Economy & Business

Asymmetrical Capitalism

Passengers disembark an American Airlines flight in 2013. (Carlo Allegri/Reuters)
The key to fairness for consumers is not regulation, but true choice.

I like to think of American Airlines CEO Doug Parker as my pen pal, but, in truth, he never writes back. It’s a lopsided relationship — asymmetrical, in a word.

I have for many years argued that most people would be enthusiastic about capitalism if not for their interactions with a small number of businesses that unfortunately occupy critical positions in the everyday economy: banks and credit-card companies, insurance companies, cable providers, airlines, and a few others. Most of those companies have a few things in common. They tend to be located in industries that are heavily regulated, which leads to consolidation and weak competition. They generally are located at choke points, meaning that many people in the ordinary course of affairs are obliged to do business with them in order to simply get on with their lives. And they often are located at the intersection of big government and financial services. And in almost all cases, they put consumers on the losing end of an asymmetrical relationship.

Here’s what I mean by asymmetrical: If I’m at Walmart and I’m told there’s going to be a six-hour delay at check-out, I flip the metaphorical bird to Walmart CEO Doug McMillon, drop my purchases where I stand, and mosey on down the road to Target or AutoZone or Academy or whichever store it is that has what I want. Walmart and I have the right kind of free-market relationship, because we both have the power of exit: It’s easy for Walmart to say “No” if I want the company to start stocking Armani or to cut the price of bananas by 20 percent, and it’s easy for me to walk away if Walmart isn’t giving me what I want at a price I like. That’s why companies such as Walmart and McDonald’s — and other firms in markets that have lots of buyers and lots of sellers making lots of transactions — cannot simply raise prices or unilaterally set terms.

That doesn’t hold true with firms such as airlines or health-insurance companies. That is, in fact, one of the biggest problems with health insurance: Most Americans have effectively zero choice in that market. Those who are in employer-based plans have their choices made by their employers, who do not necessarily have the same incentives that the employees do, and those in the individual market have in many places only one or two providers to choose from. Consolidation in the airline industry has been steady: U.S. Airways merged with American West in 2005; Delta with Northwest in 2008; United with Continental in 2010; Southwest with AirTran in 2011; American with U.S. Airways in 2013. According to Forbes, the top four airlines shared 65 percent of the market in 2010, but 84 percent in 2015.

That kind of consolidation happens frequently in heavily regulated industries: After the financial crisis of 2008–09, new regulations were passed with the promise that they would bring to an end the era of bailouts for institutions that are “too big to fail.” What actually happened is that the big institutions got even bigger. Community banks and smaller institutions saw their market share plunge, and larger institutions expanded aggressively, with both phenomena driven at least in part by the same thing: higher regulatory compliance costs.

Think of it this way: If you’re Goldman Sachs, you have a healthy delegation of in-house lawyers and outside counsel on call, and you’re used to spending a ton of money on lawyers: The bank’s general counsel was paid more than $60 million between 2003 and 2009, which is a lot of money for one lawyer. Another $10 million a year in regulatory-compliance costs is barely noticed at big financial firms such as Goldman Sachs or Citi Group, or at big consumer banks such as Wells Fargo, but they can put a smaller company out of business. For all the loose and uniformed talk about “unregulated capitalism” after the financial crisis, banks and other financial institutions — including credit-card companies and insurance companies — are among the most heavily regulated industries in the world. Airlines are up there, too.

There are good reasons for that high level of regulation, even if the regulations themselves often are not very good. But consolidation generally stinks for consumers. That’s why if you’re five minutes late boarding a flight, you are out of luck and will pay for the privilege of rebooking, but if it takes you ten hours to complete a three-hour flight because the airline can’t figure out how to get a flight crew to JFK, or if you sit on the tarmac at DFW for 90 minutes because you’re waiting on the gate to be cleared by an airplane that is actually out of commission and going nowhere—these are not hypothetical—American doesn’t pay you $200 for wasting your time. The onus is all on you.

Everybody experiences this from time to time. You get an inexplicable $15 fee from your bank and decide that it’s easier to pay it than to investigate; you set up an automated bill payment and then get charged late fees when the company’s system fails; your home wi-fi operates at 12 percent of the advertised speed and the company insists that that’s normal variation. These things end up being hard to fight, in no small part because the credit-reporting system is such an important part of our lives: Withhold rent from the landlord who is failing to keep up his end of the lease, or refuse to pay the cable company for service that is less than promised, and your credit score will take a beating, which can have far worse consequences than being obliged to pay negligent service providers. You can try to sue, but absent some dramatic development or physical injury, your chances aren’t very good, and court costs and lawyers’ fees are likely to exceed your settlement.

Fairness is an almost infinitely plastic standard in the wrong hands, but it is nonetheless a big part of the real world’s moral architecture.

This pokes people right in their sense of fairness. Fairness is an almost infinitely plastic standard in the wrong hands, but it is nonetheless a big part of the real world’s moral architecture. Progressives look at these situations and conclude that the answer is — more regulation. They believe that the way to achieve fairness is to simply mandate it. This represents some pretty primitive thinking, but primitive thinking dominates politics. Progressives are not alone in their frequent blindness to the ways in which regulation itself is a driving force behind these problems. (It is not the only force, to be sure.) A better answer is more-robust competition, but it is not always clear how to go about achieving that.

These deficiencies represent what amounts to an enormous tax on Americans. Some of those are direct costs: We pay more for health insurance, mortgage insurance, and Internet services than we probably would in a stronger market. But many of those are invisible taxes, too: American businesses waste billions of dollars a year on unnecessary travel expenses because they cannot count on U.S. airlines to keep to anything like their published schedules, which means they end up having to tack hotel expenses and 48 hours of diminished productivity onto the bill for a two-hour meeting. Many of those costs end up getting passed along to consumers and providers of business services — and to employees, too, to the extent that attaching $200,000 a year in expenses to a $75,000-a-year employee may put downward pressure on wages.

So, what to do?

Regulation, like government spending, too often is framed as a pro-or-con issue. The question of whether the federal government should spend any given dollar isn’t something that can be answered in the abstract: It matters what the dollar is being spent on. Missile defense is one thing, bulls**t subsidies for third-rate theater groups is another. (Really, Hamlet is a young woman this time? It’s been done, a lot, and it wasn’t very interesting the first 10,000 times.) The same goes for regulation: The question isn’t so much to regulate or not to regulate but what manner of regulation we should be considering. As Dodd-Frank has shown so spectacularly, not all regulation is created equal.

Here’s an idea: Enhance consumers’ power of exit. Make it easier to terminate apartment leases and cable contracts, reform the credit-reporting system to prevent its being used as a weapon in the course of good-faith disputes, make it easier for consumers to use institutions such as small-claims courts to ensure a fairer fight. And give consumers more choices wherever possible rather than limiting market disruptors such as Uber and Airbnb at the behest of politically influential cartels of one kind or another. Consumer regulation based on the power of exit rather than on the power of mandate will tend to help markets function rather than push private-sector service providers gradually in the direction of regulated quasi-public utilities — and nobody much loves their utility company, either.

For decades, conservatives have ceded the field on these issues to progressives hawking such bad ideas from the 19th century as rent controls, regulated monopolies, and price fixing. Yes, we should let markets work. Do we really think that health-insurance markets are working, or that what goes on at LAX or LaGuardia on any given Tuesday represents free enterprise? Slogans aren’t a substitute for the hard, often tedious, and generally thankless business of intelligent governance. But that work needs doing.

If you don’t believe me, ask the passenger in 27B.

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