Whatever errors we made on the fiscal side, and I have cited them frankly, were overwhelmed by the mistakes of two Fed chairmen—Arthur Burns, appointed by Nixon, and William Miller, appointed by Carter. Neither the best Democratic economists of the era nor the Republican conservatives had a silver bullet, and they were hardly unanimous at the time. When Carter had exhausted all the ammunition his economic advisers provided him, their bullets turned out to be blanks. Even today looking back, most mainstream economists agree that Carter had few realistic alternatives. Today, there is greater consensus on the central importance of monetary policy by the Federal Reserve as the key to a low-inflation environment. During the Carter years some knew that a relentless monetary squeeze would most likely do the job but were reluctant to recommend it: In their profession it was regarded as politically impossible until Paul Volcker came along. Only Carter’s willingness to appoint Volcker and allow him to wrestle with the inflation beast no one else was willing to take on turned the corner and set a standard for central banks that has lasted into this new century. Volcker gave Carter the ultimate compliment: ‘I always give him a lot of credit in my mind. I may be the only person in the United States who appreciates that he sat there as much as he did, and took a lot of guff on monetary policy.”210
In the last analysis the choice was not economic but political, and Carter had the courage to make it. It worked too late to help Carter’s 1980 reelection, but Ronald Reagan was then the beneficiary, and the country is even now.
15
THE CONSUMER POPULIST
Jimmy Carter was the most consumer-friendly president in the nation’s history, channeling his populist instincts in a very different way from all his Democratic predecessors and successors, helping make the U.S. economy more efficient and competitive, with lower long-term inflation. As a small businessman with a deep commitment to his customers, he adopted a sophisticated and forward-looking policy based on competition and not regulation in order to provide maximum choice at the lowest price. For essential health, safety, and environmental protection, he believed in reforms to deter unsafe corporate practices at the least cost possible to industry. In doing so he befriended and publicly embraced the consumer champion Ralph Nader, appointing a number of his activists to high federal regulatory positions.
Carter did more than any president before him to transform regulations that had long since outlived their usefulness, with lasting benefits that became evident only after he left office. Large sectors of the American economy, especially in virtually all modes of transportation and communications, were freed from federal economic regulations dating back to the New Deal and the Progressive era that preceded it. Many had calcified into cozy relationships among the Iron Triangle—powerfully entrenched industries, their federal regulators, and their congressional overseers. Their unions, which were the backbone of the Democratic Party, also gave full support to the status quo.
While deregulation was one strand in the Carter administration’s anti-inflation program in producing lower costs, an unexpected result was lower wages and less protection for workers in the industries that were deregulated. Unionized workers were the biggest losers, realizing organized labor’s biggest fear, and most of the benefit accrued to the general public through lower prices and greater choice.1 Ironically, for all of its success and lasting impact, the Carter presidency also registered the high-water mark of the American consumer movement, which began to lose momentum as corporate America—realizing that its own free-market principles had been deployed against it—struck back.
The reenergized heads of major American corporations for the first time formed their own organization, the Business Roundtable, which mobilized CEOs to directly lobby Congress and the White House, and backed it up with high-caliber position papers and contributions from their newly allowed PACs to punish or reward legislators who had deserted or defended them. Consumerism never recovered from Carter’s loss to Ronald Reagan in 1980, which bookended a decades-long growth of the consumer movement. No president before or since, including the Democrats Bill Clinton and Barack Obama, so thoroughly embodied the ethic of the movement and melded its critique of business into government decision making.
In the American political system, issues of social or economic importance usually become politically ripe, and eventually the law of the land, only after withstanding scrutiny in academic and public debate, and then becoming part of the agenda of the president of the United States, the only political figure capable of raising an issue to national and congressional attention. One test of presidential leadership is the ability to discover, define, and elevate issues that are ready for serious consideration. Carter had already defined his approach to consumer protection as governor of Georgia with a Law Day speech that won him national attention through Hunter Thompson in Rolling Stone magazine for attacking business organizations and the professional associations representing lawyers and physicians for protecting their members more than the public.
By the force of its logic, deregulation had already moved from the private preserve of academia into the public arena during the Ford administration. But it took a president with small-business experience, who was neither a conservative Republican nor a traditional liberal Democrat, to build a winning coalition that beat back the entrenched opposition of business and labor. That unique and improbable force was composed of free-market conservatives and liberal politicians led by Senator Edward Kennedy. During only one presidential term, Carter’s administration led in deregulating the nation’s airline, trucking, and railroad industries, and pointed the way toward deregulation of interstate bus lines. But there was more. It also took the first major steps to bring competition to the telecommunications industry, without which the digital revolution of the twenty-first century would have taken place much more slowly. He championed the elimination of Regulation Q and the 1980 Monetary Control Act to lift New Deal–era caps on the interest that banks could pay savers, broke down barriers to interstate banking that protected local banks at the expense of customers, and created variable-rate home mortgages to compete with the traditional long-term fixed-rate mortgages.2
These reforms in broad sectors of the economy are not the whole story. Carter put in place systemic regulatory changes across the federal government that weeded out and reshaped obsolete structures enacted in a time of crisis during the Great Depression to save capitalism from its excesses. But as the economy recovered and thrived over the decades, many regulatory structures remained by sheer inertia. Carter moved the pendulum back toward the center, although his successor pushed it further to the right, demonizing almost all government regulation.
