Commerce

By Stephen Koepp

"What do I think of deregulation, you ask me?" muses Joe Sixpack as he takes a break from mowing the lawn. "Frankly, I love it and I hate it! Take the airlines. I can get a great bargain fare to Miami, but you can be sure my flight will be delayed for two hours because of air-traffic congestion. As for the bank, it now gives me interest on my checking account, which is nice, but then sticks me with a $5 fee every time I drop below my minimum balance. Our family's long-distance bill has gone down, but somehow the total phone charges have gone way up. And look at the trucking business: the bill was only $500 when I moved a load of furniture from 400 miles away, but I'm scared to be on the same highway with one of those killer rigs!"

Indeed, deregulation has turned industries upside down and whipsawed consumer emotions like no other economic trend in recent history. Airlines, banks, telephone companies and trucking lines, among others, have all been transformed from placid, tightly regulated industries into volatile hotbeds of competition. Many of the results have been glowing examples of a free market at work: lower prices, greater efficiency and more choices for consumers. "Across the board, we are much better off with deregulation than without it," says Paul MacAvoy, dean of the graduate school of management at the University of Rochester.

Even so, deregulation has produced plenty of worrisome side effects. One of them is a rising concentration of market share among a few large companies -- a shift toward oligopolies that could already be stifling the very competition that deregulation was supposed to stimulate. Another ominous trend is the increased evidence of corporate corner cutting when it comes to safeguarding the health and safety of workers and customers. Investment Banker Felix Rohatyn, writing in the New York Review of Books, bemoans a "climate of deregulation pushed to dangerous extremes." Result: the beginnings of a blistering debate about the impact of the decontrol era, and a movement to re- regulate. In a growing number of cases, Congress is viewing too much corporate freedom as a dangerous thing.

Few people want to put back the overgrown regulatory thicket that grew during the 1960s and 1970s. The U.S. was clearly due for a round of regulatory rollbacks, especially in light of the relatively minimal intervention that the Constitution seemed to contemplate when, for example, it authorized federal regulation of commerce "with foreign nations, and among the several States . . ." At the time, the Constitution's framers championed a free-market system with little Government interference. Says W. John Swartz, president of the Santa Fe Railway: "The Founding Fathers would be astonished at the amount of rules we operate under today. Regulators have gone much too far."

Indeed, Government involvement grew slowly at first because most trade was carried out within individual states and therefore overseen by local and state officials. But westward expansion and the development of an extensive railroad and canal system spurred interstate markets. In 1887 Congress created the Interstate Commerce Commission, the first major federal business regulatory agency. The commission was established in part to combat price gouging by the railroads.

The first boom time for rule writers came during the Great Depression of the 1930s. At the urging of President Franklin Roosevelt, Congress commissioned ranks of regulators to repair the economic damage and prevent its recurrence by monitoring banks, stockbrokers and other businesses. Among the new watchdog agencies were the Federal Deposit Insurance Corp. (1933), the Securities and Exchange Commission (1934) and the National Labor Relations Board (1935). When regulatory legislation was first challenged, a conservative Supreme Court thought the Constitution did not provide the authority for such federal meddling, but Roosevelt's appointment of more liberal members led to a broader interpretation of the one-sentence commerce clause and other sections of the document. Portions establishing Congress's power to issue money and control its value, for example, eventually served as a basis for banking regulation.

Rule writers mostly took a recess during the wartime and postwar years of the 1940s and 1950s but got back to work during the 1960s and 1970s, when the civil rights movement, consumerism and environmental consciousness produced the largest flood of business legislation in U.S. history. The Federal Register, which publishes all proposed and adopted regulations, ballooned from a yearly total of 14,479 pages in 1960 to 87,012 in 1980.

The deregulation revolution began under Presidents Ford and Carter, but the Reagan Administration embraced the idea with energetic zeal. Hack, chop, crunch! were the sounds during the early 1980s as Reagan's regulatory appointees stripped away decades' worth of business restraints like so much prickly underbrush on the President's ranch. The expense of complying with federal regulations, Reagan claimed, had cost Americans between $50 billion and $150 billion a year. After only ten days in office, he put a freeze on more than 170 pending regulations. A drastic pullback of Government involvement in business followed, especially in federal attempts to control prices and markets. How successful was the correction? Consider four industries that have been deregulated by Congress and Administrative action:

AIRLINES. By decontrolling routes, the Airline Deregulation Act of 1978 enabled dozens of new airlines to enter the business. The number of carriers authorized to fly planes with 60 seats or more increased from 36 in 1978 to a peak of 123 in 1984; there are now 74. The legislation decontrolled prices at the same time, which sparked the fare wars that have saved consumers some $6 billion annually. Today's U.S. airline tickets are estimated to be nearly 40% cheaper than they would have been without deregulation. Airline travel has thus become far more popular, rising from 255 million domestic passengers a year in 1978 to 393 million last year.

Yet the ruthless competition that has produced such cheap rides for consumers has inspired a dozen airline mergers in which rabble-rousers like People Express have been swallowed up. The six largest carriers, which controlled 76% of the U.S. market in 1978, now have about 81% and are expected to get 90% by 1990. Large combined airlines command so much market share at some airports that the carriers may be tempted to raise prices with virtual impunity. At least three carriers control more than 80% of the business in their main hubs: Northwest Airlines in Minneapolis, TWA in St. Louis and USAir in Pittsburgh.

The most counter-pounding passenger issue is the increasing number of delays. Complaints to the Transportation Department about late flights and poor service reached 4,893 in the first quarter of this year, a 43% increase from the same period in 1986. Neither U.S. airports nor the ranks of air- traffic controllers have grown fast enough to keep up with the increase in flights that deregulation has set loose. The Transportation Department, under growing pressure from Congress, is proposing to hire more controllers and to require airlines to meet standards for on-time performance.

