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Think tanks wrap-up VIII

WASHINGTON, April 2 (UPI) -- The UPI think tank wrap-up is a daily digest covering opinion pieces, reactions to recent news events and position statements released by various think tanks. This is the eighth of eight wrap-ups for April 2.


The Ludwig von Mises Institute

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(The LVMI is a research and educational center devoted to classical liberalism -- often known as libertarianism -- and the Austrian School of economics. LVMI seeks a radical shift in the intellectual climate by promoting the market economy, private property, sound money and peaceful international relations, while opposing government intervention.)

AUBURN, Ala.--Nationalizing the airlines: Will it fly?

By D.W. MacKenzie

The Sept. 11, 2001 terrorist attacks hit no industry more directly than they did the airline industry. In 2001, this industry lost $8 billion. It lost $11 billion in 2002, two thirds of which supposedly was the result of Sept. 11. The Federal government has delivered $5 billion in cash and $10 billion in loan guarantees to airlines affected by Sept. 11. This massive infusion of money and credit has yet to satisfy the appetites of airline executives. Some predict losses ranging from $6.3 to $13 billion for this year, depending upon how the war goes.

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Outgoing Air Transport Association President Carol Hallet recently declared that "the only solution to our industry's malaise may be to nationalize the airlines". While it is certainly true that the airline industry is in the midst of very hard times, the notion that government aid or a takeover will solve the fundamental problems of this industry is fundamentally flawed.

Kevin Mitchell of the Business Travel coalition described the estimated 6 billion dollar loss from Sept. 11 in 2002 as 'creative accounting'. He attributes most of these losses to a decline in high yield business travel, not to post Sept. 11 fear. While there are certainly losses due to Sept. 11, we must understand what these losses mean.

Fallen revenues mean simply that consumers value the services of this industry less. The proximate cause of this industry's malaise is a change in the ordinal rankings of goods in the minds of many millions of consumers. Government aid and nationalization will not change this underlying reality. Passenger revenues fell from $16 billion in 2000 to $13.8 billion in 2001.

Labor and management surely have much to worry about with such figures. With such losses, they cannot maintain the levels of wages and profits that they once enjoyed. These people do the same type of work with the about same skills and about the same capital as before, yet they earn less.

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It is, however, important to realize that the value of wages and profits are not in the labor that go into products, but in the value that consumers attach to these products. This loss in revenue and all resulting reductions in profits and wages merely signal that resources expended in air travel have less value than had previously been the case. Consequently, the solution to this malaise is to move resources out of this industry, and into more highly valued uses.

There is more to this matter than simple resource allocation. These changes in consumer plans came about in part due to illegitimate and immoral responses by some to a series of prior government interventions. As Adam Young has pointed out, the United States government has intervened in the Middle East repeatedly. These interventions have had the understandable result of generating some resentment towards the United States, and unwarranted, abhorrent, but real acts of terrorism.

Twisted fanatics used airliners to deliver a blow against the United States on Sept. 11, for interventions that outraged them. While there is no justification for this kind of response to U.S. intervention, we must recognize the causal connection between U.S. intervention overseas, and resentment towards the U.S. from abroad. Now, this already sagging industry has successfully lobbied for massive subsidies in response to Sept. 11, and may be headed for nationalization.

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As Ludwig von Mises and Friedrich Hayek have argued, one intervention would generate unintended consequences that would require further intervention. Since we each see directly into our own minds alone, politicians and bureaucrats cannot predict the complex myriad of reactions that their plans for intervention will instigate. As people react and adjust to government policies, and these policies become more complex and comprehensive, we would move towards comprehensive economic planning, socialism, and tyranny.

No normal person could have predicted the plan that the fanatics in al-Qaida devised for Sept. 11. We did have some notion that such a thing could happen. The earlier bombing of the World Trade Center and the attacks on the U.S.S. Cole and U.S. embassies in Africa signaled danger. President Clinton's response to these attacks obviously did not deter further attacks and may have only prompted Al-Qaida to search for targets closer to home. But who could have guessed where, when, and how?

Now, we have a new department of homeland security and a war with Iraq. This war has increased fuel prices and reduced airline bookings. These effects have reduced airfares to 1988 levels even without adjusting for inflation.

The unintended consequences of past U.S. foreign policies and 'inadequacy' of current U.S. subsidies have led to calls for the nationalization of airlines. To many, this is the only way to restore the vitality of this industry. Of course, the concerns of Mises and Hayek overstate the immediate problem. Nationalizing the airline industry is a far cry from comprehensive economic planning and totalitarianism.

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As Don Lavoie argued, partial economic planning suffers from the same kind of deficiencies as comprehensive economic planning. Individuals make economic decisions within a given context and according to their own subjective values. Officials at planning agencies, either for the whole economy or one sector, cannot reproduce the decisions that individuals make themselves.

