FPJ — Joe Nocera in his New York Times column last week railed against deregulation of the airline industry that occurred in 1978, pointing to its long-term consequences as an example of the alleged evils of the free market, but in his effort managed only to produce self-contradictory nonsense revealing extraordinary cognitive dissonance stemming from his ideological myopia.
His fundamental criticism of the deregulation was that it has failed to do what it was supposed to do, “to bring lower prices and increased competition”.
To support this assertion, he argued that today there are only “two megacarriers, United and Delta, while a third proposed megamerger—of American and US Airways—was all but done before the Justice Department sued to block it earlier this week”. He describes the airline industry as “an oligopoly, with two dominant carriers”, adding that “oligopolies, by their very nature, are anticompetitive.” He argues that by freeing up the industry, “The natural tendency of companies to seek monopoly power took over”.
But this is nonsense. First of all, by blocking the merger, the government prevented the two “megacarriers” from having tougher competition. And the way companies compete with each other, naturally, is by trying to bid away their competitors’ customers by offering lower fares or higher quality or specialized services. And it is not as though the major players didn’t have competition from smaller competitors, as well. Here’s an alphabet soup list of airlines in the U.S., from A to X (no company names beginning with Y or Z, apparently; perhaps somebody should start one). Would Nocera have his readers believe that these airlines don’t cut into the major carriers’ share of the market?
Seemingly oblivious to the irony, Nocera actually noted in parentheses that Southwest Airlines is the third largest carrier in the U.S. today—an airline that has been so successful precisely because its business model allows it to compete with the “megacarriers”. Southwest, JetBlue, and other “low-cost” carriers have been able to succeed and compete with the “legacy” carriers precisely because of the 1978 deregulation. In 1999, the low-cost carriers had a 10 percent share of the domestic market. As of last year, their share had increased to 30 percent. That’s not competition for the majors? We should be opposed to the deregulation that has allowed these carriers to compete with the supposed “oligopoly” of the “megacarriers”? We should be opposed to the very freeing up of the market that has allowed this competition to exist?
Nocera’s cognitive dissonance here is just astounding. He actually went on to write about how in the years after the deregulation, many new airlines started up, and the legacy carriers like United and American expanded into new markets. The number of people flying increased, since “flying became something many Americans could finally afford”. There were “lower prices and greater consumer choice.”
So what’s the problem, then? “The only problem”, he continues, “was that the competition was ruinous for airline profitability.” That bears repeating and emphasis: “The only problem was that the competition was ruinous for airline profitability.”
We are thus supposed at the same time to hold the two contradictory beliefs that, on the one hand, an oligopoly has arisen in the airline industry because of lack of market regulation, which is bad because of the anti-competitive nature of oligopolies, while, on the other, the deregulation of the industry was bad because it created too much competition.
The astonishing scale of this cognitive dissonance is even more readily apparent when one takes a look at just what the 1978 deregulation actually did. The airline industry is still heavily regulated, of course, but what happened, as George F. Will explained in an article last year in the Washington Post, was that, “In 1938, the Civil Aeronautics Act codified a government-managed cartel” (emphasis added). The government protected this cartel by effectively outlawing competition and preventing startup airlines from entering the market. As Will also noted, “between 1950 and 1974, the Civil Aeronautics Board (CAB) received 79 applications for startup airlines and rejected them all, believing that if even one passenger would be taken from an existing carrier, competition would be excessive.”
What was meant by “excessive” competition, of course, what that the startups would eat into the market share of the government-created cartel, which would defeat the purpose of having created the cartel in the first place.
This is exactly what Nocera is saying—even if he doesn’t realize it—when he writes that the “only problem” with the ’78 deregulation that eliminated this government-created cartel in the airline industry was that “the competition was ruinous for airline profitability”—ruinous for the profitability of the government-legislated oligopoly; obviously not so ruinous for the airlines like Southwest that have managed to compete with the old “legacy” airlines who were part of the government-mandated cartel.
Of course, many of the smaller airlines also couldn’t compete and went out of business, but what is wrong with that? Should the government intervene to prevent airlines that don’t have a successful business model from going under? “In the last three decades,” George Will also pointed out, “there have been 192 airline bankrupcties.” But then, there have also been successful airlines like Southwest that have managed to thrive and compete with the “megacarriers”. “For years the union-burdened old-line hub-and-spoke carriers,” Paul A. Cleveland pointed out in a 2005 article for The Freeman, “such as US Airways, American, and Delta, had struggled against increasing competition from smaller, more efficient, and more cost-sensitive competitors, such as Southwest Airlines.”
