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airport leases, for example, last from ten to thirty years. Buying a competitor, or driving him out of business, may not result in effective new competitive entry. Second, the contest to decide who is IS THIS REALLY bought or driven out is not based neces­ sarily on fair market competition where NECESSARY? the firm with the best service or most r efficient operation prevails. For example, some airlines control the travel agency computer systems booking much of the AIRLINE DEREGULATION: customers, and then force them to pay full nation's travel. When the system of CRASH LANDINGS AND THE fare in order to get the flights they need. American Airlines or United Airlines is PARACHUTE OF ARISTOTLE Then I got my American Airlines used, one does not have to guess to predict mileage statement. They have now that the layout of fares, the orderof presen­ Having collected almost 100,000 fre­ declared that my mileage may "expire" tation, and other marketing techniques quent flyer miles on USAir, I decided to and they are going to start subtracting used by the airlines controlling the com­ visit my son at his school in North mileage earned more than a given number puter booking systems will favor their Carolina. I got my "certificate" and called of years ago. Needless to say, this was not own flights. Of course they do. USAir over one month before the flight. the focus of the "American Advantage" But the most major unfair practice cur­ This was October, not a holiday in sight. I advertising campaign when I signed up. rently extant and thriving favors the "deep asked for a reservation. All flights were These and other airline deceits are jus­ pocket" carrier, or the carrier with an area open-I could fly direct, and I could leave tified on an interesting legal basis. To of monopoly power which may be ex­ whenever I wanted. Then I mentioned that those who object, the airlines point to a ploited to cross-subsidize operations this would be paid by a frequent flyer small-print clause in an obscure document where it has competition. The consumers mileage certificate. "Oh, well, we do not saying that "rules are subject to change." in the monopoly market are egregiously have space for you on any of those In other words, we can promise you overcharged so that one competitor may flights," Fay of US Air explained in a prac­ whatever we want, but we will not be held drive out of business possibly more effi­ ticed monotone. "Well, what do you to our representations because of a cient carriers in another market. have?" "We have a red-eye going into clause-which we wrote-giving us the The competitive pattern in this in­ Pittsburgh which will connect into North right to change the rules anytime we want dustry has increasingly degenerated into Carolina the next day, and the trip back is to do so. We reserve the right to give price discrimination and predation, lead­ pretty much the same; it will have to be the ourselves permission to lie to you. This ing to bankruptcies and "industry all-nighter with two stops and plane chan­ theory has never been tested in court as a shakeouts," which then become tight ges, taking a day and a half." "Wait a defense, probably because no attorney oligopolies acting as cartels. That is, once second, a moment ago you told me you wants to risk the ridicule of raising it. the aggressive price competitors are either had space everywhere. Now you have purchased or driven out, the sagacious nothing and the flight's more than a month deep pocket survivor will likely benefit away in a non-traffic period. How come?" Airline Unfair Practices and from a resulting "I will fight no more Anticompetitive Results forever" oligopoly-the economic term "Well, we only allocate some of our seats 3 for the frequent flyer program." "Oh, I for a shared monopoly. don't remember seeing that in the ad ... how These practices are, regrettably, If one of the carriers is particularly many seats on the twelve direct flights I symptomatic of a much deeper malaise large, it will likely set the rates. Quite apart cannot get have you reserved for frequent affecting the nation's air carriers. Beyond from the mutual advantage, none of the flyers?" "I cannot give you that informa­ the open gauntlet of advertising deceit is small competitors dares to compete if it tion." a collection of competitive abuses war­ believes that the larger firm can and will ranting greater concern. Most of them go below cost if it is sufficiently irritated, have arisen following the Airline financed by either its larger size or by its Airline Deceptive Practices Deregulation Act of 19782 and the sub­ surfeit of monopoly business in other sequent dismantling of the Civil markets.4 I had just been the victim of a classic Aeronautics Board in I 985. First, there To be sure, the model of the free market "bait and switch" unlawful business prac­ has been increasing concentration of may dictate a challenge where prices are tice. You advertise a benefit to bait con­ ownership. During the last quarter of excessive. The reality, however, usually is sumers; then you either disparage or even 1986, a spate of mergers occurred, and the not a challenge, but conservative actions refuse to provide the advertised bargain, trend is clearly in the direction of con­ to maintain the small marketshare which "switching" the consumer to a high-profit solidation. In California's market alone, gives the large entrepreneur "cover"-the product or service. 1 USAir bought out PSA, American Airlines patina of a non-monopoly-while all par­ And it wasn't just USAir. Southwest gobbled up AirCalifomia, Delta took over ticipants eventually move toward the ex­ Airlines did the same thing the following Western Airlines, and Alaska Airlines cap­ traction of excessively high prices. This is year. They widely advertised their "buddy tured Jet America. not a zero sum game; it is better to achieve fare" -on certain flights over certain Although economists will point to a mgher rate of return on a small market­ periods, buy one ticket and get another for theoretical "ease of entry" into the airline share than to risk a competitive war which your buddy for free. But it turns out they industry, one has to have gates at the air­ will have to be lost by you. And once the do the same thing-reserve a very small ports. Major airports grant long-term large entrepreneur has actually demon­ number of seats for the program to attract leases; Los Angeles and San Francisco strated a willingness to go below cost to

