DRI-313 for week of 3-9-14: Economic Rewind: What Went Wrong With America: What Went Wrong?

An Access Advertising EconBrief:

Economic Rewind: What Went Wrong With America: What Went Wrong?

Steadily increasing technological innovation carries with it a growing focus on the future. Looking backward nowadays tends to be more and more an occasion for nostalgia. This denies us a valuable tool. Reviewing yesterday in light of subsequent events and discoveries can improve our navigation through the future.

In 1991, the Philadelphia Inquirer published a nine-part series of articles by its star investigative reporting team, Donald L. Barlett and James B. Steele. The series was entitled “America: What Went Wrong?” The articles purported to show what had recently gone wrong with the country, roughly over the preceding decade. The popularity of the series encouraged the publication of the collected articles in book form under the same title. The book became a runaway New York Times bestseller. The authors, who had both previously won two Pulitzer Prizes for investigative reporting, gained national fame and climbed the career ladder to high-level writing positions at Time Magazine and Vanity Fair.

One motive for reinvestigating this subject matter is immediately apparent. In retrospect, the suggestion that America went to hell in a hand basket during the 1980s seems decidedly eccentric, to say the least. Although the nation began the decade in a mood often characterized as “malaise,” dramatic changes in economic policies fostered by President Reagan, Federal Reserve Chairman Paul Volcker and a small number of maverick economists ushered in an economic boom that eventually became the longest peacetime economic expansion in American history up to that point. True, there was a mild recession in 1991, the year of the Philadelphia Inquirer series, but this was followed by an even longer period of expansion.

It is possible to formulate a theory that bad things happened in the 1980s and subsequently. Former Reagan administration official David Stockman developed this thesis in his recent lengthy memoir. But Stockman didn’t portray those years as years of deprivation and despair; rather, he maintained that the underlying foundations of the boom were built on excessive government spending. The good times were good enough while they lasted, in other words, but were destined to end badly.

This was most definitely not the picture painted by Barlett and Steele. It behooves us to closely examine their bestselling book today. The perspective of time enables us to appreciate how bizarre and wrongheaded their thesis was. Our economic focus will show how completely wrong their conclusions were. And, most startling of all, we will realize that the two most celebrated investigative reporters of their day apparently failed in their duty to their readers and their profession.

Readers who remember the powerful impact Barlett and Steele’s book had over twenty years ago and who are awed by their current eminence will find the foregoing contentions incredible. They should swallow their incredulity and read on.

BS on “The High Cost of Deregulation”

Barlett and Steele (hereinafter shortened to BS) organized their book into ten chapters (one more than the original number of articles). We will focus on the most economics-intensive chapters, as determined by the subject matter. Chapter 6, entitled “The High Cost of Deregulation,” is probably the narrowest in its concentration on pure economic subject matter.

We can infer that the chapter deals intensively with economics from the fact that an economist is quoted in it. You would never know that, though, from this chapter. BS quote “Darius W. Gaskins, Jr., former Chairman of the ICC.” But they do not bother to tell their readers that he is economist Darius Gaskins, leading specialist in the field of Industrial Organization, who was appointed Chairman of the ICC by President Carter specifically because of his expertise in trucking regulation.

Most of the chapter deals with the deregulation of the trucking industry that began in 1978 and resulted in the passage of the Motor Carrier Act of 1980, which deregulated the substance although not the technical form of pricing and entry into interstate trucking. This is odd. The introductory page (“What Went Wrong”) previews the topic: “Thousands of firms gone. 200,000 jobs lost. Deregulation has been costly to workers and consumers alike.” It continues by citing the costs of the savings and loan cleanup and claiming that “now the push is on to deregulate the banking industry.” Yet the chapter itself deals almost completely with the two big deregulatory efforts of the 1980s – trucking and commercial airlines.

The headline of the section on trucking deregulation is “Wrecking Industries and Lives.” The inference is clear: the trucking industry was “wrecked” by deregulation and lives were destroyed as a direct result. How was the industry wrecked?

Here is the BS explanation: “Since deregulation of the trucking industry in 1980, more than 100 once-thriving trucking companies have gone out of business. More than 150,000 workers at those companies lost their jobs.” They provide a full-page table headed “The Collapse of the U.S. Trucking Industry.” It lists “the top 30 trucking firms of 1979,” most of which are “gone.” More precisely, 17 had folded, 3 merged and 10 still operated.

How did this destruction occur? The BS view is that deregulation was based on false premises: “Removing government restrictions on the private sector would let free and open competition rule the marketplace. Getting rid of regulations would spur the growth of new companies. Existing companies would become more efficient or perish. Competition would create jobs, drive down prices and benefit consumers and businesses alike…That’s the theory. The gritty reality, as imposed on the daily lives of the men and women most directly affected, is a little different.”

