Grounded into Dust
Phillip Longman and Lina Khan have a fascinating article in the Washington Monthly about how airline deregulation has not only made flying miserable for all of us, but is having an absolutely devastating impact on some of America’s inland cities.
The authors find a parallel story in the development of railroads during the nineteenth century.
Dealing with high fixed costs is a challenge common to virtually all networked industries, and in one way or another, America has grappled with the problem throughout the country’s history. The Founders understood that private enterprise could not by itself provide broadly distributed postal service because of the high cost of delivering mail to smaller towns and far-flung cities, and so they wrote into the Constitution that a government monopoly would take on the challenge, providing the necessary cross-subsidization.
Throughout most of the nineteenth century and much of the twentieth, generations of Americans similarly struggled with how to maintain an equitable and efficient railroad network, and for much the same reason. During various railroad bubbles, exuberant investors would build lines to the farthest corners of continent, much like start-up airlines in the 1980s. But over time, the high fixed cost of railroading and the basic economics of any networked industry left all but the core of the emerging system unprofitable before it received the benefits of government regulation.
The authors then quote Charles Francis Adams’s Railroads: Their Origin and Problems (1878), in which he observed that Americans came to the conclusion that railroads weren’t like other industries, and government regulation was necessary to smooth out price discrimination and “local inequalities.” The authors continue,
The response was the creation of the Interstate Commerce Commission in 1887—a move that most Americans viewed as essential to preserving free enterprise and their way of life. The ICC took on the task of moderating the price discrimination that railroads practiced, evening out the burden among different regions and classes of passengers and shippers in a way that allowed railroads to earn enough money to cover their fixed costs, improve their infrastructure, and give their investors a fair reward. In effect, the profits railroads earned on some highly trafficked long-haul routes came to be rechanneled by government policy to cover the cost of providing balanced and affordable service throughout the country. Railroads were regulated much as telephones and power companies came to be—as natural monopolies that would be allowed to remain in private hands and earn a profit, but not at the cost of skewing the overall efficiency, balance, and fairness of American economy.
Longman and Khan argue that Americans may have to search for similar solutions when it comes to the airline industry. Anyway, read the whole thing.
What I found strangely absent from that article was any evidence (or even argument) that flight is, in fact, a natural monopoly. I understand why railroads, telephone lines, and highways are. But airline service doesn’t seem to fit that pattern. Kalamazoo, my local airport, is served by two airlines: Delta and American Eagle. But presumably United, Southwest, or JetBlue could choose to serve Kalamazoo if they thought it would be profitable. They wouldn’t have to build a new terminal–it’s already there! They wouldn’t have to hire new air traffic controllers. They would presumably need to hire a few ground personnel, and redirect resources like physical planes to serve AZO instead of some other airport. But those just look like ordinary costs of doing business. Where are the unusual barriers to entry in an additional airport that create the natural monopoly? As I see it, the issue is that there’s not much demand for air traffic from AZO–people would rather save a little money by flying out of Grand Rapids or Detroit–so it’s not worthwhile for additional carriers to compete. Sure, flights are expensive, but that’s because they’re small, inefficient planes making short hops often with empty seats. That is to say… costs are actually higher.
The flipside of this is, where are the monopolistic profits in the airline industry? If the airlines can’t make profits anyway, it doesn’t seem like they’re taking advantage of natural monopolies to gouge people. It seems instead like they’re often selling their service at below cost.
Without the natural monopoly argument being made persuasively, I’m not sure I see the argument for regulation. Perhaps it can be made… I’m not an economist, and I’m not an expert in airlines. But what I’m seeing in this article is comparison to other transportation modes that do have natural monopoly characteristics to argue for a subsidy for air traffic for people who don’t live in major air markets. That subsidy would have real, negative costs–more airflights, increasing fuel use and pollution; more mostly empty planes flying, making the environmental damage worse; and distortive effects on economic development. If there’s a compelling argument that costs would actually be lower–because it’s a natural monopoly, presumably, since that’s what they assert repeatedly throughout the article–that’s worth considering. But the absence of that argument makes me suspicious.
Comment by Adam Strong-Morse — March 14, 2012 @ 9:53 am
I think they would answer you by saying, it’s well and good if Kalamazoo has a sleepy airport, but what happens when air service to Cincinnati, St. Louis, Pittsburgh, Cleveland, and Memphis gets so scarce (or prohibitively expensive) that these cities start to die? Do we really want decisions about air travel to be made on the basis of profit and loss, or do we want to make sure that our (very vast) country has a viable transportation network adequately serving all regions? We already use tax dollars to reallocate interstate highway service to “less-used” parts of the country…but if roads are the only way to get to Cleveland, then that’s going to be pretty damaging to the Greater Cleveland Area as a whole.
