Ideas and Political Entrepreneurs: The Case of Airline Deregulation

Following up on my post from yesterday, the Civil Aeronautics Board (CAB) regulated U.S. airline rates and routes from the 1930s through the 1970s. It also kept mountains of data. Aspiring Ph.D. candidates found worthy dissertation material from the agency’s files. The research lent support to an important idea—regulation was failing in this market—but no one listened to these young academic scribblers.

By the early 70s, an established academic produced a groundbreaking treatise arguing for sensible regulation. Alfred Kahn would soon make the jump from academic to regulator—of public utilities in the State of New York, not airlines.

By the mid-1970s, criticism of airline regulation had moved from academics to economists in think tanks (Brookings, AEI) and in government. At an economic conference on inflation convened by the Ford Administration, the delegates focused unexpectedly on a different idea: existing regulations were producing high prices. Yet as every economist in Washington knows, many reform ideas never become policy. Then came the political entrepreneurs.

First, Senator Ted Kennedy. An ambitious member of the Senate Judiciary Committee and chairman of the subcommittee on administrative procedure, Kennedy saw an opportunity to attack the over-regulated and under-competitive airline industry by critically examining the rules it played by.

Most judiciary subcommittee hearings were mind-numbingly boring, but airlines were sexy, and Kennedy turned the CAB hearings into high theatre, trotting out real but outrageous examples. A flight from Los Angeles to San Francisco (intrastate and thus not CAB-regulated) cost half as much as a flight from Washington to Boston (interstate and CAB-regulated). Even the dimmest reporter could connect the dots. The CAB looked bad. Kennedy looked good, as did the odds for reform.

Then the Carter Administration tapped Kahn to run the CAB. He allowed “experiments” in price flexibility (Super Saver fares). He approved new routes. Eventually, he questioned the agency’s purpose. The CAB had to go. This meant Kahn had to sell a very big idea to the madmen in authority, the decision-makers in Congress.

An accomplished economist who dabbled in theatre on the side, Kahn played his role perfectly. The former academic scribbler was funny, smart, patient and on point. He was a master communicator with press and politicians alike.

Kahn built on Kennedy, who built on the work of intellectuals in Washington’s think tanks and policy circles, who in turn built on good academic research. Importantly, he found allies across the political spectrum, from the American Conservative Union to Common Cause, from business interests to consumer groups. This odd mix prevented easy dis­missal of reform as the pet project of the left, the right, or any special interest.

With passage of the Airline Deregulation Act of 1978, Congress closed the CAB and left behind an unprecedented example of radical reform. A better idea had made its way from academic scribblers, through the intellectuals and on to madmen in authority, who were compelled to act. Yet so much of the story hinges on the actions of Kennedy and Kahn—two very different individuals, two very effective political entrepreneurs.

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"Kennedy and Kahn—two very different individuals": is that a way of saying that Kahn wasn't a sh1t?

Actually K & K were similar in many ways: both Democrats, and Kahn, in a TV commentary late in his life, said that he was not necessarily in favor of 100% free trade if it erodes cultural values (he ended up moving to France). BTW reading the excellent Tyler Cowan's book: "How Globalization Is Changing the World’s Cultures" (2002) which you can get for free at the usual places.

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And they lived happily ever after.... except in the midwest which lost almost all of its flights and its ability to host corporate hq's or sales travel.

It was a lot better when the government forced airlines to fly to places nobody wants to go to.

Or deliver mail to people nobody wants to send mail to.

Or subsidize the delivery of junk mail that nobody wants... and LOTS of it, every darn day.

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Chicago has so few flights now.

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Alas, I don't see any Kennedy of the big regulatory issue of our time: the health care sector. All the potential Kennedys have no model in mind except single payer.

Even the madmen on the right are alternatively too timid and too bold on the issue -- either relying only on competition among insurers (unlikely to work, we need to rely as little as possible on third party payments, as bulk negotiations with care providers look inefficient; and we need to rely more on health saving accounts) or shamelessly attacking Democrats for cost reducing measures.

we need to rely more on health saving accounts

I doubt that will do any good. That $6,152, or whatever you contribute to the account, is as good as spent. Why haggle? It's all too diffuse and the time horizons are too long for folks to bother worrying about the price of their colonoscopy.

