What would happen if feds cap airline change fees?

Once upon a time you bought a plane ticket from point A to point B and it included a seat assignment (unless you were on Southwest), luggage (checked or on-board), and maybe even a snack or meal.  Now everything has been unbundled, with separate charges for seats, luggage, priority boarding and so much more.

Congress is considering an intervention by capping the amount airlines can charge for changing a flight reservation.  Currently American, Delta and United all charge $200 to change a reservation for a domestic flight.  According to WSJ, US airlines collected $2.9b in change fees last year.

What would happen if Congress put an upper limit of, say, $150 on change fees?  Standard economic analysis would interpret this as a price ceiling that would have unintended side-effects.  Airlines have already warned that they would raise fares and other fees in response, along with making fewer tickets changeable.  They also point out that customers who want more flexibility can pay for it when they buy their ticket by paying a higher fare.

But here's another thought.  The US domestic airline market is now very far from the competitive ideal of economics textbooks.  Price ceilings imposed on monopolists lead to lower prices AND increased output as long as the price provides a competitive rate of return.

My take: passengers and airlines have both benefitted from airline deregulation in the late 1970s.  Fares are much lower, more planes are flying and those planes are full.  What would really help customers is more competition.  What if we let foreign airlines provide domestic service?

Is net neutrality getting neutered by new technologies?

American Enterprise Institute blogger Mark Jamison has some insights I have not seen elsewhere regarding how new technologies are likely to make existing regulations on net neutrality meaningless.  Examples of how technology is making a difference:
1) 5G networks will be based on network slicing, which means the network will be customized to different types of traffic.
2) Netflix is investing in proprietary networks and is becoming less dependent on public ones.  Other large gobblers of bandwidth are doing the same.
3) Mobile apps are being used more.  Apps are not open but they are targeted to user needs.

A larger lesson -- in markets where technology is changing quickly, regulations have difficulty keeping up.  If they are enforced too strictly, they can actually interfere with progress.

Regulating driverless cars

According to WP, the National Highway Traffic Safety Administration is in a big hurry to issue "aggressive" regulations on driverless cars.   The regulations are likely to encompass "how and where they expect their vehicles to operate, how they will interact with other cars and the roadway, how they validate their testing, how they intend to protect privacy and prevent hacking, and how they would share data collected by onboard computers."

Two ways of looking at this.  The good news is that one set of federal regulations will make compliance easier than 50 sets of state regulations.  The not so good news is that the feds are insisting on pre-market approval with testing monitored by an independent party.  This looks like a sure way of putting the US behind other countries in the race to develop this new technology.  

Driverless car experiments are already taking place.  Hopefully the industry and the regulators can wait until there is more certainty about how such cars are likely to operate before coming up with a regulatory framework.  

The future of set-top boxes

Two recent news items on set-top boxes:
1) The Federal Communications Commission has proposed a new regulation that would force cable companies to allow customers to provide their own set-top box.  Today most cable customers pay about $10 per month per box.  The FCC argues that once companies can compete for customer's business, costs will fall and consumers will be better off buying instead of renting boxes.
2) Comcast, the largest cable provider, has come up with a new program that will allow owners of recent models of smart TVs to have full access to Comcast programming without using a cable box.  

Looks like Comcast is The Road Runner and the FCC is Wile E. Coyote! Beep beep!

FCC and net neutrality

The FCC made news last week when it issued a new set of regulatory guidelines that would allow broadband companies to charge content providers for faster access to customers.  In the "I could not make this up if I tried department," the proposal blocks the Comcasts and AT&Ts of the world from blocking or slowing down any website.  In other words, it is ok to shake companies down for money but you cannot block them out of pure meanness.

It is hard to find anyone who is happy with the proposal.  The hard-core net neutrality crowd is displeased because they want the internet to be the same speed for all.  They do not spend too much time thinking about what incentives Comcast and its ilk would have to build and maintain the bandwidth necessary to make that happen.  Moving 180 degrees to the other side of the political spectrum, any hint of regulation has stirred concerns that the FCC will impose 1970s style telephone regulation.

There is one basic point that is getting lost in this discussion -- as more broadband hungry services become available, someone's gotta pay for the pipes.  Either Netflix, HuLu and other heavy-duty video providers start charging their customers higher rates (to reflect the payments they will have to make to Comcast and Verizon) or the internet providers themselves will have to start directly charging heavy-duty video consumers more.  Hopefully the FCC can remember this simple fact before adopting final regulations.

