NOW THAT THE RUSH to deregulate is ebbing, it's time for some damage assessment.
It is becoming apparent to some members of Congress that under the rubric of deregulation, a sweeping restructuring of national priorities has occurred. In the urge to grasp the economic benefits of deregulation, very real social and human costs were overlooked. "I would like very much to see some motion to stop the momentum, the headlong drive to deregulate everything, and creating the law of the jungle again, which existed a century ago," House majority leader Jim Wright (D-Tex.), has said. "I don't see it happening with rapidity, but I do see the beginnings of that kind of movement."
We were once a nation committed to clean air and water, a safe workplace and consumer protection. We were also committed to a kind of national transportation policy and universal telephone service, and to the notion that banks -- like airlines and telephones -- were akin to public utilities.
Since airline deregulation, Bakersfield, Calif. -- population 105,000 -- has seen 13 different airlines come and go -- many of them into bankruptcy. United Airlines and Hughes Air West, which served Bakersfield before deregulation, abandoned the city. "They were replaced with bucket of bolts operations," according to Stephen P. Schmitt, aviation director in charge of Bakersfield's airport. Now, as evidence of the happenstance world of deregulation, United is scheduled to come back to Bakersfield, along with American Airlines. But in the meantime Bakersfield went into a tailspin. "They just killed us," Schmitt said. "Passenger boardings dropped from 148,000 per year to 48,000. We've lost business that could have come to Bakersfield and didn't. Business has left Bakersfield, including the Continental Telephone company, which moved its headquarters to Atlanta, saying publicly they were moving because of the air service. We've been hurt worse than any other city in the country by all this trauma and turmoil. That's what deregulation gave us, and they still haven't put Humpty Dumpty back together again."
Americans are paying bank fees today that are double what they paid in 1979, according to a study by the Consumer Federation of America. "The fees have become a virtual blizzard," says Rep. Fernand St. Germain (D-R.I.), chairman of the House committee on banking, finance and urban affairs. "Fees for deposits, fees for low-balance savings accounts with the 'low balance' arbitrarily defined by the bank, fees for transfer of funds, fees for closing accounts. In some cases, the fees virtually wipe out the interest on small accounts, negating congressional efforts to give small savers a break."
In Tennessee, the telephone company proposed a 120 per cent increase in rates. Rep. Albert Gore Jr. (D-Tenn.) organized telephone councils to help his constituents cope with the problems of deregulation.
In a series of six hearings Gore held across the state, farmers, senior citizens, the poor, hospitals, universities, rural telephone cooperatives and small telephone companies testified that they would suffer under the new rates, made necessary -- or possible -- by the break-up of AT&T.
"We hear a great deal about the new telecommunications service that will revolutionize the way we live, but who will lose?" Gore said. "I'm especially concerned about the potential problem with senior citizens who have a special reliance on telephone service. For them, a telephone is not a luxury. It is a vital lifeline to relatives, friends and neighbors, hospitals, the drug store -- all the people they rely on to get them through the day."
The move to deregulate reflected a bipartisan consensus. It was led by many of Congress' leading liberals and conservatives and by officials in the Ford, Carter and Reagan administrations. It was a response to what was sometimes rightly considered the ossification of the regulatory agencies, which were often inefficient, arrogant and captive of the industries they supposedly regulated. Deregulation proponents hoped to encourage competition, stimulate economic growth, eliminate waste and reduce inflation.
According to the theory behind deregulation, airline fares and routes, for example, would be determined by the marketplace, not by a government agency. The resulting competition led to much cheaper fares for passengers flying on popular routes.
Released from government-imposed ceilings on interest rates, banks offered some of their customers substantially higher returns on their money, as well as a wider variety of services.
The marketplace was also opened to companies previously barred by AT&T's virtual monopoly, forcing long-distance rates down.
Acting on the blueprint designed -- but not fully implemented -- by the Carter White House, the Reagan administration made the Office of Management and Budget the nation's regulatory czar. OMB now has the power to approve all major regulations within the context of a cost-benefit standard. Thus, an agency responsible for fiscal austerity determines social priorities for issues like safety, health and the environment.
The results were predictable: cost cutting became a higher priority than such social goals as mine safety or chemical waste cleanup. Regulations began disappearing down what became known as the "black hole at OMB," often following secret visits from industry representatives, according to congressional testimony. OMB told the Environmental Protection Agency to go slow on dioxin regulations, for example, warned Occupational Safety and Health Administration against regulating worker exposure to ethylene dibromide (EDB) and held up infant formula regulations propunded by the Food and Drug Administration.
In the first flush of enthusiasm for cheap fares to Disneyworld, many ignored the costly tradeoffs. These social consequences were the flip side of a policy that was advertised as a free lunch. The negative consequences of deregulation are still given short shrift by its proponents, who focused more on costs than on benefits, especially when those benefits were intangibles: life, health, community stability, regional prosperity.
The winners in deregulation include those with more than $500 in bank deposits, who earn higher interest rates and receive more services; frequent fliers between populous cities, and habitual users of long-distance telephone lines. But those with less money, who rarely fly or just need a telephone to call the corner druggist will be disadvantaged.
