. One would be to extend the federal tax exemption to infrastructure bonds regardless of whether the owner or developer is a public entity or a private firm; the test for tax-exemption would be the purpose to which the facility would be put. If it were an airport, a toll road, or a water system serving the public (as opposed to simply a few private users), it would qualify for tax-exempt bond financing.

Traditionally, the problem with this approach has been the U.S. Treasury (and deficit-reducers generally). The last thing they want to see is yet another "loophole" that would reduce federal revenues. But the privatization community has come up with an approach that might get past this traditional objection. Based on the report of the 1993 Infrastructure Investment Commission, they have proposed a new type of infrastructure bond (applicable to both public and privately owned projects) which would be marketed to individually directed retirement accounts, such as 401(k)s. On the assumption that investors who buy these (tax-exempt) bonds will liquidate an equal amount of corporate bonds, the Treasury is expected to score this proposal as "revenue-neutral." A bill to this effect was introduced late in the last Congress by Democratic Reps. Dick Gephardt (Mo.) and Rosa DeLauro (Conn.), and a revised version is expected early in 1995.

The other approach, of course, would be to remove the tax exemption for revenue bonds that go to finance transportation, energy, and environmental infrastructure--the kinds that are, at least in principle, profitable enterprises. The Treasury and deficit hawks would love this because it would add to federal revenue. The privatizers would also love it, because it's more clear-cut than the very complex Gephardt-DeLauro approach.

But investment bankers and bond buyers could be formidable opponents. Their opposition might be overcome if the proposal were narrowly drawn: applying only to new revenue bonds, and only for these specific kinds of infrastructure. That amounts to just over one-quarter of the annual volume of tax-exempt bonds. But each year's new issues of taxable infrastructure bonds would add an additional $1.3 billion in new tax revenue, so after 18 years, the annual contribution to deficit reduction from this change would be $24 billion. It might be politically smart for Gingrich & Co. to nick wealthy bond buyers to this extent, while they are hacking away at overgrown social welfare programs.

Both types of privatization--selling off federal assets and enterprises and encouraging the privatization of state and local infrastructure--share the virtues of improving the economic performance of the entity in question while contributing seriously toward achieving a balanced federal budget. These virtues, in turn, are held dear by New Democrat types as well as by New Paradigm Republicans. Hence, privatization may finally have found political champions in Washington.

The Power Crisis

info@reason.com (Robert Poole) — Mon, 01 Feb 1971 00:00:00 EST

"The number one problem facing electric utilities in the cold months ahead is getting adequate supplies of coal, oil, and natural gas."
- David S. Freeman, director of the White House Energy Policy Staff, quoted in BusinessWeek, October 3, 1970

"No homes are going to be without gas or fuel."
- Paul McCracken, chairman of the President's Council of Economic Advisors, quoted in the Los Angeles Times, October 11, 1970

"Fuel oil and coal rationing and price controls were urged by the American Public Power Association in a letter to President Nixon last week."
- Alex Radin, general manager of the association, quoted in Chemical and Engineering News, Sept. 7, 1970. Radin also called for antitrust action against the 'concentration of ownership of competing fuels' and suggested an embargo on coal export.

As blackouts and brownouts occur with increasing regularity, as fuel prices suddenly shoot skyward, as winter takes its toll of the poor and aged who cannot heat their homes because there is no fuel - it is small comfort to listen to the anxious promises of bureaucrats and the strident demands of lobbyists for price controls, rationing, and other forms of coercive intervention. One does not look to political rhetoric for explanations or analysis; to determine the source of the power crisis requires an inquiry into the economic and political context of the market for power and for its ultimate source, fuel.

A major theorem of free-market analysis is that coercive interventions in the marketplace- whether by restrictions on supply, demand, or prices - inevitably produce shortages and/or surpluses. This is so because in the dynamic process of price determination, supply and demand are continually readjusted so as to be in balance at the free market price. When government interferes with part of this process, the remainder continues to operate as if conditions were normal. If the government enforces a price ceiling on a product, demand for the product will still be a function of its price, but because of the artificially low price, consumption will increase. Unless the fixed price is fixed high enough to afford the producer a good profit, he will have little incentive to expand. Hence, a shortage of the product will develop. In the same fashion, price floors (e.g. farm price supports) tend to produce surpluses.