How French employers react to labor regs

Great article in Bloomberg Businessweek titled "Why France Has So Many 49-Employee Companies."  The answer is that once a company has 50 employees, it "must create three worker councils, introduce profit sharing, and submit restructuring plans to the councils if the company decides to fire workers for economic reasons."  In effect this means that it becomes very difficult, if not impossible, to have a reduction in force once the worker councils are in place.

As small companies expand, they either start outsourcing activities or set up new companies to avoid these regulations.  As a result, France has 2.4 times as many companies with 49 employees as it does with 50.  Another classic case of how regulations that were intended to protect jobs end up having the opposite effect. 

Regulating higher education

For years colleges and universities have participated in federal financial aid programs.  Now some strings are starting to be attached.  As I noted in an earlier post, the higher education community is viewing this development with some concern. 

Today's NYT editorial on the subject illustrates some examples of what might be in store.  The new Consumer Financial Protection Bureau has drafted a one page shopping sheet (NYT's terminology, not mine) that every school would have to make available showing annual cost (tuition, housing, books, etc. net of scholarships) and how it compares to national averages.  This would be a big step forward; I can tell you from personal experience that one of the hardest items to find on any university's website is the tuition. 

The Department of Education is working on a College Scorecard reporting data on cost, graduation rates, indebtedness, and employment.  This also would help parents and students make more informed decisions. 

Now I am sure there are other ideas out there that I will not be so crazy about, but it strikes me that the cost of providing this information will be modest compared to the benefits. 

Should the federal government hold universities more accountable?

Last week President Obama proposed sweeping changes in how the federal government handles financial aid programs at colleges and universities.  According to NYT, the President wants to put more money into Perkins loans, work-study programs and Supplemental Education Opportunity Grants.  The catch, and it is a big one, is that institutions "would instead be rewarded for lower net tuition prices; restrained tuition growth; enrolling and graduating low-income students; and providing education and training that help graduates get jobs and repay their loan." 

Since virtually every degree-granting institution participates in these programs, this would end up being a sweeping mandate.  A few reactions:
1) Most public universities have seen huge budget cuts over the last four years.  Some have reacted by raising tuition aggressively; others (including NC State) have done their best to hold the line on tuition. 
2) More transparency in higher education would be a good thing.  Why not require all schools to publish graduation rates and placement data by major?  We do this routinely in MBA programs.  Why not do it for liberal arts, agriculture and engineering?
3) The professoriate tends to be much more liberal than the general population.  So presumably they will see the wisdom of more micromanagement from Washington and there will be nary a complaint on any college campus. 

Do we need federal regulations on interstate wine shipments?

I visit the NYT foodie blog "Diner's Journal" a couple of times each week to keep up with the NYC restaurant scene and catch Mark Bittman's latest recipes in his Minimalist videos.  This week, there is an entry about a bill in the U.S. House of Representatives that would impose federal regulations limiting the shipment of wine across state borders. 

At first glance one would think that this is an unnecessary intrusion into a matter best left to the states.  Who says we need this federal regulation?  Why no other than a confederation of beer and wine wholesalers.  As various states have allowed their citizens to import wine from other states (either direct from the winery or through an internet-based retailer), wholesalers have been cut out of an increasing share of the trade.  Of course this is not what they argue, instead the bill's supporters say they are trying to better protect minors from alcoholic beverages. 

And who says bipartisanship is dead in D.C.?  There are 150 co-sponsors of the House bill, with both parties well represented.  Accepting campaign contributions from the wholesalers is an issue many House members can agree on.  

Truth in advertising in academe

I do not normally repeat blog items from elsewhere, but today my NC State colleague Craig Newmark links to a must-read piece for all would-be humanities PhDs from the Chronicle of Higher Education concerning the woeful job market these students will face upon graduation. Although I deal with many reporting requirements and regulations as associate dean (our b-school gets an accreditation visit next week), this recommendation needs further airing:

there is still almost no way—apart from the rumor mill to which they do not really have access—for students to gather some of the most crucial information about graduate programs: the rate of attrition, the average amount of debt at graduation, and, most important, the placement of graduates (differentiating between adjunct, lecturer, visiting, tenure-track positions, and nonacademic positions). Programs often claim that graduates who are working as adjuncts or visiting faculty members are successfully placed in the profession.

