March 13, 2014

Deregulation did not affect airfare prices, and Neoliberal cluelessness generally

The airline industry used to be under government regulation, whereby the state could have a say in what cities would be served, which cities could be connected with which others, what the ticket prices could be, and so on. Then the government deregulated the industry, letting the airline companies make those decisions on their own.

Neoliberal economic theory says that this will open up competition among airline companies, which will lower prices for consumers. How this happens does not matter in the details -- in the economist's mind, real-world outcomes must be special cases of a general principle. Here, "deregulation leads to greater competition among producers, which will lead to greater savings for consumers." No need to check facts or run case studies -- the theory said it will be so, so it must be so. The only open question is the magnitude.

Without any pre-conceived notions, look at the red line in the following graph showing the real cost per mile of airline travel, from 1950 to 2005, and point out where the deregulation event occurred. It should pop out if the theory holds water.


You don't see the event at all because deregulation had no impact on prices. What you see is a single downward trend with no acceleration (that is, a sharper and sharper decline). Your best guess would be around 1962, since prices had been creeping up for five years before undergoing a long and steady reversal. In fact, the Airline Deregulation Act was signed in 1978. When a major cause is invisible in a graph showing the trend in the effect, then it is not the cause of the effect after all.

From a Kevin Drum post on this topic:

Beyond that, you might be surprised to learn that it's an open question whether deregulation was such a boon for the flying public in the first place. In a 2007 paper, David Richards looked at airline fares since 1950 and concluded that deregulation accomplished little. Fares had been going down before 1978 and they kept going down afterward. Yield per passenger-mile showed no change before and after deregulation (see chart on right). Growth in passenger miles traveled actually slowed after deregulation, and fares were mostly about the same as they would have been under the old CAB formulas. His conclusion: "This paper makes clear that the grant of pricing freedom to the airline industry has generally resulted in average prices being higher than they would have been had regulation continued under the DPFI rate-setting policies."

What did happen, Richards found, was that fares decreased on routes between big cities and increased on routes between smaller cities. That may or may not have been a good thing on net, but it's certainly a far different story than the one we usually hear about deregulation. For more on this, see "Terminal Sickness," a fascinating look at airline deregulation and the death of the mid-tier market by Phillip Longman and Lina Khan.

There's the link to rising inequality, BTW: it's cheaper for elites to fly between big cities, but harder for the rabble to fly between smaller cities.

Referring back to the graph, in the years surrounding 1980, the cost per mile was about 12 cents, and 20 years later it was around 7 cents. Prices fell 5 cents in 20 years. Presto, "deregulation worked"! -- just ask this glib article in The Atlantic.

Not so fast -- from 1950 to 1970, prices fell from about 23 cents to about 16 cents, a decline of 7 cents in 20 years. That's a larger magnitude drop than 5 cents in 20 years. The slope was 40% steeper in the first period than in the later period. Hence, bad news for neoliberal theory: prices fell at a faster rate before deregulation than after.

I'm not claiming that deregulation caused the rate of decline to slow down. Maybe that fact about the history of the airline industry would have taken shape regardless of what Congress did or did not sign into law. But if we are going to link deregulation with price trends at all, we would have to say that it was harmful to consumers in slowing down the decline that had been going for damn near 30 years before deregulation.

(Skip down to the last three paragraphs to see what non-effects or harmful effects deregulation has had in other major cases.)

I also have no solid idea about why prices have been falling since at least 1950. My hunch is that there were low-hanging tech improvements for such a brand-new industry -- remember that consumer airliners are modified bombers from WWII -- and that making things more efficient allowed some of the savings to be passed on to consumers. After several decades, the improvements get harder and harder to find, and are more costly to implement, so not as much savings gets passed along as before.

But why would airline corporations bother making their businesses more efficient and passing some of those savings along to consumers, when they were protected by government regulation, barriers to entry, price controls, and so on? Maybe businessmen had a different psychology back in the '50s and '60s compared to the '80s and '90s. Of course they did: the former were in the final stage of the Great Compression, whereas the latter were in the beginning of the Great Divergence. The spirit of the former was to rein in greed (even if it could not be wiped out), while the spirit of the latter is dog-eat-dog.

These psychological changes would have applied to the regulators as well -- the former leaning on airlines to make their businesses more efficient and to keep cutting prices in step with that, and the latter looking the other way since they came to view regulatory power as bogus.

And I'm sure consumers would have felt differently back then too, shunning or slandering the airline companies if they did not make things run better and cut prices. Consumers and producers were supposed to treat each other out of good faith, and not improving things would have been seen as laziness or stinginess.