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drive others out, the lesson is easily price competition, except it has two draw­ tion prohibitions which properly apply to learned. In the real world, entrepreneurs backs. First, while it is going on, it grossly the competitive sector. would rather make friends with a stronger misallocates resources. Passengers pay At least theoretically, the Gompetitive bully than risk annihilation-so long as distorted prices where carriers are not sector of the marketplace is also subject to the bully makes room for their comfort­ engaged in battle. For example, Alaska societal safeguards and limitations. If you able operation. Although at odds with Airlines has a virtual monopoly on intra­ lie, you are punished. Deceptive advertis­ economic theory, this human pattern Alaska air travel. It is not surprising that ing is actionable. You cannot engage in seems rather obvious to anyone who is not the fares from Juneau to Anchorage, Fair­ unfair competition without sanction. Price seeking-or has not already obtained-a banks, or other cities in Alaska are much, discrimination with the intent or effect of Nobel prize in economics. much higher per passenger mile than they lessening competition is unlawful. This predictable pattern is exactly are in Alaska's California operations Predatory practices violate Business and what has been happening in the airline (where it faces competition from South­ Professions Code section 17000 et seq. industry: occasional but vicious price west). Alaska also uses its reservoir of And so on. Not only are these laws applied wars, followed by bankruptcies, mergers, monopoly power to finance its contest in properly to this particular industry, but and then oligopoly leading to price in­ California. While this is going on, people much greater scrutiny is justifiable given creases and service diminution. When travelling in Alaska are paying unfair and the common carrier nature of the industry they see this dynamic, the free market­ excessive charges for air travel. and the tendency toward oligopoly. And obeisant economists like to argue that all Second, although those of us in San finally, where the passenger volume or is well-the market is supposed to shake Diego are delighted to be the subject of a other market features are not amenable to out the inefficient. True, but the market price war, it is a Pyrrhic and temporary real and continuing competition, there should be doing so based on performance victory for us. At some point the war will must be regulatory oversight-including in the marketplace and the exercise of end, usually one of three ways: Southwest rate review. The framework underlying consumer choice, not based on deep pock­ will be bought out to get rid of the an­ these positions should not be controver­ ets or unfair practices. And the result noyance; Southwest will be driven out of sial. Economic actors have a choice: either should allow continued new entry and business; Southwest will join the club. they compete in a fair and useful manner vibrant competition between the increas­ Then prices will go up-and if there is not or, if they degenerate to a structure inhibit­ ingly efficient survivors. That is not what another Southwest in the wings (sorry) to ing price competition and noncompetitive is happening. challenge prices and go for marketshare, prices are likely, they are regulated. You Let's take an example. On March 6, the prices will rise slowly but inexorably either compete or, if you have a monopoly 1990, it cost $480 to fly round-trip from without the benefit of service, efficiency, or cartel, you are regulated in a way to San Diego to Sacramento. One could fly or other entrepreneurial improvement. preclude the abuses flowing from that lack to Europe for less than it cost to go from of competition. You do not get the cartel California's second largest city to its capi­ Needed: Refined Regulation and a blank check for the public to sign. tal. [Of course, the airlines are smart That is the principle. And it is that basic. enough to give a huge discount to legis­ So are we saying that the airlines Applying this principle of refined lators and government personnel, who fly should not be deregulated? No, the regulation to airlines or insurance or the at one-fourth the regular price.] The regulatory system in place twenty years plethora of other businesses to which it market was a tight oligopoly with USAir ago was fundamentally a cartel operation should apply is not difficult. Either a as price leader. Southwest Airlines was protecting the most inefficient carriers relevant submarket in a given geographic virtually the only competitor "on the from competition. In fact, the net effect of market of such an industry has workable make" and willing to price independently. deregulation has been positive. But the and effective competition or it does not. If But Southwest did not then serve San long-range prognosis is bleak. Because in it does, regulate only as you do the com­ Diego-Sacramento. A lack of airport gates the process of deregulation, the govern­ petitive sector generally-for deceptive in Sacramento was one impediment. But ment has not fully absorbed the obvious: advertising, antitrust, unfair competition, in markets where Southwest offers com­ that the choice is not between regulating and perhaps to inhibit or assess external petition to these same carriers, fares are to the maximum comfort of those regu­ costs (e.g., pollution or safety). But these one-fourth to one-third the per passenger lated and a competitive system where they areas are not subject