Re: Neoclassical bizarreness!!!

["David B. Shemano" <dshemano@xxxxxxxxxx>]

I am continually amazed how people on this list are so concerned when corporations are not making enough money.  Who gives a shit!  The airline industry is not an end in itself (or its employees) -- it is a tool for others.  It expands the freedom of people to live where they want, allows families to remain in personal contact, facilitates business transactions, etc.  That is how I measure the success of the industry -- not whether the pilots are making more than accountants, or whether the flight attendants are making more than waitresses, or especially whether the shareholders are receiving dividends.

And if it is turns out that it is too expensive to have an airline system because it is impossible to make a profit (i.e., I don't see anybody flying to the Moon), then let the resources be diverted to where it is possible to make a profit.  In the meantime, I don't sense a lack of investment capital in the industry -- JetBlue and Soutwest are doing fine, and when they falter, somebody else will pick it up, and when they falter, we will then let the foreign carriers do domestic routes, so we will benefit from the ridiculous subsidizations those carriers receive from the taxpayers of foreign countries.  That works just fine for me.

David Shemano


--- Original Message---
 To: PEN-L@xxxxxxxxxxxxxxxx
 From: Carl Remick <carlremick@xxxxxxxxxxx>
 Sent:  9/21/2005 12:48PM
 Subject: Re: [PEN-L] Neoclassical bizarreness!!!