Today's consumers are content to get walked all over by the airlines -- the elimination of cute stewardesses, the elimination of meals, being crammed in like cattle, fees for everything, and ever-growing restrictions on what you can do, what you can bring, and how early you have to show up at the airport.

It's not surprising that sensible explanations like this would not occur to neoliberal economists, easily the most autistic camp within social science (already a nerdy bunch). They'll allow that people are not all identical robots, but they still do view them as pieces on a chessboard -- all sets of pieces obeying the same rules and constrained into the same range of behavior no matter what chessboard they appear on, whether a 1950s chessboard or a 21st-century chessboard.

Those of them who have read their Adam Smith like to cut down the arrogance of social engineers, who in their mind are government regulators, by comparing them to chess players who see people as chess pieces, oblivious to or dismissive of the idea that those people might have their own drives that the chess player cannot simply over-ride by lifting them in the air and swinging them over toward another square.

Yet the neoliberals themselves have that same mindset, only instead of "prudent government regulation" it's "getting the incentives right." Just make the currents point West, and the ships will sail West. The notion that the boat might have a power motor, and is not some silly little raft, or that the wind-generator of policy incentives might not blow very hard, doesn't matter to them.

Nor does it occur to them that what they believe are the right incentives might be the wrong incentives. No humility. The airline deregulation case is a textbook case of this -- whatever wise changes in incentives there were circa 1980 seemed to make the airlines greedier and consumers worse off than under the earlier set of incentives.

The history of the programs flying under the banner of "deregulation" have mostly served to enrich the top and squeeze the bottom, so the standard story about airlines should have sounded suspicious from the start.

Deregulating the labor market has gone along with falling wages, ditto for deregulating residence and labor of immigrants (falling wages and higher housing costs). Deregulating finance has nearly blown up the global economy. Deregulating cable TV hasn't stopped prices from doubling. And as with airlines, real prices had already been falling in the telephone industry long before the divestiture of AT&T during 1982-'84, and even before the 1974 anti-trust lawsuit against them. (See this graph, where the gap between prices for phone services and for all items was already closing by the late '60s).

This all jibes with how most folks feel about how much worse off they are economically than their parents or grandparents' generation (except the elite, which has swollen in numbers and enjoyed greater wealth). It's not that people think having a toilet is worse than having an outhouse, but that progress was just zipping along for their grandparents and parents, while now that trend has slowed down, flatlined, or reversed, depending on the domain of life. I can't think of an uplifting way to end this post. Just that looking through the reality, rather than the theory, vindicates how most people feel about the pace of progress these days.

11 comments:

  1. I think the chart on airline prices is misleading. The most active routes saw dramatic fare reductions. In addition the number of flights and the number of airlines saw tremendous growth after 1980.
    pricing for the most common routes, such as New York to LA dropped 30% between 1980 and 1985. While it was expected to raise rates to travel between smaller cities. The predictions of the neo-liberals were more accurate than the predictions of those who opposed deregulation. smaller markets did not suffer the erosion of service predicted by opponents of deregulation.

    regulations did not end in 1980, and the government continued to interfere in the airline industry, blocking many mergers, such as in 2001 when United was blocked from buying continental. the mergers which were approved required the airlines to continue with unprofitable routes.

    Growing up outside of Philly in the 1970's , all of my friends who went to DisneyWorld got there by driving. Unlike today when they all fly. The reason is the costs. in 1977 when my family drove to Orlando from Philadelphia it would have cost my dad 2 weeks salary to fly us down to Florida. Flying to Florida was $300 per ticket in the 70s, all the airlines charged the same. Adjusted for inflation this would translate to over $1200 per ticket today.

    while the law to de-regulate airlines was passed in 1978, they gradually implemented the new rules. Fair regulations did not end until 1983. The Civil Aeronautics Board's powers of regulation were phased out, eventually allowing passengers to be exposed to market forces in the airline industry. The Act, however, did not remove or diminish the regulatory powers of the Federal Aviation Administration (FAA) The CAB was eliminated in 1985. So one would not expect a rapid drop in costs starting in 1980. More significantly the number of airlines and number of flights increased greatly after 1980 as did the number of airlines.

    I think the biggest cause of the drop in service has been the greedy unions. he young stewardesses of the 70s and 80s are became old ladies earning 6 figures to serve cocktails. What should be a young persons job , turned into a career because the pay is above the skill set. Not many cocktail waitresses earn $90,000 per year for 18 hours work each week. The old broads prohibit the airlines from hiring young girls to replace them, and their salaries keep climbing each year.