to barriers to entry, mile rate of the $480 San Diego­ do whatever the hell they want. rate controls, detailed standards, and Sacramento charge. Thankfully for some Another model exists-one of refined agency supervision. If effective competi­ of us, Southwest entered Sacramento; im­ regulation. It is governed by the following tion is lacking, then target the regulation mediately, fares from San Diego to maxim: We stimulate maximum competi­ to prevent the abuse arising from the Sacramento were magically cut to one­ tion, but we regulate in a targeted fashion market flaw at issue. fourth the previous level. where market prerequisites preclude ef­ This means that we properly do not This pattern is not one of fair or effec­ fective competition or where there are ex­ "deregulate" all airline markets or, as we tive competition. It is one of price dis­ ternal costs in the absence of regulation. discuss in the comment below, all in­ crimination and predation. USAir is deter­ We may want to deregulate an industry­ surance or all aspects of savings and loans. mined to drive Southwest out of busi­ that is, end an intrusive paternalistic sys­ We discriminate based on the economic ness-not by providing better or less ex­ tem of price controls, entry barriers, condition and state of competition within pensive service, but by cross-subsidizing licensing, standards, and the rest of it. But relevant markets-conditions which may from excessive charges where it does not we need not do so carte blanche. We may vary within an industry. And we may face Southwest competition to accom­ decide not to deregulate as to a part of an properly regulate competitors in one modate very low fares where Southwest industry where competition is lacking; market as to maximum price, while allow­ appears. and where we do rely substantially on ing competition to dictate prices for the This pattern appears to mimic to some competition, we maintain the deceptive very same industry with other competitors extent the pricing expected during healthy advertising, antitrust, and unfair competi- and a different economic reality some-

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place else. It is possible to distinguish oligopoly or monopoly occurs. Apply dif­ General in 1987. What the airlines were between situations where you regulate and ferent degrees of regulation within the in­ doing was advertising a price, and then situations where you do not, and that need dustry. Meanwhile, enforce strongly all of when the ticket was bought, adding on may vary within a single industry. Hence, the safeguards against market abuse nor­ substantial "surcharges" for "fuel" and the pattern we now insist upon-we either mally applied to preserve fair competition. "tax." This allowed them to charge more regulate or we do not regulate, without than their competitors while advertising a regard to particulars-is wrong. It is Mattox II and the lower price-which in tum forced com­ universal, but it is wrong. Pendulum Swing to Laissez Faire petitors to engage in like deception to In the case of airline regulation, as with compensate. The defense argued, in­ many others, we commit the sin of Proof of the extent of the "hear no evil, credibly, that state deceptive advertising generality-applying the same basic sys­ see no evil" problem in the airline industry statutes were preempted by the tem across markets of varying regulatory as deregulation has led to a combination "regulatory" authority of the now fang less need. We impose a single cookie cutter, as of classic competitive abuses is provided Department of Transportation-on the if it is impossible to vary the system within by the infamous Mattox II case of 1990,6 basis that it had been transferred the power a single industry and its regulatory recently affirmed by the U.S. Supreme to regulate deceptive advertising. The scheme. And the cookie cutter-either all Court in Morales v. TWA. 7 Fifth Circuit Court of Appeals-in a regulation or total passivity-is applied in By way of background, the leading decision which can only be described as extremis reflecting excess in one direc­ case in defining the primary jurisdiction of bizarre-held that the current nonregula­ tion, and then the other, seriatim. First, we airline regulation has been for years Nader tion system preempts state regulation and have no regulation at all. Then airlines are v. Allegheny Airlines, Inc. 8 In Nader, the state deceptive practice laws. Only the subjected to detailed regulation by the plaintiff had a confirmed reservation on an regulator (the Department of Transporta­ Federal Aviation Administration and the Allegheny flight. He was bumped and tion) may enforce them. Good luck. Fur­ Civil Aeronautics Board covering fares, sought damages for breach of contract, et ther, the court implied that this delegation routes, and virtually all aspects of opera­ al. The defense asserted that the system of of authority to DOT covers deceptive 5 tion. Then when we wake up and realize airline regulation by the Ci vii Aeronautics practices and all "unfair acts." Hence, un­ that we have been running a cartel at Board was comprehensive; because the less DOT stops it, it's Katie bar the door. public expense, we deregulate. But in Board (together with the FAA) regulated The Supreme Court's opinion on this doing so, we move to the other extreme all aspects of the fare/reservation system issue is even worse. In a 5-3 decision, the and regulate nothing. We forget about as well as routes, baggage rules, and vir­ Court held that the guidelines adopted by deceptive advertising law. We forget about tually every aspect of airline practice, the the National Association of Attorneys basic antitrust and unfair competition law. common law of contracts and torts was General, which required accurate dis­ We lack the ability to differentiate what superseded by this regulatory system. The closure of the exceptions and conditions should be regulated and the ability to defense buttressed its argument with the to advertised "fare bargains," are gauge when it should occur, so