The Curious Politics of Deregulation
A few words in praise of Edward Kennedy
The problems of our economy have occurred not as an outgrowth of laissez-faire, unbridled competition. They have occurred under the guidance of federal agencies, under the umbrella of federal regulations.
Edward Kennedy actually said that. It was early in the morning on a cold December day in 1975; his face was florid; he drank two glasses of water waiting for his introduction; he read from a prepared text. But, still, he said it, and one can argue very plausibly that his attempts in the last two years to introduce competition into federally regulated industries have been more effective than those made by just about anyone else in Washington.
This may come as a surprise to those who believe that liberal politicians pose an inherent danger to the free market. And, if the truth be known, little in Senator Kennedy's background would cause one to suspect him of harboring latent free-market, antiregulation tendencies. His apparent conversion to the virtues of competition, however, and his actions in implementing his new-found beliefs offer interesting insights into the practical side of the politics of deregulation.
The political framework for deregulation is easier to understand when you realize that there are seldom any viable economic arguments justifying government regulation of any industry. Moreover, consumers never benefit from regulation. They only pay for it. The litany is so familiar that now the government even points a finger at itself. Justice Department and Federal Trade Commission economists estimate that federal regulation of milk prices costs consumers almost a billion dollars a year more than if competitive conditions prevailed. The President's Council of Economic Advisors has estimated that airline price regulation by the Civil Aeronautics Board (CAB) costs consumers an extra $365 million.
If one analyzes these twin qualities of regulation—lack of economic justification and higher consumer costs—it is easy to identify the major political forces responsible for regulation. Businesses that have been removed from the free market and placed in the control of political decision makers have had the greatest economic interest in initially supporting regulation and, likewise, have the greatest interest in opposing deregulation.
In this context, Roy Child's observation in "Big Business and the Rise of American Statism" is worth recalling: "To a large degree it has been and remains big businessmen who are the fountainheads of American statism. If libertarians are seeking allies in their struggle for liberty, then I suggest that they look elsewhere.…Liberals should…reexamine their own premises about the market and regulation. Specifically, they might reconsider the nature of a free market, and ponder on the question of why big business has been opposed to precisely that. Isn't it odd that the interests of liberals and key big businessmen have always coincided?" (In The Libertarian Alternative, ed. Tibor R. Machan).
Edward Kennedy, to name one liberal, has apparently found this coincidence curious and has, if only to a limited extent, reexamined his own premises regarding the market and regulation. In the process, he has become increasingly critical of the New Deal cartels: "The same federal regulations which they put in place to free the public of the economic tribulations of [their times] must not be allowed to stifle the healthy forces of the market place in ours. With milk products as with air travel, the watchful eyes of price competition and consumer demand may well be better regulators than a handful of civil servants in Washington."
Kennedy is no free-market zealot and doesn't pretend to be (witness his opposition to natural-gas deregulation). But, as of this writing, he is close to achieving a partial deregulation of the airline industry, one of the major New Deal cartels. It is an accomplishment that, if successful, could serve as a precedent for future deregulation efforts. Also, the struggle Kennedy has led for airline deregulation illustrates the types of political forces opposed to deregulation and coalitions that can be utilized to overcome these forces.
Airline deregulation had its formal start in the summer of 1974, when Kennedy decided to hold hearings on the effect of government regulation on the cost of living. Kennedy perhaps viewed this as a consumer-oriented subject that might help divert attention from the real causes of inflation. Even so, government regulation is scarcely a narrow topic. Why pick on the airlines? While Kennedy has not stated publicly why he chose airlines, a Teamster lobbyist suggested in the February 1977 Fortune magazine that Kennedy focused on the airlines (rather than, say, the trucking industry) because its defenders and lobbyists were nowhere near as politically powerful as the highway trust and the Teamsters.
Whatever his reasons, Kennedy held ten days of hearings on the airline industry in late 1974 and early 1975. The witnesses were many and varied—Ford administration officials, liberal Democrats, conservatives, consumer groups, and economists. No one defended airline regulation except the airlines themselves and their unions, who had likewise grown plump and prosperous at the public's expense (airline workers have an average annual income of more than $18,500, the highest for any single industry in the country).
FACT AND MYTH
Kennedy himself summarized the findings of his hearings in the speech mentioned earlier, which he gave in December 1975.
"A central question running throughout our hearings was, why haven't American consumers been provided the choice of low-cost air service as an alternative to the high-priced service now available.