>> >From: "David B. Shemano" <dshemano@xxxxxxxxxx>
>>
>> >... Going back to the larger point, bankruptcy is essential to any
>> >well-ordered economic system, because the potential reality acts to
>> >moderate and rationalize the economic participants (or at least most of
>> >them most of the time).
>>
>> [Meanwhile back on Earth:]
>>
>> There?s No Free Market
>> At America?s Airports
>>
>> By Nicholas von Hoffman
>> (NYO 9/26/2005 edition)
>>
>> The statistic that shook up business writers around the country is that more
>> than half of domestic passenger seats belong to airlines in bankruptcy. The
>> spate of bankruptcies, on the other hand, is something less than a unique
>> event.
>>
>> ?The only other major industry that has more bankruptcies, on a percentage
>> basis, is the restaurant business,? said Richard Gritta, a professor of
>> finance at the University of Portland in Oregon whom The New York Times uses
>> as an expert. In the last 25 years or so, the professor added, two-thirds of
>> the industry has landed in bankruptcy at least once, and three?Pan Am,
>> Eastern and Braniff?never made it out alive.
>>
>> >From the standpoint of airline investors, according to a remark attributed
>> to Warren Buffett, it would have been a far, far better thing if the Wright
>> brothers had crashed and burned at Kitty Hawk. Since the industry was freed
>> of government supervision in 1978, it has had brilliant executives, stupid
>> executives, madmen executives, ingenious executives, incompetent executives,
>> charismatic executives, but never a profitable one. Oh, there have been
>> brief periods when an airline here or there has made money, but sooner or
>> later they all go kerplop.
>>
>> When they do, the stockholders will be wiped out and the employees will take
>> terrible hits in salary and benefits, even as the taxpayers will be obliged
>> to put up huge sums to make the whole thing work?or kinda-sorta work?again.
>> The only people who profit from these airline business catastrophes are the
>> lawyers, accountants and Wall Street investment-banking houses who will pick
>> up hundreds of millions (literally hundreds of millions) in fees and charges
>> before this latest airline spasm has run its course. Seldom will so few have
>> made so much for doing so little.
>>
>> This disaster is not unprecedented. A hundred years ago, the railroad
>> industry was in exactly the same shape. More than half of its trackage was
>> in bankruptcy?and for some of the same reasons that have made a ruin of the
>> airline companies. Both industries had to deal with huge up-front starting
>> costs. Both industries faced large operating costs and fickle, unpredictable
>> and highly variable patronage.
>>
>> In the last quarter of the 19th century, railroad companies besieged by
>> angry customers?mostly farmers furious at the rates they had to pay to move
>> their products to market?reacted by forming cartels to fix freight tariffs,
>> but the cartel members would continually double-cross each other, so that
>> approach didn?t work. Another attempt came with the establishment of the
>> Interstate Commerce Commission, which had the power to fix rates and other
>> terms of doing business, but the commission became a battleground between
>> the railroad and the shipping interests, with the result that political
>> pressures made it impossible to govern the industry for its long-term
>> health. As a last resort, railroad companies had recourse to buying each
>> other out to create enough of a monopoly to be able to dictate prices. This
>> approach failed when even the giants of the era, like J.P. Morgan, ran out
>> of money trying to pull it off. It didn?t help that Morgan had no background
>> in transportation and thus didn?t have a clue what the hell he was doing.
>> The monopoly route was also stymied by giant shippers like Andrew Carnegie,
>> who put the railroads on notice that if they tried to hold him up with what
>> he thought were extortionate rates, he?d build his own goddamn railroad.
>>
>> The airline mess has also been compounded by much malarkey filling the air
>> about ?private sector? this and ?free market? that. Right-wing egestions
>> hold that until the coming of closet collectivism, government stayed out of
>> the private sector, an area of life unsullied by any form of public subsidy
>> or subvention. Left-wing disgorgements hold that any kind of public help is
>> corporate welfare. All of this flies in the face of the history of business
>> in the United States, where subsidies in transportation have been the rule,
>> not the exception.
>>
>> The Federal-era stagecoach network was subsidized through the Post Office,
>> as the airline companies would be two centuries later. Stagecoaches were
>> useless for hauling freight, especially bulk shipments of grain from the
>> rapidly developing Midwest. It would have been convenient if the rivers had
>> run from west to east to facilitate transshipment to the markets of Europe,
>> but since geography wouldn?t cooperate, Americans dug canals, mostly paid
>> for by state and local governments. The most famous and most wildly
>> successful was the Erie Canal, and from Albany to Buffalo, nary a complaint
>> about socialism was to be heard.
>>
>> The railroad gradually superseded the canals as the primary method of
>> shipping. They too were the beneficiaries of a variety of federal, state and
>> local subsidies. Next came the automobile and the truck, whose subsidies in
>> the form of roads, bridges and tunnels are so much a part of the landscape
>> that we seldom think of them as subsidies, but as the natural, God-given
>> responsibility of government. It wasn?t so in 1914, when the Wilson
>> administration put the federal government in the road-building business for
>> the first time since Andrew Jackson?s era, when such activities were
>> pronounced unconstitutional. Only now, when the costs of road building and
>> maintenance has gotten to the point that some states are granting toll-road
>> monopolies to private firms, has it occurred to us that this form of
>> transportation is highly subsidized, even with the dedicated gas tax.
>>
>> The airline industry has never drawn an unsubsidized breath. The development
>> costs for passenger aircraft and their avionics have been paid for, directly
>> or indirectly, as a national-defense gimmick for a century, and we will not
>> even venture a guess as to what it would have cost the industry (even if it
>> had had the money) to build the airports. Given these actualities, when an
>> outfit like Delta goes down, it?s less of a private-sector bankruptcy than
>> another government-program cock-up. To treat the industry as a group of
>> private-sector enterprises is to feed another of the delusions as to who and
>> what we are that infect the national public life.
>>
>> The only time the airline industry had a degree of stability and
>> profitability was during the years it was run by the Civil Aeronautics
>> Board, the government agency that set ticket prices and assigned routes to
>> airlines. The C.A.B. was stodgy?it failed to run the industry so that people
>> of moderate means could afford to fly, and it generally lacked imagination,
>> flexibility and even a hint of daring?so it was pulled down in the late
>> 1970?s by people screaming that the free market could do it better.
>>
>> In some ways, they were right: The market did do it better than the C.A.B.,
>> but you can?t really, really, really have a free market in an industry
>> dependent on the government. And so, in the end, unrestricted free-marketism
>> will kill the industry for lack of investors, chaos, customer cruelty and
>> skies dyed crimson from the red ink. ...
>>
>> <http://www.observer.com/opinions_vonhoffman.asp>
>>
>> Carl
>>
>>