    ReplyDelete
  2. As true as those facts may be, they don't tell us what the effect of deregulation was. You have to look at the trends that had been going on since 1950. If the trends after 1980 are a mere continuation of those earlier trends, then deregulation had no effect. If the post-1980 (or whenever) trends slowed down, compared to the earlier trends, that's an even worse argument for deregulation.

    ReplyDelete
  3. Why do you assume the trend would have continued?

    ReplyDelete
  4. You mean the one before 1980? Well, it had been going for 30 years at least by that point. The fact that it did continue through today means we don't need to invoke a special cause at any point.

    If you're going to say, "Deregulation was necessary to prevent the decline from stalling out" -- there were no such signs. Also, you could say that about any point. We needed it in 1960, or 1970, etc., yet we did not.

    One cause that describes all the data is better than invoking two or three or four. I'm not sure which single cause that is -- probably tech improvements in a new industry, showing diminishing marginal returns. But it's clear that there is only one, and it began at least as far back as 1950.

    ReplyDelete
  5. Isn't it theoretically possible that, this time around, the inequality never reverses? Turchin argued that it was the threat of foreign countries which brings inequality to an end, yet we can argue this time that America is so powerful that we can continue becoming inequal without risking foreign competition. Or, another argument is that the war technology has changed so much that inequality is embedded.

    ReplyDelete
  6. to look at the true effects, look at the trend of flight from NY to LA, NY to Miami , Chicago to LA, NY, or MIA. Dallas to Philly, San Fran to Atlanta etc.. Also the new rules were phased in over 5 years, after being discussed for 5 years, as the airlines fought against de-regulation they did not fight for fare increases in an attempt to keep their guaranteed profits in the years leading up to 1978.

    The trend of all flights will mislead, because the most dramatic drop in cost occurred with the popular flights. As expected. Some predicted flights to small cities would cease operating, but these flights continued , but as expected the cost to fly into and out of small cities did not fall much, if at all although politicians continued to pressure the airlines to serve small cities with other means of coercion.

    looking at the overall trend misses the true results. The biggest benefit was more flights serving more people at lower costs.. Those who opposed deregulation did not predict this. the Neo-liberal prediction was close to the actual results. If anything they failed to predict that within ten years the number of flights would more than triple.

    amazingly even Jimmy Carter realized the The Civil Aeronautics Board's powers of regulation was being abused. Restricting flights, competition and fares.

    ReplyDelete
  7. I think massive cost savings would be possible by deregulating healthcare, but unfortunately almost no one seems to be demanding such a change.
    Big business is very comfortable with a wealth of regulations and bureaucracy.

    If it were to happen, it is quite likely rich execs would use the change to benefit themselves, and consumer costs would only decrease marginally.

    ReplyDelete
  8. "The biggest benefit was more flights serving more people at lower costs.. Those who opposed deregulation did not predict this."

    We're not siding with one or the other side of a 35 year-old policy debate, but figuring out what happened given all the data we now have. If opponents of dereg didn't predict that it would have no effect, arguing that it would have had a drastically harmful effect, well OK, they were wrong too. Like I said, the policy looks invisible in the long-term trends.

    It's as if Congress passed a law on the path that the moon would take.

    ReplyDelete
  9. I was thinking of what other reality checks we could do on the theory that falling prices reflect tech improvements or other ways of making their business more efficient that have been going on since at least 1950.

    Airline fatalities (controlled for the number of departures) have been falling since 1950, and dereg is invisible in that trend too. Policy wonks might argue that dereg would have increased the fatality rate, others arguing that it would make things safer. But the reality is that the policy is invisible.

    The single downward trend since at least 1950 is probably due to something like tech improvements or greater familiarity with their industry, finding efficiency gains, and so on.

    ReplyDelete
  10. Airplanes are often dirty.

    ReplyDelete
  11. I remember Julian Simon (the uber-"free markets will solve everything" guy) used a similar graph with, I think, levels of air pollution - but to make the opposite point about regulation. He showed that the levels were trending down starting in the 50s, and you can't tell where the clean air act was passed in the 70s from the graph - it's just a smooth downward trend.

    Just putting it out there, I'm not necessarily pro or anti regulation (although I am for anything that would bring back sexy, cheerful stewardesses)...

    ReplyDelete

You MUST enter a nickname with the "Name/URL" option if you're not signed in. We can't follow who is saying what if everyone is "Anonymous."