"In addressing this question, we tried to separate fact from myth, and that was the biggest challenge of all.
"We were told by industry spokesmen that airline regulation was first imposed by Congress to overcome the destructive cutthroat competition which had prevented development of a unified, dependable network of air service previously.
"Yet our own review of both legislative history of the Federal Aviation Act and economic history of the industry revealed that Congress passed that law in response to growing industry concentration and financial losses which were caused not by competition but by the way in which the federal mail subsidy program had been administered up to that time.
"We were told that in a competitive environment airlines would be unable to generate excess profits on some major routes to support unprofitable service to small communities, and thus economic development of many parts of our country would be impaired.
"Yet when I asked each airline to provide a list of the communities that would lose service in a competitive environment, only the most feeble response was forthcoming. It turns out that, at most, only a small handful of routes—representing only a half of one percent of airline business—would be lost. And even those could be maintained by a modest expansion of our existing federal subsidy system.
"We were told that intrastate carriers in Texas and California offer service at down to half the cost of similar flights in the East because of such factors as weather, passenger volume, delays, labor costs, and others.
"Yet in our hearings we compared these factors in great detail and determined that there was really only one factor which explained the difference between the approximately $20 Los Angeles-San Francisco fare and the $45 Washington-Boston fare: federal regulation of interstate carriers.
"In short, once the myths were dispelled, we found that federal economic regulation of the airlines is responsible for stifling price competition, maintaining most air fares at excessively high levels, and costing consumers anywhere from one to 3.5 billion dollars every year. We also learned that neither small communities nor airline companies themselves benefit in any real economic sense from federal regulation. Instead, costs go to pay for hundreds of half-empty planes flying around the country.
"Airline regulation thus presents a classic examine of the high cost we pay in the 1970's for slavishly pursuing the imagined benefits seen from classical price and profit regulation in the past."
Unfortunately, on his way to making honest businessmen out of Frank Borman and his brothers, Kennedy encountered some trouble. Specifically, Kennedy held hearings before the Administrative Practices and Procedures Subcommittee of the Senate Judiciary Committee, which unfortunately had no legislative jurisdiction over the CAB. That jurisdiction resides in the Aviation Subcommittee of the Senate Commerce Committee, chaired by Senator Howard Cannon of Nevada. It is fair to say, based upon an unusual public exchange of letters between the two (in which Cannon accused Kennedy of interfering with the business of his subcommittee), that Cannon was less than pleased with Kennedy's new-found devotion to the virtues of competition. Despite Cannon's displeasure, however, he was eventually forced to take action on his own after Kennedy had introduced an airline deregulation bill and President Ford had submitted his own bill to Congress in October 1975. Senator Cannon's hearings on the subject were held in 1976, and thereafter he introduced his own deregulation proposal.
Of these three airline deregulation bills, Kennedy's was the most far-reaching. It would have established, after four years explicitly unlimited freedom of entry into the industry and into routes, while Cannon's and Ford's bills retained varying degrees of restriction on entry.
After Carter's election, Kennedy and Cannon made their peace and introduced a single bill which, predictably, was a watered-down version of Kennedy's original bill.
• It would allow the five largest airlines—American, Delta, Eastern, TWA, and United—annually to add one new route of less than 2,000 miles without CAB approval.
• All other airlines would be allowed annually to add four routes without CAB approval so long as each airline's additional mileage did not exceed 4,000 miles.
• If any two airlines wanted the same route, the CAB would be required to favor the smaller airline.
• If an airline wished to drop service on a route, it could do so with three months' notice, although the CAB would have the authority to require service to continue for an additional year in order to find a new carrier.
• Airlines would be allowed to raise their rates 10 percent a year during the first two years after the passage of the bill and 20 percent a year thereafter, all without CAB approval.
• Airlines would be allowed to lower their fares to the level of their direct costs without CAB approval.
• Any airline would be allowed to start a new route in any market where an existing airline was not exercising its certificate of authority.
• The CAB would no longer have any authority over airline mergers.
The Carter administration subsequently endorsed the Kennedy-Cannon bill even though its Transportation Secretary, Brock Adams, is on record as supporting the existing regulation of airlines as a "public utility."
