A recent article by Alan Rappeport takes a generally dim view of Jimmy Carter’s attempts to fight inflation in the late 1970s and warns Joe Biden not to repeat his mistakes. Much of what Rappeport says is correct. Once inflation is in full swing, the president has few effective tools to fight it but gets all the blame. Some of Carter’s attempts were desperation moves that did not help much. But as an active participant in the Carter administration’s anti-inflation campaign, I was disappointed to see no mention of one initiative that did bear fruit—although not in time to help him in the 1980 election.
The policy I have in mind is transportation deregulation. In much the same way as Biden is taking on the pricing power of the Organization of the Petroleum Exporting Countries (OPEC) oil cartel, Carter took on the then-powerful cartels that dominated trucking, railroads, and airlines. From 1977 to 1980, I worked first on trucking deregulation at the Antitrust Division of the Justice Department and then on rail deregulation at the Interstate Commerce Commission.
The transportation cartels, like OPEC, were explicitly designed to keep prices high, but there is one big difference. Our federal government has been consistently antagonistic toward OPEC, but the U.S. government itself created the transportation cartels. They were a misconceived part of Roosevelt’s New Deal. The theory behind them was that if prices could be kept high, profits would be higher. This would mitigate the ravages of unemployment, as employers would not have to lay off workers or cut wages. Of course, no economist would make that argument today, but many did at the time.
In trucking, for example, each market segment—say steel hauling—was managed by a “rate bureau.” Rate bureaus had several tools for restricting competition. One was the power to set minimum prices for any particular service— prices that would give haulers a “fair” profit, with “fair” defined by the haulers themselves. Another tool involved manipulating the system for issuing “certificates of convenience and necessity,” without which no company could enter the steel hauling business. The certificates themselves were issued by the Interstate Commerce Commission (ICC), not the rate bureaus, but naturally, the commission paid attention to testimony from the incumbent haulers who dominated the bureaus. The latter rarely saw it as either necessary or convenient for newcomers to horn in on a business that operated under a guaranteed profit.
Carter’s efforts eventually paid off, but not quickly. The cartels were not fully tamed until well into the Reagan administration, which continued to support deregulation. Nevertheless, prices eventually did come down. For example, according to a report written for the Department of Transportation, truck and rail prices fell by some 30 percent from 1982 to 1998. Airline fares fell by about the same amount, although it took longer. Deregulation also increased competition by easing the entry of new firms in many transportation markets and eliminated regulatory micromanagement in a way that encouraged productivity increases.
However, the whole episode illustrates two major limitations of using microeconomic tools like deregulation and antitrust to fight the macroeconomic problem of inflation.
First, they do not work quickly. The lag in the effect of monetary measures like raising interest rates ranges from around a few months to a year. As the Carter-Reagan transportation deregulation initiatives show, even highly successful microeconomic policies can take a decade or more to affect prices.
Second, unlike monetary policy, deregulation, and many other microeconomic policies, affect only the level of prices, not inflation, which is the rate of change in prices. That means that their beneficial effects are felt only one time. Once you have abolished trucking rate bureaus, you can’t abolish them again.
But on the whole, I would put a positive spin on the story of transportation deregulation in the 1970s and 1980s. Even though the policies did little in the short-run to bring down inflation, they had long-term benefits both on the levels of prices and productivity. Still, those benefits alone would not have been enough to overcome the opposition of entrenched forces within the industries themselves, including the success of truckers, railroads, and airlines in “capturing” their regulatory agencies.
Politically, deregulation succeeded only when it was linked to the popular issue of fighting inflation. Could there be lessons here for the Biden administration? Take, for example, the shameful federal policies that mandate burning food (corn-based ethanol) to power our cars amid a looming global famine. The big benefits of ending ethanol mandates would be environmental and humanitarian—issues that, sadly, are not winning elections in this cycle. But why not promote an end to ethanol as a measure to fight inflation? Even though the effect on inflation in the food and fuel sectors might be small, it could be a wedge for getting something done that is long overdue, just as was the case for transportation deregulation in the 1970s and 1980s.
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