we don't fact that the Board was indeed considering economically undesirable. Its logic, do it at all, even in some markets which the issue of reservation bumping. The drawn from the seemingly unfathomable have only one carrier and monopoly Supreme Court held that there was no well of University of Chicago ignorance, power prices become obvious. This will absolute occupation of the field, and that is that it is a good idea for the airlines to probably go on until the abuse becomes so unless the CAB specifically permitted a deceive people because more people are egregious that political pressure builds. practice which breached a common law thusly attracted to the airlines, resulting in Then there will be the inevitable ex­ principle of contract or tort law, the under­ higher utilization and lower fares. plosion, sad tales, dramatic testimony, lying common law applied. The Nader I am not making this up. "Accordingly, media exposes, and we' II move back again case was allowed to proceed.9 airlines try to sell as many seats per flight to gratuitous, costly, and unnecessary But now we have deregulation in the as possible at higher prices to the first regulation-eventually controlled by the airline industry. We have decided to let the group [price-insensitive business industry and inevitably framed to keep the marketplace prevail in an industry which travelers], and then to fill up the flight by most inefficient carrier in the history of the (economists point out) has small, discrete selling seats at much lower prices to the world in operation. units of production which may be adjusted second group [price-conscious pleasure to traffic volume, moved, bought, and sold travelers]. .. .In order for this marketing The Prescription of Moderation (the planes). Hence, so long as safety is process to work, and for it ultimately to assured, it is not a natural monopoly but is redound to the benefit of price-conscious Aristotle counselled "moderation, amenable to effective competition. Con­ travelers, the airlines must be able to place moderation in all things." His advice well gress removed most of the jurisdiction of substantial restrictions on the availability applies to the state as regulator. Yes, try to the Civil Aeronautics Board and, with the of the lower priced seats (so as to sell as let competition do 1t, but watch it careful­ enactment of the Sunset Act of 1984, the many seats as possible at the higher rate), ly, and enforce the laws refined over many limited federal powers left were trans­ and must be able to advertise the lower 10 years to assure a fair contest where con­ ferred to the Department of Transporta­ fares." s um er sovereignty decides the tion. This included the standard authority Let's stop here for a moment. What the marketplace winner. Then, where you find of all regulators to police deceptive adver­ Court is here saying is that it is ideal to narrow areas and markets where the pre­ tising. have "value of service" pricing, where the requisites to competition are not present­ On November 14, 1988, the attorneys prices vary according to ability to pay. as perhaps in lightly travelled airline general of Texas and several other states Such an arrangement only works in a car­ markets-regulate in rifle-shot fashion to notified TWA, Continental, and British tel setting to extract monopoly power address the abuses created by those flaws. Air that they were engaged in deceptive profits. In a competitive market, the busi­ This might mean nothing more than advertising under guidelines adopted by ness fares would be cut until fully dis­ limited maximum rate regulation where the National Association of Attorneys tributed costs are reached. The Court is

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here pretending that the airline industry, FOOTNOTES San Francisco/Oakland to New instead of being a low-fixed-cost York/Newark in 29 C.A.B. 811 ( 1959). enterprise with small units of production I. Often, bait and switch is ac­ 6. TWA v. Mattox, 897 F.2d 773 (5th (planes) highly mobile and able to adjust complished by stocking or obtaining a Cir.), cert. denied, _U.S._, 111 S.Ct. by route and schedule, is a high-fixed-cost limited number of the bargain "bait" ad­ 307 ( 1990), later proceedings, 924 F.2d enterprise with enormous unavoidable ex­ vertised, knowing that only a small I 055 (5th Cir. I 991 ), 949 F.2d I 4 I (5th cess capacity requiring price reductions to proportion of those who are likely to Cir. 1991), afj'd in part and rev'd in part marginal cost to maximize efficiency. respond to the ad will be able to obtain it. sub nom. Morales v. TWA, et al., This is, of course, mostly nonsense. The limited numbers available are not dis­ _U.S._, 60 U.S.L.W. 4444 (June I, Certainly, few if any economists ever to closed. Here, the offense is particularly 1992). study this industry would agree with the egregious because USAir cannot argue, as 7. Morales v. TWA, _U.S. __ , 60 economic underpinnings of the Court's is common: "I only bought nine of those U.S.L.W. 4444 (June I, 1992). view. But even if one were to posit the low-priced stereos (although I advertised 8. 426 U.S. 290 (1976). need for fare reductions to prevent empty to two million people) because nine was 9. The Nader decision is consistent seats, it is possible to do so without lying. all I could get." Here, the limitation on with the notion of coextensivity of Instead, the Court notes that "requiring too supply is self-created and gratuitously remedy. The Court viewed itself as the much information in advertisements can manipulated. They have the product decisionmaker for basic societal contract have the paradoxical effect of stifling the promised; it is available-but only if you and tort disputes; it is not displaced merely information that customers receive." 11 pay full fare. For a discussion of the cir­ because of the presence of a regulatory The attorneys general were not suggesting cumstantial evidence sufficient to estab­ system unless that system has previously the reprinting of the telephone-book-sized lish bait and switch practices, see Tashof considered and ruled contrary to the un­ tariffs with every advertisement, but the v. FTC, 437 F.2d 707 (D.C. Cir. 1970). derlying common law policy. The ap­ prohibition of deceit. It is possible to ad­ 2. 