Regulate To Prosperity?

One of the hot topics this year in the political debate has been the amount and scope of Federal regulation of business.  We have already had sweeping new regulations in the financial industry and the consumer credit industry this year and the regulation thrust has much more room to run in the EPA areas and the off shore drilling sector to mention only a couple.  This is without even considering the complete take over of the health care industry and the thousands of pages of new regulations to be imposed there.  Most would agree that some regulation is essential to the proper functioning of a modern economy.  What is needed is a fair playing field and then rules fairly invoked and enforced by a neutral arbiter–unseeing like Lady Justice.  Some argue today that the negative effects of regulation are overblown and that regulations do not hamper industry or dampen innovation.  Some history might give a bit of insight into this dispute. 

Prior to Reagan the airline industry was one of the most regulated in the US.  Not only were there many regulations relating to safety issues there were regulations about who could fly on what routes and how much they could charge.  The Feds had to grant a permit to start a new airline or railroad.  Even if you had found the capital to start a new airline you  had to petition the ICC for a permit and prove that your new service was for the public “convenience and necessity”.  Of course the airlines then were captives of the Feds because they were so regulated.  All the other airlines you can be assured would oppose your petition.   They didn’t want competition.  The prices for air travel were very high and the service was not that good because of the lack of competition.  The airlines understandably were more interested in satisfying the demands of the regulators than the wishes and wants of their customers.  The customers had limited choices after all since there was only as much competition as the regulators would allow.  Some of that changed in the early ’70’s.

The DFW airport was being built between Dallas and Fort Worth due to the political pressure of Fort Worth and their representative Jim Wright.  Very few people wanted to fly to Fort Worth compared to the demands for travel to Dallas’ Love Field.  Many people in Dallas and nearby didn’t want to make the drive to the new airport.  Even with all the power that the Feds had there was one area they could not control–purely intrastate commerce.  Some visionary entrepreneurs saw an opportunity when the new airport opened.  This was the birth of Southwest Airlines.  It started as a strictly intrastate airline.  This was their opening.  The initial routes were limited to Houston, Dallas, San Antonio and Austin.  They quickly added other routes when they met with success to Amarillo, Midland and El Paso. 

The secret to their success was that they did not have to meet any regulations of the ICC or receive a permit to fly.  The only Federal regulations they had to meet were those regarding safety of the planes and the air crews.  Southwest starting flying simultaneously with the opening of the new DFW airport.  It was an immediate success from the git go.  Their prices were incredibly cheaper than the competition.  You could fly round trip from Dallas to Houston for about 50 bucks.  It was hundreds for the same flight on American or Delta.  They turned their flights around very quickly at the gates and you on and off in a flash and they flew many flights per day so it was convenient.  The founders were fortunate in that only California and Texas had the population density and size to make economic sense to operate within the borders of only one state.

Of course the Democrats and Jim Wright were furious about all this.  Fort Worth had bet the ranch on the new airport and as Democrats were loyal to the whole regulatory scheme of the Feds controlling everything.  They couldn’t stop Southwest from operating inside Texas but they brought out their knives to make sure they couldn’t expand.  Thus the Wright amendment was born and implemented to restrict future operations of Southwest to only the surrounding states if and when they got a Federal permit to fly beyond the Texas borders. 

Then came Reagan and the era of de-regulation and we all have benefitted tremendously from the enhanced competition.  Just compare the current airline fares on an inflation adjusted basis with those of thirty years ago and you will see.  The prices fell like a rock.  But the airlines got lots more passengers as a result.

The direction we are going today it would be impossible for a new airline to start off the way Southwest did and succeed.  Less regulation will always lead to more innovation and economic growth.  Some ideas will be busts and some will be hugely successful.  The story of Southwest is a continuing lesson in economics and the role of regulation.  Lets hope the wave of new regulation will be halted before it squeezes out the new companies and the new ideas that will  produce the jobs for our children and grandchildren.

To every man his chance, to every man, regardless of his birth, his shining golden opportunity–to every man the right to live, to work, to be himself, and to become whatever thing his manhood and his vision can combine to make him–this, seeker, is the promise of
America”–Thomas Wolfe.


1 Comment

Filed under business, Economics, government, history, Politics

One response to “Regulate To Prosperity?

  1. Pingback: Regulate To Prosperity? « A Sage for the Ages - Amarillo Tx News

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