BS illustrate the difference between the promise of deregulation and its actual performance with anecdotes. A trucking-company employee was stricken with a “rare bone cancer.” His company went bankrupt. He lost his medical insurance and could not pay for his medical treatment. (Oddly, BS say that the company’s checks paying for the treatment “began bouncing.”) The treatments apparently continued until the man’s death, but his wife suffered harassment by the collections department of the hospital.

A woman worked for nineteen years as an accountant for a trucking firm. It went out of business. She took part-time jobs at a lower salary. Another woman suffered the loss of her husband, who was killed in a highway accident. Rather than paying her out of the state worker’s compensation fund, regulators allowed the trucking company to pay her directly. But “deregulation was helping drive it…out of business.” After bankruptcy, the woman’s checks stopped and she became an unsecured creditor.

These three anecdotes are attenuated and decorated with detail to stress the suffering of the principals. Likewise, the good old days of regulated trucking are fondly recalled. “My uncle was a truck driver twenty years ago and, wow, he made a lot of money…drove a nice car…had a nice house.” “Trucking was a good job in those days…the pay was good, it was steady work.” The contrast with deregulation is stark. “Deregulation has been a nightmare…

now, drivers are struggling to survive.” “For truckers, the 1980s were a dismal time.”

The BS Theory of Deregulatory Disintegration

It is one thing to claim that things are bad under deregulation but another to actually state a logical chain of reasoning to underpin the disintegration. Why did things go bad? Why must it be inevitable that deregulation is doomed to failure while regulation should succeed? The closest that BS come is to insist that government statistics do not tell the true story, that deregulation causes wages to spiral downward and “good, middle-class jobs” to disappear and that deregulation produces financial disaster for the industry.

BS actually cite a Brooking Institute study claiming a $20 billion net benefit from trucking deregulation. (They say nothing about who did the study, how it was done or the nature of the benefit.) They are willing to concede that “companies that hire truckers have profited from lower rates” but maintain that “there are no economic data showing that the cost savings have been passed along to consumers.”

BS admit that “according to the Bureau of Labor Statistics…between 1980 and 1990, the number of employees increased 248,000 [and] average yearly earnings went from $18,400 to $23,400” in the trucking industry. But the good jobs, those with seniority, high wages, benefits and health insurance, went down the tubes along with the 100 big trucking firms that failed. In their place came a raft of “one-owner, shoestring trucking operations.” Deregulation “eliminated two jobs that paid, say, $30,000 and created three jobs that paid $20,000 or less.” The $23,400 earnings figure is misleading because “the government excludes one major category of drivers from its figures – self-employed drivers. And their earnings are generally lower than those for drivers employed by major companies.”

BS spend the best part of seven pages decrying the particular efforts that failing companies employed to stay afloat. These included mergers, leveraged buyouts and particularly the use of employee stock ownership plans (ESOPs) as a means of raising capital by selling ownership in the company to its employees. “Since 1980, more than two dozen ESOPs financed by worker wage cuts have been adopted by large trucking companies. With few exceptions, the companies failed anyway.” BS wax especially indignant at the activities of one (1) financier who owned an S&L as well as a trucking company and was eventually convicted of fraud and sentenced to twenty-four years in jail.

Such is the BS theory of deregulatory disintegration. On regulation, BS are even vaguer. They see it as a kind of mediative or ameliorative process, apparently intended to smooth out (or saw off) the rough edges of the competitive process. BS drop stray hints that regulation was not perfect. (“Undoubtedly, the ICC, like its counterpart in the aviation industry the Civil Aeronautics Board (CAB), had had stifled competition and discouraged innovation…If the ICC had been guilty of overregulation in the past…”) But deregulation was not the answer; instead, policymakers should have repaired regulation. (“Rather than correct the defects in the regulatory system, Congress chose instead to throw it out…It was somewhat akin to eliminating the referees in a football game because of flawed calls, instead of merely replacing them.”) Do BS mean that regulators should have been replaced? Of course, civil-service regulations make it difficult, if not impossible, to replace anybody below cabinet level for political or policy reasons. Higher-ups usually get replaced anyway as administrations change.

In any case, as we shall see below, virtually everything BS say in this chapter is wrong, misleading or irrelevant.