49 App. U.S.C. § 1301 et seq. proach of that Court-but certainly not the vertise a lower rate, even one with condi­ 3. If only two to six carriers dominate Morales Court-is well vindicated by a tions, clearly and without deception. a certain route, there may well be implicit Jong series of plaintiff cases across a Every other industry is theoretically under collusion at some point, particularly if panoply of abuses theoretically addres­ such an obligation. And it is important that they learn of each other's fares at or before sable by regulatory agencies. The most this obligation not be subject to only one effectuation. In the Jong run, lowering serious abuses within the real estate in­ single means of enforcement. The fares will simply result in reductions by dustry (multiple listing group boycotts, American system of checks and balances competitors, leading to the gradual extortionate behavior, price fixing), bank­ works because we do not vest in a single realization that following a price leader up ing industry (NSF check overcharges and entity final authority to create or continue in an eventually established pattern impound account excesses), insurance in­ an abuse. Virtually every other industry benefits all of the participants-it is not a dustry (bad faith refusal to pay claims), subject to regulatory control is also sub­ zero sum game, and all can win at the and many others have been brought before ject to public prosecutor or private suit expense of the consumer. the courts and adjudicated favorably to where it deceives. That multitude of alter­ 4. Although free market economists plaintiffs. None of them were brought by native enforcers creates an important like to deny the possibility of such be­ regulators. Although each industry has check. The Supreme Court's option, with havior, it is easily demonstrable. comprehensive regulatory systems, none little support in the legislative history Businesspersons do not, in fact, conform ever entertained these problems-not­ cited, confines this important check to a to the mindset as attributed by economists. withstanding decades of abuse and the single institution-and one historically That is, they are not idiots. Typically, free violation of numerous statutes. vulnerable to corruptive capture. market economists like to argue that such IO. Morales v. TWA, supra note 7. We have moved from a system of in­ an oligopoly will not deviate from proper­ 11. Id. dustry sycophants protecting existing air ly competitive prices because the low bar­ carriers from competition to a system run riers to entry will attract newcomers if the BEYOND AIRLINES: by ideologues who have infinite faith in a large firm starts to go too high, and that THE FAILURES OF MODERN market god which deserves a measure of the smaller existing competitors will also DEREGULATION respect but which is not properly deified. likely lower prices to attract a larger There is ground in the middle. To occupy marketshare. Such an analysis To regulate or not to regulate; that is it requires a sense of particularity; a will­ misunderstands human psychology. The not the question. As we argue above, we ingness to regulate sometimes and some­ new entrant and the existing smaller car­ are jeopardizing the deregulation of air­ places, and to know why one and not the rier will not challenge the market leader if lines by assuming that the question is one other. they believe that the leader will retaliate of paternalistic control industry-wide, or by going below cost to hurt them. They Perhaps, perchance, somewhere along abandonment to competition-even believe in maximum revenues as the evolutionary cycle, and before the end where unfair or ineffective. We have failed economists assume, but they believe more of time, someone will set the pendulum in to deregulate intelligently, to apply refined strongly in survival, which economists do the middle. Let us all hope we shall not regulation, and to continue deceptive ad­ not assume. Perhaps one of the problems vertising and fair competition enforce­ have to wait the eons necessary before we is the difficulty of quantifying the desire are graced by another Aristotle to teach us ment which maintains the ground rules for security. Economists tend to think that the simplest of truths to still its swing: making competition effective. Not only in if something cannot be quantified, it does moderation, moderation in all things. the airline industry, but in trucking, not exist. savings and loans, banking, cable 5. See, for example, the proceedings television service, local exclusive necessary to obtain but a third carrier from franchises, and more recently in telecom-

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munications have we not learned the les­ enemies. So use the market, consider the competence (the justification for most son of Aristotle preached in the comment market, give it presumptive status per­ licensing regulatory systems). When the above. haps, look for ways to interject its ability Board of Accountancy, consisting in The errors in each case have a common to allocate resources with efficiency and majority of practicing certified public ac­ thread: an inability to understand that the in response to arguably the purest of countants, adopts a rule providing that issue is not whether to regulate, but how democratic forces-votes by purchase. only CPAs may use the word "accounting" to regulate. There is always some degree But understand what the prerequisites are or "accountant" in describing their ser­ of regulation; even in the Smithian wel­ for market function consistent with its vices, it is not regulating for public health tanschauung of University of Chicago beneficial features. Understand the nature or safety-although it is assuredly in­ naivete, the marketplace is defined by the of its limitations and of the