The opposition to the Kennedy-Cannon bill is the same as Kennedy encountered in his original hearings—the companies and unions who have grown fat at the public's expense. Company flacks are claiming it is an "antilabor bill" that will ground 300 to 500 planes, resulting in a direct loss of 29,000 jobs. The AFL-CIO opposes the bill, as does the International Association of Machinists and the Airline Pilots Association. The Wall Street Journal (April 19, 1977) reported the AFL-CIO's claim that the bill would "adversely affect the stability of the air transport industry and the job security of over 300,000 airline employees.…While carriers experiment with routes, points and markets, the employees suffer." And the president of the Airline Pilots Association has stated that "the main thrust of the bill is lower labor costs, an anti-labor piece of legislation."
The airlines generally are reacting to the Kennedy-Cannon bill much as you would expect from someone whose free meal ticket is in danger of being revoked. They claim that under deregulation, airlines trying to hold on to their present market shares will lower fares without appreciably increasing passengers, thus eroding earnings. They further claim that flights now supposedly losing money—mostly those going to smaller airports—will be dropped. The Air Transport Association trots forth a computer simulation showing that 1,198 routes would be vulnerable to abandonment if federal subsidies end. "No matter what the deregulation advocates say, we cross-subsidize on our route structures," states a spokesman from Eastern Airlines (Business Week, March 21, 1977). This cross-subsidization claim is hardly persuasive. According to Fortune (February 1977), Eastern Airlines' own study shows, for example, that its Louisville to New York route is subsidizing vacationers on its Antigua to St. Maarten flight. Regulation can be beautiful.
The united front of the air industry's establishment has been shattered by United Airlines' tentative support of the Kennedy-Cannon bill. United stated that it favors increased fare flexibility and a gradual relaxation of CAB control over entry into the markets. A United spokesman was quoted in Business Week as saying, "This can provide airline companies with the leeway for using their managerial skills and selling techniques to benefit the consumer and the companies." This position, needless to say, didn't go over well with United's competitors. Morton Erlich, senior vice-president of Eastern Airlines, says that United's position "is designed to maximize United's market share. It is extremely self-serving." Maximizing market shares is obviously not the way the game is played in the airline cartel.
It is uncertain how the Kennedy-Cannon bill will fare, although it is expected to pass the Senate. More trouble is anticipated in the House, and the fate of the bill there may depend in large part upon the strength of labor's opposition and the extent to which the Carter administration actively supports the measure.
Given the comparatively narrow political power of the forces in opposition, therefore, airline deregulation shows good promise for success. On the other hand, efforts to deregulate the trucking industry provide a good example of how a politically powerful regulated industry successfully defends itself. Deregulation of trucking is hardly spoken of in this session of Congress. Yet over a year ago, it was a major issue. The lead article in the June 13, 1976, Business and Finance Section of the Sunday New York Times commenced with the ominous phrase: "A spectre is haunting the nation's trucking establishment—the spectre of laissez-faire capitalism."
It was hardly that. The Ford administration's Motor Carrier Reform Act, introduced in November 1975 (a month after Ford submitted his airline deregulation bill), was a relatively modest effort as far as deregulation proposals go—less radical, for example, than Kennedy's airline deregulation bill. Ford's bill called for liberalized entry into the trucking and bus industries by establishing a simplified set of criteria of public convenience and necessity for entry, expediting procedural requirements, and providing for phased-in price flexibility for motor carrier rates.
Despite the modest nature of the proposal, the trucking industry and the Teamsters reacted as if Ford had actually proposed a resort to laissez-faire capitalism.
"We've lived through deregulation and it was chaos. We don't want to go through that again. Regulations buy stability," declared the president-elect of the American Trucking Associations. The chairman of the same group (and of Transcon Lines) commented similarly: "I have built a career in transportation, I'll be darned if I am going to stand by quietly and watch a bunch of academic theorists who have never operated a truck, or even a forklift, or made out a bill of lading, or arranged for a shipment of any kind, bring the whole thing tumbling down over my ears." (Fortune, February 1977)
The essence of the opposition to the Ford bill was capsulized by that bastion of capitalism, the U.S. Chamber of Commerce, whose director of transportation, C. Budd Faught, stated, "We support market forces but there is a need for continuity. [Deregulation] could open the trucking industry to anyone who could afford to buy a truck and afford to operate it."
