Special Report

Needed: An Alfred Kahn for Health Care Reform

He deregulated airline travel. Who will deregulate health insurance?

By 1.18.11

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In the annals of progressive thought, there was a fleeting moment when Ted Kennedy, Ralph Nader and other left-wing icons sang the praises of unfettered free-market capitalism. This happened with the passage of the 1978 Airline Deregulation Act during Jimmy Carter's presidency.

The recent passing of Alfred E. Kahn is a reminder of that remarkable moment -- when leaders on both sides of the political and ideological spectrum agreed to deregulate the U.S. airline industry. In 1977, incoming President Carter appointed the flamboyant and outspoken Kahn as chairman of the Civil Aeronautics Board, the agency responsible for setting airline routes, schedules and fares. Kahn set out on a mission of writing himself and his agency out of a job -- opening the industry to real competition for the first time. Kahn gave airlines the freedom to enter (and exit) domestic markets and to price as they pleased. He also allowed new low-cost, low-fare airlines to challenge the incumbents.

With the exception of United, all of the established airlines were adamantly opposed to deregulation, as were the unions representing airline pilots, flight crews and baggage handlers. But as Kahn recognized, this was a classic instance of the capture of the "regulators" by the "regulated" -- to the disadvantage of the traveling public.

For four decades, going back to 1938, the CAB had presided over a closed system that provided the airlines with guaranteed profits, while underwriting generous wages and pensions and cushy working conditions for their heavily unionized workforces. While earning six-figure incomes, airline pilots routinely worked second jobs, knowing that they needed to fly only two or three days a week.

"Whenever competition is feasible," Kahn wrote, "it is, for all of its imperfections, superior to regulation as a means of serving the public interest." In simpler language, he bluntly stated, "Where competition is feasible, the government should get the hell out of the way."

In chairing the CAB, Kahn, an economics professor from Cornell, put together an amazing coalition that included everyone from Milton Friedman and Barry Goldwater to Kennedy and Nader. It helped considerably that two states -- Texas and California -- had served as laboratories in demonstrating that no-holds-barred competition between existing carriers and the first no-frills airlines had resulted in lower fares and greater choice.

For the first eight years of its existence -- from 1971 to 1979 -- Southwest Airlines flew only inside the state of Texas. It was, therefore, outside the CAB's purview, because the agency regulated fares and routes only on an interstate basis.

Throughout the 1970s, there were wild fare wars inside Texas (and to a lesser extent California) as the upstarts battled with the incumbents for market share. Air fares fell by more 66%, and the number of flights per day between Dallas and Houston and other city pairs multiplied. At one point, much-larger Braniff tried to drive Southwest to the wall by dropping its Dallas/Houston fare from $26 to just $13. But Southwest had a good answer. It gave its customers a choice: They could pay the new $13 price -- or they could pay the old $26 price and receive a free bottle of whiskey at the end of the trip. Under this promotion, Southwest became, for a time, the biggest liquor distributor in Texas.

Beginning in 1975, Kennedy held U.S. Senate hearings that showcased the fact that the cost per mile for an inter-state air ticket from -- say -- New York to Washington, D.C. was several times higher than it was for trips of comparable distance inside Texas. Roused by this evidence, Kennedy thundered on the Senate floor: "Regulators all too often encourage or approve unreasonably high prices, inadequate service, and anti-competitive behavior. The cost of this regulation is always passed on to the consumer. And that cost is astronomical."

Exactly. The first two decades of airline deregulation replicated the successes seen earlier in Texas and California. Nationwide, enplanements more than doubled and, in inflation-adjusted terms, airline ticket price fell by about 50%. The lowered cost, expanded choice and rapid growth in air travel helped to stimulate further growth in many other fields.

IN RECENT YEARS, many critics have held airline deregulation to blame for everything they dislike about air travel today -- from overcrowded planes and poor service to the abysmally poor financial record of the U.S. airline industry. Kahn responded both graciously and forcefully to such critics. He noted that some of the problems cited by critics were exposed by deregulation, not caused by it:

Labor unrest and the insecurity and downward pressure on the wages of the preexisting labor force have been undeniable. From the standpoint of the public, however, grossly monopolistic wage levels are no more acceptable than monopoly profits. The fact that these costs have been unusually severe may be just as logically blamed on the regulation that created vested interests in its perpetuation as on deregulation.

Most travelers, he went on to say, were perfectly willing to sacrifice comfort for lower fares:

In the decade before deregulation, domestic flights were, on average, less than 53% full; in 1997 to 2001, they averaged over 70%. But crowding reflects the success of deregulation, not its failure. Competition in the unregulated market has proved… that most travelers are willing to sacrifice comfort for lower fares.

Since 2001, the U.S. airline industry has shed 160,000 jobs. That's about a third of the workforce -- gone. And yet the industry has kept going -- even if it hasn't succeeded in making many people happy.

In addition to the two recessions since 2001, and in addition to increased security costs, by far the biggest problem that the industry has faced over the past decade has been increased fuel prices. Since 2002, the cost of labor, measured in cents per available seat, has been reduced by more than 25 percent -- going from a little more than four cents per mile to under three cents. Unfortunately, over the same time, the cost of fuel has shot up from a little more than one cent per mile to more than three cents per mile. For the first time, the cost of fuel equals or exceeds the cost of labor.

It is fair to say that airlines have faced some monumental problems. And they have done far better than some of their peers -- in health care and college education, to name two -- in holding a line against cost and price growth.

TODAY'S LIBERAL Democrats are caught in a different ideological mindset than those of 1978 -- one that blinds them to the possibility of applying the same kind of free-market thinking in other areas of the economy. In the health care arena, they are stuck on the idea of creating a government-controlled, single-payer system. On the one hand, they are determined to raise costs through expensive new federal mandates; and on the other, they are committed to imposing increasing stringent price controls that threaten to bankrupt insurers and drive many health care providers out of business, with dire consequences for consumers. As Dave Barry jokingly put it in his recent 2010 "Year in Review" in the Washington Post, Obamacare "will either a) guarantee everybody excellent free health care, or b) permit federal bureaucrats to club old people to death." Obamacare as it now stands is a surefire formula for making everyone -- unhappy.

There is a better way.

Deregulate health insurance. Do to the insurance companies what Kahn did to the airlines when he forced them to compete across state lines on both price and range of product offerings.

There is ample opportunity for enabling consumers to reap immediate benefits in the form of lowered premiums and greater choice through the simple expedient of allowing health insurance to be sold across state lines. This would give individual consumers the freedom to buy low-cost, low-priced health insurance -- from a far larger universe of sellers. And it would cause big insurance to lose the monopolistic or oligopolistic positions that they have built up over the years through assiduous lobbying at statehouses around the country, with cozy arrangements with state regulatory offices resulting in mandates to cover everything from hairpieces and contraceptives to acupuncture and marriage counseling.

It would be a first step to a more competitive marketplace forcing all producers (both insurers and health care providers) to reduce costs and offer products that meet customer demand.

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About the Author
Andrew B. Wilson, a frequent contributor to The American Spectator and a former foreign correspondent, is a resident fellow and senior writer at the Show-Me Institute in St. Louis.