Even the information that prices convey is in a coded form -- contextual and tacit. Each weighs possibilities his own mind, and makes decisions that central planners cannot make for them. Each weighs future alternatives in terms of their own personal expectations, subjective values, and individual circumstances. The idea that even partial central planning can replace the market is all utterly unreal. The danger that movement in this direction could leave us less free is genuine.

The idea that economic knowledge is subjective, fragmented, and widely dispersed has two important implications here. Intervention is dangerous because those who intervene lack the knowledge to form plans for intervention that reflect all the ways that people will react to their plans.

This leads to potentially disastrous unintended consequences, as different amounts and kinds of intervention than originally envisaged unfold. Such intervention then leads to a situation where we replace competitive markets with at best heavily regulated markets, and at worst outright socialism. These economic systems result in markedly lower living standards and varying degrees of political repression.

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That this is all true in this case is evident from the fact that consumers are choosing to spend less on air travel. Intervention on behalf of airlines is obviously working to resist the movement of scarce resources into more highly valued uses. It is making us poorer, except for the few who collect these government transfers.

At one level, we should recognize and respect the wishes of consumers. At another we should recognize that part of this change in consumer preference and want for more intervention derives from prior interventions. Fear and animosity generated by terrorism and intervention are what we should be wary of, not falling revenues in any one sector of the economy. Intervention is the problem, not the solution, particularly its worst form: war.


The Competitive Enterprise Institute

(CEI is a conservative, free-market think tank that supports principles of free enterprise and limited government, opposes government regulation, and actively engages in public policy debate.)

WASHINGTON -- C:\Spin -- Regulatory mousetraps

By Ben Lieberman

Build a better mousetrap and the world will beat a path to your door, especially if you've patented that mousetrap. Or, build and patent a mousetrap that isn't necessarily better but is the only one that complies with some new regulation, and the world will still beat a path to your door.

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But is it legal for a mousetrap maker to actively lobby for that regulation, while silently working to obtain such a patent? This is the controversy currently before the Federal Trade Commission, which has initiated an administrative complaint over a patent for gasoline held by Unocal, the Union Oil Company of California.

Both the federal Clean Air Act and California state law set numerous rules for the composition and emissions performance characteristics of gasoline. In the early 1990s, the California Air Resources Board, known as CARB, was creating new requirements for reformulated gasoline, or RFG, a specialized blend designed to help fight smog. Unocal and other California refiners were involved in the rulemaking process, and had a hand in developing the specifics of the final rule.

Unknown to anyone outside Unocal, the company had a pending patent application for the fuel formulations it thought best able to meet these new RFG requirements. Unocal received its patent in 1994 (and related ones later), and announced its intention to seek licensing fees from competitors in 1995. The new RFG provisions went into effect in 1996.

In 1995, the other California refiners, including Arco, Chevron, Exxon-Mobil, Shell, and Texaco, challenged the validity of the patent in federal court. This effort was unsuccessful. Unocal was awarded a royalty of 5.75 cents for every gallon of RFG that infringed its patent.

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This cost could be passed on to California drivers in the form of higher pump prices (though the FTC reported in March of 2001 that for most producers the Unocal patent was not a factor in an earlier spike in Midwest prices). Though not the main reason California's gas prices currently lead the nation, the patent dispute has clearly exacerbated matters; it will be a greater factor in the summer, when the rules are stricter.

Related cases are still pending. But on March 4, the FTC launched its own action against Unocal. It alleges that Unocal misrepresented itself during the rulemaking proceedings, presenting as "nonproprietary" information for which the company was in fact seeking patent protection. The agency also asserts that Unocal amended its original patent application to better reflect the emerging details of the RFG regulations.

FTC concludes that, absent this alleged deception, "CARB would not have adopted RFG regulations that substantially overlapped with Unocal's patent claims." FTC asserts that these and other allegations constitute a violation of the Federal Trade Commission Act, and seeks to stop Unocal from enforcing its patents against competitors making RFG.

Unocal denies any wrongdoing. The company points to the failed attempt to invalidate its patent as reason to believe it will prevail again. Unocal believes it merely came up with and patented some of the best-clean burning gasoline formulations around -- the proverbial better mousetrap - and deserves reasonable compensation for this accomplishment. The case, currently before an FTC administrative law judge, could end up in federal court as well.

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True or not, these allegations raise troubling concerns about the potential misuse of the regulatory process. Such concerns will only grow as the regulatory state expands its reach to more and more products. A patent on a better mousetrap is one thing, but a patent on a regulatory mousetrap is quite another.

(Ben Lieberman is a senior analyst at the Competitive Enterprise Institute.)

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