Airline regulation revisionists face the wrath of Kahn

Alfred Kahn, the eminent economist and chairman of the Civil Aeronautics Board who oversaw airline deregulation in the 1970s, has published a fascinating new working paper on the AEI Reg-Markets Center site. He addresses the difference between “liberal” and “progressive” views on economic policy and regulation, and he argues that “progressivism” as defined by those who claim its mantle today is not truly progressive — in fact, that it runs against the mainstream liberalism of the mid-twentieth century and its signature economic reforms, such as airline deregulation.

What does Kahn hold up as liberalism? (He is himself a proud liberal, appointed to the CAB by Jimmy Carter and later serving as Carter’s inflation adviser.) “Liberals . . . have historically advocated an open market—private, free enterprise, free trade—economy, with consumers best served by competition among producers and sellers, both internationally and domestically,” he writes. Thus, liberalism in the nineteenth and early twentieth centuries consisted of fighting Republican tariffs, using antitrust laws to break apart monopolies, and supporting free public education and other social services designed to break down heightened income inequality. If this sounds suspiciously like the “progressive” movement of the late nineteenth and early twentieth centuries, you’re not wrong. Kahn argues that liberalism is progressive but that the label “progressive” has been hijacked by radical populists:

As I will argue, partly on the basis of my own experience as a regulator, deregulator, and advisor on inflation to a liberal President, there is nothing either “progressive,” “liberal” or desirable about—successively—populist protectionism, xenophobia, competition-suppressing regulatory cartelization, repression of energy prices, recourse to price controls as a remedy or preventive of inflation or a rush to rein in or hamper the dynamic market processes of technological change—the major areas in which authentic liberals will continue to clash with latter-day “Progressives”.

How does this apply to aviation policy? Kahn devotes part III of the paper to defending the liberal and progressive bona fides of airline deregulation in 1978, and how many of the parties that fought for it then are opposed now. You should read the full paper, but I’ll give you some of the highlights here.

According to Kahn, the nascent airline industry emerging in the 1930s was “cartelized” in the framework of a (usually illiberal) New Deal framework. Entry was limited and price competition was forbidden. Deregulation was supported by a broad-based coalition that included the Gerald Ford administration and its successors in the Carter administration, Senator Ted Kennedy, the Consumer Federation of America, Ralph Nader, Southwest Airlines, the National Association of Manufacturers, and others. It was opposed by interstate airlines and airline unions.

Kahn defends the record of airline deregulation:

No one who has looked at the facts of the last 25 years can fail to see that, on the contrary, the most dramatic and immediate effect of airline deregulation was the explosion of discounting, cutting average fares by about one-half, inflation adjusted, and bringing air travel at once within the reach of people of modest incomes. . . . The significant economic fact is that those discount fares, employed almost at once by the overwhelming majority of travelers, made possible, and, correspondingly, were made possible by the increase in the average percentage of seats sold—load factors—from the low 50s in the decade before deregulation, with comfortable spacing of seats, into the very high 70’s and now low 80’s—for torsos only. That release of price competition produced annual benefits to consumers that Clifford Winston and Stephen Morrison, the foremost academic students of this experience, have estimated at $20 billion a year. And it did this without in any way interrupting the long-term decline in accident rates, ensured by continuing safety regulation and improvement in technology—confuting the dire predictions of opponents that the pressures of price competition unleashed by deregulation would force managements to skimp on safety.

But not all deregulation’s supporters remained happy with it. Kahn notes the defection of consumer advocates from the coalition, and he documents devastatingly their willful and ideological rejection of the facts about the economic impact of fare competition. Deregulation has its enemies today in Congress: one cannot attend a hearing of the House Transportation Committee without hearing Chairman Jim Oberstar opine that it’s time to partially reregulate the industry. This usually has to do with consumer issues like delays (which is not an issue of industry regulation) or “the passenger experience.” Deregulation’s critics routinely lament the perceived decline in standards of comfort in air travel. What does Kahn have to say about this?

To be sure, the 25- to 30-point increase in airline load factors has meant increased crowding and discomfort, the intensity of which I have no intention to minimize. But it was precisely the failure of the industry under regulation to provide travelers of modest means with a choice of economy over comfort that constituted both the need for deregulation and the essence of its success. The airline experience wonderfully illustrates the principle that cartelization of a structurally competitive industry—in particular, the prohibition of price competition—sets off all sorts of other forms of competition, substantive and non-substantive—the fatal flaw of which is that it denies customers the choice of low-priced service free of those amenities.

This, translated, means that service has dropped to match the lower fares available today. The service environment of regulation-era airlines was artificially enhanced at the expense of excluding many low- and middle-income travelers — exactly the sort of people that “liberals” should want to help with consumer-friendly deregulation.

Kahn offers a perspective on how the CAB handled rules about bumping passengers off full flights. Some on the board argued that the issue was a moral matter of justice: it’s not fair to bump paying passengers, therefore bumping should be illegal. Kahn argues for a different policy: should bumping be necessary, airlines must offer passengers sufficient compensation — vouchers, etc. — to persuade enough of them to be voluntarily bumped. He saw it as an economic issue, not a moral one. The airline wants to overbook because it stands a better chance of having no empty seats, which once the plane takes off is money down the toilet. Some passengers are not in a rush and will freely give up their seats for vouchers. If the airline has to give away too many vouchers, that will signal that it is overbooking by too much with no government intervention needed. The market works, writes Kahn, who calls this “a perfect example of a no-loss no-loser arrangement.”

Kahn also lays out the case for congestion pricing of airport and air traffic control services. (This is not a new idea; Kahn points out that he and colleagues have been arguing for congestion pricing since the 1960s.) He is dismayed that instead of vigorously pursuing congestion pricing, the Bush Department of Transportation and Democratic senators are pursuing an illiberal policy: convening summits of airline and airport officials to negotiate voluntary traffic cuts. This smacks of “cartelization.”

As for a passenger’s bill of rights, Kahn argues that liberal policy would be to protect consumers and enact such legislation — but he says the problems such a policy would address have “little or nothing to do with economic merits of deregulation.”