BANKS. Until deregulation gave them relief in 1980, banks and thrift institutions were rapidly losing business to competitors ranging from Sears to Merrill Lynch, whose money-market funds could legally offer much higher yields than the 5 1/4% maximum savings-account rate. But the Depository Institutions Deregulation and Monetary Control Act gradually abolished limits on interest, enabling banks and thrifts to offer lucrative accounts like Super NOW checking. The new law was a boon for savers, since it touched off interest- rate wars among financial institutions competing for consumer deposits.

Not all customers, however, have shared in deregulation's bounty. Because banks started paying more to depositors, the institutions felt compelled to start charging higher fees for routine services, usually to customers with puny balances in their accounts. The average fee for a bounced check increased from $5.07 in 1979 to $11.71 last year. Banks began increasing the holding period on deposited checks to as long as three weeks, which enabled the institutions to earn a tidy return on the funds. But consumers became steamed, and by last week Congress was close to approving legislation that would ultimately limit the holding period to two days on local checks and five days on most out-of-state checks.

Far more frightening for depositors are bank failures, which have risen sharply in the deregulatory era. Last year 138 banks collapsed, a post- Depression record, and as many as 200 are expected to go under this year. One reason for the shake-out is that the high cost of attracting deposits has forced banks to seek higher-paying, and thus riskier, loan ventures. What bankers think they need to survive amid the financial-services hurly-burly is even more deregulation, namely the repeal of the Glass-Steagall Act, the Depression-era law that forbids them to underwrite securities. Opposing that proposal are Wall Street's investment bankers, who would prefer to keep the business to themselves; they claim that commercial bankers would get in over their heads if they were allowed such privileges.

TELEPHONES. The dismantling of Ma Bell in 1984, the result of a Government antitrust suit, is probably the most unpopular deregulatory move. According to a Wall Street Journal/NBC News poll published in April, 59% of consumers think the breakup was a "bad thing." One emerging problem is the perceived decline in the quality of the nation's telephone service since the Bell system was broken up. Customer complaints and confusion are at an all-time high.

No one, however, is seriously proposing to reassemble AT&T. "These are eggs that can't be unscrambled," said Missouri's John Danforth, the ranking Republican on the Senate Commerce Committee. Instead, the Administration wants to encourage competition by deregulating the regional phone companies even further to allow diversification into such fields as insurance, real estate and computer manufacturing.

Since the breakup, telephone users have enjoyed a cut in long-distance rates of about 20%, or $4 billion, thanks mainly to deep rate reductions by AT&T that tiny rivals like MCI and US Sprint find difficult to match. But rates for local service, which remains a monopoly business, have jumped nearly 35%, or $6 billion. Overall, a typical telephone bill has increased about 25%. The increases in local rates appear likely to slow down, but unfortunately so do the long-distance discounts. AT&T so dominates the market, with an 82% share, that its competitors may lack the financial clout to survive future rate cuts.

Frustrated consumers can find relief at their local telephone-equipment stores, where they have enjoyed a remarkable bounty. Since the breakup, the number of telephone makers selling to the U.S. market has jumped from 25 to more than 200, which has vastly improved the range of prices, styles and capabilities. The high-tech scramble has produced phones with such space-age functions as voice-activated dialing and message machines.

TRUCKING. While most people are probably unaware of it, the Motor Carrier Act of 1980 has saved them a bundle. The law boosted efficiency by dismantling 45 years' worth of interstate hauling rules, including some oddball anomalies like provisions that allowed agricultural haulers to transport milk but not yogurt or ice cream. All told, trucking deregulation since 1980 has saved consumers $72 billion in lower prices on the goods they buy, according to Citizens for a Sound Economy, a conservative, Washington-based research group.

Deregulation has encouraged new operators to enter the business, but the intense price competition has worn them down like a long, grinding upgrade. About 17,000 new trucking companies have formed since 1980, and more than 6,500 companies have failed during the same period. The newcomers have felt increasing pressure to cut costs by scrimping on safety, which has spawned fleets of so-called killer trucks with bald tires, worn brakes and bleary-eyed drivers. While most major carriers can afford adequate maintenance programs, struggling trucking companies often put worn-out rigs on the road as a calculated gamble. Most often it is everyday motorists who stand to lose, since the odds are about 30 to 1 that car occupants will be the injured parties in a crash. Truck accidents in the U.S. have increased 26%, from 31,000 in 1980 to about 39,000 in 1985, while the number of miles traveled by the vehicles has gone up 17%. Last year Congress began to improve safety with a law requiring truck drivers to meet minimum testing standards.

The overall winners and losers from deregulation form a mixed gallery, but a few generalizations can be drawn. By and large, consumers who make enough money to take advantage of lowered prices in sufficient quantity, and those canny enough to understand the widening array of choices, will reap the most benefits. Conversely, poor people, who are strained by high minimum-balance requirements at banks and steep local phone rates, may be faring the worst. Says David Schwartzman, economics professor at the New School for Social Research in Manhattan: "Low-income customers have been the real losers in deregulation. They don't use long-distance service, they don't have large deposits at banks, and they don't fly much." Organized labor has also been adversely affected. As airlines and trucking companies have slashed prices, many unions have had to take pay cuts.

The challenge as the pendulum starts back in the current re-regulatory climate will be to maintain a sensible balance. Says Swartz, the railroad president: "The question should be, 'At what point do regulations become no longer instructive, and entirely counterproductive?' " The Constitution's framers, notes Richard Epstein, University of Chicago law professor, were "deeply suspicious of government." But after the experiences of the early 1980s, today's legislators will be wary of too little government as well.

With reporting by Jay Branegan/Washington and Thomas McCarroll/New York