Wednesday, March 26, 2008

the Airline industry's Shock Doctrine

In the wake of the September 11 attacks, the Economist published an article encouraging America and Britian to refrain from doling out subsidies to airliners which benefited mainly shareholders and already well-paid staff. "The right way forward would start by letting more airlines go under," the article said. "That would have given a breathing-space in which to sort out how many ought to survive, and in what form."

Though she hadn't written her book "The Shock Doctrine" yet, Naomi Klein calls advice like this "disaster capitalism", whereby in her view politicians and capitalists use disaster scenarios to expand enterprises and let the free market control once-nationalized industries. However, why should we be so onerous about letting inputs and prices even themselves out? The alternative view is to call this process "creative destruction" when new forms of organization and management replace older, failing forms. This process can be sparked by new technologies or disasters, or other dynamic changes. The view that "capitalism" is at its worst when disasters strike is nonsense, since by virtue of being disastrous, disasters are undesirable. When prices are free to find the appropriate level resources can be allocated without waste, especially during times when all resources are more scarce than usual. Preserving everything the way it had been before by using police power to allocate and redistribute is one of the worst fallacies of leftist statism.

It does not follow from any of this that the system of free exchange is to blame for the ill effects from disasters on prices and outputs. Naomi Klein's book, which I have read and whom I also heard speak in Los Angeles, is incredibly naive in its theoretic work. It was written after Hurricane Katrina hit New Orleans, and its ideas can hardly be extended beyond that isolated incident. As Robert Nozick wrote in his essay "Why Intellectuals Oppose Capitalism", leftists are so incredibly quick to blame nearly everything undesirable on the market system.

The further advice from the Economist was for the air carriers and governments to

"dismantle the network of regulations that have for too long stood in the way of change in the industry. America should open up its market to foreign competition, dumping restrictions on foreign ownership of domestic airlines and allowing foreign airlines to compete internally. The Europeans should jettison their web of national bilateral treaties with America and negotiate a genuine open-skies deal, at EU level. That would allow Air France, for instance, to fly to America from London or British Airways to do the same from Paris. Cross-border mergers should be permitted and even encouraged. And instead of suspending the use-it-or-lose-it rule for take-off slots, they should be auctioned to the highest bidders, which will probably be low-cost airlines."
What role ought a government play in a disaster scenario? After 9/11 air travel was in extremely low demand, and rightly so. Consumer confidence in the industry had dropped due to the attacks which may have been prevented without relying on government security regulations. This is a hardline argument, but I think it is acceptable: if air staff were permitted a means of defending themselves whilst in air, they may have been able to stop the terrorists from taking control of the planes.

Instead of permitting air carriers to defend themselves in ways that they see fit, governments imposed stricter regulations and handed out subsidies to the largest carriers. By October of 2001, the US government had spent $5 billion in airline subsidies and $10 billion in loans for an industry that was already losing $3 billion before the attacks. European carriers then complained that this put their industries at an absolute cost disadvantage since their governments were not subsidizing their industry to keep them competitive. Though the EU took a less-lenient stance, US actions put pressure on every government to spend billions in airline subsidies in order to compete with America.

If anything, disaster capitalism is not a problem of the market, it is a problem with governments. The airline industry is not going to disappear if states do not subsidize them. Air travel grew steadily at 5% annually for all but one out of fifteen years prior to 9/11, the only exception being the recession and following Gulf War of 1991.

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