by Jimmy Carter faced one major economic problem throughout his presidency, 1977-81 – stagflation. The incredible combination of double-digit annual inflation with economic stagnation and unemployment was the problem his presidency was supposed to solve, but it didn’t. In 1980, Carter’s last full year in office, inflation was over ten percent a year for the second consecutive year and the economy was in recession.
You had to run places in the 1970s, it was so expensive to fly.
In a central sphere, however, Carter created the apparent repudiation of stagflation, the great deflationary boom of the 1980s and 1990s, which began soon after he left office. Carter was certainly the greatest deregulator of any president, including Reagan.
Carter brought zeal to his causes, and one of them was deregulation. It unlocked two hugely important industries, air travel and trucking, from federal regulatory restrictions and set the stage for deregulation of industries just as compelling, including telephones.
In the 1970s, the blanket regulatory apparatus of the New Deal still dominated air travel and trucking operations. By the 1930s, the government had become so paranoid about deflation and collapsing profit margins that it guaranteed certain price structures and market monopolies to certain continuing businesses. The experience of watching farmers fail to recoup even their costs as farm prices collapsed in the Great Depression convinced President Franklin D. Roosevelt’s brains to trust that federal guarantees were necessary to keep essential engines of the American economy.
In the case of airlines, carriers had route maps that were exclusively theirs and could not charge below a set high price. Until the mid-1970s, airlines tried by various means to penetrate competitors’ route maps and compete on quality, as they were prohibited from competing on price. Images of luxury jets being served sliced prime rib by uniformed waiters are internet memes. However, to ask “look what they got us” is to miss the point. Price-regulated airlines were left to compete on what was left, namely quality.
Historian Thomas H. McCraw put it this way Prophets of Regulationhis 1985 Pulitzer Prize-winning book: “by restricting economic competition,” federal regulation “encouraged greater competition in frills: fancier in-flight food and drink, more movies, additional attendants — all secondary forms of customer service” .
Trucking had a similar experience. The regulation, which dates back to the 1930s, guarantees certain carriers routes and a healthy price cap. The heavily urban environment of about 1940 limited the damage of this facility. Once suburbanization took off in the 1950s, however, the costs and bottlenecks became overwhelming.
Before Carter took office, there was a bipartisan push to discard these costly remnants of the New Deal. Democrats generally led the way. Senator Edward M. Kennedy of Massachusetts was a leader, along with his aide and future Supreme Court Justice Stephen Breyer. When Carter took office, he installed a deregulation chief, the colorful Cornell University economist Alfred Kahn, who was more than capable of the job. Carter’s appointment of Kahn was a masterpiece and a testament to Carter’s executive ability.
Kahn combined an academic’s understanding of regulatory inefficiency with an uncanny ability to deal with officials and personal organizations in Washington and business leaders across the country. The deregulation of both industries, airlines and trucking, was accomplished through legislation enacted and passed in 1978-1980.
Incumbent companies in these industries occasionally tried to fight back, but they too were tired of the Procrustean regulatory apparatus that had run amok in the 1930s. One problem was that their unionized employees knew their price structure as history. This put management in a difficult negotiating position – the company could not threaten to maintain its pricing power because the feds guaranteed it. Meanwhile, all kinds of venture capital were gathering to break into these industries once the restrictions of the Roosevelt era were lifted.
Since 1980, airlines have generally been able to charge what they want and fly where they want. The same applies to transport companies. The big bang of deregulation happened the year Ronald Reagan took office. During the Reagan administration, 1981-89, the plans were implemented. Flying has been democratized like never before. Gone are the high prices and prime rib to make up for it in favor of lower fares and lots of customers. Trucks criss-crossed the country as befits a suburban and mobile nation, creating great business success stories like Wal-Mart and amazon.com.
In November 1980, the Reagan transition team’s infamous “Dunkirk” memo warned of a regulatory “tool” about to hit the nation. Some officials worried that the Carter administration had created regulatory overreach in the agencies that would be automatic in the 1980s. That fear was misplaced. Carter gave Reagan the amazing gift of deregulation. Combined with the marginal tax cuts enacted in 1983, the economy experienced a growth spurt unlike anything seen since the 1960s, if not the 1920s. All the capital freed up by Reagan through his tax cuts he found room to roam the deregulated world Carter had created.
Why did Carter pledge to deregulate business? Because he was embarrassed by it – and he felt, rightly so, that deregulation would moderate inflation. He was also embarrassed by the tax code, its complexity, the immensity of its deductions, and the falsification it pursued in terms of the discrepancy between the rates announced and the rates that were actually effective. He never came up with the obvious solution of lowering tax rates, other than the capital gains rate cut that was placed on his desk against his wishes. But it was definitely liberating. The story of the incredible deflationary economic boom of the 1980s and 1990s is incomplete without Carter’s deregulation.
Check out our recent book on the history of income tax: Taxes have consequences.
