The Congress set a bad example by bailing out the airline industry post 9/11. Even after 2 bailouts, they want more. The only airline (Southwest) that didn't ask for the bailout has been doing just fine, making a profit. The market cap of Southwest is more than that of all of the other airlines combined (I know, marketcap is just an indicator).
Companies with failed business models should be allowed to fail: that is The American Way. This economy depends on the fact that failing companies die, and in their place better/faster companies are born. Just like any other healthy ecosystem, we need a certain amount of "churning" to keep things moving. Stagnation is bad, and will only lead to long-term problems.
The US economy is DRASTICALLY improved by commercial air travel. The fact that you can cross the country at will is a BIG part of why we think of ourselves as one country and NOT a union of states (the Civil War was a BIG step in this direction as well).
If you allow unprofitable airlines to fail, there are side effects. Right now, you can get anywhere pretty easily and pretty cheaply. For a while, the regulated airline market had heavily regulated costs that helped keep all costs "reasonable."
The problem with "market forces" is that it ignores externalities. There is an overall economic benefit to having small cities connected to the nation's air travel grid. The nation as a whole benefits, but the airlines are only compensated for some of it.
You can't worship at the altar of market capitalism (and you SHOULD) without understanding and appreciating the problems that externalities create. Figuring out how to internalize externalities, which IS a legit role of the government, is VERY tricky business. The more you internalize externalities, the BETTER the market functions.
Let me give a hypothetical. Airline A services small towns in 10 states connecting them to business centers. The airline agrees to continue service with a $1 billion bailout because the routes are unprofitable. If the routes result in business of $10 billion, and alternatives like video conferencing would only produce $6 billion dollars, than the airlines are worth $4 billion to society. In this case, it's a no brainer, because it will also generate over $1 billion in tax revenues. What if alternatives would develop $9 billion? Society is a wash on the decision, economically, but the bailout might still make sense because of the side effect of making people in those states live better by being able to vacation.
We definitely need churning, but you need to look beyond the sum requested by the company, political ideology, and desire for churning. You need to understand what the full economic consequences are before judging an economic action.
Let me give a hypothetical. Airline A services small towns in 10 states connecting them to business centers. The airline agrees to continue service with a $1 billion bailout because the routes are unprofitable. If the routes result in business of $10 billion..
[snip] Waitaminute...
Why can't that $10 billion business afford to pay a little more for airline tickets?
It's really just a choice: who should pay that $1 billion: just those who benefit from it? Or everyone?
But you are forgetting the externalities caused by air travel in form of exhaust emissions and to a lesser extent, noise (it is usually partially internalized in the airport tax). Flying causes global warming, which is not included in the ticket cost (kerosene is basically subsidised by the government because the taxes are so much lower than on gasolene).
This is the reason why air travel is a viable way of transport at all and we are not using more telecommuting etc. that would be more beneficial for the society.
(Even though I'm serious with my point, I can't resist adding that externalities work both ways as an explanation, as do most of the concepts in economics:)
I'm not forgetting that, I'm suggesting that the opposition if overly simplistic. There are LOTS of negative extenatlities and flying, though I won't agree with global warming.
Back to the subject, telecoms are a bit different. What are the positive externalities of universal telecom service? The network effects make everyone better off the more people that are on the system, how do you internalize that?
There may be benefits to broadband availability, in terms of dealing with the so-called digital divide. There are lots of issues on both sides, but an overly simplistic "let the market decide" argument to massive projects among oligopolies is doomed to fail.
Free market capitalism in an idealized sense works "perfectly" for perfectly competitive markets with perfect information and no externalities... how many markets does this apply to? While in general we need "less" government interferance, we need to understand where collective action is beneficial.
Government "research" into munitions manufacturing during the Civil War products massive economic growth in this country. Research into code-breaking equipment provided some bootstrapping for computers. America's economic dominance is likely heavily influenced by a federal government that plows money into things then lets private individuals figure out a way to profit off it. We also take our lumps when needed and let things shake out. However, there is no reason to dismiss minimizing the pain by spreading SOME of the costs throughout society.
