"We've tried deregulation, and it doesn't work," proclaimed Bill Arnett, owner of Yellow Cab of Phoenix. He was speaking to Arizona's House Transportation Committee in early 1983—before Arizona's deregulation of intrastate motor carriers had been in effect even for a year.
Arnett's firm conclusion, often repeated by deregulation critics, was supported by no specific evidence of any kind. Though deregulation opponents often refer vaguely to "unreasonable" taxicab fares, there are no data giving flesh to this claim. Insubstantial as the charge of unreasonable fares is, this alleged consequence of deregulation is mild compared to the prederegulation forecasts of rising incidences of rape and murder that would accompany the abandonment of regulation.
Impartial observers might view this condemnation of deregulation as an unduly hasty conclusion. After all, regulation had been "tried" for over 60 years. Since 1921, when Arizona's regulatory body, the Corporation Commission, ordered an operator of an unscheduled limousine-type service to charge no less than 140 percent of the fares charged by scheduled carriers—and a court upheld the order—Arizona had suffered under the most restrictive transportation control in the nation.
Despite the state constitution's explicit language pledging that monopolies "shall never be allowed in this State," regulators coddled the motor carrier industry with a rigidly controlled system that guaranteed virtual monopoly positions for approved carriers. Arizona's regulatory regime was comprehensive: all motor vehicles transporting freight or passengers for compensation were subject to regulation. The fundamental issue, in any case, is the same, regardless of the type of service provided—namely, should people be free to exercise choice or not? The rationale for enforcing a pervasive monopoly system was to "prevent unnecessary duplication of service." This the state did with stolid dedication, even to the point of absurdity.
A 1966 state supreme court decision demonstrates the absurdity of Arizona's regulatory scheme. The court case had its origin in 1948, when a firm proposed to establish a door-to-door refrigerated-van service to various points in Arizona. Even though no licensed carriers provided such a service, a number of them protested the new firm's application. Under Arizona law, carriers holding "territorial" operating rights had to be given the opportunity to provide any new service in their "territory."
The Corporation Commission, charged with the responsibility of enforcing the regulatory system, gave existing licensed carriers 60 days to initiate a refrigerated-van service. Then, after 60 days, the new firm's application was dismissed—on the grounds that the proposed refrigerated-van service was now being provided by existing operators! The would-be new firm, its marketing innovation expropriated, was sent packing.
By 1953, the carriers with territorial monopolies had discontinued refrigerated-van service. So the same firm that had originally proposed this type of service made a new application for operating authority. This time, the Corporation Commission, observing the lapse of refrigerated-van service, awarded an operating certificate. The existing licensed carriers sued, and after lengthy litigation the Arizona Supreme Court ruled in their favor in 1966.
Before new authority could be awarded under Arizona regulations, the court ruled, it had to be shown that existing carriers had refused to provide service, but their failure to do so was not proof of their refusal to serve. Before a new firm could be awarded operating rights, the court ruled, existing carriers had to be given another opportunity to provide the service. Thus, no matter how many times an existing carrier might allow a specific service to lapse, no matter how much dormant authority might exist, no new firm could be permitted into the market without the acquiescence of the existing carriers.
The inhibiting effects of this regulatory scheme are not difficult to perceive. Any person wishing to provide a new service was required to present, in detail, the whole proposed operation. The new applicant had to show a need for the service, thereby disclosing a potential market. Ability to serve had to be shown, thereby illustrating how this market might be served. After going to some expense to expose the profit potential of some new service, the new applicant would have no protection against the expropriation of his market idea and operating plan.
Given this absurd regulatory scheme, it is not surprising that poor motor carrier service was cited as a negative factor in a 1972 Batelle Memorial Institute report on Arizona's economic growth potential. And since state regulations applied to all motor carriers, including taxis, it is not surprising that in qualitative measures of taxi service, Phoenix came in dead last among a survey of 30 major metropolitan areas conducted in the early 70s.
In a more perfect world, a mere showing of the negative results of a government-mandated regulatory program might be enough to cause its demise. In the real world, though, such a showing is not enough. Indeed, in early 1983 an Ohio court ruling—reaffirming the state's authority to regulate prices of alcoholic beverages—stated that if a mere proof of negative outcome were sufficient to overturn government regulations, the government wouldn't be allowed to regulate any economic activity.