In the broadest sense, deregulation has created a restructuring of national priorities. Airline deregulation is, for example, an assault on a national transportation policy that sought to assure easy, reasonable, reliable access to all sections of the nation. Like most industrialized nations, the United States had long appreciated the commercial, business and social value of a national transportation network, as witness the federal interstate highway program.
Many towns and small cities, as well as businesses, are suffering from the uncertainty and upheaval resulting from the immediate aftermath of deregulation. Sen. Mark Andrews (R-N.D.), chairman of the appropriation committee's subcommittee on transportation, represents a state that has been hard hit by airline deregulation.
"The secretary of transportation estimated that the air service in my state had decreased 12 per cent since deregulation," Andrews said. "Before deregulation, our state was served in seven cities by regularly scheduled carriers. Now we have four cities with such service. Regions such as ours deserve the same dependable air service they had before deregulation."
Jamestown, N. D., is a small farming community (population 16,000) in Andrews' state that typifies how similar communities have been hurt since the passage of the airline deregulation act in 1978. "Dollars have stopped changing hands because we've lost air service," reported Gary Baker, director of the airport. "In Jamestown, if we are going to maintain any sort of progress in terms of business, we have to fight to keep airline service."
Deregulators contend, however, that there is insufficient public demand for flights into such small communities, and that it is misguided public policy to maintain these services.
Andrews requested a study by the Congressional Research Service (CRS) on fare increases to test administration claims that air fares have increased at a rate lower than the inflation rate. The CRS study showed that of 30 pairs of cities, selected at random, 17 experienced increases in all fare classes -- after being adjusted for inflation -- since the advent of deregulation. In 10 of the pairs, either the coach or the discount fare increased by over 50 per cent when adjusted for inflation.
The upheaval of airline deregulation has also led to three major airline bankruptcies, and the possibility of more to come, as the airlines gird for yet another series of fare wars. Deregulation advocates who felt that these dislocations were necessary for the economic health of the airline industry overlook the social consequences -- thousands thrown out of work (10,000 in Braniff's case), delays at airports that are attributed, in part, to the airlines' new freedom over routes and schedules and loss of service for some communities.
Similar to the promises of airline deregulation, telephone divestiture and deregulation was promoted as a pro-consumer measure, and also undermined another national priority: universal telephone service. Like most industrialized nations, the United States long regarded a telephone in every home as important not only to the individual user, but to the prosperity of the business community. True, it was more difficult to install and maintain telephone lines in rural communities, but such a telephone system helped a raft of businesses and institutions dependent upon telephone shoppers.
Finally, who can deny the role of banks in the circulatory system of American business? But this, too, is being undermined by some of the unanticipated outcomes of banking deregulation. Forty-eight banks failed last year, the most since 1942, and the number already is higher this year. Bank regulators say privately that they expect more than 60 banks to fail this year, more than in 1939, when the Depression was ending.
On the other side of the counter, customers with small accounts are having the window shut in their faces. In New York City, a major bank stopped cashing city-issued welfare checks, despite the city's maintaining substantial non-interest bearing accounts to compensate he bank for the service. Since deregulation, some banks now charge fees of $2 to $3 per Social Security check. Military personnel, home on leave, and with full identification, have been turned away, their government checks refused.
Under banking deregulation, "the move to affluent markets, and away from the blue- collar, the elderly and the less well-to-do, is being accomplished through an elaborate fee system that effectively prices the 'undesirables' out of the market," charged St. Germain.
Another congressional critic, Rep. Charles E. Schumer (D-N.Y.), believes the deregulation of financial institutions has contributed to the increase in real interest rates. This change affects small-business owners, many of whom find themselves shut out of capital markets, and home buyers, who cannot afford the high interest rates that deregulation has led to, and do not want to subject themselves to the uncertainty of adjustable rate mortgages. "Deregulation was pushed in the name of the consumer," said Rep. Schumer, "although very few consumers expressed that desire."
"When I got to Congress, there was a mad rush to deregulate," Schumer continued. "The question was not how, but when. That has totally changed. Now the people who have been hurt are beginning to howl. What we've seen is that the very large institutions haven't handled themselves very well . . . . Regulations were put there for a purpose. The purpose is still there."
To redress the inequities of banking deregulation, St. Germain has proposed a two-track government policy. Banks that exploit deregulation to help the affluent at the expense of the poor would have to get along without federal assistance -- such as insurance bailouts. The Federal Deposit Insurance Corporation and other federal assistance would also be restricted to those banks that help their communities, he suggests.
The debate over deregulation is not a debate between those who believe in government and those who love and hate the Federal Register. It transcends the debate over whether a free market can really exist in an advanced industrial society, and the debate between economists and social planners. The real question is how far should government go to protect society, and when should it allow the free market to prevail?
The regulation of airlines, banks and the telephone service reflected an earlier view that these industries were more than merely entrepreneurial -- they were central to the nation's business and commerce. But unleashing these industries from the constraints of regulation has left certain segments of the public unprotected. These industries are now able to pick and choose their customers, and set their own rates, in the name of competition and the free market. Not surprisingly, the burden has fallen on those least able to protect themselves.