Precisely! It could. But Ford's bill didn't even come close to that. Nevertheless, it died with his administration; the Carter administration has shown no real inclination to pick up the ball; and, now that Mike Mansfield has retired, no Democratic Senate leaders appear ready to take his place. Indeed, Mansfield's successor as Senate Majority Leader, Robert Byrd, cosponsored a bill with Senator Percy of Illinois in the last Congress which had the support of the Chamber of Commerce and the American Trucking Associations and called for no deregulation of trucking pending yet another major federal study of the industry.
As for Senator Kennedy, he obviously will not take on more than one regulated industry at a time. After all, he had a chance in 1974 to confront the truckers and chose the airlines instead. As the New York Times (June 13, 1976) quoted the Senator on the political expedience of deregulation, "You're making real enemies today for potential friends tomorrow." Also, there are only so many times you can poach on another committee's jurisdiction, as Kennedy did with the airlines, without injuring your standing as a member of the Senate's establishment.
Senator Kennedy's devotion to competitive market principles, however, has not been limited to his efforts against the less than politically powerful airlines and their unions. In 1975, Kennedy advanced a proposal so sweeping in its potential effect as to strike fear in the hearts of every federal regulatory agency as well as the businessmen and unions hovering under their protection. The bill, which Kennedy initially introduced in 1975 and had reported out of the Senate Judiciary Committee in 1976, was the Competition Improvements Act of 1976 (S. 2028). It deserves far more popular attention than it has received.
In essence, the act would require that federal agencies (including such staunch defenders of the public interest as the Interstate Commerce Commission, the Federal Power Commission, the Federal Communications Commission, the Civil Aeronautics Board, the Federal Maritime Commission, and the Nuclear Regulatory Commission) refrain from taking any action the effect of which may be substantially to lessen competition or to create a monopoly, unless the agency first specifically finds that:
• The action is necessary to accomplish "an overriding statutory purpose of the agency."
• The anticompetitive effects of the proposed action are clearly outweighed by significant and demonstrable benefits to the general public.
• The objectives cannot be substantially accomplished by alternative means having lesser anticompetitive effects.
The actions of agencies failing to make such findings or to prove that substantial evidence exists in the record for these findings would be subject to reversal by federal courts, pursuant to the appeal provisions of the Federal Administrative Procedure Act. The specific purpose of S. 2028, therefore, was forcibly to require federal agencies to promote competition and to bear the burden of justifying themselves in court if their actions failed to do so.
Kennedy outlined his perception of the problem in his statement introducing the bill: "It is now apparent to Congress, the President, and the American people that the regulatory agencies, by and large, are not discharging their responsibilities consistent with our fundamental national dedication to a competitive economy. Regulatory agencies often stifle or restrict competition more than they foster it. Rather than serving the public, regulatory agencies have become the servants of the industries they are supposed to regulate—they often appear to be far more concerned about the profits of the corporations they regulate than the pocketbooks of the consumers they are supposed to serve."
Kennedy's original bill was far more radical than the one eventually reported out of the Judiciary Committee. It would have required separate competitive impact statements to accompany all agency actions and legislative proposals, permitted standing in court to any citizen to seek judicial review of any agency action that did not meet the competitive requirements of the act, and required U.S. District Courts to review the agencies' actions de novo, with the burden of proof being on the agency to establish that it had met the standards set by the act.
A PRAGMATIC ALLY
Kennedy's bill was a conscious effort to bring the benefits of antitrust enforcement, competition, and the free market to their antithesis—the regulatory agencies. It was an explicit rejection of the superficial reasons behind the creation of the regulatory agencies: that the competitive forces of the free market are incapable of serving the public interest.
There is immense political significance when Edward Kennedy attacks such sacred cows as the New Deal-style regulatory agencies and says that "the healthy forces of the market place" can do a better job. For better or worse, Kennedy will never be just another politician. He has more influence in the Senate than his brothers ever did, and few senators today can rival that influence. In 1976 he sat on 5 full committees and 22 subcommittees—more than any other senator. He was chairman of 4 subcommittees. He had over 60 staff people—personal staff and subcommittee staff-working for him.
Journalist Laurence Leamer in his book Playing for Keeps in Washington describes Kennedy as an institutional absurdity because of the myriad issues, bills, hearings, and meetings he must deal with on a daily basis. Leamer suggests in this approach an inherent carelessness that allows Kennedy to monopolize issues and give them high visibility without making any original contributions himself. Kennedy, however, sees nothing wrong with this. He pictures himself as a generalist and admits that he will never know all the details of any issues he addresses. He finds trusted staff persons to work out the details, and he then makes broad policy decisions.
