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Free Minds & Free Markets

Taking It on the Road

They've got their transportation deregulation act together in Arizona, but some carriers want to close down the show.

"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.

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