Why deregulation has gone too far: toxic drugs, tainted meat, exploding airplanes, and other dangers of unfettered capitalism

Robert Worth

Toxic drugs, tainted meat, exploding airplanes, and other dangers of unfettered capitalism

Twenty years ago this spring, the Senate voted to abolish the Civil Aeronautics Board. Where the government had maintained an elaborate and often unwieldy scaffolding of routes and fares, the free market now came crashing in like a mighty river. Within a few years the flood would carry a host of other regulated industries, including telephones, trucking, and banking, along with it. The Age of Deregulation had begun.

At first, liberals went with the flow, or even helped stir it up. "Regulators all too often encourage or approve unreasonably high prices, inadequate service, and anticompetitive behavior. The cost of this regulation is always passed on to the consumer. And the cost is astronomical?" Thus Sen. Ted Kennedy on the first day of the hearings that were to lead to the abolition of the CAB. But before long, the movement had gathered a fatal momentum, losing its roots in the consumer movement. Deregulation became an article of faith, "espoused more or less automatically, even unthinkingly, by a wide range of officeholders and their critics," wrote Martha Derthick and Paul Quirk in their classic study The Politics of Deregulation.

Twenty years later, liberals have plenty of reason to regret the notion that the way to fix regulations is by scrapping them. Deregulation has definitely made the wheels of the economy spin faster. But the competition it has brought has often been unfair and destructive, and the alleged price cuts often haven't trickled down to the average American.

Take airline deregulation. Sure, the CAB was a clumsy bureaucracy, notorious for its "procedural spaghetti" and the bizarre "kabuki dance" hearings where it decided who could fly where, and for how much. By 1976 even the Board's officers were in favor of some kind of decontrol. But airports aren't like restaurants; you can't just round up some friends, buy a little property, and set up shop. Big carriers control access to airport gates, arrival and departure slots, and even to computer booking systems. A few years after the abolition of the CAB, the major airlines were muscling the little guys out of the sky. And that wasn't so good for customers. Long-distance fares dropped, but smaller communities often got fewer flights for higher prices. Today, the same thing is true. According to the Transportation Department, which is considering punitive action, the big airlines' bullying practices "can hurt consumers in the long run by depriving them of the benefits of competition," and leave "much of the demand for low-fare service in many local hub markets unserved?"

It could get even worse. On April 3, a passenger on a US Airways jet landing at New York's LaGuardia airport looked out his window and saw another plane coming straight at him. He screamed as the pilot pulled up in an evasive maneuver, avoiding a head-on collision by a mere 20 feet. Panicked traffic controllers breathed a sigh of relief. But they were so busy that the incident didn't even get reported until two months later. Why? Part of the answer is that deregulation has led to a 50 percent increase in air traffic since 1981, with proportionately far fewer controllers and less supervision. In-flight gaffes like the one at LaGuardia are up 19 percent this year, and ground errors are up 49 percent.

"What's gotten left out is somebody still has to manage the system," says MIT economist Lester Thurow. And like it or not, the best way to do that is with tougher, smarter regulation.

Market Failure

"I strongly oppose regulation," said Sen. John McCain at a hearing in February, "but I don't oppose regulation as much as I oppose unregulated monopolies" He was talking about cable TV, where deregulation was supposed to bring competition from satellite companies to the old cable monopolies. Instead, they've been banding together -- witness the recent merger announcement of American Sky Broadcasting, a major satellite company, with Primestar, a cable group. "That's bad for competition and bad for consumers," said Joel Klein, the Justice Department's top antitrust enforcer. It's also one of the reasons cable prices have been rising at five times the rate of inflation.

McCain and Klein could have been talking about any one of a number of deregulated industries. On May 19 members of the Senate's antitrust subcommittee asked Ed Whittaker, CEO of the telecom giant SBC, why his company was proposing to merge with its potential competitor Ameritech, reducing the number of Bell operating companies to four from an original seven. Whittaker insisted that there was no need to worry; the 1996 Telecom Act was working its magic and competition would soon arrive. Then he said he foresaw a mere handful of companies dominating the global phone market, including just one of the current Bell operating companies. He didn't need to add that he wanted to be that one company.