So, to sum up his argument so far, Nocera tries to slam the deregulation of the airline industry ostensibly on the grounds that it has allowed the airlines to create an “oligopoly”, even though the deregulation he refers to in fact eliminated the oligopoly that existed between 1938 and 1978, which was legislated into existence by the very same government regulation Nocera would apparently have us return to.
There is one way to reconcile Joe Nocera’s self-contradiction here, however, which is to understand that he isn’t really against oligopolies; he just thinks that government bureaucrats know better than the markets which airlines should be granted cartel status. This is the only meaningful interpretation of his criticism of the deregulation here. If this was not his intent, then his criticism just boils down to absolute nonsense.
Nocera didn’t limit his argument to trying to suggest that the deregulation, in the long run, has resulted in less competition. He also tried to argue that it has failed in its goal of reducing prices, writing that, “In the last few years especially, ticket prices have skyrocketed”.
Of course, Nocera himself admits that “lower prices” was an immediate consequence of freeing up the market, so why were prices so high under the regulation in the first place? As Bloomberg explained in a 2011 article, “The Civil Aeronautics Board had forbidden price competition. The result was service competition instead: empty seats, steak sandwiches, Aloha bars near the galley, and sky-high prices. A business traveler may be pleased to find an empty seat for his briefcase, an FTC official said at the time, but probably doesn’t realize he is paying full fare for the briefcase.” And what about the long-term consequences for prices? Bloomberg also pointed out: “In 1974 the cheapest round-trip New York-Los Angeles flight (in inflation-adjusted dollars) that regulators would allow: $1,442. Today one can fly that same route for $268. That is why the number of travelers has gone way up.”
It is true that air fares have risen in recent years, but Nocera himself points out factors like “9/11, which caused people to stop flying”, and “volatile fuel prices”, where “between 2000 and 2012, fuel costs for the industry rose from $16.8 billion to more than $50 billion.” And, oh yeah, “Then came the Great Recession”—which was caused not by the free market but by government interference in the market, with the Federal Reserve’s low-interest rate policy and government policy of encouraging homeownership inflating the housing bubble that precipitated the financial crisis.
But even after acknowledging these other factors in the market, like fuel costs, Nocera tries to convince his readers that by “consolidating” and creating this supposed “oligopoly”, the airline industry is somehow gouging its customers. “What did consolidation give the airlines?” he asks. “Pricing power, as it’s called.” He argues that while demand remains high, this “oligopoly” has “slackened” its “supply”, such as by “cutting back the number of seats they offered. That’s why when you fly today, the plane is likely to be full; there are simply fewer flights available.”
Apart from it being a self-evidently good thing for the airlines to be acting more economically in terms of fuel consumption, and the fact that Nocera is effectively criticizing them for not being more wasteful of valuable resources, we may return to the Bloomberg article, which incidentally concluded with the relevant question: “how many now will vote to go back to the ‘good old days’ of paying high, regulated prices for better service? Even among business travelers, who wants to pay ‘full fare for the briefcase?’”
Joe Nocera, for one. Never mind the fact that as a result of the deregulation, adjusted for inflation, air fares fell by 44.9% from 1978 until 1997. From 1991 until 2000, air fares fell by 25%. From 2000 to 2011, fares fell by 18% in real terms. According to another estimate, from 1978 to 1999, average airline fares fell 40% in real terms, while airline travel increased from 227 billion passenger-miles to 652 billion passenger-miles. As the educational website HowStuffWorks.com points out, “Believe it or not, fares are cheaper today than in 1978, which is why more people are flying than ever before.”
But never mind the actual facts. According to Joe Nocera, this deregulation of the airline industry was a bad thing because it unleashed the forces of that sinister free market, and the obvious solution is to go back to even more heavily regulating the industry again—perhaps such as going back to having a government-mandated cartel to put an end to what Nocera calls the “only problem” with the 1978 deregulation, all that excessive competition.
The incoherence of Nocera’s argument would seem to indicate how it was simply an instinctive reactionary response for him, presumably owing to his statist ideology, to automatically take a position against “deregulation” and the “free market”, without bothering to spend any time actually thinking about what it is he was saying.
It seems fitting to close with some words of wisdom from the great economist Murray N. Rothbard: “It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.”