Don't Blame Deregulation

CONVENTIONAL wisdom blames many of our current economic woes on the deregulation movement of the early 1980s. The costly savings and loan fiasco is an often cited example. Higher cable television rates and crowded airports are also frequently blamed on deregulation. Upon closer look, however, it appears these problems were not caused by deregulation. Ironically, they were caused because too much federal control remained. Deregulation of these industries was never completed.

Proponents of deregulation argue that competitive markets serve consumers better than federal regulators. They say politically appointed regulators do not always have the public interest in mind. Effective regulation is too often neutered by special interest groups and whims of Congress.

In terms of overall consumer welfare, deregulation has been successful. Firms in newly deregulated industries were suddenly forced to compete for customers. As a result, consumers get more for their money. Only where the government did not complete deregulation have consumers been hurt.

For example, a recent Brookings Institution study of airline deregulation shows that air travelers are now better off. Although fares on some routes are higher, the study finds that when adjusted for inflation, consumers on average pay lower fares today than when the government regulated the industry. Unfortunately, while the airline companies were deregulated, airports were not.

With air travel increasing every year (despite the current war-caused slowdown), a critical shortage of airport capacity is developing. Private firms are still not allowed to build new airports despite growing demand for landing space. Most major airports are overcrowded, effectively defeating a main goals of deregulation. Without building more airports or expanding existing ones, airlines are protected from new competitors.

To make matters worse, long-term gate leases have allowed airlines to form hubs at existing airports. While this is an efficient business strategy for airlines, hubs enable airlines to further lock out competition.

The cable television industry has similar problems. Although cable television was deregulated nationally, local cable monopolies were allowed to remain. The resulting mix has been a blessing for cable companies who are now enjoying monopoly profits, but consumer welfare is dwindling as monthly rates have soared.

THERE is no economic reason to give local cable companies a monopoly. Consumers can and should be given a choice over who provides their television signals. For example, fiber optic phone lines can carry huge amounts of electronic data, including television pictures. If allowed by law, phone companies could lease their lines to new companies who would then be allowed to compete directly with cable television companies.

This would not only give consumers more choice, it would give a whole new meaning to television as we now know it. Imagine coming home late and realizing you missed the evening news. With fiber optics, you could request the evening news whenever you had time to watch it. Interactive television, where the viewer could influence what was shown, would also be possible.

The savings and loan crisis was another case of incomplete deregulation. While S&Ls gained the right to set their own rates, they were not able to compete directly with banks for deposits. Commercial banks offered depositors higher interest rates because they were allowed to engage in many more types of business ventures than S&Ls.

As a result, banks have had very diversified portfolios and can bear the risks of more profitable transactions. For S&Ls to offer depositors higher interest rates in order to compete with banks, they were forced to make very risky investments, including junk bonds and dubious real estate projects.

At the same time, Congress ordered regulators to increase deposit insurance to $100,000 per savings account. Knowing that American taxpayers would end up bearing all the risks, the S&Ls made even riskier investments without being responsible for the consequences. Now taxpayers are stuck with a $300 billion bill to clean up the mess.

Most economic problems currently blamed on deregulation were actually caused by incomplete deregulation. Competition is still suffering in many industries because of leftover regulatory barriers.

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