--our economy in general and the airlines in particular grew from a single point of reference that can change radically soon and that is the current price of petroleum based fuels. We have enjoyed realtively cheap fuel based on the remnants of colonialism and imperalism. The supply inside north america has peaked and is falling with a few untapped pools left worth only a few years max at current useage levels. The past economic colonies represented primarily in size nature by a small handful of middle eastern islamic countries are now hip to their past colonization and this situation is changing, and changing fast. Airlines are only profitable in the sense we have enjoyed in this country from cheap fuel and that's it. As soon as this situation changes they are hideously unprofitable except for a very few and exceptional cases. although I agree in most part with your conclusions of the over all benefits of a widely accessible market based on transportation of goods and people, it is still based on using millions of years worth of produced fuel in roughly one century. Umm, this isn't changing very soon either, no matter how much tech theythrow at the problem. there's no free lucnh, energy isn't created it is merely changed from one form to another. petroleum and natural gas based everything dominate our society, as that disappears expect it to get-uhh, "bad".
The top level large internationalists understand this, and this will be known by future historians as the the century of the resource wars, primarily over oil, minerals, fresh water and arable land that doesn't require irrigation. I fully expect mass universal airline travel to gradually start slipping away on an increasing bell curve line from here on out now, baring some incredible energy tech breakthrough that is unforseen, and I'm not talking about fuel cells either, they are a bandaid solution at best. the other alternatives now being used are a another form of bandaids. I use them myself-solar PV in particular-but I am not under any illusions that right now they can replace stuff pumped from the ground as an exact erg to erg replacement without an extreme consciousness shift into expectations that people have been raised with, particularly in the the united States.
Let me give a hypothetical. Airline A services small towns in 10 states connecting them to business centers. The airline agrees to continue service with a $1 billion bailout because the routes are unprofitable. If the routes result in business of $10 billion, and alternatives like video conferencing would only produce $6 billion dollars, than the airlines are worth $4 billion to society. In this case, it's a no brainer, because it will also generate over $1 billion in tax revenues. What if alternatives would develop $9 billion?
But to complicate matters there maybe other alternatives. Let's say that someone develops a jet [eclipseaviation.com]
that can carry six people and is as cheap to operate as a luxury car. Then you could start an airline that can go to more places, work on demand, and be more efficient than the current model (i.e. hub-and-spoke and big jets). Plus such an airline could serve many more cities and towns that are currently not covered by the majors. Could it generate more income for everyone? Think of time lost at airports today...
If some of the big dinosaurs died off, there maybe a room for more fast mamals...:-)
Right on! The original post was correct: externalities are often ignored in a free market. There is no direct feedback. The feedback comes in the form of customers and competition. Ideas such as the one you cite are a very good example of this. With the high level of subsidization of the airline industry, there is no reason to develop this widely.
Similarly, as long as highway traffic is subsidized, and rails are left to rot, there is no reason for companies to invest in improving railways.
Externalities are real problems. The original poster makes the mistake of thinking that the government can do a better job at bringing these to the market than the market itself can do.
The other problem is that we are in a morass of rules and regulation that totally bastardize the free market. This is whether you are in Russia, France, or the US. Many of the arguments against free trade, deregulation, etc. are misguided. The first problem is that the US gov't's idea of 'free trade' is far too involved. I had an econ prof at about the time NAFTA came out who was not in favor of it. Not because he was against free trade. On the contrary, he'd probably teach Ayn Rand a thing or two. His problem is that a free trade agreement that meant 'free trade' could be summed up in about two paragraphs. The NAFTA agreements were 1000 page monsters.
Another example is the deregulation of power in CA. It doesn't point to a failure of deregulation; it points to a failure of going from one type of regulation to another. Opponents of deregulation frequently confuse the two.
my problem with the airlines is that they receive a disproportionate amount of funds. does the airline industry contribute to the economy, yes. but, when people complain about funding amtrack to a much smaller level, i fail to see the logic of your argument. is air travel desireable to low priority destinations? why not a viable high speed rail network with stops at airport hubs--like in europe? this is not an either or situation, and some will have to fail. the current telecom issues have been compared to the over-investement in rail networks during the last century. this over-investment promoted cheap transportation during the beginning of the 20th century, but many rail lines folded, in fact the vast majority of them folded.
