Deregulation pioneer Kahn still favors it but sees its warts

October 20, 2002|By JAY HANCOCK

WHENEVER THERE was a plane crash in the 1980s, or an airline bankruptcy or a report on airport chaos, people would often call Alfred E. Kahn in upstate New York and ask, "How do you like deregulation NOW?"

More than anybody else, economist Kahn was responsible in the late 1970s for dismantling the price and route controls that had made airlines expensive but stable public utilities. With each new gust of post-regulatory turbulence, journalists and policymakers wanted to know whether he had changed his mind.

He hadn't. Low fares, more flights and the transformation of air travel from an exclusive, luxury-liner privilege to a boon for the masses outweighed the problems, he argued.

Deregulation, of course, has continued its advance, conquering swaths of territory that would have amazed Carter administration officials who thought they were being radical by weakening the Civil Aeronautics Board and freeing up truck-freight rates.

Millions of consumers can shop for the best deals, not only in air travel, but in electrical power, natural gas and local and long-distance phone service. Banks sell stocks, underwrite securities offerings and do business across state lines. The economy is possibly less regulated than at any time since the early part of the 20th century.

As a result, the dislocations, bankruptcies and other damage that many associate with deregulation are perhaps greater and more painful than ever.

The evidence: Enron, Global Crossing, US Airways, PSINet, Pacific Gas and Electric, Covad, Winstar, Dynegy, TXU, WorldCom, Lucent etc. And an electricity bill of billions for California taxpayers. And an incident involving deregulated airlines on Sept. 11, 2001.

So how about it, Dr. Kahn? Any regrets about deregulation NOW?

"On airlines, no," he said on the phone last week. "I am less confident about how telecommunications and electric power are working."

Well, he's not alone. But among deregulation skeptics, he is perhaps most worth listening to. For three decades, he has been an intellectual light for economywide deregulation - not just airlines - and his continuing critiques of it are sharp, informed and sobering.

He plans to work until Thanksgiving on a paper tentatively titled "The Role of Regulation and Deregulation in Three Financial Meltdowns." Those would be the meltdowns in energy, telecom and the Internet.

"I think deregulation deserves a good deal of the blame for the telecommunications problems," Kahn says. In electricity, he says, "you can't totally deregulate because you have to have a regulated transmission network which plays a crucial role in balancing demand, in getting prices right, in ensuring system reliability."

Balance of demand, rational prices and system reliability are pretty much what California lacked last year, when deregulation led to blackouts, price-gouging and a huge government bill. The bubbles in the Internet sector and the wider stock market, Kahn says, might also be seen as the result of too little government.

"Obviously, you really should have had more effective regulation against lying and thievery," he says.

A Cornell University economist who grasps the economy of tarmac and power generators as firmly as that of algebra and Greek letters, Kahn, who turned 85 Thursday, was chairman of New York's Public Service Commission in the mid-1970s and became head of the Civil Aeronautics Board under Carter in 1977.

A self-described liberal Democrat, Kahn is respected from both sides of the political fence, as welcome at the libertarian Cato Institute as he is at the moderate-liberal Brookings Institution. He has not given up on deregulation - far from it.

"I think that where an industry is potentially effectively competitive, then competition is a far better protection of the public and insurer of technology progress than regulation," he says. And, he stresses, "don't regulate new, innovative services. Stay the hell away."

But he seems to find much of the deregulation of the past decade to have been maladroit, counterproductive and perhaps excessive. He favors forcing local phone companies to open their lines to competitors - but not how the government did it. Like many, he thinks California's policy of capping retail but not wholesale electricity prices was economically crazy.

Kahn is hunkered down in his Cornell office, doing autopsies on the blowups, trying to identify what worked, what didn't and why.

"It is proving so difficult, but I haven't seen anybody else do it," he says. "I'll have a much better grasp on it in four or five weeks. Either that or I'll retire."

Whatever the conclusions, when the granddaddy of deregulation points out problems in the trend he started, we might want to pay attention.

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