The power crisis now facing this country consists in a peculiarly interlocked group of shortages, not only of electrical generating capacity but also of every major fuel supply. Behind these shortages lies a system of controls and interventions which not only have failed individually to achieve their intended purposes but have also worked at cross-purposes with one another. I n short, if one wished to wreak havoc in the field of power generation, it would be difficult to design a system that would succeed better than the current patchwork of interventions.

The ultimate source of power - whether for heating or for electricity - is fuel. The four primary types of fuel in use today are coal, oil, natural gas, and uranium (for nuclear power plants). Nuclear power plants provide less than 1% of the nation's total electricity and there is no shortage (at present) of uranium; for a variety of reasons, however, a number of nuclear power plants which were expected to be in operation by this time have been delayed, often by several years. Thus, although the delay in nuclear plants contributes to the power shortage, it is not in itself a part of the fuel shortage. It has contributed to the problem because electric utility officials, not anticipating the delays, were counting on the increased nuclear capacity and, consequently, did not pay sufficient attention to assuring adequate supplies of coal, oil, and gas for the current season. The major shortages of these three fuels are being blamed by the utility companies.

The causes are more complex than that, however, as an examination of the fuel market demonstrates. I n recent years, both because of anti-pollution regulations and because of its relatively low cost, clean-burning natural gas has become an increasingly popular fuel. In order to protect consumers from the perils of capitalism, however, the Federal Power Commission ( FPC) regulates natural gas pricing. In the 1950'sthe FPC made a vain attempt to regulate individual producers, on a case-by-case basis. Even the federal bureaucracy recognizes some limits on the amount of paperwork which can possibly be handled; therefore, in the 60's, the Commission switched to regulation by geographical area. Even so, the injection of politics into the pricing process resulted in an administrative nightmare. The criterion for setting prices was supposed to be based, not on what the consumer's demand indicated (the market price), but rather on what the political process determined was a "fair" return for the producer, regardless of demand. As a political process, the rate decisions were often challenged in court by one faction or another, who differed on the definition of "fair". The court cases often took several years, and when a previously-set price was eventually ruled "excessive," the producer was ordered to pay huge refunds.

The combined effect of lower than-market prices and the continual threat of court-ordered refunds, needless to say, has had a powerful disincentive effect on the producers' desire to explore and develop new sources of natural gas. At the same time, the lower-than-market prices provided a strong stimulus to demand for natural gas, since as time went on it became a relatively cheaper and cheaper fuel. The final straw was provided by the money market of 1969 and 1970; with interest rates at 9 and 10%, gas producers could frequently earn a much better return on their money by investing it, rather than spending it on bringing in new sources of gas. Thus, fall and winter of 1970 found many of the pipeline companies and utilities unable to buy sufficient gas from the producers- the latter simply were not producing at the old fixed price. It should be pointed out that as of now there is no actual shortage of natural gas supplies; known reserves (i.e., neglecting all probable but unconfirmed sources) are sufficient for many years. It is just that there is no reason for producers to bring it to market at current prices.

The FPC is finally beginning to bestir itself and admit that something is wrong with its position; it has cautiously proposed exempting small producers from price regulation and has talked about granting large producers a 5 cent per 1000 cu. ft. increase (on new-well gas only). Industry economists estimate that the free-market price would currently be about 10 cents above the current average price of 40 cents per 1000 cu. ft. Thus, the FPC's moves are only a minor step, applying to only a fraction of the market; further, they leave unchanged the basic principle that the government, rather than the market, should determine the price. In that the Commission only invites further shortages. Pipeline companies are taking what few steps they can to obtain more gas.

Several are planning to import liquified natural gas (LNG) from Algeria and Venezuela, although the first small amounts will not be available until late 1971. The price of the imported LNG is expected to be between 65 and 70 cents per 1000 cu. ft. - another indication of how far out of line the current 40 cents price is. Pipeline and utility companies presumably have enough demand for gas to be willing to pay such a price by next winter. If the past is any guide, the shortages will probably be worse by then.