Why did Kennedy take on the New Deal? The way he operates as a senator is one explanation. He seems compelled to address himself to as many issues as his staff can competently handle. The New Deal cartels are inherently anticonsumer, and Kennedy's staff people, always searching for new issues, obviously recognized this. Ralph Nader may believe more regulation is the best cure for cartels, but Kennedy can ignore a Nader in a way other senators cannot. He can listen to the facts and agree with his staffs conclusions that competition ultimately benefits consumers. And if Kennedy's support for market forces is essentially pragmatic and not principled (probably a safe conclusion), then better a pragmatic ally like Kennedy to move toward deregulation, however modest the steps, than those conservative senators who profess to believe that half a loaf is worse than none.
Consider, for example, the opposition to the Kennedy Competition Improvements bill in the Judiciary Committee. It came principally from conservative Republican Senators Roman Hruska, Strom Thurmond, and William Scott, all of whom—to judge by their minority views expressed in the committee report—were suffering, at best, from an advanced case of political naivete and, at worst, from hypocrisy. Their basic objection was that the act was "deregulation through the back door" and that Congress ought to have the courage to tackle deregulation head-on.
Specifically, in commenting upon the testimony of Allen Ferguson, president of the Public Interest Economics Center, the Republican Senators accused Ferguson of harboring the heretical notion "that Congress does not have the courage to enact what Mr. Ferguson believes to be the wiser course: deregulation of the transportation industries.…Is this not raising political pragmatism to the height of expediency?…Would it not be better to determine whether the Congress will be as timid as Mr. Ferguson appears to assume.…Is it wise to pass second best legislation that will bog down the courts in litigation before it is demonstrated that the Congress lacks the wisdom, capacity and vision to pass legislation that is truly in the public interest? We do not happen to share such a denigrating view of the U.S. Congress."
Maybe this is why Senators Hruska, Thurmond, et al. are in a minority—most other people do have such a view of Congress.
Not content, however, with making fools of themselves by suggesting that Congress possibly possesses the requisite wisdom, capacity, etc., the three Republican Senators go on to offer an apologia for the political cowardice of their colleagues. "Would it not be more efficient for the Congress simply to deregulate…? If it is argued instead that political reality prevents passage of the more efficient legislation, it must be concluded the supporters of S. 2028 are counting on fooling those people who would—successfully—oppose enactment of the superior legislation.…We do not believe it wise to pass second best legislation on the premise that it is the only means available to sneak desired objectives past an unsuspecting public."
Nonsense like this is political sophistry at best. But it does lead to a conclusion of sorts and provides a framework for suggesting why legislation like Kennedy's Competition Improvements Act of 1976 possibly offers an approach to wide-scale deregulation more politically promising than the traditional industry-by-industry approach. It is not so much a question, as the three conservative Senators claim, of deceiving people who would oppose specific deregulation or sneaking objectives past an unsuspecting public. Rather, it is a question of neutralizing the immense power of the regulatory lobbies—the kind of power that crushed Ford's Motor Carrier Reform Act and kept it from ever reaching the floor of Congress. Antitrust laws and competition are politically popular code words. People want antitrust laws enforced. Why not use them where they can accomplish some good for a change—in the government's own regulatory agencies. A broad approach like that of the Competition Improvements Act makes this possible while providing a less attractive political target for the regulatory lobbies.
Pure deregulation may never come on an industry-by-industry basis. Look at the most Kennedy was able to achieve against the politically weak airline industry. Look at how timid a bill Ford failed to have enacted over the opposition of the trucking industry. It is more difficult to lobby against general principles of competition and antitrust enforcement than against specific legislative proposals directly affecting a specific federal agency, a specific regulated industry, and a specific group of union employees. When considering deregulation of a particular industry, legislatures are always going to make compromises for political reasons. A general measure like the Competition Improvements Act, however, will eventually have courts—not politicians—making specific, sometimes unpopular, decisions on the application to regulated industries of general antitrust and competitive principles.
All this is not to suggest that the Competition Improvements Act is an adequate substitute for serious deregulation. It does not, however, foreclose radical deregulation. It does throw the monkey wrench of competition into the machinery of government regulation. It does offer the possibility of politically acceptable change. We could fare worse.
Michael McMenamin is a partner in a Cleveland law firm. His expose of milk money in government appeared in the March 1976 REASON. Copyright © 1977 by Michael McMenamin