Did Deregulation Work?

Did Deregulation Work?

A consideration of the unintended consequences of deregulation.

By the late 1970s, lobbying money had begun to change minds in Congress about deregulation, and both parties began voting to deregulate industry. The mantra preached by most lobbyists was that economic regulation was outmoded and market self-regulation should be the norm. The idea they espoused was that government regulation impedes the natural laws of supply and demand, which ultimately increases cost to consumers. They insisted that deregulation would create more competition and thus lower prices for consumers.

President Jimmy Carter presided over the initial efforts, by promoting transportation industry deregulation. During his administration, Congress passed the Airline Deregulation Act, and the Motor Carrier Act.

President Reagan came into office wanting to deregulate the finance, agriculture and more of the transportation industries. During his administration the Bus Regulatory Reform Act, The Surface Freight Forwarder Deregulation Acts were passed.

Later the Ocean Shipping Reform Act, the Energy Policy Act of 1992 the Telecommunications Act of 1996.

These are not all of the deregulation Acts but they are among the most important--except for finance which is discussed below. But first, let's consider a few of them.

The Airline Deregulation Act of 1978

When the Airline Deregulation Act of 1978 passed, there were 43 airline companies. By 2013, there were only nine. Many airlines were forced out of business, either filing for bankruptcy or merged into/acquired by a competitor. This included big airlines like TWA, Pan American, Eastern and Continental.

Among the stated goals of the original airline deregulation was the following: “the avoidance of unreasonable concentration which would tend to allow one or more air carriers to unreasonably increase prices, reduce services or exclude competition.”

Contrary to these intentions, the industry continues to consolidate. Today, there are four major airlines that control 80% of the routes and gates.

Yes, airline fares were low for many years, and the airline companies became more efficient. However, thousands of employees lost their jobs or were forced into lower wages by two-tier wage systems. Some of the employees’ pensions were eliminated by bankruptcy and were put into the Pension Benefit and Guarantee Corporation, a government-run insurance program that takes over pension plans of bankrupt companies.

Deregulation also led to poor services and many customer complaints. In 1978, all tickets were refundable, you could change flights with no penalties, travelers would be compensated for canceled flights, seats had more leg room, meals were free, and checking bags was free.

By 2007, the airlines had enough monopoly power to charge for checked bags, charge up to $200 for a ticket change, eliminate food, reduce leg room, abandon routes to smaller cities, and, of course, raise airfares.

Airlines' non-ticket revenue increased to $15 billion a year.

So, yes, it is easy to conclude that deregulation worked in terms of lowering prices to consumers and lower costs for the airlines, and that the competitors who couldn’t compete perished.

But, I don’t think that the authors of the Airline Deregulation Act of 1978 anticipated that the country would end up with only four competitors, essentially an oligopoly.

In mid-2015, an Associated Press analysis of the airline industry found that “at 40 of the 100 largest U.S. airports, a single airline controls a majority of the market, as measured by the number of seats for sale, up from 34 airports a decade earlier. At at 93 of the top 100 airports, one or two airlines control a majority of the seats, an increase from 78 airports."

"The strategy is paying off: In the past two years, U.S. airlines made a record $19.7 billion profit, even though air travel is growing only modestly."

The four big airlines now control 80% of the U.S. market, and in June 2015, the Justice Department began investigating whether they are colluding to drive up fares by limiting the availability of seats and flights.

When you factor in the full costs to employees, customers, communities, and the middle class in general, any rational cost/benefit analysis would declare the deregulation of the airlines a failure.

Consider what happened to United Airlines from 1978 to 2014, after deregulation.