Oil production is probably more entangled in politics than any other industry. Although a complete analysis is beyond the scope of this article, the salient points concerning regulation of supply and pricing can be summarized briefly. The U.S. oil market is divided between the thirty "majors" - large international oil producers - and some 15,000 "independents" - small and medium-sized domestic producers. The federal government controls the market by setting oil import quotas and regulating interstate oil shipments, while the state governments set monthly production quotas. With this type of politico-economic structure, the lobbying aims of the majors and the independents are somewhat different. The majors tend to oppose import quotas and assistance to Israel; they have a stake in Arab oil and want to ensure that they can continue to obtain it and sell it in the U.S. The independents, by contrast, "count amongst Israel's best friends…and they are careful always to advocate a policy which will prevent the flow of Arab oil from endangering their industry, wealth, and future" (from Survival, June 1970). They consequently favor strict import quotas.

The President's Task Force on Oil Imports found that import quotas, by restricting imports to 12.5 percent of U.S. consumption, drive up the price of oil from a free market level of $2.24 per barrel to about $3.90 per barrel. Put another way, the Task Force estimated that American consumers last year paid about $5 billion more for oil products than they would have in the absence of import restrictions. Thus, the widespread complaints by users- both individual consumers and utilities- about the high price of oil supplies, is largely a result of the quota system. In addition, the state regulatory agencies, such as the Texas Railroad Commission, set monthly oil production quotas for the industry, at a certain percentage of the wells' maximum production rate (e.g., for September 1969 the Texas quota was set at 3,354,696 barrels per day - 53.7 percent of the wells' ability to produce). The effect of such quotas ( another cozy arrangement between the government and the producers) is to restrict the supply in order to support the artificially high price level. The quotas thereby prevent "destructive competition" between producers, in response to the high demand by consumers and utilities.

Once more, the regulations contribute to the non-market high price and short supply. There is an abundance of oil, both in the U.S. and abroad (not only in the Middle East but also in Canada, Latin America, Indonesia, etc.) Foreign oil prices are generally about half of U.S. prices and are generally trending downward, while U.S. prices continue to increase. (As this is written, the foreign oil price is temporarily inflated by the tanker shortage caused by the Middle East war. This is only a minor exception to the general trend, although it does exacerbate the current supply problems.)

It is massive political interference with the market that gives the illusion of shortages to the U.S. consumer.

The final major fuel is coal. Historically, coal has been the cheap-and-dirty fuel that was always around in sufficient supply to take up the slack when oil or gas was in short supply. Several years ago, the utilities took coal so much for granted, as they counted on increased nuclear generating capacity (which did not materialize), that they neglected to make long-term commitments to assure a sufficient reserve of coal. Meanwhile, Japan's booming economy resulted in a huge demand (and consequently a high willingness to pay) for coal, which Japanese firms secured via long-term contracts with U.S. producers. As a result, all across the U.S., coal stockpiles are dwindling. The TVA, which normally maintains a 75 to 90-day stockpile, was down to 25 days last winter and 11 days worth this winter. Many utilities and other firms are fearful of having to shut down completely for lack of coal.

Actually, the coal shortage would be nowhere near as severe were it not for the Interstate Commerce Commission. For in fact, as with natural gas, there is actually enough coal to go around, if only it could be delivered to the users fast enough. Nearly all coal is shipped by rail in hopper cars. Years ago the railroads worked out extensive contractual agreements allowing interchange of cars between railroads; it is so much more convenient for railroads to accept and transport loaded cars from connecting railroads (rather than transferring the load to one of their own cars) that they are willing to pay a daily charge to the owning railroad for each day's use of its cars. The value of this privilege fluctuates over time, depending on the demand for freight cars in a particular region; however, the ICC, in order to prevent "profiteering", fixes the price - called the demurrage charge - and seldom changes it.