In a valedictory signing statement attached to the rail deregulation bill, Carter pulled together his accomplishments. He noted that by executive order, he had mandated that all regulators publicly analyze the costs of major proposals, setting the goal of achieving their objectives in a cost-effective way. He established a sunset-review program to test whether major regulations were still needed after they had been in place a number of years. His paperwork reduction program cut federal paperwork by 40 percent. He created a Regulatory Review Council to eliminate inconsistent regulations and encourage innovative regulatory techniques, saving hundreds of millions of dollars. The president also signed the Regulatory Flexibility Act, which passed the Senate without a dissenting vote, converting into law his 1979 administrative program requiring federal agencies to eliminate unnecessary regulatory burdens on small business. Since the federal government began calculating its benefits, the law is estimated to have saved small business and the economy as a whole more than $200 billion. With all this, Carter was justified in claiming in the signing statement: “We have secured the most fundamental restructuring of the relationship between industry and government since the time of the New Deal.”3
Why did virtually no one appreciate this then or now? I believe double-digit inflation and interest rates, gasoline lines, and the Iran hostage crisis sucked the polit
ical oxygen from the positive effects of deregulation on inflation and competition over the years. Succeeding presidents, Reagan in particular, were the major beneficiaries. His showdown with the air controllers’ union demonstrated that Reagan, but not Carter, had taken on powerful unions. And since it was never a traditional Democratic presidential priority to eliminate regulations, Carter was acting out of the party’s character—but he was not a traditional Democrat. He was a New Democrat, moderately conservative on fiscal issues and committed to ending regulations shackling private industry, when unconnected with safety. He did more than any president to clear the regulatory underbrush that had imposed costs, inflation, and inefficiencies on the American economy.
Deregulation opened airplane travel to the middle class and made it possible for cargo services like Federal Express (FedEx) and United Parcel Service (UPS) to provide the efficient cross-country delivery that now is part of America’s business infrastructure. It permitted low-fare start-ups like Southwest Airlines and JetBlue to thrive. Ending federal controls on trucking and railroads had even greater but less obvious benefits because consumers cannot readily appreciate the billions of dollars saved in more flexible and cheaper transport. The degree to which the Carter administration opened up these basic industries to competition and benefited consumers and businesses through their supply chains is matched only by the energy of Theodore Roosevelt’s administration a century ago.
That some of these innovations were later manipulated to endanger the financial system or squeeze consumers is not a criticism of deregulation but of ideologues who treasure the belief that markets can correct themselves without any controls at all, from safety labels to antitrust laws. The general relaxation of antitrust enforcement freed the airlines to merge into a virtual oligopoly, cutting fares to fill planes but skimping on customer service in ways ranging from stuffing passengers into their seats to late arrivals. This demonstrates the truth of one of our democracy’s classic rallying cries: “Eternal vigilance is the price of liberty.”
Deregulation must always be accompanied by a countervailing policy to protect the consumer from unbridled economic competition, which, without proper oversight, can be turned on its head to the disadvantage of the public, as demonstrated by the financial crash of 2008. Years before, Carter had begun cautiously freeing up the financial sector, but unrestrained regulation of complex financial instruments and nonbanks like Lehman Brothers eventually turned liberties into license and produced disaster. Alan Greenspan, during his remarkable tenure as chairman of the Federal Reserve, justified such financial competition by arguing that informed market participants would police one another and thus protect the consumer and the banking system. After the crash Greenspan was forced to admit to Congress that he had found “a flaw in the model … that defines how the world works.”4
DEREGULATING THE AIRLINES
The airline industry was the first major battlefield for deregulation, and it comes as close as any to a case study of the history of regulation and the benefits of its undoing. The cast of characters that made victory possible was worthy of a Broadway play, with a love story thrown in for good measure. Fred Kahn, Carter’s new chairman of the Civil Aeronautics Board, looked the part of an absentminded professor and turned out to be anything but. Kennedy and several of his young lawyers made victory possible by taking on a cosseted political-industrial complex. They were headed by the Judiciary Committee’s chief counsel, Stephen Breyer, who was later elevated to the U.S. Supreme Court, and the staff director for the committee’s antitrust subcommittee, David Boies, later one of the country’s leading litigators. On our side we had my White House Domestic Policy Staff and Mary Schuman, then all of twenty-six years old but as tough and brilliant as she was charming and beautiful, who met Boies during our negotiations and later married him. Presiding over this cast as a sort of producer was no less than the president of the United States, who was willing to risk short-term political costs for the nation’s long-term gain—a major theme of the Carter presidency.
