Deregulation Is Great, But...

Deregulation has been one of the great driving forces of the New Economy. By removing the heavy hand of government control from key industries, deregulation dramatically increased the flexibility and responsiveness of U.S. corporations in a period of rapid technological and competitive change. Indeed, by making it easier to shift capacity where it is needed, deregulation deserves some of the credit for the current low rate of inflation.

Yet some recent events in the airline and telecom industries suggest it may be time to fine-tune the tool. Certainly, by many measures, deregulation is a success in both industries. Airline hours flown are way up, and there is no evidence that safety--one of the biggest worries going into deregulation--has been compromised. Telecom, too, has prospered under deregulation, with regional telephone companies, long-distance providers, and cable companies investing heavily to give the U.S. one of the most technologically advanced systems in the world.

But both industries face irate consumers and politicians, irked by the apparent lack of competition. In the case of airlines, tHe problems are the dominance of one carrier at many hubs, sKy-high fares for business travelers, and a growing sense that passengers are treated badly. For telecom, the biggest issue is the continued consolidation of the industry into meganetworks which will all offer cable, telephone, and broadband Internet. The Mar. 22 announcement of Comcast Corp.'s acquisition of MediaOne Group means that the number of major telecom players has shrunk to five: AT&T, MCI WorldCom Inc., and the pending mergers of Bell Atlantic-GTE, SBC-Ameritech, and Comcast-MediaOne. At the same time, cable rates have been skyrocketing at 7% annually over the last three years, far above overall inflation.

Without turning back the clock to the bad old days of bureaucratic micromanagement, there are some steps that could help ensure a level playing field and more competition in these industries. For airlines, one key is to open up access to landing slots at airports such as New York's LaGuardia Airport, something already under consideration by Congress. That would make it easier for existing airlines to challenge the hubs of their rivals, and for new startups such as Frontier Airlines and Vanguard Airlines to expand and thrive. Federal and local governments can encourage the use of alternative or secondary airports. And federal regulators can keep an eye out for "predatory pricing"--that is, deep price cuts by incumbents purely targeted at driving potential competitors out of business.

The situation is trickier in telecom, where the rapid pace of technological change may be about to create new competition. For example, the introduction of broadband Internet service by cable companies makes it easier for them to provide phone service as well. What's important here is to make sure that consolidation, important for economies of scale, does not turn into a new monopoly.

Nobody wants to give up the benefits of deregulation, but that doesn't mean closing our eyes if problems come up. It's time to make a good policy better.

Before it's here, it's on the Bloomberg Terminal.