Most departments will never willingly provide that information because it is radically against their interest to do so. I can see no way for that information to become available unless it becomes part of accreditation or rankings in publications such as U.S. News and World Report.

Why is Houston growing and NYC isn't?

MBA 505 veteran Lea Chan sent me this link to an article by well-known Harvard economist Ed Glaeser about this question. Having visited both cities on multiple occasions, one might think at first glance that this is a simple case of "de gustibus not est disputandum. " Glaeser does a very nice analysis of all the economic factors that might lead a household to prefer to reside in one city or the other, including housing prices, commuting, wages and salaries, and taxes. Of course there are many other factors to consider: Houston has NYC beat bigtime on Mexican food and NYC has sports teams that actually win championships. As I said, de gustibus!

A must read piece on big finance and big government

Luigi Zingales, a finance professor at the University of Chicago, has a brilliant piece "Capitalism After the Crisis." Zingales explains how the finance sector has grown in both size and political influence, grown to the point where he thinks it has become dangerously co-dependent with the federal government. He sees two possible paths: (1) genuine market-oriented reform of the financial sector that would shift risk away from taxpayers and back to executives and shareholders (in other words, an end to "too big to fail") or (2) federal policy supports the continued survival of big firms in the financial sector while regulating executive pay to appease populist outrage (but taxpayers still end up holding all the risks). This is the type of "big think" piece that economists do not write often enough. You may or may not agree, but you should take the arguments seriously.

Some updates on the health care debate

A few interesting pieces have come out in the last week on health care. The one that has received the most attention is a WSJ op-ed by Whole Foods CEO John Mackey. Mackey makes two main points: (1) market-oriented reforms targeted at the tax-treatment of health insurance, insurance industry regulation and malpractice litigation would increase competition and lower health care costs and (2) we need to address the root causes of poor health:

Unfortunately many of our health-care problems are self-inflicted: two-thirds of Americans are now overweight and one-third are obese. Most of the diseases that kill us and account for about 70% of all health-care spending—heart disease, cancer, stroke, diabetes and obesity—are mostly preventable through proper diet, exercise, not smoking, minimal alcohol consumption and other healthy lifestyle choices. Recent scientific and medical evidence shows that a diet consisting of foods that are plant-based, nutrient dense and low-fat will help prevent and often reverse most degenerative diseases that kill us and are expensive to treat. We should be able to live largely disease-free lives until we are well into our 90s and even past 100 years of age.

Some of Mackey's customers have taken offense at his remarks, announcing a boycott of Whole Foods.

I also found David Ignatius's column in today's Washington Post interesting. He thinks that the President is losing the battle on health care reform and needs a new general: Denis Cortese, CEO of the Mayo Clinic. Cortese thinks we have gotten too hung up on health insurance issues and are not getting to root causes of the problem (FYI, I agree 100%):

First, he thinks Obama has made a mistake in moving toward the narrower goal of "health insurance reform" when what the country truly needs is health system reform. Imposing a mandate for universal insurance will only make things worse if we don't change the process so that it becomes more efficient and less costly. The system we have now is gradually bankrupting the country; expanding that system without changing the internal dynamics is folly.
Second, Cortese argues that reformers should stop obsessing over whether there's a public option" in the plan. Yes, we need a yardstick for measuring costs and effectiveness. But we should start by fixing the public options we already have. Cortese counts six existing public options that should be laboratories for reform: Medicare, with its 45 million patients and a fee-for-service structure that all but guarantees bad medicine; Medicaid, with an additional 34 million beneficiaries; military medicine, through which government doctors deliver state-of-the-art care; the Department of Veterans Affairs, which has improved performance at its hospitals by embracing new technology; the "Tricare" insurance plan for military retirees; and the Federal Employees Health Benefits Program.

Finally Martin Feldstein at Harvard (former chief economist for Reagan and president of NBER, not to mention my macro theory professor) has weighed in on Obamacare in a WSJ op-ed. Marty is concerned about the long term effects of on research and innovation. Money quote:

In the British national health service, a government agency approves only those expensive treatments that add at least one Quality Adjusted Life Year (QALY) per £30,000 (about $49,685) of additional health-care spending. If a treatment costs more per QALY, the health service will not pay for it. The existence of such a program in the United States would not only deny lifesaving care but would also cast a pall over medical researchers who would fear that government experts might reject their discoveries as "too expensive."