The airline industry is virtually a child of the federal government. As an infant industry in the 1920s, United, American, Eastern, and others received subsidies in the form of contracts to carry airmail; the precedent for this was the huge government subsidy to the railroads by giving away millions of acres along the roadbeds that tied together the industrializing nation in the nineteenth century. The airlines easily fell into the lucrative habit of bidding low for the airmail contracts and then claiming they were losing money to obtain more. Congressional investigations led to New Deal legislation regulating entry, prices, and routes through an independent agency later known as the Civil Aeronautics Board (CAB), which also took over airline safety, all designed to protect consumers. Rates were set by the government on the basis of the airlines’ costs plus a guaranteed rate of return, which they simply passed along to their passengers long after they had fully matured into profitable companies. The rationale for this arrangement was that competition would endanger safe and reliable service.
While airmail subsidies were phased out during the Eisenhower administration, the CAB staff continued meeting in private with the Airline Transport Association (ATA) to negotiate guaranteed profits on their routes. The government and the industry developed a symbiotic relationship through this cost-plus formula, and passengers had to take it or leave it. On short flights, fares were set low to compete with cars and trains, but on long-haul routes where the airlines had a definite advantage, they were protected by a CAB rule that forced a prospective competitor to show that the existing carrier did not provide adequate service, which was almost impossible to prove.5
Ten major trunk airlines carried more than 90 percent of the nation’s interstate air traffic, although within California competition thrived, without regulation. From 1969 to 1973 not one new route was approved by the CAB, and it took eight years for Continental Airlines to win approval for a route from San Diego to Denver. As airline seats were limited by an outrageous capacity-control agreement cooked up by American, United, and TWA, ever-higher fares produced more empty seats than profits.
Instead the airlines competed among themselves for the shares of a shrinking market only on frills: serving meals supervised by famous chefs and dressing stewardesses in hot pants. Only business travelers benefited, not just because of the sensory attractions, but because by the time Carter proposed deregulation in 1977, only 55 percent of U.S. airline seats were filled, and business passengers could be fairly well assured of an empty seat next to them to put their briefcase and papers. The CAB oversaw this tight cartel benignly and spent its time regulating even the size of in-flight sandwiches.6
Enter stage left, Ralph Nader, the father of the consumer movement, whose harsh exposé of the automobile industry, Unsafe at Any Speed, had landed him on the cover of Time. Carter shared Nader’s suspicion that big industry was anticonsumer, but Ham Jordan vigorously objected when they joined forces because Nader was deeply unpopular with Carter’s conservative Southern base. By then, after he was bumped from an oversold Allegheny Airlines flight, Nader had shifted his focus to airlines. He filed a suit for damages charging deliberate overbooking and formed a consumer advocacy group focused on the airline industry.
This raised the visibility of the issue in Congress, where Representative John Moss, a California Democrat, had already formed a congressional consumer caucus and sued the CAB for $265 million on the ground that it had become the industry’s partner in setting rates behind closed doors, without public hearings. U.S. District Court judge Skelly Wright agreed and in 1970 threw out the negotiated-rate system.7 Retreating, the CAB developed a system that fed in the airlines’ cost data and automatically spewed out high fares.
At the same time a number of prominent economists allied with both parties presented papers describing the economic inefficiencies of federal airline regulation. But such cries for reform from the ivory tower usually remain unheard unless powerful politicians hear them and act.
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bsp; TED KENNEDY, STEPHEN BREYER, AND FROZEN DOGS
In Congress the Massachusetts liberal Ted Kennedy, deeply committed to government action to right what he saw as injustices of the free market, was searching for issues on which to focus. He had become chairman of the nondescript Administrative Practice and Procedure Subcommittee of the Senate Judiciary Committee and, turning to his Harvard brain trust to give it some direction, was recommended to hire Stephen Breyer, a young professor of administrative law. Breyer was initially dubious but decided to use a 1974 sabbatical to take a whirl in the political world, where the laws he taught were being forged. He joined the subcommittee staff and identified 32 sectors of the American economy that could benefit from lighter regulation without affecting health or safety, starting with the airlines. He prepared a list of possible hearings on ten subjects “which nobody’s ever heard of … [that] would be consumer-oriented and would help people.” He impressed Kennedy by simply asking: “Why in heaven’s name are you not letting people compete?”8 The Harvard law professor and the powerful senator realized that the politics of airline and truck deregulation were fierce, with Kennedy recognizing that if Democrats were going to take on the unions, Republicans needed to take on the airlines.9
President Carter Page 44