flaws which it voked. When marketing orders use the larger society. The rules and mores of may well carry. Consider scarcity, natural power of the state to tax consumers of transactions are unavoidable. I have put monopoly, imperfect information, ad­ wine, milk, cheese, eggs, avocados, and my manufactured article on the truck to go hesion, economic coercion or bullying, beef to finance promotional ads stimulat­ to your store; if it is damaged, who pays? collusion, deceit, external benefits, exter­ ing increased consumption of these sup­ If the smoke from my stack prevents you nal costs. posedly under-ingested products, health from using your property nearby or injures and safety justifications are certain to be your family, do I pay the damages so Error#l: Overregulation catechistically invoked-and will suffice created or not? All sorts of complicated to sustain the regulatory act. rules exist; they cannot be avoided. From There are two extremes in juxtaposing bills of lading to the meaning of warran­ the flaws of the marketplace against its Error #2: Underregulation ties, the issue is never whether there benefits. The first extreme is to use the should be some sort of interference in a existence of flaws as an excuse to abrogate The second extreme is represented by "natural marketplace." There is no natural the benefits of the marketplace in unjus­ airline regulation discussed above, but marketplace; there never has been one. Its tified ways. The trucking industry has ac­ hardly confined to it. It occurs usually invocation is simply a device to beg the complished this by claiming that mini­ following deregulation. Telecommunica­ issues (what are the rules? how much in­ mum and collusively set prices are neces­ tions have been deregulated and the net terference should there be? for what pur­ sary in order to assure a margin of profit effect, as with airline deregulation, has pose? in what manner?) so they are not for trucking to finance safety standards. been beneficial-at least for the short run. decided or addressed. The common justification for regulation is But here also regulators have gone to the What we have done repeatedly is to to find some health and safety string, and other extreme and are allowing monopoly subject whole areas of the economy to pull it. loop operations which remain to give substantial regulation, and then as the Modern courts have long since sur­ cross-subsidy advantage to the utility as it political pendulum swings to the right, we rendered their role as a constitutional competes in the private competitive sec­ have deregulated. But time after time we check on meritless economic regulation­ tor. The regulator is not watching below­ have done so by the act of simple release all that is required is the invocation of cost practices. The regulator is permitting from the previous regime of regulation. "safety" or "health." Never mind that the monopoly loop to obtain excess profits We have done so as if there is some kind there is no real nexus between the by allowing rate increases by pass­ of natural law to which all such systems regulatory system and the value invoked through formulae. The long-run result will return upon the mere withdrawal of to justify it. Giving truckers a price floor may be highly damaging because the same the state. The state is the '·'problem," and may guarantee more revenue and may basic error is being made as with airline its removal subjects the industry to the keep in business more marginal carriers, deregulation: In moving from regulation beneficence of the invisible hand. Regret­ but it does not assure that the extra money to deregulation, there is excessive reliance tably, most of the impetus behind this as­ is spent on safety. There are ways to en­ on a marketplace where there are serious sumption emanates from a school of free courage safe performance without anomalies. Where the existence of strong market economics whose adherents are wholesale pricing freedom with proceeds monopoly power and the underlying im­ more akin to disciples than to scholars. to be spent wherever the recipient desires. portance of the industry dictate more They do not pursue truth; they manifest There are many alternative regulatory vigilant application of standard antitrust faith in a doctrine with all of the charac­ means which connect to the safety or other and unfair practices law, it is instead teristics of a religion. And their system of justification. But the courts do not want to suspended or waived to allow the abuses belief has the basic attraction of religious examine the difficult justifications. They which led to the regulation in the first doctrine: Its rules are internally consistent, do not want to challenge either the exper­ place to proliferate. and it seems to explain almost every­ tise or the good faith of legislators or Other examples loom around us. The thing.1 regulators. They want a bright-line test. allowance of exclusive franchises-law­ But often our systems of regulation Invoking a health and safety concern ful monopolies-by local governments which we have created were designed to seems to provide it. for trash hauling or cable service, for ex­ address market flaws which remain after The result of this judicial license, and ample, may be arranged without the re­ deregulation and warrant some adjust­ the political power of profit-stake inter­ quirement of competitive bidding or rate ment. Often, the act of regulation itself has ests, has been a great deal of unnecessary regulation. State law understandably created market flaws which are exploited regulation for cartel purposes. When the prohibits our cities and counties from let­ during the deregulation transformation. Board of Landscape Architects decides to ting a public construction project of over The market is, indeed, a force to be­ license those who design golf courses to $10,000 without competitive bidding be­ hold. And its benefits are now being ac­ confine such business to California "ar­ cause of the corruption which has resulted knowledged across a panoply of varied chitects," it is hardly protecting con­ historically from bribery to obtain local cultures and in the homes of its ancient sumers needing the state's assurance of business. But in the deregulation of local