Costly, harmful government rules persist as they do because a small group of persons reaps some benefit, and although the benefit may be dwarfed by the costs, the costs are broadly dispersed. For example, before the interstate trucking industry had begun to be deregulated—in 1980—the total cost of the negative impacts of regulation outweighed the total benefits to the truckers by a 30-to-1 ratio (see my "Regulation of the Truckers, by the Truckers, for the Truckers," REASON, March 1979). At the same time, the benefit per regulated trucker outweighed the cost per victimized consumer by at least 400 to 1.
The beneficiaries of motor carrier regulation, though a minority, have powerful financial incentives to promote and preserve harmful government controls, and overcoming the influence of this minority requires persistent effort. For example, for several years prior to enactment of Arizona's motor carrier deregulation, Prof. Jonathan Rose, of the Arizona State University's law school, made almost annual appearances at the state legislature to testify in favor of deregulation. Staff employees at the Corporation Commission and the Arizona Department of Transportation conducted research and collected data for nearly two years before the deregulation bill passed. But meanwhile, various private-interest coalitions were bringing persuasive influence to bear on the legislative process, trying to block deregulation. Thus, though a deregulation bill was passed in 1979, and the law was to go into effect only if the voters reaffirmed it by referendum—which they did by a 2-to-1 margin—regulation defenders were able to postpone the legislation's effective date to July 1, 1982.
After years of struggle, Arizona's motor carriers were finally deregulated. And though opponents of deregulation vociferously predicted that chaos would ensue, no evidence of chaos has come to light. The minor disturbances that have arisen in Arizona's trucking industry have been protests over increased state and federal taxes on heavy vehicles. (At the same time that deregulation was enacted, Arizona implemented a new weight-distance tax aimed at collecting a larger share of highway-user taxes from heavy trucks. And in December 1982, Congress voted to raise the federal heavy-vehicle use tax, in phases, from $240 to $1,900 by January 1984). The unfortunate concurrent implementation of both deregulation and higher truck taxes in Arizona confounds attempts to evaluate the effects of the new market regime in motor carriage.
But there is no mystery surrounding the way regulatory restrictions generally affect motor carrier service and charges. So certain results of the removal of regulation can be predicted. In short, we would expect the quantity of service to increase and freight shipping charges to decrease. On the other hand, the simultaneous tax increase would put upward pressure on shipping charges. Moreover, we would expect the increased operating costs occasioned by the tax hike to restrain service expansion. Consequently, we could imagine that rates might go up and service decline, all because of the tax increase, but with deregulation taking the blame.
Yet the issue of deregulation fundamentally is one of freedom—entrepreneurs and consumers should be free of government interference in their voluntary economic activities. Still, it is fortunate for those who prize economic liberty that the overall effects of Arizona's motor carrier deregulation have been favorable. Indeed, in a survey conducted in November 1982, and published in January 1983, for the Arizona Department of Transportation, Profs. Richard Beilock and James Freeman, respectively of the universities of Florida and Kentucky, found that deregulation seemed to be producing the expected beneficial results. To carry out the survey, they sent a questionnaire to 160 carriers and 787 shippers and receivers in Arizona. Seventy-three carriers and 231 shippers and receivers returned the questionnaires.
No doubt, a survey of people's perceptions of the effects of deregulation will disappoint some people. Those quantitatively inclined would be more impressed by an index of freight charges or a measure of service capacity. But there are two key reasons for rejecting such an approach. First, assuming that a valid index could be compiled, there would be no way to segregate the various possible causes of changes in the index. Asking instead for an informed judgment on the part of users and providers helps to deal with the causation question.
Second, values are subjective. The valid measure of consumers' benefit is whether they are more or less satisfied with the value received as they themselves perceive it. Since an individual consumer purchases a complex mixture of services at varying prices, an aggregate statistic purporting to show an average price may be more misleading than we like to think: the trade-off between price and quality can be very subtle. It is by no means obvious, then, that an economist's classification and measurement of various grades of service at various prices is superior to consumers' own perceptions as a gauge of consumer benefit.
Of all the various forecasts of the effects of deregulation, Beilock and Freeman's survey most outstandingly confirms those concerning competition. According to the survey, taken nearly six months after the effective date of intrastate deregulation, overwhelming majorities among users and providers of trucking service perceived greater competition following decontrol. A ratio of 12 to 1 users thought competition had increased, and among providers, the ratio was nearly 8 to 1.
