Inertia Wins!

The man who deregulated air travel passed away yesterday at age 93. That man, Alfred Kahn, was a Cornell economics professor who did far more than teach. He revolutionized the role of economics in regulatory policy. He also did important work on electricity deregulation in addition to his famous work on deregulating air travel.

Kahn’s most famous book was The Economics of Regulation, which pointed out that regulations often hinder competition, not help it. His use of the economic way of thinking was distinctly unfashionable at the time. One of his greatest legacies is righting that wrong.

As a lifelong partisan Democrat, Kahn had credibility in political circles at a time when regulatory skeptics were shooed away from the corridors of power. After chairing the New York Public Service Commission, President Carter appointed him to lead the Civil Aeronautics Board in 1977, which he dismantled.

Before Kahn, airlines had to get permission from the CAB to establish new routes or terminate old ones. The CAB set ticket prices, not the market. This prevented profitable or high-demand routes from being given adequate service, and kept money-losing, little-traveled routes open. It prevented airlines from keeping up with their customers’ ever-changing needs.

The CAB was also a wonderful device for keeping pesky startups from competing with established industry giants such as Pan American. Southwest Airlines, for example, would only fly routes inside the state of Texas to avoid CAB regulations.

Once the CAB was abolished, Southwest and other small airlines tried out new business models and offering lower fares. Some of them prospered; others did a poor job giving people what they wanted and ceased to be. Today, air travel may not have the amenities it used to, but it cheaper, more flexible, and more adaptable than it was under the CAB.

Washington could use more people like Alfred Kahn. He had his successes in a few choice sectors of the economy, but many more still have Civil Aeronautics Boards of their own stopping them from reaching their potential. Let us learn from his example of a life well lived; a good place to start is Thomas McCraw’s Prophets of Regulation.