For the past several years the demurrage charge has been far below the market level for hopper cars, and as a result, severe shortage of hoppers have developed in parts of the country. Railroads near ports serving the export market gladly paid the low price for hanging onto a large supply of other roads' cars - and their owners were powerless to change things. Only in October 1970 did the ICC finally wake up to the reality of the coal shortage - at which point it abruptly doubled the demurrage charge. (So much for the chaotic free market vs. orderly government control.)

Thus, in the case of every major fuel the picture is much the same; apparent shortages exist primarily because of government interference in the market. In the face of such evidence, the response of politicians and statist lobbyists can be seen for the power-seeking demagoguery that it really is Senator Philip Hart recently asked the Federal Trade Commission to investigate the gas producers' request for higher prices, charging that producers are "withholding" gas supplies! Of course they are, as the preceding analysis has pointed out— the producers exist to make a profit, not to sacrifice themselves by producing at below-market rates. The American Public Power Association - a lobby group representing 1400 government-owned utilities - has called for price controls, rationing, an embargo on exports, and antitrust action against fuel producers all in the name of solving the problem brought about by such interventions. Some people just do not learn!

The actual solution should be clear from the foregoing analysis. The market mechanism must be allowed to regain control of fuel pricing; otherwise, the shortages of the last few years will continue to intensify, especially if shortsighted cures such as rationing and price-controls are enacted. But beyond the fuel market, what might be said of the utilities, whose incredible lack of planning and foresight has certainly contributed its share to the present crisis?

The sad fact is that the electric utilities constitute one of those uniquely American hybrids: franchised private enterprise (which translates as monopoly, pure and simple). Conventional wisdom holds that utilities are natural monopolies, and that for this reason they should be either government-owned or government-regulated. Yet this contention is a gross oversimplification, as a number of economists have recently pointed out. As Stigler and Friedland put it in the Journal of Law and Economics in October 1962, "the individual utility system is not possessed of any large amount of long nun monopoly power. It faces the competition of other energy sources in a large proportion of its product's uses, and it faces the competition of other utility systems, to which in the long run its industrial (and hence many of its domestic) users may move."

The first of these points can be illustrated by the growth of total energy systems in shopping centers, schools, and apartment buildings. In such systems, natural gas or kerosene is used to power a gas turbine generator which produces the building's electricity on-site; the exhaust heat is recycled and used to provide heating or air conditioning, depending on the season of the year. Such systems are directly competitive with commercial electric power in many parts of the country. Competition between two electric utility systems (the second point above) is quite conceivable, much as there used to be between telephone companies before government franchises became the rule. Manis has described such a case, as follows:

"Companies may send representatives to selected adjacent areas served by competitors. if they could offer better service and/or prices, they could get residents to sign contracts agreeing to take their service for a period of time at stipulated prices if the company builds into the area and offers the service. They can go to the existing company and indicate that they have the contracts and intend to provide service. It will then pay the existing firm to sell their equipment in the area and make something on it, rather than have it become completely useless. This could also be done by individuals without an existing company."

Thus, it is perfectly feasible to have competition in providing electricity or any other utility service, thereby making regulatory rate-setting commissions unnecessary. Those who argue for government regulation of utilities are quick to conjure up straw-man pictures of evil capitalists, but slow to admit the hidden costs of the monopolies such regulation fosters. An article in Fortune recently described the electric utility industry as "clumsy" and "sluggish" and stated categorically that "utility executives are generally unimaginative men, grown complacent on private monopoly and regulated profits."10 Despite being the biggest industry in the U.S., with assets of over $75 billion, and net income of over $3 billion, the electric power industry spends less than one quarter of one percent on research and development. Small wonder, then, that it failed to forecast the current demand for service, the technical problems of nuclear power development, the current fuel shortages, and the growing concern over pollution.

When profits are not guaranteed by public regulatory commissions, but must be earned by good service, companies have a large incentive to forecast correctly, to innovate, and to invest in R & D. Similarly, when the fuel market is unrestricted by coercive price controls and import-export restrictions, the free operation of the price system provides vital feedback on the state of the market for energy sources - allowing long-term decisions to be made accurately. The dead hand of regulation is a death-grip for any industry, and the sooner the fuel and electric power industries shake it off, the better off (and warmer) we'll all be.