The problem with "market forces" is that it ignores externalities. There is an overall economic benefit to having small cities connected to the nation's air travel grid. The nation as a whole benefits, but the airlines are only compensated for some of it.
Amen! One specific goal of any government at any level is to provide services that only an authoritarian entity can provide, i.e. services outside the normal operation of society left to run itself. In a capitalist society, this means market externalities, like national defense and environmental protection, things that won't be done by corporations but that require doing.
Nevertheless, there comes a limit on what any government can accomplish, given its resources. If I need to take care of the military, parkland preservation, and waste cleanups, and I've only got $1, I'm kinda screwed. It may be cheaper to let businesses take the burden, pass regulations (legislative branch), and fund the police (executive branch) to enforce them.
Getting back to the topic of the telecoms, if it becomes too expensive for the government to regulate/bailout the telecoms, and if they represent critical infrastructure, as has been suggested, then the logical conclusion is for the government to assume partial (or total) control of the phone system. Remember, for the government, dealing with market externalities takes precedence over making a profit.
Let me give a hypothetical. Airline A services small towns in 10 states connecting them to business centers. The airline agrees to continue service with a $1 billion bailout because the routes are unprofitable. If the routes result in business of $10 billion, and alternatives like video conferencing would only produce $6 billion dollars, than the airlines are worth $4 billion to society. In this case, it's a no brainer, because it will also generate over $1 billion in tax revenues.
The correct question to ask is, "how much bailout is too much?" I don't think too many people outside the GAO or OMB know the answer to that.
"Be there. Aloha."
-- Steve McGarret, _Hawaii Five-Oh_
No bailouts (Score:5, Insightful)
Companies with failed business models should be allowed to fail: that is The American Way. This economy depends on the fact that failing companies die, and in their place better/faster companies are born. Just like any other healthy ecosystem, we need a certain amount of "churning" to keep things moving. Stagnation is bad, and will only lead to long-term problems.
The problem with airline failures (Score:5, Insightful)
If you allow unprofitable airlines to fail, there are side effects. Right now, you can get anywhere pretty easily and pretty cheaply. For a while, the regulated airline market had heavily regulated costs that helped keep all costs "reasonable."
The problem with "market forces" is that it ignores externalities. There is an overall economic benefit to having small cities connected to the nation's air travel grid. The nation as a whole benefits, but the airlines are only compensated for some of it.
You can't worship at the altar of market capitalism (and you SHOULD) without understanding and appreciating the problems that externalities create. Figuring out how to internalize externalities, which IS a legit role of the government, is VERY tricky business. The more you internalize externalities, the BETTER the market functions.
Let me give a hypothetical. Airline A services small towns in 10 states connecting them to business centers. The airline agrees to continue service with a $1 billion bailout because the routes are unprofitable. If the routes result in business of $10 billion, and alternatives like video conferencing would only produce $6 billion dollars, than the airlines are worth $4 billion to society. In this case, it's a no brainer, because it will also generate over $1 billion in tax revenues. What if alternatives would develop $9 billion? Society is a wash on the decision, economically, but the bailout might still make sense because of the side effect of making people in those states live better by being able to vacation.
We definitely need churning, but you need to look beyond the sum requested by the company, political ideology, and desire for churning. You need to understand what the full economic consequences are before judging an economic action.
Alex
Re:The problem with airline failures (Score:3, Insightful)
Why can't that $10 billion business afford to pay a little more for airline tickets?
It's really just a choice: who should pay that $1 billion: just those who benefit from it? Or everyone?
Re:The problem with airline failures (Score:1)
This is the reason why air travel is a viable way of transport at all and we are not using more telecommuting etc. that would be more beneficial for the society.
(Even though I'm serious with my point, I can't resist adding that externalities work both ways as an explanation, as do most of the concepts in economics :)
Absolutely (Score:2)
Back to the subject, telecoms are a bit different. What are the positive externalities of universal telecom service? The network effects make everyone better off the more people that are on the system, how do you internalize that?
There may be benefits to broadband availability, in terms of dealing with the so-called digital divide. There are lots of issues on both sides, but an overly simplistic "let the market decide" argument to massive projects among oligopolies is doomed to fail.