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government activities and of cable, we recognize that elements of both competi­ review functions of the Office of Manage­ allow multi-million-dollar exclusive tion and regulation are appropriate within ment and Budget (0MB) exercised franchises to be awarded without any bid­ a single complex industry. However, the through the Office of Information and ding and without any required or likely proposition failed to take the final step. Regulatory Affairs. Operating outside due rate regulation. And the local jurisdiction Rate review is triggered by the size of an process, the Administrative Procedure may collect a "franchise fee" based on a increase proposed by an insurance com­ Act, public review, the hearing process, et percentage of the take-reducing further pany.2 The optimum system would ex­ al., this group can pull any federal regula­ the impetus to regulate. amine the insurance submarkets and re­ tion it dislikes for "review." Instead of And, of course, the ultimate example quire rate-of-return maximum rate regula­ following a procedure where financially we have just all experienced: the savings tion for any such submarket where avail­ neutral officials representing the long­ and loan debacle. Same story, lesson still able tests for workable competition are not range interests of the people hear evidence not learned. When we determined it ad­ met. If they are met, the rates would be set from all sides, duly noticed, and in public, visable to deregulate savings and loans to by the marketplace. Review would not we have the spectacle of those with a make them more "flexibly able" to com­ occur. If competition is lacking to assure vested profit stake in policies engaging in pete with other financial institutions, did market-set prices, there is a fair rate of private appeals to officials who have not we calculate fully the market-affecting return review, whatever the rate proposed. weighed the evidence, but who are-let's consequences of federally insured Such a system obeys the basic prescription face it-more interested in the weight of deposits assuring them profits if they won we here advance: If there is a reason to available campaign gold than in the and publicly financed relief if they lost? regulate, regulate there and to that extent. weight of evidence. This is not refined Did we deregulate thoughtfully, taking Apply the rule where there is the reason regulation. into account market flaws and human na­ for the rule. The "Council" is now pushing a ture? The question is now regrettably What is interesting is the extent to "moratorium" on regulation-all of it-so rhetorical. which we sometimes are so unrefined in business can recover. It pleads that it will our regulatory systems that we overregu­ except serious health and safety related Error #3: The Failure to Refine late and underregulate within the same rules from the ban. But that is hardly Regulation system. That is, we quite often overregu­ refined. Many rules prohibiting corrupt late in the formulation of entry barriers. business practices are rightfully imple­ Sometimes an industry requires tight Not only is the admission to an industry, mented; many rules are desired by honest price regulation in one of its relevant trade, or profession often too high, but it businesses knowing that the failure to geographic or product markets, and some­ is often unrelated to the purpose of the adopt an industry-wide standard means times it does not. Natural monopoly, for regulation. A refined system of regulation that they are forced into injurious practice example, warrants maximum price regula­ requires the system to address its raison themselves to stay even with competitors. tion-and there may be markets in many d'etre time and again. But attorneys are Sometimes a standard must be imposed industries which may be served efficiently licensed based on a single general ex­ from the outside and across the board for by only one provider while much of the amination at the age of 25-never to be the benefit of all. The whole notion of a industry is subject to meaningful price tested again, and never tested in the actual "moratorium" rests on the demagogic and competition. Why must we either over­ area where their skills are relied upon. The lazy assumption that all rules are the same, regulate the entire industry, or ignore what same goes for physicians. Here are two or that perhaps they can be divided easily are obvious regulatory needs? In addition areas where regulation is amply jus­ into two categories: those necessary for to enforcing generic statutes designed to tified-we properly do not rely on the health and safety, which are okay, and all protect the marketplace where it can marketplace. But then what do we do? We the rest, which are not. Some rules are potentially work (deceptive advertising regulate in a way very distantly related to unnecessary, gratuitous, self-serving, and statutes, antitrust law, unfair practices our purpose. The result is that we do not more costly than alternatives-including prohibitions), we can arrange for condi­ optimally accomplish our purpose. A their nullification. Others are important tional maximum rate and entry controls­ refined system of regulation of attorneys for many reasons. But they have to be where natural monopoly or other flaws would test attorneys in their actual area of analyzed on their merits. One cannot say preclude its efficacy. practice, be it immigration, antitrust, with any intellectual honesty that a regula­ As we argue above, airline regulation criminal, or tax law. The examination tion is "bad" or "good" without reference is a prime candidate for both vigorous would not be difficult or off-point, but to what it does. Why is that so hard for 3 competition in some markets--enhanced would ascertain that the practitioner in some people to