Deregulation Blues By Doug Dowd
Just when we’re about to blow our tops at the airlines for the delays and crowding and lousy service—and rising prices—we get blindsided by blackouts and for our electricity and rising prices (as also for gas, and water, and gasoline). How come?The architect of airline deregulation told us last fall that what’s needed is more deregulation; Pres. Pudd’nhead (deeply into oil and electricity shares himself) responded to the California crisis by saying that what is needed is more deregulation, get rid of environmental protection.
Whatever else such muddleheaded punditry puts one in mind of, it brings back Vietnam. There, as the U.S. invasion of Viet Nam settled into an always deeper swamp, the Best and the Brightest who had fostered and guided that mass criminality argued that was needed was more of the same: more troops, more bombs, that would turn the trick. To paraphrase Marx, “Escalate! Escalate! That is Moses and the Prophets.” For the airlines and the utilities, it’s “Deregulate! Deregulate!” (That is, when it isn’t “Privatize...!”)
I am happy to say that I have never met Pudd’nhead, and hope my luck holds up; but I was in the same econ dept for 17 years with the wizard of airline deregulation; indeed, we were friends—for a while; that ended as the war in Vietnam became more than an itch, as he became a Dean, as I became something else. He was among the two or three brightest people I have known, and, for an economist, among the best-informed on the realities of monopoly and competition. But he never let his knowledge get in the way of his judgment. He had a mental/political block: he couldn’t turn his thoughts to left, only straight ahead, or to the right. (That helps, if you want to become a Dean, or head up a federal agency.)
Now a short lesson in economics. As mainstream economists are all taught (and most conveniently forget) “the free market” is safe and desirable only when all firms have to accept the dictate of the market—that is, when no firm or cooperating firms can dictate to the market. In turn, that state of affairs can be true only when there are so many firms that no one of them (or small group of them, called “oligopoly”)—by controlling supply through restricting production—can keep prices from falling.
Those “free market” conditions do not now nor have they ever come close to being met either for the airlines or for the electricity, gas and water (or oil) companies—nor could they be, given the technology of the industries. They are all what economists call “natural monopolies” (or oligopolies). Every economist is taught that a “natural monopoly” such as your friendly Gas & Electric Company, must be regulated, lest all hell break loose.
In California there are two such distributors: PG&E and Southern California Edison (really one for the north, one for the south: each a geographic monopoly). They were regulated until 1996; then they were deregulated (by a unanimous vote!), after years of pressure on the legislature to do so. You will be surprised to learn that the utilities in California have considerable political clout (the strongest understatement I have ever made); as do the banks and the oil companies (and a handful or two of other industries, in descending order). Now, in the face of the ongoing crisis, the deregulation of 1996 is being criticized by (so to speak) friends of “the family” (not your family, you can bet) only because it didn’t go far enough. And one would like to know just far they would like it to go, and what their rationalizations for that would be.
Now, as the ship is sinking, there is a recognition that something—but just what is not agreed upon—went awry. Bush’s Secy of Treasury says the dereg plan was “lunacy...; the legislature thought they could defeat the laws of economics.” It was lunacy, all right; but one may guess that he didn’t wish there to be less deregulation, only more, or total. And then there the Calif. state officials. They now grant that “there was a failure to anticipate ways that energy companies could manipulate the system by withholding electricity to drive rates up. State authorities also wrongly assumed that deregulation would bring new price-lowering competition quickly, which it has not done, officials say.” (Source: Intl Herald Tribune, 19 January 2001)
Bah, humbug. Sure as shootin’, the utility companies did not “wrongly” make that assumption—any more than the airlines have done, since they were deregulated back in the late 1970s by my old economist pal.
So now we have an onrush of mergers and acquisitions in the airline biz, with the virtual certainty (among other developments) that American and United will, between them, control half of all air traffic in the eastern USA. The price-lowering, service-improving competition is likely to be so fierce, friends, that it will make your heads spin. Almost as fierce as PG&E and Southern Cal Edison.
Please tell me, mainstream economists, given the existing (and, worse, emerging) ownership structure of the airline industry what likelihood is there, in any foreseeable future, that airlines will provide us with more leg room, fewer delays, less lost or misplaced baggage, something approaching edible food—without being forced to do so by governmental regulation? And what likelihood is there that the producers and distributors of utility services will, in the near future, increase (rather than restrict) supply so as to meet the extraordinary increases in demand over the past ten years and more?
“Oh, yes, the likelihood is great!” I hear back from them: Just send more troops, more bombs. Look! See? Down there at the end of the tunnel, there’s a light!
Jan. 19, 2000
