On the Passing of a Liberal Deregulator
The economist Thomas Hazlett, who wrote about the late Alfred Kahn for Reason in 1995, has a terrific obit of the liberal economist-slash-father of airline deregulation for the Financial Times. Subscription required, but here's a snippet:
Kahn liked to boast that he was the last living doctoral student of Joseph Schumpeter, the classic exponent of capitalist "creative destruction." But the young scholar was not so warm for the charms of the market. His initial work channelled Thorsten Veblen, who was critical of consumers' choices and heralded wide scope for government regulation.
But Kahn studied on. He was surprised to find that markets accommodated productive forces that eluded the immaculate models of economic analysis. He saw that that government regulation was no deux ex machina. Administrators faced challenges of their own; buffeted by political lobbying, they often raised prices for customers. Theory said that market forces should push prices down to marginal cost, and that regulators could help supply some oomph when competitive pressures were weak. But Kahn found electricity regulators fixing charges at the same level no matter the time of day.
Analogising to the butcher shop, Prof. Kahn asked: "What would happen if everything that came out of the cow – steak, hamburger, suet, bones, and hide—were priced at average cost per pound?" Kahn came to conclude "that society's choices are always between or among imperfect systems." But markets generated a dynamism lacking elsewhere, giving them an edge: "Wherever it seems likely to be effective, even very imperfect competition is preferable to regulation."
What many people don't realize about Kahn is that he was much more interested intellectually in deregulating telecommunications:
Kahn spent much of his last three decades analysing communications policy. The 1996 Telecommunications Act boldly rejected monopoly, eliminating barriers to market rivalry. The law was a paean to the dean of regulatory economists.
But its execution left much to be desired. Kahn blasted the FCC's attempts to impose textbook conditions of perfect competition – including improper mandates for marginal cost pricing. "I…had anticipated the very error the FCC was about to commit," wrote Kahn in a 2004 book (Lessons from Deregulation). Confused by the textbook version of "perfect competition," regulators mandated existing telephone networks to share their lines with rivals, charging only what the new users cost them directly. This ignored the risks taken to create such networks in the past or improve them in the future. Such policies deterred, rather than advanced, the deployment of competing phone or broadband systems.
Justice Stephen Breyer, in Supreme Court decisions in 1999 and 2002, cited the Kahn critique. The powerful economic logic drove the DC Circuit (in 2004) to toss out the FCC's ill-crafted network-sharing rules. Quickly, cable operators built out "digital phone" services. Today, the US residential market features nearly ubiquitous head-to-head fixed-line phone competition. This, and mobile rivalry – another deregulatory bonus – may far exceed the consumer gains delivered to air travellers.
Wait, liberal Justice Stephen Breyer is deregulation-friendly? Actually, much more than that: He was a key architect of the 1975 Senate hearings, chaired by Teddy Kennedy, that laid the groundwork for airline deregulation. He co-wrote the opening chapter in the 1982 book Instead of Regulation: Alternatives to Federal Regulatory Agencies, edited by Reason's own transportation policy super-genius Bob Poole. Left-of-centerists may tell themselves now that deregulation has always been an evil right-wing plot to allow corporate trillionaires to feast on the bones of young street urchins, but in the 1970s Democrats saw it–rightly–as a populist issue. Here's Alfred Kahn being interviewed by Bob Poole in the February 1989 issue of Reason:
REASON: Do you think the fact that it was a Democratic administration helped? And that people like Ted Kennedy supported it, when deregulation had more traditionally been associated with Republicans?
KAHN: I think it probably helped. But of course, the initial proposals came in the Ford administration. As a matter of fact, it was Kennedy–that is to say John Kennedy's Council of Economic Advisers, back in the early '60s-that began to propose some deregulation of transportation.
REASON: That I didn't realize.
KAHN: Remember, also, that anybody who is a strong antitruster ought to be opposed to regulation. So it was the convergence of the free-market people and the antitrust tradition, in which Kennedy is very strong. We had a most interesting political alliance of the National Association of Manufacturers and Ralph Nader. We had Common Cause and we had the National Federation of Independent Businesses. We had the Ford Motor Co. and we had the Consumer Federation of America.
Imagine that: Applying anti-trust logic to government regulation….
Wanna blow your mind a little bit? Go back and read the one and only presidential debate between Jimmy Carter and Ronald Reagan, source of such lasting political catch-phrases as "there you go again" and "are you better off than you were four years ago?" It may surprise the court that this section, near the close, came from the Democrat:
I share the basic beliefs of my region [against] an excessive government intrusion into the private affairs of American citizens and also into the private affairs of the free enterprise system. One of the commitments that I made was to deregulate the major industries of this country. We've been remarkably successful, with the help of a Democratic Congress. We have deregulated the air industry, the rail industry, the trucking industry, financial institutions. We're now working on the communications industry.
Read the Free State Foundation on Kahn here.