United Airlines – 1978 to 2014
1978 – Deregulation of the airlines
1985 – United demands that  pilots accept a two-tier wage contract. Pilots strike but accept a modified agreement. Flight attendants also accept two-tier wage agreement.
1994 – An employee stock ownership plan (ESOP) is negotiated which reduces wages 12% to 15%. Pilots accept another two-tier wage contract.
1997 – Wage reopener – An agreement to raise wages by 2% to 3% is rejected.
1997 - Passenger service agents decide to join the IAM union for protection.
1997 - United negotiates a regional airline contract for a lower cost airline, United Shuttle, where employees are paid less than United employees.
2002 – UAL files for Chapter 11 bankruptcy protection and shifts 30% of its flights to TED, a lower cost airline. With bankruptcy, new labor contracts are imposed to reduce labor costs $2.56 billion per year over 6 years.
2002 – The new chairman of UAL, Glen Tilton, tells employees to either accept his leadership decisions or he will file for chapter 7 liquidation. With UAL still in serious financial trouble, Tilton secures a $3 million signing bonus, $4.5 million in a pension trust, and $1 million per year in salary.
2005 – UAL asks for a another round of wage cuts of $200 million per year.
2005 – The bankruptcy judge approves company plan to cut pensions and send them to the Pension Benefit and Guarantee Corporation, a government agency.
2005- UAL demands $96 million in additional concessions from labor, from sick time and holiday pay, and by outsourcing its IT jobs.
2006 – UAL emerges from bankruptcy after three years.
2008 – The American Customer Satisfaction Index rates UAL next-to-last in customer satisfaction.
2010 – UAL is still financially troubled but merges with Continental Airlines.
2012 – The unhappy employees and disheartened managers contribute to United having the worst operational record in the airline industry. It has 77.5% rate of on-time arrivals, the highest number of delayed flights, and more customer complaints than all other airlines combined, according to the U.S. Transportation Department.
2014 – United announces the outsourcing of 630 gate jobs at 12 airports. The new non-union employees will be paid from $9 to $12 per hour. Terminated employees will be asked to take early retirement, transfer to other cities, or quit. UAL says that 30 more airports are targets for job outsourcing, while most bag and cargo handling jobs have already been outsourced.

The Deregulation of Trucking, Finance & Commodities

The Motor Carrier Act of 1978

The Motor Carrier Act of 1978 was designed to deregulate the trucking industry. The justification was that getting rid of regulations would spur growth for new companies and existing (surviving) companies; trucking companies would become more efficient or perish. The new competition would create jobs, drive down prices, and benefit consumers.

The reality was that deregulation triggered a price war and cutthroat discounting, forcing 20 out of 30 of the largest companies out of business. These changes created an influx of owner operator (shoe string) companies that worked for much lower income. About 400,000 new owner operator companies came into the industry in the early 1990s. The result was too many companies chasing too little freight, which ended in rate wars.

In May of 1985, the pressure was really on the Teamsters union. They were losing a lot of jobs and members. They agreed to a two-tier wage system, where existing members would continue to make their wage of $16 per hour ($33 per hour in today’s money) and new hires would make $8 per hour. The union agreed to the new contract because new members had to pay the same union dues as old members, and real income for the union would go up.

The second phase of trucking deregulation was that the surviving companies began to buy up the survivors, which put fewer companies in control of the industry. So, in some ways, deregulation worked as intended: either trucking companies became more efficient or perished. There was new competition that drove many companies out of business and reduced prices to consumers.

However, to achieve the original objectives of deregulation, 100 large companies went out of business and 150,000 people lost their jobs--these were the high paying union jobs that had good benefits like health insurance and pensions.

So deregulation did result in tough competition, more efficiency, lower costs, and lower prices to consumers. But in attaining these goals, thousands of companies were forced out of business, resulting in lower wages, and the creation of oligopolies through mergers and acquisitions.

The Deregulation of Finance

Senator Phil Gramm led the effort to repeal the Glass-Steagall Act, which was a New Deal law that kept commercial banking and investment separate. Bill Clinton also supported the bill, so it was a bipartisan effort. One year later, Gramm inserted the Commodity Futures Modernization Act into a must-pass budget bill that rocketed through the Congress. One part of this bill would prohibit the regulation of derivatives, which allowed finance gurus to leverage and speculate with other people’s money. By using derivatives, credit default swaps and other unregulated financial instruments, the big banks were able to chop up and resell loans and mortgages as repackaged securities or derivatives. The new securitization became globalized and eventually affected the world economy. The speculation and lack of effective regulation eventually led to the crash of 2007 and The Great Recession.