Administrative bloat at UNC?

Today's N&O has a big story on a study by Bain and Company of administrative efficiency at UNC-CH. The headline "Report Finds Bloat at UNC" sounds like a big expose. But after reviewing the study on the UNC-CH website, I think there is less here than meets the eye. Bain found that UNC-CH has a complex organizational structure and that administrative expenses had grown more rapidly than academic expenses. This is true at every major public research university, including NC State. The report NEVER gets into the root causes of the phenomena. Instead, it rather naively recommends the standard business process and IT system re-engineering that took place in most Fortune 500 companies in the 1990s, e.g., collapse layers of management. (For instance the report makes a big deal about many supervisors having only one to three direct reports. Maybe these surpervisors have job responsibilities of their own?)

UNC-CH and NC State are not Fortune 500 companies; they are public research universities. The ratio of overhead to academic costs will rise whenever universities decide to undertake a wider range of overhead activites or when the cost of overhead inuts rises relative to academic inputs. There is little reason to believe that the price of a dean or a program director has risen relative to the price of a faculty member, so let's focus on the activities side of the equation.

I see two leading suspects, the first of which is regulation. Most of the research is funded through federal agencies that dictate volumes of regulation. Accreditation bodies extract an additional tax, one that has gradually risen over time (for instance, now universities have to demonstrate academic programs result in student learning, and test scores don't count as evidence). The state has its own requirements, especially for personnel and procurement. All of these mandates require resources. To offset these costs which have grown over time at a good clip, universities rely more and more on non-tenure track faculty to provide instruction, thereby flattening out the growth rate of the academic expenses.

The second is mission creep. To compete for students and gain a spot or two in the US News rankings, universities are engaged in a broader range of activities than they were when (ahem) I was in school. For instance compare dorms, gyms, and student centers today to 30-40 years ago. Universities have launched initiatives to correct problems that linger from that era, e.g., diversity offices and advisors. And of course we also have intercollegiate athletics; how many more teams, coaches and administrators do we have now? Last but not least, universities are becoming more and more involved with economic development, including research parks such as NC State's Centennial Campus.

By ignoring the mission and environment of UNC-CH and the root causes behind the changes in structure and overhead expenses, the Bain report comes off as, well, a standard consulting report. Bain would (for a certain price) be more than happy to help UNC-CH re-engineer all sorts of systems and processes. But would you write a big check to a consulting company to do this if you thought they had missed the boat on problem definition?

Pomerleano: scorecard on financial reform package

Michael Pomerleano is a Harvard classmate who is now advising the Bank of Israel. His article yesterday in the Financial Times Economists Forum cautions that we have much work yet to do. Money quote:

There is a considerable disconnect between the stern principles enunciated by policymakers and their actions. Recently Jacob Frenkel made an astute observation: there are two types of investors: the ones with short memories, and the others with shorter memories. To that we need to add two set of policy makers as well. We are back to business as usual. How disappointing!

Whither financial regulations?

This week the Obama administration issued proposals for expanded regulation of financial markets. This should be viewed as an opening gambit. Goodness knows what, if anything, will make its way through Congress. The package expands the role of the Federal Reserve as a financial regulatory agency and that concerns me a bit for two reasons. First, the Fed has enough on its hands these days dealing with the money supply and short term interest rates; can any Fed chairman keep his or her eye on a vastly wider range of issues? Also, wider regulatory powers will invite enhanced political meddling from Capitol Hill and the White House, potentially compromising the Fed's independence.

Paul Krugman is pleased that the proposals regulate the "shadow banking system," or at least what is left of it. Krugman is less pleased that the plan does not address compensation issues more aggressively.

Simon Johnson thinks the proposals lack teeth. He raises the interesting point that if some banks have become too big to fail, shouldn't we cut them down to size? I am emotionally sympathetic to this view, but I am doubtful that (1) this could be done under existing laws (Sherman Act, Section 2: I don't think so) and (2) we could trust the government to have the power to decide how big is too big.

So far both links come from a left-of-center perspective. I will add more balance over the next few days.