Content area
Full Text
Although the presidency of Jimmy Carter (1977-81) is widely regarded as a failure, the deregulation movement that was largely initiated during his term in office was and remains a very successful policy. This essay focuses on airline deregulation in particular. There are several reasons for this emphasis.
First, airlines were the first of the transportation industries to experience deregulation. Second, airline deregulation and transportation deregulation in general produced unambiguous benefits. In contrast, the benefits of financial deregulation initiated in the same period are much cloudier. Finally, the measures adopted were largely those proposed by the community of economists who had studied the performance of the airline industry. Indeed, the leader of the Civil Aeronautics Board in the initial stages of deregulation was Alfred Kahn, an economist who had quite literally written the book on regulation.
The context of this policy success was the unsatisfactory performance of the American economy during the 1970s due to "stagflation." The deregulation movement represented an attempt to remove microeconomic rigidities in the economy so that the economy would be less inflation prone. Although the current consensus appears to be that stagflation had monetary roots, eliminating these rigidities nonetheless represented an important step in modernizing the U.S. economy.
The essay begins by discussing two of the preconditions for the deregulation movement of the 1970s: the unsatisfactory performance, relative to recent experience, of the U.S. economy and the growing scholarly consensus in favor of liberalizing the existing regulatory mechanisms. Next I examine the process of deregulation first through administrative liberalization and later through statutory enactments. Then I detail the specific provisions of the Airline Deregulation Act of 1978 and oudine the empirical economics literature regarding the effects of airline deregulation.1 A brief conclusion summarizes what lessons may be learned from this policy.
Economic Performance and Microeconomic Rigidity
Economic regulation at the federal level first came to the United States with the passage of the Interstate Commerce Act of 1888, which was aimed at railroads. This legislation and the regulatory commission established in it created the template for subsequent federal regulatory actions. Economic regulation was extended to other transportation industries (motor carriers, interstate pipelines, airlines, etc.) during the 1930s. The postwar performance of the U.S. economy appeared to validate the mix of market...