Most people think that the big bank bailout was the $700 billion that the U.S. Treasury Department used to save the banks during the financial crash in September of 2008. But the bailout is ongoing. According to the Center for Media and Democracy, $4.6 trillion has been paid out by the government and trillions of dollars are still committed. Yes, trillions not billions, and the banks are now larger and still too big to fail.

The operating principles of the big banks gives a very bad name to free-market capitalism. During the housing bubble Wall Street was considered the heart-and-soul of free-market capitalism. However, when they were in danger of total collapse, they fell on their knees as socialists, begging the government and tax payers to bail them out (and we did).

The Dodd-Frank Act was promoted as the answer to Wall Street improprieties. But it has now been four years since it was approved, and only half of the regulations have been implemented. An important part of the Dodd Frank legislation was the Volcker Rule, which was to bar banks from proprietary trading or making trades using customer funds. The legislation was scheduled to go into effect in 2012, but lobbyists have successfully stalled the bill until at least 2017.

The deregulation of Wall Street led to gambling and created a giant hole in our economy. In 2008, after the financial crash, eight million people lost their jobs and the U.S. fell into the greatest recession since the Great Depression.

During the bailout, the government also allowed many of the banks to use the bailout money to merge--Chase and Bear Stearns; Wells Fargo and Wachovia; and Bank of America with Merrill Lynch. So the result is that the banks are much bigger today; they have become an oligopoly that controls a huge amount of money. The 12 largest banks now control 70% of all bank assets.

The choice is clear, either we regulate the big banks like we did during the New Deal or they will eventually destroy both themselves and the economy.

The Deregulation of Commodities Trading

A very good example of how deregulation doesn’t work is the 1999 amendment to the Bank Holding Company Act. This amendment allowed Goldman Sachs, a financial company, to get into the aluminum business. They bought the trading company Metro in 2010. Their approach to trading in aluminum was to buy up thousands of tons of aluminum and then to hoard it in 27 Detroit warehouses.

This allowed Goldman Sachs to control supply and price of aluminum as a monopoly, and they also controlled delivery times. According to the book, Makers and Takers, by Rana Foroohar, when Goldman Sachs bought Metro, the delivery time was 40 days. By 2014, the delivery time had ballooned to 674 days. This allowed Metro to raise prices to big users of aluminum like Coca Cola.

Goldman made $100 million per year in storage fees and increased earnings from $67 million to $211 million by 2012. Thousands of employees lost their jobs or were forced into lower wage jobs. This example shows how a non-industry speculator can take advantage of deregulation and could come into a market, buy up most of the commodity, and control supply and price--and it is all legal.

Deregulation's 'Mixed Bag'

Very few citizens had any idea what kind of economy deregulation would bring, so the idea that it would lead to more competition and lower prices sounded reasonable. The promoters of deregulation intimated that all people in the industries would share equitably in the savings, but this turned out to be untrue.

The results of deregulation is a mixed bag, but I think it is accurate to say that ideology triumphed over evidence. Deregulation was very good for a small elite group of investors and owners, but not good for the large group of workers in every industry.

Deregulation did lead to lower consumer prices in many instances, but at the cost of thousands of jobs, thousands of companies going out of business, and declining wages.

One of the stated objectives of deregulation from the very start was that it would lead to more competition. I think it is safe to say that most deregulation eventually led to less competition--consolidation and monopolies in many industries. This isn’t the invisible hand of the market doing the right thing for the many, it is a bias against working people’s wages that led to monopolistic controls. Self-regulation turned out to be an oxymoron.


Michael Collins is the author of  The Rise of Inequality and the Decline of the Middle Class. He can be reached at mpcmgt.com.

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