It could hardly be otherwise. Carriers have gone from a system in which only government-authorized operators could provide service, to one in which there are no restrictions on service or prices—any carrier may serve any shipper anywhere in the state, and all rates are left completely to the market.
Increased competition has manifested itself in new service offerings and in various rate discounts, practices unheard-of in the prior, regulated regime. Almost half—47 percent—of the surveyed users of trucking service reported that new carriers had solicited them with proposals to provide service, and 45 percent reported offers of rate discounts for selected shipments.
The effects of increased competition, however, have not been uniform. As would be expected, some areas of the market have experienced a greater response to the expanded freedoms. Thus, while nearly half of the surveyed shippers reported some discount offers, about two-thirds hadn't seen any significant overall change in rates. But among shippers who did perceive a general change in basic rates, those reporting a decline outnumbered, by more than 2 to 1, those reporting an increase.
It is in the assessment of deregulation's effect on rates that the confounding influences of increased truck taxes may be wreaking its havoc. Nearly two-thirds of the shippers and receivers responding to Beilock and Freeman's survey felt that the higher truck taxes had made freight charges higher than they would have been otherwise. Whether these higher taxes nullified any possible rate declines due to increased competition cannot be determined. But it is significant nonetheless that despite this tax hike, rates still appear to be somewhat lower on average.
Opponents of deregulation might concede that customers in the busy metropolitan areas would benefit from removal of controls. But people in small towns, these critics are wont to warn, would suffer. Government controls aid in the establishment of cross-subsidies (excess profits in urban markets with which carriers could subsidize unprofitable rural service). From an equity standpoint, the enforcement of monopoly profits from excess charges on urban shippers is reprehensible—why should urban users of motor carrier service subsidize rural users? Nonetheless, this cross-subsidy scheme was actually touted as a rationale for opposing deregulation.
As it turns out, Arizona's rural trucking-service users perceive almost as much benefit from deregulation as their urban counterparts. More than 60 percent of the rural shippers and receivers surveyed observed increased competition for freight. Almost 40 percent received offers of new service, and more than a third have been offered discounts from regular shipping rates. While more than 60 percent saw either no change or were uncertain of whether there had been a change in overall rates, a slight plurality of those who did see a change thought rates had come down.
Unsurprisingly, the prederegulation forecasts of the regulated carriers were not borne out. Far from being abandoned, small towns in Arizona have shared in the general beneficial effects of deregulation. More service seems to be available, sometimes at discount prices. Rates, instead of going through the roof, appear to be, if anything, somewhat lower than under the regulated system—again, in spite of a tax increase.
Well, say deregulation opponents, maybe the small towns do all right, but surely the small shippers must be hurting—without government controls, the big shippers can throw their weight around and get the best deals while the little guy suffers. Once again, however, the data show that the market provides better protection for everyone, including the little guy. While Beilock and Freeman's survey found that more big shippers perceived improvements under deregulation, many small shippers also gained from the removal of controls. Almost 40 percent received offers of new service, and more than a third were offered discounts. By a ratio of 10 to 1, those who saw a change in competition thought competition had increased. And of those who perceived an overall trend in rate changes under deregulation, more than twice as many saw rates declining as saw them rising.
As I noted earlier, motor carriers, too, perceived an increase in competition, and more than a third of those surveyed by Beilock and Freeman have changed the way in which they establish freight charges. Their favored new methods are (1) meeting the competition and (2) setting rates based on the cost of providing service. More than 40 percent of the surveyed carriers said that deregulation has led to lower freight charges. And, as might be expected, nearly two-thirds of them feel that deregulation has lowered their profits.
Just as shippers are a diverse group, so are truckers. And deregulation has not affected all carriers in the same way. Smaller carriers, for example, seem to be experiencing fewer negative impacts than larger carriers. And this runs counter to one of the purported justifications for regulation—the protection of the small carrier.
While more of the carriers surveyed said they would prefer a return to regulation than those preferring continued deregulation, there is an interesting divergence of opinion among subgroups. By a ratio of 3 to 1, unionized carriers who expressed a preference favored reregulation. But carriers who use independent owner-operators for providing service were evenly split on this issue. (One outspoken trucker, in responding to this issue on the survey, asserted that "truck regulation is stupid, costly, and unnecessary. All my experience in trucking has shown that the regulators know nothing about regulating.")