" Why haggle? It’s all too diffuse and the time horizons are too long"

That's not how real world competition works -- you don't "haggle" at Walmart. You go there because you heard from someone who cares about those things that they have good stuff cheap.

I can't imagine that the current situation, where you need detective skills to even find out the price on any procedure, is not deeply pathological.

There is more than just opinion on this: Singapore has the lowest GDP percentage spent on healthcare in the world and they rely heavily on health care savings accounts.

Apples and Oranges! Walmart sells goods and MDs sell services. I don't think you want to necessarily go to the lowest cost provider to get your colonoscopy. What are you going to use as data to make your decision?

I don't haggle at Supercuts either, and they sell services.

The asymmetric information problem is completely overblown -- you can use quality metrics and evaluations provided by professionals.

We can start with government provided quality evaluations if that makes the asymmetric information fears go away.

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I don’t haggle at Supercuts either, and they sell services.

I haggle when I get a haircut, and so do you.

First, I go to a place that charges less than Supercuts, and the haircut is just as good - minus all the "stylist" BS. Does price not influence your decision to use Supercuts?

Second, I tip. If I like my haircut I tip more than if I don't. Since I go to the same place all the time the haircutters know that.

But all that depends on the fact that I can tell, without consulting a medical version of Consumer reports, whether I like the haircut or not.

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There is little that's undesirable about *some* price and quality search -- including consulting medical Consumer Reports.

I only object to "haggling" being necessary if by that we mean an extremely impractical process that's unlikely to work except in a minority of cases.

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You go there because you heard from someone who cares about those things that they have good stuff cheap.

If I have an HSA why go to the Walmart of healthcare when I can go to the Neiman Marcus of healthcare? Once I hit the deductible, I can go with Neimans at no loss to me. The sooner I hit the max, the sooner I can go with the best goods and services.

You're describing how insurance drives consumers to overspend on healthcare -- health savings accounts don't have deductibles.

The closest thing to what you are describing is someone spending all the money in the health savings account in order to go on welfare healthcare. That's probably not the Neiman Marcus of healthcare.

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health savings accounts don’t have deductibles.

Health savings accounts exist to cover deductibles! That's my whole point.

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in order to go on welfare healthcare

Blue Cross with a high deductible (supplemented by a HSA) is welfare healthcare? What the hell are you talking about?

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Blue Cross is an insurance, not an HSA. Also, HSAs are not limited to the current form they are implemented in the US.

What I'm talking about is relying on HSAs for most healthcare costs, with catastrophic costs covered by insurance.

If you're grasping for how this can be done concretely, think of cheap insurance that does not cover low and moderate cost procedures, but does cover high cost ones. The low and moderate cost procedures would have to be paid either from the HSA, the pocket, or from welfare.

This is different from HSA supplemented high-deductible insurance.

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What I’m talking about is relying on HSAs for most healthcare costs, with catastrophic costs covered by insurance.

If the HSA is covering anything below the deductible of the catastrophic plan, I fail to see what incentive I have to stay below the deductible. It would seem I'd have every incentive to hit the deductible as soon as possible.

If you're talking about an HSA that covers the first $5k in deductible and then there is a $50k "donut hole" till the catastrophic policy kicks in, that's not included in any current or foreseeable policy proposal.

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jmo, study the Singapore health care model, then add and subtract some policies using your taste.

Extensive reliance on HSAs works: Singapore healthcare spending is around 4% of GDP on healthcare, USA spends around 16% of GDP on healthcare, and Singapore has excellent care.

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Singapore healthcare spending is around 4% of GDP on healthcare

I'll use the usual libertarian talking point when people mention something that works well in Sweden: The US is a vast country with a genetically diverse population of very fat people. What works in Singapore is very unlikely to work in a immense and multi-ethnic nation of +300 million.

