Why deregulation has gone too far: toxic drugs, tainted meat, exploding airplanes, and other dangers of unfettered capitalism

Washington Monthly, July-August, 1998 by Robert Worth

Toxic drugs, tainted meat, exploding airplanes, and other dangers of unfettered capitalism

Twenty years ago this spring, the Senate voted to abolish the Civil Aeronautics Board. Where the government had maintained an elaborate and often unwieldy scaffolding of routes and fares, the free market now came crashing in like a mighty river. Within a few years the flood would carry a host of other regulated industries, including telephones, trucking, and banking, along with it. The Age of Deregulation had begun.

At first, liberals went with the flow, or even helped stir it up. "Regulators all too often encourage or approve unreasonably high prices, inadequate service, and anticompetitive behavior. The cost of this regulation is always passed on to the consumer. And the cost is astronomical?" Thus Sen. Ted Kennedy on the first day of the hearings that were to lead to the abolition of the CAB. But before long, the movement had gathered a fatal momentum, losing its roots in the consumer movement. Deregulation became an article of faith, "espoused more or less automatically, even unthinkingly, by a wide range of officeholders and their critics," wrote Martha Derthick and Paul Quirk in their classic study The Politics of Deregulation.

Twenty years later, liberals have plenty of reason to regret the notion that the way to fix regulations is by scrapping them. Deregulation has definitely made the wheels of the economy spin faster. But the competition it has brought has often been unfair and destructive, and the alleged price cuts often haven't trickled down to the average American.

Take airline deregulation. Sure, the CAB was a clumsy bureaucracy, notorious for its "procedural spaghetti" and the bizarre "kabuki dance" hearings where it decided who could fly where, and for how much. By 1976 even the Board's officers were in favor of some kind of decontrol. But airports aren't like restaurants; you can't just round up some friends, buy a little property, and set up shop. Big carriers control access to airport gates, arrival and departure slots, and even to computer booking systems. A few years after the abolition of the CAB, the major airlines were muscling the little guys out of the sky. And that wasn't so good for customers. Long-distance fares dropped, but smaller communities often got fewer flights for higher prices. Today, the same thing is true. According to the Transportation Department, which is considering punitive action, the big airlines' bullying practices "can hurt consumers in the long run by depriving them of the benefits of competition," and leave "much of the demand for low-fare service in many local hub markets unserved?"

It could get even worse. On April 3, a passenger on a US Airways jet landing at New York's LaGuardia airport looked out his window and saw another plane coming straight at him. He screamed as the pilot pulled up in an evasive maneuver, avoiding a head-on collision by a mere 20 feet. Panicked traffic controllers breathed a sigh of relief. But they were so busy that the incident didn't even get reported until two months later. Why? Part of the answer is that deregulation has led to a 50 percent increase in air traffic since 1981, with proportionately far fewer controllers and less supervision. In-flight gaffes like the one at LaGuardia are up 19 percent this year, and ground errors are up 49 percent.

"What's gotten left out is somebody still has to manage the system," says MIT economist Lester Thurow. And like it or not, the best way to do that is with tougher, smarter regulation.

Market Failure

"I strongly oppose regulation," said Sen. John McCain at a hearing in February, "but I don't oppose regulation as much as I oppose unregulated monopolies" He was talking about cable TV, where deregulation was supposed to bring competition from satellite companies to the old cable monopolies. Instead, they've been banding together -- witness the recent merger announcement of American Sky Broadcasting, a major satellite company, with Primestar, a cable group. "That's bad for competition and bad for consumers," said Joel Klein, the Justice Department's top antitrust enforcer. It's also one of the reasons cable prices have been rising at five times the rate of inflation.

McCain and Klein could have been talking about any one of a number of deregulated industries. On May 19 members of the Senate's antitrust subcommittee asked Ed Whittaker, CEO of the telecom giant SBC, why his company was proposing to merge with its potential competitor Ameritech, reducing the number of Bell operating companies to four from an original seven. Whittaker insisted that there was no need to worry; the 1996 Telecom Act was working its magic and competition would soon arrive. Then he said he foresaw a mere handful of companies dominating the global phone market, including just one of the current Bell operating companies. He didn't need to add that he wanted to be that one company.

Conservatives often counter that the Justice Department is quite capable of enforcing the antitrust laws -- witness, for instance, Joel Klein's decision in May to block the American Sky/Primestar merger. They often add that Justice would do an even better job if only the regulators would step further out of the way. Take the current railroad slowdown in the South, where nine men have died and billions of dollars have been lost in what's being called the worst rail melt-down in U.S. history. That mess is a direct result of the 1996 merger of the Union Pacific and Southern Pacific railroads -- a merger the Justice Department wanted to block, but couldn't, because the Surface Transportation Board, a regulatory agency, has jurisdiction over the rails. "One mistake we made with deregulation," says Cliff Winston of the Brookings Institution, "is that we've left a specific regulatory body to handle antitrust issues, instead of just saying `now you're subject to the Justice Department.'" Defenders of telecom deregulation say the same thing. "[F]or decades, the FCC has legitimized telecom practices that antitrust courts would never have tolerated in its absence," writes Peter Huber of the Manhattan Institute. The remedy, he adds, is to abolish the FCC and hand over the reins to Joel Klein and his trusty knights.