Free market capitalism in an idealized sense works "perfectly" for perfectly competitive markets with perfect information and no externalities... how many markets does this apply to? While in general we need "less" government interferance, we need to understand where collective action is beneficial.
Government "research" into munitions manufacturing during the Civil War products massive economic growth in this country. Research into code-breaking equipment provided some bootstrapping for computers. America's economic dominance is likely heavily influenced by a federal government that plows money into things then lets private individuals figure out a way to profit off it. We also take our lumps when needed and let things shake out. However, there is no reason to dismiss minimizing the pain by spreading SOME of the costs throughout society.
Alex
airlines/transportation/economy (Score:1)
The top level large internationalists understand this, and this will be known by future historians as the the century of the resource wars, primarily over oil, minerals, fresh water and arable land that doesn't require irrigation. I fully expect mass universal airline travel to gradually start slipping away on an increasing bell curve line from here on out now, baring some incredible energy tech breakthrough that is unforseen, and I'm not talking about fuel cells either, they are a bandaid solution at best. the other alternatives now being used are a another form of bandaids. I use them myself-solar PV in particular-but I am not under any illusions that right now they can replace stuff pumped from the ground as an exact erg to erg replacement without an extreme consciousness shift into expectations that people have been raised with, particularly in the the united States.
YMMV
Re:The problem with airline failures (Score:2)
But to complicate matters there maybe other alternatives. Let's say that someone develops a jet [eclipseaviation.com] that can carry six people and is as cheap to operate as a luxury car. Then you could start an airline that can go to more places, work on demand, and be more efficient than the current model (i.e. hub-and-spoke and big jets). Plus such an airline could serve many more cities and towns that are currently not covered by the majors. Could it generate more income for everyone? Think of time lost at airports today...
If some of the big dinosaurs died off, there maybe a room for more fast mamals... :-)
Re:The problem with airline failures (Score:2)
Similarly, as long as highway traffic is subsidized, and rails are left to rot, there is no reason for companies to invest in improving railways.
Externalities are real problems. The original poster makes the mistake of thinking that the government can do a better job at bringing these to the market than the market itself can do.
The other problem is that we are in a morass of rules and regulation that totally bastardize the free market. This is whether you are in Russia, France, or the US. Many of the arguments against free trade, deregulation, etc. are misguided. The first problem is that the US gov't's idea of 'free trade' is far too involved. I had an econ prof at about the time NAFTA came out who was not in favor of it. Not because he was against free trade. On the contrary, he'd probably teach Ayn Rand a thing or two. His problem is that a free trade agreement that meant 'free trade' could be summed up in about two paragraphs. The NAFTA agreements were 1000 page monsters.
Another example is the deregulation of power in CA. It doesn't point to a failure of deregulation; it points to a failure of going from one type of regulation to another. Opponents of deregulation frequently confuse the two.
balanced transportation (Score:1)
Re:The problem with airline failures (Score:2)
Amen! One specific goal of any government at any level is to provide services that only an authoritarian entity can provide, i.e. services outside the normal operation of society left to run itself. In a capitalist society, this means market externalities, like national defense and environmental protection, things that won't be done by corporations but that require doing.
Nevertheless, there comes a limit on what any government can accomplish, given its resources. If I need to take care of the military, parkland preservation, and waste cleanups, and I've only got $1, I'm kinda screwed. It may be cheaper to let businesses take the burden, pass regulations (legislative branch), and fund the police (executive branch) to enforce them.
Getting back to the topic of the telecoms, if it becomes too expensive for the government to regulate/bailout the telecoms, and if they represent critical infrastructure, as has been suggested, then the logical conclusion is for the government to assume partial (or total) control of the phone system. Remember, for the government, dealing with market externalities takes precedence over making a profit.
Let me give a hypothetical. Airline A services small towns in 10 states connecting them to business centers. The airline agrees to continue service with a $1 billion bailout because the routes are unprofitable. If the routes result in business of $10 billion, and alternatives like video conferencing would only produce $6 billion dollars, than the airlines are worth $4 billion to society. In this case, it's a no brainer, because it will also generate over $1 billion in tax revenues.
The correct question to ask is, "how much bailout is too much?" I don't think too many people outside the GAO or OMB know the answer to that.