Tuesday, April 28, 2009

Needful Distinctions

At the conclusion of his recently published tract, A Failure of Capitalism: The Crisis of '08 and the Descent into Depression (Harvard Univ. Press, 2009), Judge Richard Posner identifies the present depression as "the product of a financial crisis that resulted from the confluence of two dangerous developments: low interest rates in the early 2000s and the deregulation movement, which began in the 1970s," id. at 315.  On the latter development, it would seem that Judge Posner is repeating a certain prejudice which has captured part of the present political imagination: deregulation is intrinsically bad (if not evil) and thus to blame for the U.S.'s (if not the world's) present economic woes.  However, 200 pages earlier in the book, Posner offers an important observation which lends credence to the view that it is not deregulation per se which is blameworthy, but a failure of some to make the necessary distinctions between the industries and sectors which have been subject to a rollback in regulatory oversight:

The roots of the failure [for government to prevent the economic crisis through stronger regulatory oversight of the financial sector] lay in a widespread dissatisfaction, beginning in the 1970s,with public-utility and common-carrier regulation, and other forms of economic regulation as well, including the regulation of banking and investment.  The economists who inspired the deregulation movement were not macroeconomists and did not differentiate between banking and other regulated industries, such as railroads and airlines.  They were not alert to the macroeconomic implications of competition in banking; and macroeconomists . . . thought that the problem of depressions had been solved.

Id. at 115.

Without entering the present fray over the extent to which financial institutions such as banks ought to be reregulated, it is worth reiterating that a commitment to a liberal, free market approach to the transnational air transport industry is not foreclosed by present (and hopefully passing) economic conditions.  Such an approach, as demonstrated by the airline deregulation movements of the U.S. in the 1970s and the European Community in the 1990s, has resulted in cheaper fares, more services, new route networks, and innovative consumer benefits programs.  It has also, as the airlines' cultured despisers are quick to point out, brought on a plethora of bankruptcies, a sharp reduction in onboard amenities, and concerns over apparent market dominance by a shrinking number of carriers.  The debate which began raging shortly after the U.S. industry was deregulated--and which has never subsided--is the extent to which deregulation itself led to these outcomes.  See, e.g., Airline Deregulation: The Early Experience (John R. Meyer et al. eds., Auburn House Pub. Co., 1981); Barbara S. Peterson & James Glab, Rapid Descent: Deregulation and the Shakeout in the Airlines (Simon & Schuster, 1994).  The absence of regulatory strictures are not to blame for bad business models.  To quote Posner again (though this statement will no doubt be obvious to those who follow the airline industry): "[A]irlines are constantly teetering on the edge of bankruptcy because of their very high fixed costs--costs that by definition do not fall when output falls."  Posner, supra, at 160 (parentheses eliminated).  In a volatile operating environment such as the one carriers have been forced to contend with since at least 2007, staying alive is about all the airlines can do until better times appear.

Yet for all of the criticisms heaped on the industry, few seem to realize (or want to realize) that deregulation for the airlines has been an interrupted process which continues to verge on reversal.  Civil aviation remains one of the most heavily regulated industries in the world.  It has never had the freedom to become a truly globalized industry.  Instead, it has remained subject to an international regulatory system organized around the nationalist notion of the flag carrier and subject to strict limits on national ownership and control.  In the U.S., legislative proposals such as those contained in the 2009 FAA Reauthorization Act would raise new, xenophobic restrictions on foreign participation in the business operations of American carriers while undermining the survival of international airline alliances--the industry's ingenious answer to foreign ownership caps.  Even if it is possible to rightly decry the "anarchy" brought on by the deregulation of certain industries or markets, there's simply no way to do so consistently or honestly with respect to civil aviation.  Civil aviation's time, in the view of lawmakers, has not come. In the wake of the great financial meltdown of 2008, it is difficult to see when it will come.  That does not mean it isn't worth agitating for.  To do so successfully calls for making distinctions which, upon sober reflection, appear quite obvious and yet are oftentimes clouded by the fallout of economic collapse and the proverbial steam emitting from the ears of indignant politicians.


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