The Joy Of Deregulation

DEREGULATION IS ONE OF THOSE CLUMSY WORDS THAT have crept into our language in the past decade. Before that, only a tiny band of economists and academics used it. But now it's tossed about casually, because we've had so much of it. All sorts of industries have been ""deregulated.'' What are we to make of this? Well, plenty. We've had enough experience with it to draw some conclusions. And the main one is: it works.

We now know this from a useful new study that assembles much of what's been learned about the benefits from deregulation in five industries: airlines, natural gas, railroads, telecommunications and trucking. The resulting price savings in these in- dustries now total roughly between $40 billion and $60 billion a year, estimate economists Robert Crandall of the Brookings Institution and Jerry Ellig of George Mason University. At the high end, the savings approach 1 percent of national income (gross domestic product). Not bad.

If Congress created a program worth $40 billion annually, you'd hear plenty about it. But deregulation's benefits get lost in controversy and complexity. Whenever an industry is pulled apart--and that's a consistent effect of deregulation--protest and pain are unavoidable. They get most of the attention. People are upset. Still, the benefits mount over time. Consider:

Since 1978, when airline deregulation took hold in earnest, air fares (adjusted for inflation) have declined by about a third.

Long-distance telephone rates have dropped by about half (again, after inflation) since 1984, when the American Telephone & Telegraph Co. was broken up.

Trucking and railroad freight rates have dropped by between 30 percent and 50 percent (yes, after inflation), according to Crandall and Ellig. (Determining the precise percentage is hard, because many types of freight are hauled at a multitude of different rates.)

Deregulation means the relaxation or removal of government controls over industries that were thought to be either ""natural monopolies'' (telephones) or essential public services (airlines, trucking). As a result, industries got protection against renegade competition. For 40 years, the Civil Aeronautics Board barred the creation of any major new airline. And carriers could fly only over routes awarded them by the CAB. Similarly, the Interstate Commerce Commission confined truckers to designated routes. And obviously, there was little phone competition.

In exchange, industries surrendered their pricing freedom and had to perform certain public services. Regulatory agencies had to approve prices (air fares, freight rates, phone tariffs), because companies had monopoly power--or something close to it. And strings were attached. Airlines, truckers and railroads often had to provide service over routes that were unprofitable or barely profitable. Phone companies subsidized local phone bills through artificially high long-distance rates.

With time, the bargain grew increas- ingly bad. Insulated from competition, regulated industries had little reason to lower costs. They concentrated on influencing the regulators to make favorable decisions. There was an unhealthy tension. As costs rose, industries sought price increases; regulators resisted, often depressing industry profits. That, in turn, impeded new investment and perpetu- ated high costs, poor service or both. A vicious circle.

As deregulation unfolded--new competition was permitted, rate regulation was loosened or abandoned--the vicious circle began to reverse itself. AT&T had been slow to adopt fiber-optic cable. In 1985 there were only 136,000 miles of it in AT&T's system. Sprint and MCI had more. AT&T responded. By 1994 it had 1.3 million miles of fiber cable (slightly more than MCI and Sprint). Airlines, freed of the CAB's route restrictions, organized ""hub and spoke'' systems--feeding passengers to major transfer points--that provided more connections. In 1978 about 14 percent of all passengers had to change airlines to reach their destination; by 1995, that was about 1 percent.

Of course, some of these benefits (fiber cable, for instance) would have occurred anyway; but they would have arrived later. In general, new technologies have benefited. The deregulation of the telephone-equipment market hastened many new devices. Between 1987 and 1995, sales of fax machines jumped from 500,000 to 4.2 million. It will also be noted--correctly--that deregulation imposes costs. Some workers lose jobs, because their companies fail (among airlines, Eastern and the old Pan Am are gone). Some suffer wage cuts. And some competition is wasteful. Cable TV and phone companies both boasted they could easily invade the other's market--and have spent billions proving, so far, that they can't.

But the costs are exaggerated. It was feared that telephone deregulation might cause the poor to lose their phones, because local phone rates would rise as the long-distance subsidy was cut. What happened is that local phone companies reduced their costs; so local phone rates (after inflation) stayed stable. The share of households with phones rose from 92 percent in 1984 to 94 percent in 1995. Although some workers have lost jobs, the survivors often do well. Since 1980, railroad employment has dropped by half; but the industry's wages and fringe benefits have risen steadily. In 1995 they averaged $48,000 per worker.

There will and should be more deregulation. What's undeniable, though, is that the deregulation process is intensely political. The Crandall-Ellig study, for example, was funded by advocates of deregulation in the electric-utility industry. They want ammunition for their case. Details matter. The deregulation of the savings and loan industry (omitted by Crandall and Ellig) was botched big time. Everything called deregulation won't enhance competition. Sometimes the label is a cover for some new corporate special interest. So deregulation is messy and open to abuse. But done right, it pays big dividends.