Are subsidies the price of deregulation?

One good thing about deregulation is that it clears out economic dead wood. When regulations are lifted, companies start competing and either get efficient or lose their shirts. Over time, economic losers go away and low-cost producers thrive. And society gets things done better.

At least that’s the theory.

In practice, economic losers don’t go away so easily. Once deregulation frees-up markets, politicians often rush in with heavy subsidies to losing companies. People like stability, and subsidies promote that.

These subsidies can be huge, and they’re an often-overlooked “cost” of deregulation. After accounting for the cost of subsidies to taxpayers, actual gains from deregulation can be dramatically lower.

A common example is airlines. Even after deregulation in the 1970s, airlines continued to enjoy a seat at the federal trough during rough times. According the Congressional Research Service, between 1918 and 1998 the feds spent about $155 billion on commercial airline subsidies—guaranteed loans, airport subsidies, direct hand-outs, you name it. And the trend isn’t slowing. By some estimates, they’ve tacked on another $15 billion just since September 11, 2001. (Download the study in PDF here).

That’s a lot of cash down the drain. Historically, these subsidies have gone hand-in-hand with deregulation, leading some to argue they’re simply a “price” we pay to enjoy deregulation’s gains.

If that’s the case, is the price worth it? Well, even if we assume losses from subsidies always go along with deregulation—what I call the “post-deregulation welfare” effect—compared to the benefits, they’re peanuts.

Take the case of airlines. Just between 1976 and 1990 the estimated savings from deregulation were $5 billion to $10 billion per year. Taking the low estimate, that’s $70 billion in savings over just 14 years—and that’s just lower ticket prices. Add in better routes, safety, customer service, innovation, and 14 more years of low prices to the present, and that total’s much larger.

So, is “post-deregulation welfare” inevitable? That’s debatable. But one thing isn’t: even with wasteful subsidies to laggard companies, the cost/benefit balance still tips in favor of deregulated markets.

Posted by andrewdavidchamber on Thursday May 27, 2004 | Feedback?

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