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"What works in Singapore is very unlikely to work in [US]"

You were grasping for reasons why HSAs don't provide incentives for cost reduction. You only gave bad reasons, not supported by orthodox economics, not supported by heterodox economics, and like the Singapore example shows, they are not supported by empirical reality either.

Just how much of an improvement the policies will provide in the USA would be something to be seen, but if you dismiss both theory and empirical data, you don't have much of an argument left.

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Alex,

So, I assume you'd advocating the US adopt Singapore's rigid system of price controls?

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Singapore has price controls on public hospitals.

I have no problem whatsoever with price controls in public facilities, and I have no problem with letting state provided care compete with private provided care.

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We do seem to be in a period of high political constraints on beneficial reform. All the more important to be investing in ideas at both the academic scribbler and intellectual levels.

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John Kingdon's policy process text devotes considerable attention to airline deregulation and policy entrepreneurs

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Kahn is remembered for being instructed to not use the word recession so he just called it a banana -- the press loved it.

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A couple of minor corrections.

"Then the Carter Administration tapped Kahn to run the CAB. He allowed “experiments” in price flexibility (Super Saver fares)."

Actually experiments in price competition began with John Robson as Chair of the CAB (Kahn's predecessor).

Recall that Southwest Airlines was entirely intra-Texas and thus its prices were not regulated by the CAB. Texas International, which ran routes outside of Texas and was CAB-regulated, sought authority to compete with (and undercut) Southwest. What they offered were called "Peanuts Fares."

Southwest responded by matching Texas Air''s $13 fares and also retaining their $26 fare which came with a bottle of liquor, those on expense accounts bought the higher fares and if memory serves Southwest was the largest liquor distributor in the state that year...

'Super Savers' were American's product between New York and California introduced in April 1977 and expanded across the domestic route network in March 1978.

American's idea was offering different classes of fares on the same aircraft to compete with discounters (they could run a discount airline and a full fare airline ON THE SAME AIRCRAFT).

Thanks, Gary. I remember talking with you about the liquor bottle example when I was at IHS. Wayne & I include much of what you point out in the book although there wasn't enough space to do so here on the blog. Thanks for adding your points here.

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Also worth adding that Kennedy staffer's were key in this -- Phil Bakes and Stephen Breyer.

And that Ralph Nader was pro-deregulation, since the CAB was anti-consumer and captured by business interests. Most airlines opposed deregulation.

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I think the concept (which I first heard from Arnold Kling) of the economy's "commanding heights" is useful here. The state wants to control those industries that are most important and prestigious to the economy at that given time. In the 1950s those industries probably included steel and airlines. Today steel and airlines are rather bland, non-dynamic, non-prestigious and utility-like. The commanding heights of the economy today are industries like healthcare and finance.

Thus the political and bureaucratic classes, who have hefty but still finite power aren't going to spend their political capital and effort expanding their control over the former. If Elizabeth Warren had targeted the sights on her academic hit jobs on the steel industry instead of the finance industry she'd be a bit player instead of a household name.

Airlines deregulated because the real masters of government policies academics, bureaucrats, journalists, think-tanks, etc. became uninterested in continuing to regulate it. When they stopped repressing it, the obviously correct but non-lucrative (there's plenty of jobs to distribute from adding government agencies, but none from dismantling them), free market ideas won out. Overall though it wasn't a great victory for the free market because the socialist power structure simply went and intervened in some other newly importantly industry.

Sometimes an industry falls from the commanding heights because of economic shifts, but sometimes it falls because the blood-suckers from the government basically kill it. For example finance was a large and dynamic industry from 1820-1930, then it was strangled by the state until the 1980s when it came back to life. Now the vampires have their sights on it again and we'll probably repeat the cycle. With devastating impact to economic growth and living standards no doubt.

I see reality bubbles are still blowing in the wind

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sounds a lot like Kingdon & Zahariadis ;)

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Contrast airlines with trucking. Both had fares deregulated at about the same time, but the ICC still exists. These means 1) that the commissioners and bureaucrats there have to justify their existence and 2) some are just biding their time until the people are upset enough with market outcomes to restore sensible regulation. Kahn is my hero because he actually closed his agency. When else has this happened?