The Truth About Trucking Deregulation

That this account of trucking deregulation could appear in a major metropolitan newspaper under the guise of investigative reporting, then subsequently form the basis for a non-fiction bestseller, is astonishing. America: What Went Wrong was subsequently named one of the 100 leading pieces of investigative journalism in the 20th century by New YorkUniversity’s Department of Journalism. This gives it a status approximating that of Piltdown Man in the scientific world. We can begin to appreciate this by methodically recounting the truth about trucking deregulation, as revealed by the logical and empirical tools of economics.

As with all forms of industrial regulation, the roots of trucking regulation have been meticulously traced. It did not arise owing to a spontaneous, grass-roots demand by the public. Railroads resented the competition for freight carriage presented by trucks during the 1920s and 1930s. They strenuously lobbied state regulators and the ICC. In 1935, the ICC subjected the interstate trucking industry to tight regulatory control governing entry into the market and prices charged by trucking firms to shippers, as well as safety standards of operation. Meanwhile, each state established analogous control over intrastate trucking.

The essence of entry control was the certificate of convenience and necessity, which required would-be new entrants to prove to regulatory authorities that their new service was both necessary and appropriate. (Incumbent firms were mostly grandfathered into the business without having to meet the requirements.) The regulatory authorities included current active truckers, so would-be entrants were begging their competitors for permission to compete with them. Not surprisingly, their entreaties were seldom heeded. Applications for new service by certificated firms were given precedence over those by new entrants.

Prices were submitted to regulatory authorities at least 30 days in advance of effective date. Anybody interested party could view them and object to them. Once again, this was a virtual bar to any effective form of competition, since objections would give rise to a bureaucratic investigation and competitive gains would be eroded or eliminated altogether by the investigative costs.

The rules governing service authority under regulation were staggeringly inefficient. Because the chances of passing muster for a certificate of convenience and necessity were virtually nil, the only way companies could enter the business in practice was to buy the authority to provide trucking service to a particular route. This cost hundreds of thousands of dollars (in today’s money, the equivalent of millions of dollars). The lack of price competition and difficulty of competitive entry meant that trucking companies earned monopoly profits. The only way an existing trucking firm would sell its authority to operate was if it were compensated for the loss of those monopoly profits in the sale price; that is, the price reflected the discounted present value of anticipated future monopoly profits. This is directly analogous to the sky-high prices received for the sale of taxicab medallions in places like New York City, where entry and price competition were similarly restricted. Unlike the taxi case, though, trucking-company owners had to split the monopoly profits with unionized company employees, who made up about 60% of large-company workers. (Deregulation was vehemently opposed by both the Teamster’s Union and the American Trucking Associations, which included the large trucking firms.)

If a trucking firm was lucky enough to raise the price of entry, it still faced barriers to efficient operation. Consider the case of a firm serving the route from Cleveland to Buffalo under regulation. Let’s say it purchased the right to a route from Buffalo to Pittsburgh. Could it carry freight traveling from Cleveland to Pittsburgh? No, it couldn’t travel straight between those two cities because it had no authority to serve that route; it must travel many miles out of its way by going through Buffalo in order to serve Pittsburgh from Cleveland. And what about the return trip? As every commercial drive knows, “deadheading” or returning empty is mindboggingly inefficient. But that’s what trucks had to do under regulation.

How inefficient was regulation? Certain commodities were exempt from regulated carriage, and their rates averaged 20-40% lower than regulated rates. Dressed poultry was exempt; its rates were 50% below that of regulated cooked poultry. Trucking rates in West Germany and the U.S., which had similar forms of trucking regulation, were 75% above those in unregulated Great Britain.

Does something seem not exactly copasetic about this arrangement? So it must have seemed to Congress, which passed the Reed-Bullwinkle Act in 1948 exempting motor carriers from the anti-trust laws. Thus, the ICC effectively functioned as a cartel allowing trucking-industry firms to act collectively as a monopoly and the firms were immunized against the legal consequences of doing that by act of Congress.

How much of this did BS tell their readers? Absolutely nothing.

Deregulation was proposed by John F. Kennedy in 1962. It was proposed again by Gerald Ford in 1975. It was backed by economists who studied the industry virtually from the outset of regulation in 1935 until 1978, when Senator Edward Kennedy sponsored the enabling legislation signed by President Jimmy Carter in 1980.

BS’s piece on deregulation appeared in October, 1991; their book appeared in Spring, 1992. By then, careful economic studies on the effects of trucking deregulation had already appeared. Since then, of course, even more empirical work has been done confirming and strengthening the initial results.