The positive results of deregulation in Arizona parallel those in Florida. While Arizona went through a lengthy legislative, initiative, and delayed implementation process, Florida lapsed into deregulation in 1980, when the state legislature failed to renew the regulatory authority of the public utility commission. Nonetheless, Beilock and Freeman report in their study for Arizona's Department of Transportation, the pattern of positive results was the same. Based on data from a 1981 survey of Florida truckers and shippers, a majority of users perceived increased competition. A third of them had been offered discounts. More than 60 percent had received offers of new service, and nearly three-fourths felt that rates were generally lower due to deregulation. The absence of a simultaneous hike in truck taxes may account for the more widespread impression of lower rates in Florida compared to Arizona.
From almost any perspective, Arizona's motor carrier deregulation has been a success. Based upon Beilock and Freeman's survey, users of trucking services in Arizona, by a wide margin, appear to prefer the deregulated environment. Overall, nearly 3 out of 4 of the surveyed shippers and receivers favored continued deregulation. Urban users favored deregulation by more than 4 to 1; rural users, by more than 2 to 1. Large shippers and receivers, Beilock and Freeman's survey found, favored deregulation by 4 to 1; small shippers and receivers, by 6 to 1.
Despite the overall success and popularity of motor carrier deregulation, attempts to chip away at it are under way. For example, in early 1983 Arizona passed legislation to reregulate ambulance service. The rationale was the typical "public health is too important to leave to the free market." Ironically, it was the previous regulatory regime that denied the establishment of new ambulance services. In a case that reached the Arizona Appeals Court in 1972, a firm applying to provide new ambulance service in a small town was denied authority, because other ambulance services in the nearby area were getting poor financial returns. The new firm's evidence of the established firms' slow service, the court decided, was insufficient to overcome the importance of the financial evidence of poor returns. The regulators and the court never considered the possible link between slow service and low profitability.
The second front for reregulation is in the taxi industry. Taxi availability in Phoenix has improved dramatically since deregulation. The official figure for taxis (not including "gypsy" cabs) in Maricopa County, which includes Phoenix, is 498 for 1982 compared to 251 prior to passage of deregulation legislation in 1979. In 1981, the year before deregulation went into effect, there were 341 cabs registered in Maricopa County. Undisclosed in these figures is the shift of actual cab operations from peripheral areas of the county to Phoenix—particularly to the airport. Thus, all factors considered, the amount of service available in Phoenix is probably three times what it was prior to 1979. And waiting times for cabs, consequently, have gone down substantially.
Passengers may pay fares higher or lower than under the previous, regulatory regime, depending on the taxi company they choose. The overwhelming majority of riders, it appears, are coping quite well with sometimes having to negotiate fares with drivers. The only information on dissatisfaction is that the city has "received some complaints." The alleged sources of these complaints are motel and hotel operators. (There is nothing, however, to stop these people from either establishing their own taxi service or "endorsing" taxi operators that meet with their approval.) In the face of all this, the city has been attempting to reimpose some sort of controls.
Those urging new taxi controls often cite tales of naive tourists having been ripped off by excessive cab fares. But these tales lack credibility. Over the long run, in an open market, high-priced cabs cannot exclude lower-priced cabs—consumers will seek out cabs offering lower fares.
Consider the situation at Phoenix's airport, the presumed site of these "rip-offs." There, taxi service is a hotbed of competition. Arriving travelers must pass posted notices that taxi fares may vary. Cab charges are routinely posted on the outside of the vehicle. There is no system requiring would-be riders to take any particular cab. They may choose from any that are waiting. In addition, the airport is also served by bus and limousine, not to mention numerous auto-rental companies. Only gross negligence on the part of a taxi rider could account for his paying more for a ride than he might have wished.
A TV station's touted exposé of these alleged rip-offs, conducted only months after deregulation went into effect, could produce "evidence" of overcharging only by offering drivers large sums for short rides. The TV station did not find any cabbies who demanded $20 or $30 for the few miles' ride to downtown. It was only when a "decoy" offered to pay these amounts that reporters were able to obtain "proof" of excessive charges.
Yet based on this flimsy case of the "defects" of deregulation, Phoenix city officials are seeking ways to reregulate the taxis. Their first attempt—in which the city limited the number of cabs allowed to serve the airport—was overturned by the Arizona Superior Court in early 1983, but on rather narrow grounds. It remains to be seen whether the city will try again to reregulate cabs.
