Remembering What Regulatory Capture Looked Like: The Airline Experience

This week, my colleague Jerry Brito asked me to guest lecture to his George Mason University law school class on regulatory process. He asked me to talk about one of my favorite topics: the sad, sordid history of regulatory capture. Regular readers will recall the compendium I posted here a few months ago [and that I continue to update] of selected passages from books and papers penned by various economists and political scientists who have studied this issue.

Again, it doesn’t make for pretty reading, but the lesson that history teaches is vital: No matter how noble the “public interest” goals of regulatory advocates or their specific proposals, the only thing that really counts is what regulation means in practice. Regrettably, all too often, regulation is “captured” by various interests and used to their advantage, or at least to the disadvantage of potential competitors, new entrants, and innovation.

While I was gathering some materials for the case study portion of my lecture — which incorporates the history of telecommunications monopolization, broadcast industry regulatory shenanigans, and transportation / airlines fiascos — I figured I had to post a passage from one of my favorite books on regulation of all-time: Thomas K. McCraw’s brilliant Pulitzer Prize-winning 1984 book, Prophets of Regulation. In his chapter on the late great Alfred Kahn, the father of airline deregulation, McCraw recounts the history of the Civil Aeronautics Board (CAB) from its creation in the 1940s up until the time of Kahn’s ascendency to CAB chairman in the Carter Administration (and then the CAB’s eventual deregulation and abolition). Here’s the key passage from that history:

“Clearly, in passing the Civil Aeronautics Act [of 1938], Congress intended to bring stability to airlines. What is not clear is whether the legislature intended to cartelize the industry. Yet this did happen. During the forty years between passage of the act of 1938 and the appointment of [Alfred] Kahn to the CAB chairmanship, the overall effect of board policies tended to freeze the industry more or less in its configuration of 1938. One policy, for example, forbade price competition. Instead the CAB ordinarily required that all carriers flying a certain route charge the same rates for the same class of customer. […] A second policy had to do with the CAB’s stance toward the entry of new companies into the business. Charged by Congress with the duty of ascertaining whether or not ‘the public interest, convenience, and necessity’ mandated that new carriers should receive a certificate to operate, the board often ruled simply that no applicant met these tests. In fact, over the entire history of the CAB, no new trunkline carrier had been permitted to join the sixteen that existed in 1938. And those sixteen, later reduced to ten by a series of mergers, still dominated the industry in the 1970s. All these companies… developed into large companies under the protective wing of the CAB. None wanted deregulation.” (p. 263)

To reiterate: Zero new competitors were allowed. Zero price competition was allowed. And very little service innovation was permitted. It was a comfy little protected cartel from start to finish. It’s no wonder that “none wanted deregulation”! Folks, if that isn’t the very definition of regulatory capture, I don’t know what is.

This is what makes Fred Kahn’s achievement all the more monumental. Beyond his obvious mastery of the subject and rigorous documentation of regulatory failure in action, it was Fred’s sheer force of will and amazing spirit that provided the spark to get the deregulation of this mess moving forward. Against all odds — and with the help of some fellow liberal Democrats like Ted Kennedy, Ralph Nader, and Stephen Breyer — Fred did it.

And consumers owe him a huge debt of gratitude for it. Prices plummeted following the CAB’s abolition and countless new industry faces have come and gone since deregulation. Things haven’t been perfect by any stretch of the imagination, but can you imagine how much worse off we would have been absent Fred Kahn’s bold move to break the regulatory capture logjam and “free the skies” for competition?

Something to think about next time someone tells you that regulation is always in consumer’s best interests.

[P.S. – I posted a short obit here late last December remembering Fred Kahn upon his passing. I hope you read it if you haven’t already. I still wish I could hear Fred speak just one more time. What a joy and inspiration that man was. I always treasured my moments with him. I still have the final email he sent me from early 2010 sitting in my inbox. I just can’t bring myself to delete it for some reason. He had passed along a nice note about a paper I had recently written. I practically cried when I read his note. One of my intellectual heroes had not only read something I penned but he had actually liked it! And he was 92 when he sent it to me. Blows my mind.]