Conservatives often counter that the Justice Department is quite capable of enforcing the antitrust laws -- witness, for instance, Joel Klein's decision in May to block the American Sky/Primestar merger. They often add that Justice would do an even better job if only the regulators would step further out of the way. Take the current railroad slowdown in the South, where nine men have died and billions of dollars have been lost in what's being called the worst rail melt-down in U.S. history. That mess is a direct result of the 1996 merger of the Union Pacific and Southern Pacific railroads -- a merger the Justice Department wanted to block, but couldn't, because the Surface Transportation Board, a regulatory agency, has jurisdiction over the rails. "One mistake we made with deregulation," says Cliff Winston of the Brookings Institution, "is that we've left a specific regulatory body to handle antitrust issues, instead of just saying `now you're subject to the Justice Department.'" Defenders of telecom deregulation say the same thing. "[F]or decades, the FCC has legitimized telecom practices that antitrust courts would never have tolerated in its absence," writes Peter Huber of the Manhattan Institute. The remedy, he adds, is to abolish the FCC and hand over the reins to Joel Klein and his trusty knights.

As it happens, the Monthly made a very similar case back in 1969, when liberal skepticism of the regulatory bureaucracy was at an all-time high. But the past 30 years have made it clear that antitrust law can't substitute for regulation. For one thing, there's a practical limit to what Klein and his fellow trust-busters can do. Their division is working at historic levels and facing a virtual avalanche of cases. Meanwhile, the number of lawyers on staff has declined from 456 in 1980 to 343 today.

Besides, anyone who still thinks the Justice Department can stand in for an entire regulatory bureaucracy has obviously forgotten all about Charles Keating. It was Keating, after all, who recognized that after the passage of the Garn St.-Germain Act of 1982, which deregulated the savings and loan industry, there was no one to stop him from taking over an S&L, lending out its taxpayer-insured deposits, and gambling them away with his friend Michael Milken the junk-bond king. In the end Keating was caught. But most of his fellow con artists got off scot free, and collectively bilked U.S. taxpayers of $130 billion and counting.

Where was the Justice Department? Standing by; powerless to help. And if you think Congress won't get fooled again, think twice. On May 13 the House voted to abolish Glass-Steagall, the 60-year-old law that prevents banks from gambling away their federally' insured deposits by getting into the securities and insurance businesses. Supporters of the measure claim it won't pose any danger, since new technologies and creeping deregulation by the Federal Reserve already allow banks to get around Glass-Steagall. But is that really a good thing? After all, Nationsbank has agreed to pay nearly $37 million in settlements and fines over the past few years for selling high-risk securities to customers -- many of them senior citizens -- who didn't understand what they were being sold. At the very least, Congress should make sure someone is watching before it frees banks to do all kinds of creative new things with our money.

Another unsettling consequence of deregulation has been the tendency of competition in newly opened markets to hurt those who can least afford it. In telecom, for instance, the demise of AT&T as a regulated monopoly has brought plenty of competition, and lower rates, to the long-distance market. (It has also brought some of the downsides of competition; if you've ordered phone service lately, you've probably been "slammed" -- billed by a phone company you never chose. Complaints about the practice rose 56 percent last year.) But at the local level deregulation has been a disaster, because the regional Bell companies have neither regulators nor real competitors to rein them in. As a result, service is both deteriorating and becoming more expensive.

The deregulation of electricity -- the last of the regulated monopolies -- poses similar threats to the average consumer. Federal Trade Commission Chairman Robert Pitovsky says the potential for savings with deregulation is "enormous" Maybe so -- if you're a Nissan factory. As new power companies compete to sweeten the deal for high-volume business users, they'll be forced to make up the difference on the backs of residential ratepayers. "And transaction costs will go up," says Mark Cooper, research director of the Consumer Federation of America, as the centralized power grid gives way to a crazy quilt of private distributors.

Free-marketeers will counter that all these downsides are a small price to pay compared with regulation, which costs the economy far more every year than the S&L debacle ever did. "Federal regulations cost $1.3 trillion in economic output to be lost each year," according to the Heritage Foundation's voluminous website on the topic. "When a business devotes resources to adhering to regulatory mandates, it is using those resources less efficiently."

But that misses the point. Left to its own devices, the economy -- no matter how large or small -- always inflicts some unfairness on those who don't own a lot of stock. The purpose of regulation in areas like telecom, electricity, and banking was to defray the cost of service for ordinary people at the expense of the high-volume users --businesses, mostly -- who could better afford it. These "cross-subsidies" may have distorted the economy a little, but they maintained a vital safety net for people who might otherwise have fallen through.

