Politics & Policy

The Wonders of Deregulation

It has benefited many Americans and harmed very few.

Decades of deregulation and economic liberty, President Obama argues, have endangered and impoverished Americans.

He has told voters in recent weeks that “we tried [the] theory” of deregulation, and it “hasn’t worked.” Further, today conservatives “keep telling us that if we’d just strip away more regulations, and let businesses pollute more and treat workers and consumers with impunity, that somehow we’d all be better off.”

#ad#But the problem for the president is that, thanks to deregulation, we actually are all better off.

Of course, almost everyone agrees that the government should play a role in regulating certain segments of the economy, and certain risks cannot be mitigated by the market alone. But the president pretends that Americans have been, on balance, ill served by greater economic liberty. He often argues his case by conflating consumer, environmental, and financial regulation (most prominently using the investment-banking financial crisis to justify the Consumer Financial Protection Bureau). Deregulation may well have played a role in the 2008 financial crisis, but claiming that deregulation of all sectors has made Americans worse off is extremely deceptive.

In fact, one of the most beneficial macroeconomic developments of the past few decades, in the U.S. and abroad, has been the huge benefits provided to consumers by the repeal of government regulation. In most industries, government regulation raises costs and reduces choice without providing tangible benefits or protections.

As a national industry, transportation — including trains, buses, and airlines — has historically been a target for interference and market distortion by the federal government. Perhaps the most striking story of deregulation in the American economy is the radical transformation of the airline industry, which went from being a luxury to a regular component of our national transportation system.

Since the industry’s inception in the 1930s, interstate airlines were heavily regulated by the Civil Aeronautics Board, which determined which routes they could fly, how much they could charge, and when they could schedule flights. Consumers were ill served by limited routes and schedules, and many were locked out by high fares.

In 1978, the federal government began dismantling this byzantine system, which had allowed airlines to generate steady but unimpressive profits for decades. As a result, airlines began flying to destinations they hadn’t served, at greater frequency, and, most important, at dramatically lower costs. One estimate by the Air Transport Association suggests that ticket prices today are 44.9 percent lower in real terms than they were in 1978. Millions of Americans who had effectively been priced out of the market for air travel could now afford to fly.

Deregulation also freed airlines to provide new services; with much more leeway in their cargo policies, overnight and same-day delivery of packages became more common and affordable. Notoriously, the industry has stripped away nearly every enjoyable passenger amenity, but it has done so in response to consumers, who have decided that they prefer lower prices instead of in-flight cuisine. Before deregulation, the federal government’s shackles had made their decision for them.

In fact, customers have won such an overwhelming victory that airlines’ prices are now sometimes too low — most so-called legacy carriers are either defunct or in dire financial straits. But this has just opened up the industry to new entrants providing lower costs or serving previously underserved routes. (The only real downside to this for the taxpayer is that the older airlines have represented the largest pension accounts transferred to the Pension Benefit Guaranty Corporation.) The human cost of lower compensation and more unpredictable employment has been obvious, but evidence suggests that the older airlines’ promises were too generous in the first place. The churn of creative destruction isn’t entirely to blame for airlines’ failures, but it is definitely the source of lower prices.

#page#Buses, a less glamorous transportation industry, have also flourished when unfettered. As Michael Barone recounted in a column last fall, inter-city bus transportation has long been looked down on by American consumers, but in recent years, private bus lines have dramatically improved, offering cheap, reliable, and comfortable service between many major cities.

From the 1960s until the early 1980s, as middle-class demand for inter-city buses shifted or decreased for a variety of reasons, the industry collapsed, unable to adapt because of restrictions on the number of carriers, price controls, and policies requiring stops in relatively obscure areas. The Bus Regulatory Reform Act of 1982 dismantled these restrictions. That didn’t immediately revive the industry, not least because its image had been tarnished over the years. But it enabled bus companies to innovate and compete, and in the last decade, when high fuel prices and traffic congestion drove consumers back toward mass transit, Americans boarded buses in droves, traveling to and from convenient locations at rock-bottom prices — from New York to D.C., for instance, for less than $25, which is perhaps 10 to 20 percent of the price of the alternatives.

#ad#Buses are hardly an innovative or flashy technology, but in the hands of the private sector, they have been honed into an efficient and inexpensive one.

The story of American deregulation is largely one of the federal government clearing away restrictions it had previously put on particular interstate industries (other examples being trucking, railroads, utilities, and telecommunications). Some other nations have benefited even more dramatically from rejecting dirigiste dogma. Several East Asian nations have become financial and trading hubs thanks to the freeing of their financial markets. Many African nations dismantled their exploitative primary-commodity-marketing boards in the 1980s, allowing farmers and small producers to export freely at the world-market price. India has slowly loosened its grip on the country’s manufacturing and retail sectors. These broader developments have not just provided cheaper, better services to consumers; they also have liberated and enriched entire nations.

President Obama clearly doesn’t realize that freer economies tend to be richer ones, and that regulation raises prices and reduces choice. Of his recent comments on the question of regulation, the most embarrassing and deceptive came in his Associated Press luncheon speech, in which he argued that deregulation of the health-insurance market has caused premiums to “soar.” Not exactly: An important cause of soaring premiums has been regulation in the form of mandated services and tests. Though that might be desirable in some cases, the most highly regulated states, such as Massachusetts and Florida, are easily the most expensive.

In fact, health insurance essentially follows the standard story of overregulation: Government raises barriers to entry, forces out alternatives, and makes the remaining ones more expensive by controlling consumer choice. Individual plans have become prohibitively expensive, and some types, such as high-deductible plans, are now almost impossible to come by in some markets. People looking for certain kinds of coverage are not just priced out of the market; in many cases, the market doesn’t even exist.

The president’s health-care reform, though he claims it will make health insurance cheaper and easier to obtain, is likely only to compound these problems, by allowing HHS to mandate services, a decision previously left to the states.

Government has a role in regulating some types of commerce, but it also has a habit of making business more expensive and less nimble. If the president took an unbiased view of history, he would notice that deregulation has benefited many Americans and harmed very few. Unfortunately, he seems to ignore the dividends accrued from greater economic liberty, and is prepared to reverse a beneficial trend.

— Patrick Brennan is a 2011 William F. Buckley Fellow at the National Review Institute.

Patrick Brennan — Patrick Brennan is a writer and policy analyst based in Washington, D.C. He was Director of Digital Content for Marco Rubio's presidential campaign, writing op-eds, policy content, and leading the ...

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