The ICC went out of business. Safety regulation of the trucking industry was passed on to the DoT/FMCSA.

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"Kennedy turned the CAB hearings into high theatre, trotting out real but outrageous examples. A flight from Los Angeles to San Francisco (intrastate and thus not CAB-regulated) cost half as much as a flight from Washington to Boston (interstate and CAB-regulated)."

Now all these years later a flight from LAX to SFO still costs half as much as a flight from LAX to BOS.

The relevant comparison flight of course is the Washington to Boston, which seems to be cheaper than LA to SF

There are still plenty of stupid pricing rules, even after deregulation. A few years ago I wanted to fly CLE to PHL. That flight cost $500, but a flight CLE to BWI, with a layover in PHL (on, indeed, the same plane from CLE to PHL) cost $100.

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Go to this link and watch Chapter 14: Deregulation Takes Off. It covers this very topic:

http://www.pbs.org/wgbh/commandingheights/lo/story/ch_menu.html

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Thanks Ed. I tried to make a similar point a couple days ago in a comment. You were far more eloquent and thorough than I could have been.

I remember your comment from last Sunday, and it's factored in to my decision to post care about airlines here. Thanks!

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IMHO airline deregulation was a disaster. I can fly standby for free almost anywhere but I seldom do it. I've had it with the cattle car experience. For those of you so unfortunate as to have missed it, planes used to fly half empty. Lots of room for everybody. You got cloth napkins and real utensils. Free of course, along with your free meal. On some runs on certain days the passengers had largely gotten to know each other and the crews. Thus birthday celebrations enroute. Really nice and stress free. Competition focused on who could provide the best service. Worth $more.

You can't pay up for first business class?

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Sorry. You have the chronology wrong.

Deregulation began at the end of the Nixon Administration, got a foothold in the Ford Administration (see, Reports of the Antitrust Division circa 1975 studying deregulation in surface transport (truck, rail), airlines, and insurance), Hearings before the House Judiciary and House Interstate and Foreign Commerce committees in the early Carter years.

As a side note, Dave Boies, who taught antitrust as an adjunct at NYU, lectured on trucking dereg in the mid 70s, became the Antitrust Counsel to Ted Kennedy; Kennedy's previous committee was Admin law, with Steve Breyer as his counsel, advocating deregulation for truck, airlines etc. The House Judiciary Monopolies and Commercial law subcommitee held a series of hearings on deregulation under Rodino, and worked with Interstate and Foreign Commerce to both deregulate and curtail exemptions when dereg occurred. And, the Antitrust Divisions ATT case brought about, in effect, competition in long distance carriage.

This was a long process, beginning around '72 with enactments around '78.

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I thought Kennedy only did bad things, like increase union bureaucratic regulations up the wazoo.

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If airline deregulation had no downside, why do airlines keep going bankrupt and merging? Soon there'll be only one.

Airline bankruptcies don't result in the airlines going away. They result in the airlines shedding their promised obligations (e.g. pensions) and re-entering the market. Every legacy carrier operating today (including American, Delta, US Airways, United, and others) has gone through bankruptcy at some point--and often more than once: http://www.npr.org/blogs/money/2011/11/29/142892288/why-do-airlines-keep-going-bankrupt

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Actually, this is a very depressing post. Look at how many people had to work very hard for a long time to reverse something that never should have happened in the first place. Then ask yourself how likely it is that we will ever get rid of, say, farm price supports.

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I had the privilege to know Dr. Kahn personally, not professionally. He told me late in life, but before the Alzheimers, that he deeply regretted the deregulation. Oddly, I also knew the acting Chief Administrative Judge during Kahn's tenure. Now there was a titanic clash of personalities. Kahn was intellectually first rate, but the complexities of business development and competition in relationship to social consequences for employment and service were outside his models. He ended up preferring the subsidized European airlines and employment structures, hence his late-life move.

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