Comment by Benjamin Carp — March 14, 2012 @ 10:23 am
Sure, but if they give up the natural monopoly argument, then the whole “this is like the railroads” historical metaphor collapses. The authors whole story in the second half is “air traffic is like the railroads.” But if it’s not, in the relevant way, then that’s all sleight of hand.
Now there’s just the “oh, woe is Cincinnati and Pittsburgh” emotional argument. But then the question becomes, why should we, collectively, care about whether jobs are in Cincinnati or in Charlotte? After all, the point isn’t that the jobs are ceasing to exist, or even going overseas. The argument is that the jobs are moving, to some extent consolidating. That’s rough on people who are committed to those areas. But increasing overall costs to plan an economy creates dead-weight loss (and environmental costs as well). Shouldn’t we care about maximizing jobs overall and minimizing costs overall? Sure, maybe parts of the country will have lower populations. But why should we care about that if it makes the actual people of the country better off? If the argument was based on managing transitions, or cushioning the blow during the realignment, that
Canada is a vast country–essentially all Canadians however live in a narrow slice of Canada. That’s probably a good thing, on balance. It means people don’t spend tons of money flying all over the huge, mostly unpopulated north. It means less fuel gets used. If the US reorganized in a similar way, but coastal versus inland instead of south versus north, why would that necessarily be a bad thing? Transportation networks serve people (sometimes by moving physical resources), not regions. And to the extent that the response is, “but St. Louis’s population is growing, not shrinking,” then my question is: so where’s the evidence that St. Louis is actually dying? It has less flights, less seats on planes in and out, but apparently its economy is still doing well enough that people choose to live there.
I’m not convinced that the underlying point of the article is wrong. But sob stories about a company relocating away from Cincinnati, or a Pittsburgh firm having its annual meeting elsewhere, aren’t enough to convince me that it’s right. We should care just as much about the people celebrating in Charlotte, or the unknown uncounted person who has a job because the overall economy is more efficient. And if some of those people in Pittsburgh fly less and collaborate more via e-mail, GREAT!
The part that is somewhat persuasive is the argument about network values. Being able to fly becomes more valuable as the number of destinations proliferates. But sometimes the best way of running a network is indeed to use hubs and spokes, even if that means that the remote spokes require more connections. Now the argument has to be that the best network is one that would be produced by regulation, not by competition in a less regulated area. But that’s a task they don’t take on directly.
Comment by Adam Strong-Morse — March 14, 2012 @ 10:47 am
Coming from a rather different tact, I would like to comment on the accompanying illustration, which is the 1855 painting (30 x 50”) by American painter George Inness. Like BP’s post-drilling disaster TV commercials or Mobil-Exxon’s op-ed pieces, this work, The Lackawanna Valley, was commissioned by the railroad company specifically point a flattering picture of the railroad’s impact in a more or less actual location. As Jeffrey Pasley may recall, Leo Marx (in his Machine in the Garden) commented at length on the painting’s deliberate anodyne composition. (It is, by the way, a very fine painting in its own right, in my opinion.) Of course, 1855 was a generation before the Gilded Age crisis of over-expansion referred to in the article. At this earlier time, all was a well-integrated, happy whole in this commissioned work, because artists have to eat, too. [If all this was commented on elsewhere, such as in the article itself, my apologies.]
Comment by Thomas Bridewell-Southall — March 15, 2012 @ 6:31 pm
Adam,
You might be right that the whole argument is bunk. As you say, some of these cities are doing just fine, and Khan and Longman may be exaggerating their economic plight, or misdiagnosing the causes (or I’ve mischaracterized their emphasis). And I’m no economist either. But it seems to me that trying to resolve the problems in terms of classical economics (assuming perfect labor mobility) is like trying to solve physics problems while saying “assume no wind resistance.” The wind resistance here is provided by all the other factors that public policy types need to consider: not just the people who live in Cincinnati, etc. (and the homes that they presumably won’t be able to sell), but the fixed infrastructure of buildings, roads, universities, local transportation networks, etc. (There’s also the point that a lot of firms relocate to southern states because of the more capital-friendly labor laws.)
So, this is not a very intellectually rigorous point, but I can’t shake the feeling that it doesn’t make a lot of sense for all of this potentially usable stuff to plummet in value just because the Big Six airlines have decided it’s not cost-effective enough to fly to these places. Maybe the solution isn’t (solely) further government regulation of the airlines, but a broader, sensible transportation policy that will make all these places accessible (something the market doesn’t seem to be able to resolve on its own). We can’t all live on the coasts.
Canada isn’t a great comparison because most of the country has *never* been habitable/accessible–although, who knows, maybe global warming will open up Rupert’s Land for growing bananas and beach resort tourism. Most of the American cities in this article are located on rivers, and river access is no longer a big factor in transportation networks, but still, it’s not as if Cincinnati, St. Louis, Pittsburgh, etc., are fly-by-night boom towns that deserve to be abandoned as soon as the local mines are exhausted.
Comment by Benjamin Carp — March 16, 2012 @ 10:26 am