ORacle

The parable of regulations

Doug Samuelson
samuelsondoug@yahoo.com

The conversation at the summer poolside party had turned, naturally enough, to the recent vote by the U.S. Senate not to repeal the Affordable Care Act. A couple of people expressed disappointment that the Republicans had been unable to reach any agreement, even with control of the presidency and both houses of Congress. Others were angry at President Trump or at John McCain. Still others, a majority of the group, were relieved that the current system, flawed or not, had survived, at least if the alternative had not been thought through carefully.

Jill protested, “But at least they’re trying to reduce regulations. I run a small business. You wouldn’t believe how many requirements we have to meet. The health insurance we’re required to carry now is one of the most expensive ones. And I know fishermen on the Eastern Shore of Maryland, where I used to live, who have lost their livelihood because of the limits on some kinds of fishing in Chesapeake Bay. Less regulation is better, don’t you think?”

At this Joe, an O.R. analyst and one of the older people present, gave her a wry little smile. “Actually, no,” he replied. “Let me tell you a story. In the early 1980s, I was at a conference, organized by the editors of The Washington Monthly, trying to lay out an agenda counter to the Reagan philosophy of ‘smaller government is always better.’ One of the featured speakers was the CEO of People Express – anyone remember them? They were a small airline, one of the ones that sprang up in the late 1970s and early 1980s after deregulation. They had a hub in Newark and were competing very well against the Eastern Airlines – remember them? – shuttle service between Washington, D.C., and New York, also between those cities and Boston.

“This CEO explained how their low-fares for no-frills service approach was winning the competition. I was young and naïve, working for the federal government, and after his talk I asked him how he thought the air traffic controllers’ strike had affected his company’s business.

“He exclaimed, ‘Oh, it’s awful. The restrictions on flights have hemmed us in on all sides. We can’t wait for those limits to come off.’ ”
Joe went on, “So I asked, ‘But what if your real competitive advantage isn’t price, but time? Right now, because of the restrictions, flying through Newark has the least delay getting into and out of New York. When those limits come off, isn’t there a chance you’ll be in a lot of trouble?’

“The CEO was polite, but dismissive,” Joe continued. “He was sure of his appreciation of the situation. And when the controls did come off, six or eight months later, his competitors started introducing deep discounts and other incentives to lure customers onto their shuttle services. In less than a year, People Express was out of business. They had actually been benefiting from the regulatory restrictions they were complaining about.”

“Isolated case,” Jill objected. “Obviously there would always be a few exceptions, but in general ...”

“I don’t think it’s all that unusual,” Joe responded. “You know how economists say that markets are myopic, that they see only the short-term profit and not the long-term consequences? Well, business managements are myopic in a different way, not because they’re not smart, but because they’re in no position to see some of the more distant features of the situation. What they see is what regulations prevent them from doing. They almost always can’t see what regulations prevent their competitors from doing to them. Of course, that’s partly because they also often can’t see what their competitors would want to do. And in the longer term, too much unrestricted competition can hurt the whole market.”

Fred, who had worked for the Federal Aviation Administration, chimed in. “You’re right, Joe. And ironically, it was the airlines who pushed for government safety regulations and then for operations limits on the few most congested airports. They needed government safety inspections and rules to give people enough confidence to fly. And when congestion led to planes circling for an hour or more waiting to land, they decided it would be better to have limits than to keep burning fuel and crew time.”

“Back to your health insurance example,” Joe added. “No doubt the current law has raised costs for small businesses. But hasn’t it also made many more small businesses possible? People with sick family members could afford to quit their jobs and start companies, because they no longer had to worry about not being able to get any coverage at all without the employment.

“And then,” Joe went on, “there’s another benefit – one that Obama, to my lasting surprise and disappointment, never mentioned. If we ever get hit by a major outbreak of infectious disease, either natural or man-made, the difference between a close call and a catastrophe is about a week. Having everyone who starts showing symptoms go immediately to a health care provider who’s in the national reporting system is critical. That meant that universal access to low-cost health care is neither a right nor a privilege, it’s a national security imperative. And you don’t get there without a government mandate!”

Art, who had been quiet, spoke up. “And without that ban on fishing in the bay, we would have run out of rockfish,” he said. “Then no fisherman could have made a living from them. So, yes, I’d have to say that some regulations are good! Now it’s up to us analytics types to find the right balance, wouldn’t you say?”

Doug Samuelson (samuelsondoug@yahoo.com) is president and chief scientist of InfoLogix, Inc., in Annandale, Va.