In the absence of many of these regulations, there's already plenty of evidence that lower-income people are losing out. The recent wave of banking mergers, for instance, has been hailed by brokers and economists alike -- perhaps because most brokers and economists earn enough to profit from it. For those who don't, several recent studies by the Federal Reserve have shown that large interstate banks charge higher service fees than small banks do, and that they're much less likely to make loans to small businesses. Meanwhile, the number of bank branches in inner-city neighborhoods is declining -- down 21 percent from 1975 to 1995, according to another Fed study.

The buyout frenzy that deregulation triggered has also eroded some of the other institutions that used to help define a sense of community, for middle and lower-income people. In the two years since Congress eased ownership limits on radio stations, 4,000 have been sold, and more than half of big-city stations are in the hands of just five companies. The result has been a rising flood of bland pop songs dictated by big companies that don't want to take risks. So what? Not much, if you have a 2,000 CD collection of your favorite music. If you don't, you could be out of luck.

That doesn't mean we should call in the Quality of Life police on every merger that would close down a neighborhood deli or bookstore. It does mean we should think carefully about who benefits, and how, before we unleash the bulls and bears of the market on our everyday lives.

Poison Pills

Of course, there are plenty of silly or overburdensome regulations on the books. The Equal Employment Opportunity Commission has been after the Hooters restaurant chain for years because Hooters doesn't employ male waiters (if you don't know why, God bless you.) The EEOC is also pursuing Joe's Stone Crab restaurant in Miami for failing to hire enough women waiters, even though most of the restaurant's managers, and its owner, are women.

Yet too often gaffes like these become an excuse for cutting back on all government regulations, even in areas that ensure our health and safety. For years, Congressional Republicans have targeted the FDA as the country's "leading job killer," a mammoth bureaucracy that takes too long to approve drugs and places intolerable burdens on medical and pharmaceutical companies. Recently they got at least part of what they wanted with last fall's passage of the FDA Modernization Act. But before you accept their claims that this law merely "streamlined" the FDA drug approval process, consider the story of Mary Yount. Last year Mary was on vacation in Florida when she began to gasp for breath. "I felt like my heart was going to pump out of my chest," she says. After a number of tests, doctors found that her heart (which had been tested and found healthy only two years before) had been irreparably damaged by the combination of diet drugs her doctor had prescribed for her ten months earlier, now known as Fen-Phen. The drugs were soon off the market, but not before causing serious heart valve damage to 285,000 Americans. Next time it could be much worse, because Congress's new FDA "modernization" allows drug and medical companies to do "off-label" marketing -- promoting their products for unapproved purposes. "If this law had been passed before the Fen-Phen mess," says Mary, "the drug companies would have been advertising it to thousands of doctors." The Act also lowers the number of clinical investigations required to establish a drug or medical device's safety. And it allows medical device manufacturers to hire private for-profit firms to review the health and safety of their products -- even when those "independent" reviewers are then offered jobs with the manufacturer. Dr. Arnold Relman, an emeritus professor at the Harvard Medical School, calls the Act "an invitation to disaster and chaos."

Perhaps worst of all, the law burdens the FDA with new responsibilities in the review process for drugs and medical devices without giving it the money to do the job, just as a spate of recent failures suggest that the agency is already incapable of handling its duties. Nick Valestrino found that out the hard way a few months ago when he went to the doctor for a routine injection of intravenous immune globulin, a drug that he and tens of thousands of other Americans depend on for their health. The drug was unavailable, because the FDA had failed to respond promptly to a shortage. Why? One reason, says a top FDA official, is that "[w]e've had a series of annual cuts for five straight years. He added that the new law will only make that worse. "Any time you've already got some measures of program failure, a new law saying `Go do this, too' will have an impact. The whole agency is kind of stressed out."

If that doesn't scare you, think about what happens when the Department of Agriculture's meat and poultry inspection system fails. Just before Christmas 1992, Lauren Rudolph felt sick to her stomach after eating a hamburger for lunch. "Daddy, I'm going to die," she told her father, who soothed her and told her she'd be fine. But Lauren was right. After a week of unspeakable suffering, her tiny body seized up in a massive heart attack, her breathing stopping and her lips turning blue. Lauren was killed by a microbe known as E. coli O157:H57, which is found in ground beef and anything else that has come in contact with manure. (Vegetarians: that means fruits and vegetables.) Her death was the "index case" in an outbreak that caused 732 illnesses and ultimately killed four children, an outbreak that "might have been identified and stopped in San Diego, where it apparently began, if only California had a reporting requirement and encouraged testing," writes Nicols Fox, an expert on foodborne illness. The outbreak helped pressure Congress into adopting a stricter meat inspection system -- a system that the National Academy of Sciences had been urgently recommending for eight years.