Economist Thomas Gale Moore published an early study in 1987 and later contributed two summaries, one to the Fortune Encyclopedia of Economics and one to its successor, the Concise Encyclopedia of Economics. He found that average rates for (full) truckload shipments declined by 25% between 1977 and 1987 and LTL (less-than-truckload) rates fell by 10-20% between 1979 and 1986. Overall, revenue per truckload ton fell by about 22%. The cause of the decline in prices and revenue was the increase in price competition caused by the tremendous influx of new entrants into the market, which broke up the monopolies exerted by the big trucking firms and destroyed their monopoly profits. It also produced an increase in trucking output. By 1990, there were about 40,000 truckers in the U.S., more than twice the number operating under regulation. (BS themselves recognized both an increase in truckers and an 11% increase in trucking output, which they derided as “too many trucks…suddenly chasing too little freight.)

In surveys, 77% of shippers approved of deregulation. Official complaints by shippers against trucking firms fell to less than 10% of their former levels under regulation. The Department of Transportation conservatively estimated the gains from trucking deregulation at $38-56$ billion per year.

One of the major unanticipated gains was the role played by deregulation in adoption of the “just-in-time” (JIT) system of inventory control. JIT is now recognized as a key prophylactic against the fate suffered by the U.S. economy in 1920, when the large inventories accumulated by firms produced a short but extremely sharp recession. The tremendous improvement in trucking efficiency produced by deregulation allowed business firms to cut their level of inventories from 14% of GNP in 1981 to 10.8% in 1987.

BS noted with disapproval the role played by Senator Kennedy in deregulation. Other than that – and the derogatory reference to the increase in trucking output – they told their readers absolutely nothing of the true genesis and effects of trucking deregulation.

What Did BS Owe Their Readers? What Did They Deliver?

Readers may be a bit dizzy at this point. Can it really be true that the two leading investigating reporters of all time – ranking above even Woodward and Bernstein in the esteem of many commentators – could have produced an article so completely lacking in merit? After all, BS are not themselves economists; they were only reporters and never pretended otherwise. Is this EconBrief holding them to an impossibly high standard?

The following compares what the readers of BS had every right to expect with what BS delivered.

Journalistic Integrity. A reporter is not an editorialist. He is not supposed to state unsupported opinion. He is supposed to seek out expert, authoritative opinion whenever possible – not set himself up as an expert. He should cite his sources of information or state that their anonymity is being preserved. An investigative reporter is supposed to learn the facts and present them, not create a story to fit his preconceptions. The reporter’s opinions are irrelevant to the story.

Economists are the authoritative experts on the organization of industry, consumer benefit and government regulation. They offer university courses on these subjects, provide expert testimony in regulatory and judicial proceedings and advise government in official and unofficial capacities. They offer the only formal theory of human behavior dealing directly with these issues.

BS made no visible effort to consult expert, authoritative opinion. They cited no economist. They quoted one economist, but hid his economic credentials from their readers. They did not understand the economic theory and logic underpinning their subject. They did not understand the implications of the scanty data they did cite on the subject. They operated on the basis on an apparent, implicit “theory” concerning the trucking market and its deregulation. That implicit theory bore no relationship to reality or to economic logic.

BS violated most of the canons of sound reporting. They adopted an advocate’s role with no factual or logical basis underlying it. The case they presented to their readers was incoherent, resting on illogic and non sequitur. Thus, they relied entirely upon eliciting an emotional reaction from their readers. Whatever else this is, it is not good journalism.

Analytical Coherence. BS paint a picture. In order to be worthwhile, that picture must be coherent. Otherwise, it has value only as a kind of surrealist exercise. “The High Cost of Deregulation” fails that test completely. The very title is a misnomer. The word “cost” – like all terms used by economists – is a term of art. It denotes opportunity cost, the highest-valued alternative foregone. BS assumed the burden of proving that (say) the failed businesses were in fact in their highest-valued use, or that employees had greater productivity in the job they lost than in their subsequent employment. They didn’t do this and made no attempt at it.

BS want us to presume that an industry is “wrecked” when large businesses fail and people lose their jobs. But business failure happens daily throughout the economy. A majority of small businesses fail within five years of inception, but their industries survive. Large numbers of restaurants fail and their employees must seek out new jobs, while others prosper and create wealth for their owners and employees. That is how the competitive process learns exactly what buyers want and weeds out inefficient suppliers. Considering that “wants” and “efficiency” change frequently, successful competition is something we should cherish, not deplore.

BS invert the stereotypical casting of the left-wing business morality play. Here, it is the big, bloated corporations that are heroic because they provide their doughty workers with “good, middle-class” wages and safe jobs. They are undone by the hordes of evil, one-owner small businesses that invade the industry when unleashed by deregulation. But economics is not a morality play. Trucking deregulation was beneficial because it replaced a monopolistic cartel with competition. The beneficiaries of monopoly were made unhappy by deregulation. But their satisfaction did not take precedence over that of workers, business owners and consumers who benefitted from it.

