If You Took an Airplane Recently, You Know Deregulation's a Loser

If you are like millions of Americans who vacationed this summer, you paid top dollar for airline tickets, had little choice of airline, and were rewarded by long delays. But then, when you landed, you became a sovereign consumer again. You had your choice of car rental companies, hotels, and restaurants. You could shop around for the best prices, carefully measuring price against quality, and exercise real buying power.


Indeed, at the very same airport where one or two airlines monopolize routes and disrespect passengers, 10 or 15 auto rental companies, often side by side, compete vigorously and courteously for your business. How it is that car rental companies give you plenty of choice and high quality service, but not airlines?


The answer is that airlines are not a naturally competitive industry. They require very expensive capital equipment that needs to fly mostly full to be cost effective. Big airlines have the market power to crush little ones. And airlines depend on public facilities, namely airports. All of which is why they used to be regulated.


More than 20 years ago, however, the fathers of airline deregulation thought that airlines could be just like car rental companies or restaurants. Stop regulating fares and routes, get the government out of the way, and new, cut-rate carriers would offer better service or lower fares.


But it hasn't worked out that way. Without government policing the skies, big airlines either bought out or drove out most upstarts. The few surviving cut-rate airlines with good safety records, such as Southwest, have toeholds in some big airports (thanks to antitrust regulation); but they are mostly limited to fringe air fields.


Absent more public regulation and public investment, airlines are increasingly crowded, surly, incompetent and overpriced. What choice do we have? We can always walk.


This summer has also brought a test of deregulation of electric power. Again, deregulation failed. In California, the vanguard of electricity deregulation, consumers are facing bills double and triple those of the regulated era. As in the case of airlines, the idea was that electricity is just another commodity. Get government out of the way and the free market will figure out just the right price and the right generating capacity. But whoever thought up that idea is a dim bulb.


There is a very long lead time in the construction of power plants. The free market can't easily predict weather conditions or peak demands; it can't suddenly add new capacity. Electricity is, of course, a necessity. If scarcity suddenly materializes because private entrepreneurs cut construction costs, they still win by raising prices. Consumers can only conserve so much; they simply have to pay whatever the electric company charges. (Price competition is not meaningful in a deregulated system because different power companies increasingly all buy in the same wholesale power market and charge essentially the same prices.)


Ironically, the one part of California that still has plenty of power at reasonable prices is Los Angeles, which has its own system and never bought into deregulation. L.A.'s system, not coincidentally, is headed by David Freeman, who was once the chief of the granddaddy of all public power systems, the TVA.


Under the bad old regulated system, electric prices were set by public utility commissions. A power grid was maintained, with plenty of generating capacity to spare. Regulators made mistakes, but nothing like the calamity that Californians face this summer. For three quarters of a century, as technology improved, regulated electric rates came steadily down.


Want one more example? How about banking. Under the old regulated system, banks almost never failed, they didn't buy and sell each other, and customer service reps actually had time for their customers. And there was more choice of local competing banks.


Granted, a lot of the economy works fine with little regulation. Other than making sure that cars pass safety standards, government can stay out of the auto rental business. Other than inspecting kitchens for cleanliness, government doesn't need to second guess what restaurants serve or how much they charge. The same goes for most of retailing and manufacturing. But big industries where market power is concentrated, and the product is a public necessity, and consumers lack the effective means to shop around, are just different.


Deregulating them doesn't help the consumer. It just helps the consumer to get gouged. The geniuses who brought us deregulation of these industries should be sentenced to a purgatory of endless waits at a one-airline airport. During a power brownout in a heat wave. On hold to their banker.



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