David R. Henderson  

An Optimistic View on Deregulation's Prospects

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My thesis is as follows: Gains from exchange contain the seeds of their own expansion. When economists and other intellectuals provide evidence that deregulation increases gains from exchange, either these intellectuals, bureaucrats, or others often draw on this evidence to seek deregulation. They don't always succeed, but they do sometimes, and one success can lead to others.

[Peter] Van Doren and [Thomas A.] Firey's own story about one of the biggest deregulation successes--the deregulation of airlines--illustrates the important role of individuals and ideas. Nothing inherent dictated that Stephen Breyer would latch onto airline deregulation as the cause that he urged Ted Kennedy to pursue. Nothing inherent dictated that two bureaucrats and an appointee at the Civil Aeronautics Board (CAB) would become energized and push internally for deregulation. Yet had they and Breyer not done so, it might not have happened. There are similar stories about other successful deregulations both in the United States and other countries.

This is from David R. Henderson, "A More Optimistic View," Regulation, Spring 2017. This is the 40th anniversary edition of Regulation.

Editor Peter Van Doren and managing editor Thomas A. Firey write the lead article, "Regulation at 40." When Tom sent me a draft, I told him that I found it unduly pessimistic. He asked me to write a relatively short piece giving my more optimistic view. I found that I needed a lot of space to give the particulars behind my view.

The third piece, "Restraining the Regulatory State," is by my favorite Brookings economist, Robert W. Crandall.

One other excerpt from my piece:

But deregulation would probably not have gotten nearly as far were it not for the support of intellectuals--some lawyers, but mainly economists--who systematically studied the effects of airline regulation. In his 1964 presidential address to the American Economics Association, George Stigler pointed out that from the founding of economics as a discipline in the 18th century until the early 1960s, almost all economists--although willing to advocate or oppose regulation--avoided studying its effects. As only Stigler could put it: "The economic role of the state has managed to hold the attention of scholars for over two centuries without arousing their curiosity.... Economists have refused to leave the problem alone or to work on it." But there were a few exceptions in the profession. And one of the areas in which many of these exceptions worked was airline regulation.

Three early exceptions were Lucile Keyes, Richard Caves, and Stigler's student Sam Peltzman. As early as 1949, Keyes had seen through the public-interest rationale for airline regulation, pointing out that the CAB's actions protected airlines from competition. In 1962, Caves, a Harvard economist, wrote a scholarly, evidence-filled tome in which he argued the CAB was suppressing competition and such a restriction on freedom to compete was difficult to reconcile with the public interest. In 1963, Peltzman, a graduate economics student at the University of Chicago and later an economics professor there, wrote a piece in the New Individualist Review that presented a concise, carefully reasoned, empirical case against federal regulation of air fares and entry into the airline industry. While we take for granted today that economists will actually study the effects of government regulation, Keyes, Caves, and Peltzman were pioneers in that research.

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CATEGORIES: Regulation

COMMENTS (3 to date)
Thaomas writes:

This is what we need to do: apply cost benefit analysis to regulation to see where it needs to expand on what dimension) and where contract. It requires analysis of facts.

GM writes:

Nice article. Derthick and Quirk also point out that President Ford supported deregulation as an inflation fighting measure. Roger Noll noted that the movement to deregulate fizzled once inflation was reduced in the 1980s. The ability for politicians to make a connection between regulation, which created higher prices and the need to lower prices through dereguraltion, may have been a key factor. This idea was easy to sell poltically even though economists understood that there was little connection between regulation and inflation.

Larry writes:

Curious as to your thoughts on Murray's By The People, which offers a subversive and original take on attacking the regulatory state.


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