understand? by enforcement of those laws designed to that area knows the basic cases and under­ California has followed the federal ex­ further fair competition-and perhaps for stands the basic procedures. The test ample with its own Ueberroth Competi­ specific entry and maximum rate controls would be given once every five years to tiveness Report. Here is the same problem. in markets where the limited number of assure continued competence. The same All would be better if government simply viable competitors precludes real com­ process would rightfully guide physician "got out." Got out of what? Where? Well, petition. licensure. The underlying principle? says Ueberroth, almost everywhere. Another prime example is insurance Regulate narrowly and specifically to ac­ Among other things, we should repeal the regulation. In most states, there is both complish the stated goal. Corporate Criminal Liability Act. This is exemption from antitrust laws-no as­ The most egregious example of the a law which makes the unremarkable sured competition-and little meaningful blunderbuss "know nothing" school of statement that a corporate manager who regulation. The worst of all worlds. In public policy is easily found at the highest knows of a "hidden defect" which is likely California, we certainly improved matters levels. Take the Dan Quayle Council on to cause death or great bodily injury has by subjecting the industry to antitrust law Competitiveness. This Council has taken an obligation to notify the workers if it through Proposition 103 in 1988. And the over the role of the previous "Bush Task endangers them, or Cal-OSHA if it proposition was sophisticated enough to Force"; that is, it oversees the regulatory threatens consumers. Cal-OSHA is then

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supposed to notify the appropriate FOOTNOTES regulatory agency for a review. So if you find out a product of yours is going to 1. The market economist religion is cause people to die or become disabled, actually built upon a traditional theism. you have to tell an agency so they can There is an all-permeating god: the check it out. Wow, that is certainly un­ market. It is defined as whatever is after reasonable. Query: Under what definition the removal of state "intrusion." If that of civilization would we countenance the market is left "alone" to function, all contrary proposition? If you know your things will emerge as they should in the product will kill and maim (through its long run. Voltaire's Pan gloss has the same normal and expected use), you shall (or view in the classic essay Candide: All is may) keep it to yourself and let it happen as it should be no matter what happens without letting anyone know. But if we are because god controls all and all is accord­ in the world of the regulatory demagogue, ing to his plan; whatever happens is that is fine, because we do not then engage predestined to be for the best. There is in refined regulation; we engage in a series precious little difference between the faith of caveperson grunts: regulation creating the "optimism" skewered so bad ... ugh ... business good .... regulation devastatingly by Voltaire centuries ago, make business do things they no and the faith of Nobel prize-winning want. .. ugh, that bad .... regulation market economists in the unfettered stop ... good happen ... belch. majesty of their god. The import of all of this ponderous 2. Insurance Code section 1861.05 prose? The how of deregulation is as im­ (added by Proposition 103, section 3). portant as the threshold decision to Note that the prior approval review of deregulate. Too many treat the entire mat­ insurance rates is triggered by a proposed ter as a "yes" we regulate or "no" we do rate adjustment of 7% for personal lines of not, as if that decision ends the inquiry. As insurance or 15% for commercial lines. the current crop of twelve-year-olds likes However, the Commissioner has the to blurt .... NOT!! A decision to regulate, or authority to entertain objections by others to deregulate, begins the inquiry. But we to rate increases which do not meet this seem unable to begin it. It's as if our test, or to sua sponte examine a rate on his policymakers have adopted the ten­ or her own. Ideally, the Commissioner second attention span of the mass media. would develop a test by rule making keyed The airline industry has been joined by to the degree of competition extant in a local government exclusive franchises subline of insurance where a rate change (covering trash, sports arenas, ambulance is sought. services, et al.), telecommunications, 3. Five examples of regulations savings and loans and financial institu­ delayed by this undifferentiated tions, trucking, the cable industry. A long moratorium-allegedly excluding "health and costly line has marched before us, one and safety" rules-are those which would: that is apparently part of a long and costly require infant formula manufacturers to line to come. Having ignored history, we report consumer complaints and results of seem condemned-as the cliche goes-to tests for microbiological contaminants; repeat it. The prediction is not meant to tighten rules for preventing industrial ac­ resonate cynicism, but the pendulum has cidents involving toxic chemicals; swung from unfettered marketplace to prohibit sale of child safety seats that are overly burdensome regulation controlled dangerous when adjusted in certain seat by those on the inside, and now to ir­ positions; prevent hospitals from using responsible deregulation absent even the inability to pay as a reason for denying modicum of competition-maintaining and treatment to emergency patients or women fairness-assuring measures we apply in labor; and require warning labels on generally. certain toys, balloons, marbles, and other The question before the house is not children's playthings with small parts. that we have erred; can there be any doubt of that? It is rather how much of a price we shall have to pay before we begin to think. r

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