Arizona is a state reputedly more committed to free enterprise than most, and the implementation of radical motor carrier deregulation can be taken as a demonstration of that commitment. But Arizona's experience also demonstrates that even widespread commitment to—as well as widespread satisfaction with—deregulation can be threatened by those special-interest minorities who seek to use the coercive engine of government to achieve ends unattainable through voluntary means. As with all basic freedoms, then, it remains clear that the price of economic liberties is, and always will be, eternal vigilance.
John Semmens is a senior policy analyst with the Arizona Department of Transportation. The views expressed here are the author's and do not necessarily reflect the policy of the Arizona Department of Transportation.
Alaska, Colorado: Grassroots Reform
The fresh breezes of transportation deregulation may soon be felt beyond the borders of Arizona. In Colorado and Alaska, pro-free-market groups are turning to the ballot initiative to put strong deregulation measures to a vote.
In Colorado, the effort is being led by a group called Coloradans for Free Enterprise (CFE). The state's constitution stipulates that public utilities are subject to state regulation, and common carriers have always been regulated as such. The CFE strategy is to work for a constitutional amendment specifying that motor-vehicle carriers are not public utilities and hence are not subject to regulation. This would have the effect of lifting the hand of the state from package delivery, intercity buses, taxi and jitney services, and household-goods movers.
According to Paul Grant of the CFE, the group is now working to meet the legal requirements for a petition drive that would get the measure on the ballot next November. The petition campaign itself—with a goal of 47,000 signatures—is scheduled to be launched in February, but the issue has already been well publicized throughout the state. Grant has given several speeches on deregulation and was in a debate last fall with Denver University law professor Paul Dempsey, a federal official under Carter and a nationally known supporter of regulation.
In the statehouse, several Republicans have voiced opposition to the deregulation initiative, but it has won the support of a number of Democratic liberals. "The Democrats see the current regulation as protecting special interests and anti-consumer," explains Grant. "And they're right."
Deregulation has also garnered the support of "victims of the Public Utilities Commission," Grant told REASON. An example is Jack Rivera of Senior Cab. Rivera hoped to start a taxi service for senior citizens, providing three rides a week anywhere in the Denver metropolitan area, at any time, in exchange for monthly "dues" of $30. In case of medical emergencies, the rides would be in oxygen-equipped vans driven by trained medical technicians.
In spite of popular enthusiasm for the idea, the Public Utilities Commission demurred. The agency claimed it would be "unfair" for Senior Cab to charge a flat monthly rate rather than a mileage-based rate. But with a small-scale political lobbying effort, Rivera was eventually successful in getting the PUC decision overruled. He is one of the few people to have taken on the PUC and won, but, even with his own problem solved, it was not hard to enlist him as a supporter of the deregulation initiative.
In Alaska, the deregulation forces are setting their sights high, aiming for complete abolition of the Alaska Transportation Commission (ATC) and repeal of virtually all the regulations the commission now administers. The only state requirements to be left intact would be that private firms show "financial responsibility" (by obtaining insurance or posting bond) and meet existing requirements concerning safety. Administration of both requirements would be transferred to other agencies.
Dick Randolph, chairman of Alaskans for a Competitive Economy and leader of the deregulation drive, told REASON that Alaska now "probably has the most heavily regulated intrastate transportation in the country." For example, the Transportation Commission rigidly controls firms' entry to and exit from the air and surface transportation market and has no compunction about denying applicants' petitions. And because of Alaska's size, transportation is an especially important part of the state economy.
Like their counterparts in Colorado, the Alaskans hope to qualify for the November 1984 ballot. They need a minimum of 20,000 qualified signatures by January 9 but are hoping to gather at least 27,000. The campaign to gather signatures began in earnest in September.
Randolph, a former Libertarian state legislator and a veteran of Alaska's "Tundra Rebellion" and income-tax repeal initiatives, noted that political battle lines will probably not be drawn until after the initiative qualifies for the ballot. He expects the strongest opposition to come from the Teamsters Union and from transportation firms that have benefited from ATC protection from competition.
At the same time, Randolph seems confident that a strong base of consumer support for deregulation exists. "In Alaska," he says, "people get on the bandwagon after the signatures are gathered."