The trucking industry was not “wrecked.” Numbers of trucking firms increased dramatically. Today, trucking carries roughly two-thirds of all freight moved in the U.S. The only problem with deregulation was that it was not complete; it did not extend to intrastate trucking and it only affected pricing and entry, not the remaining aspects of the business. BS complain that deregulation was based on a false premise, yet everything that BS say did not happen under deregulation – free and open competition, entry of new firms, removal of burdensome regulations, lower prices, more output, job creation, benefits to consumers and businesses alike – did happen.

Incredibly, BS insist that there is no “data” verifying that the “lower rates” produced by deregulation were “passed along to consumers.” Apparently, BS were expecting to find an actual government data category reading “price decrease to consumers caused by deregulation,” or some such. If the “rates” refer to freight rates, that is what happens by definition; that is what is measured by the benefit studies done by Brookings, Moore, et al. If “rates” refers to wages rates, it is again true by definition. After all, deregulation abolished the monopoly cartel run by the ICC, it did not introduce monopoly. There is no mechanism by which sellers can benefit from lower wages created by competition and than arbitrarily keep all the gains for themselves. If they believe otherwise, BS should go start a trucking firm and utilize that mysterious arbitrary power to earn profits that will prove their case.

BS also insist that government data showing a $5,000 yearly increase in average yearly earnings for truckers is “misleading” because deregulation “eliminated two jobs paying $30,000 and created three jobs paying $20,000 or less.” But their own arithmetic doesn’t even support their argument; it produces stable or falling earnings. And their claim that government data excludes self-employed truckers does not support their case, either – deregulation destroyed the cozy monopoly combination between big trucking firms and unions, thereby freeing up the market and enabling small-business truckers to increase their incomes.

BS rest their anti-deregulation case on anecdotal misfortunes suffered by workers. But in every case, deregulation was a non sequitur, not the cause of the misfortune. Loss of health insurance in bankruptcy is caused by the linking of insurance coverage to employment, which is the major cause of the crisis in health care generally. Deregulation is merely one of a myriad of factors that bring this problem to the surface. By her own admission, the fifty-nine year-old accountant who lost her job chose to limit herself to part-time employment thereafter. Substitution away from worker’s compensation was done by regulators; there was no “deregulator” who made the decision that the widow’s compensation would be paid by the failing firm rather than the state fund. ESOPs originated in 1974, well before deregulation. The same is true of the other tactics used by struggling firms. Indeed, the fraud and safety derelictions complained of by BS were failures of regulation, not deregulation; these areas were not deregulated. BS are blaming the invisible hand of deregulation because the visible hand of regulation failed in its explicit duties.

There is nothing left of the BS case. Every single point made against deregulation by BS was analytically wrong, misleading or irrelevant.

 

The Implications of BS

Since 1992, the world of journalism has undergone earthshaking change. The print newspaper business has become an endangered species. The conventional thinking ascribes this fall to the rise of the Internet. But the decline in newspaper circulation began before the rise of the World Wide Web.

Up to this point, our focus has been purely analytical. Now is becomes speculative. An educated conjecture is that newspapers throughout the land emulated the techniques of BS. Those were the techniques of “advocacy journalism,” which is a euphemism for disregarding the objective basis of reporting in favor of political partisanship. They can be summarized below.

“First, write the basic outline of your story – then research it. Your every action as reporter will serve your agenda. Objective fact will enter only as an incidental by-product in your story. Do not approach any sources whose views will dispute or even mitigate that story. Tell your story mainly in personal anecdotes. Use emotive language that paints a vivid picture for your audience. Limit yourself to short factoids that will intensify the picture you are painting. Make your story a morality play, a Manichean struggle between good and evil. Poor helpless victims grip the emotions of the audience and are ideal centerpieces for your story. Rich, powerful villains trigger anger in your audience and sway them in your favor.”

Roughly half the country gradually came to the realization that this agenda, not the precepts of journalism, now guided the reporting as well as the editorial policy of most major metropolitan newspapers. They gradually lost respect for, and enjoyment of, those papers, patronizing them only when absolutely necessary. The rise of the Internet made their decision much easier and speeded their transition away from print media, but it was not actually the decisive factor in that move.

Has this speculative addendumgiven BS less than their due? No, it has done them a favor. Otherwise we would regard their work simply as hopelessly incompetent. The next EconBrief will continue to analyze this watershed work in the decline of American journalism.

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