Deregulatory tailspin

Chaotic conditions and rate wars vex the airline industry; financial failure threatens several carriers; the weaker ones will be forced out, allowing those remaining to charge monopoly rates; airlines compromise safety by failing to buy new aircraft and by failing adequately to maintain and staff existing planes.

A description of the airline industry in the 1980s? Actually, no. These were the concerns expressed by Congress when it passed the Civil Aeronautics Act in 1938. The 1938 act imposed upon the industry federal regulation of fares, routes, practices, and mergers. Those measures brought the problems of the industry under control for 40 years.

Control was not cure, however. Congress proved this in 1978 when it removed almost all the regulatory restrictions of the 1938 act. The problems promptly reappeared. Every air traveler has experienced the industry's chaotic condition since 1978. Intensive rate wars were common in the early and mid-1980s.

Partly as a result of those rate wars, bankruptcies and near-bankruptcies have been epidemic. The debilitated condition of many airlines has led to massive industry consolidation. Almost 93 percent of all passenger traffic is now controlled by the eight largest airlines. This consolidation has led in turn to steadily rising fares.

Economists predicted in 1978 that even if consolidation did occur, rates would remain competitive because of potential entry by new airlines. In fact, the remaining airlines have seized control of almost all gates at the nation's major air terminals. Without gates, new airlines cannot enter.

Most disturbing of all, deregulation has revived the safety concerns expressed by Congress in 1938. Aircraft fleets have aged to record levels, and the ages of planes have been implicated in a number of accidents. Other problems are hasty or inadequate maintenance procedures and young and inexperienced crews.

Deregulatory d'ej`a vu is by no means confined to airlines. The problems of the savings-and-loan industry are notorious - and were, again, anticipated by Congress. In the early days of the depression, bank failures were a staggering problem. Many banks had made risky and speculative loans, and their gambles were exposed by declining economic conditions.

Congress passed the Home Loan Bank Board Act against this background in 1933. This act required federally chartered S&Ls to place almost all their loans in home mortgages. Home mortgages, although a dull investment to a go-go banker, are a safe and stable asset.

In 1982, Congress removed the home mortgage requirement. S&Ls were allowed to place 100 percent of their funds in commercial real estate ventures. As with banks in the 1920s, many S&Ls then gambled. They bet their depositors' money on increasingly risky commercial real estate projects in the hope of higher returns. They lost their bets. Now the federal insurance program faces a staggering cleanup cost of $50 billion to $100 billion.

Other examples abound. Increasing commercialization of children's television prompted the Federal Communications Commission to adopt protective rules in 1974. In 1984, the FCC repealed those rules. It reasoned that the marketplace was, after all, a sufficient regulator. The result has truly been a saturnalia for the nation's advertisers of sugar and toys.

How could Congress and the regulators have been so naive? It appears that regulation was in part the victim of its own success. Congress believed in 1978 that the airline industry had matured since the 1930s. What Congress perceived as maturation was in fact the reflection of 40 years' regulation. The FCC managed to confuse the success of its rules with the workings of the marketplace in only 10 years.

This is not to say that deregulation is all bad. The 1938 act was enforced with the imagination of a fossil by the former Civil Aeronautics Board. The CAB inflexibly refused to permit true competition on any routes, or to permit competition to be a primary regulator of rates. Resulting inefficiencies caused both higher rates and poorer service.

But deregulation is hardly a cure for badly executed regulation. The rational approach is to correct the problem itself. Sweeping deregulation risks return of the market defects that led to regulation in the first place.