But even with the new system, USDA inspection is woefully inadequate. "Do not stop the line," wrote one supervisor last summer at a slaughterhouse where up to 50 percent of the carcasses were visibly smeared with feces, bile, or hair, "unless the contamination is dripping." It's not uncommon for inspectors to supervise 300 carcasses an hour -- far too many to do a good job. And the number of inspectors is way down, from 12,000 20 years ago to 7,500 today. When they do find something, inspectors cannot order a recall; "they have to rely on voluntary cooperation from companies to get known contaminated meat off the market," says Elizabeth Dahl, a staff attorney for the Center for Science in the Public Interest. So it's no surprise that outbreaks of E. coli and other deadly foodborne illnesses are on the rise. (They've increased almost fivefold since 1988.)

The FDA's food inspectors are even farther behind. According to a recent GAO report, the agency only inspects 1.7 percent of the 2.7 million shipments of fruit, vegetables, seafoods, and processed foods under its jurisdiction. Clinton has repeatedly tried to help the FDA keep up by giving it broad new inspection and enforcement powers, but Congressional Republicans have thus far refused to give him a hearing.

Fix It

When you look at the human damage weak regulation can do, the question becomes not whether to regulate at all but how to do it better. Sadly, there's plenty of evidence that our regulatory process could use a good kick in the pants. U.S. environmental law, for instance, looks pretty good on the books. But the EPA's inspector general recently detailed a list of leaky sewage plants, belching factories, and dump sites that are in violation of the law. "If one state clearly has more relaxed standards, then businesses might flee to those states," Phillip Wardwell, a state environmental official in New Mexico, told The New York Times. "That's exactly the function of the federal agency, to head off that race to the bottom."

This touches on a crucial truth about regulation: No one, particularly in America, wants to be the one sucker who's playing by the rules. Unfortunately, our federal agencies often don't enforce them. Eighteen years after the landmark Superfund legislation was passed for cleaning up toxic waste sites, 63 percent of the nation's 1,359 official Superfund sites haven't been touched. And if you think that's just an issue of old zinc smelters and mines that no one ever goes near, think again. For years, managers at Connecticut's Millstone nuclear power broke federal safety rules on the handling of fuel rods, cooling pipes, gauges, and filters, and punished workers who tried to warn them about the dangers involved. Ultimately the government had to spend $750 million to bring the plant up to speed and re-educate its managers -- money that would have been saved if everyone had respected the regulations in the first place.

In some cases, regulators fail to do their job because they're too friendly with the industry they're supposed to be policing. In the past few years the number of deaths in charter and commercial bus accidents has nearly doubled. That's partly because the Department of Transportation does a poor job of inspecting the buses. But it may also have something to do with the fact that in 24 states, charter bus companies are allowed to inspect their own buses, as "20/20" recently reported.

You might answer that bus companies have a pretty strong incentive to keep their buses in good shape. After all, they look bad when even one bus goes careening off the road and kills a group of schoolchildren. But the fact is that bus lines, like all private companies, are competing for market share, and struggling to get as much use as they can out of every tire, axle, and muffler. This is where the remorseless logic of deregulation kicks in: There will always be people willing to pay a little less for a cheaper bus ride. And there will always be someone willing to serve that market. If you doubt it, remember the word "Valujet."

The Valujet crash and others like it might never have happened if the Federal Aviation Administration were not so eager to please the airline industry. In fact, until recently the FAA was officially charged with promoting aviation as well as safety. This dual mission has contributed to countless air disasters, including the crash of Flight 800, which exploded in midair in July 1996 when a spark in its center-wing fuel tank ignited. Investigators at the National Transportation Safety Board (which has never suffered from the FAA's identity crisis) had been pushing the FAA to develop a fuel-tank design that would eliminate the danger for years. The FAA had resisted them, not because it wasn't technologically feasible, but because it would cost money. Ironically, the charges leveled at the FAA in the wake of Flight 800 echoed those made against the CAB in 1978: They had become yes-men for the industry.

But this time the remedy is to make the regulators tougher, not to kick them out. Let's hope the conservative and libertarian policy wonks who are celebrating deregulation's 20th anniversary this summer remember that it, too, has a cost -- even when that cost is measured in human suffering rather than dollars and cents.

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