Why Do Americans Hate Congress?

Numerous polls have demonstrated that the American people have nothing but disdain for the U.S. Congress. A page on PollingReport.com lists numerous polls over the past year in which Congress has failed to approach even a 20% approval rating.
These ratings are well below the approval ratings achieved by President Bush.

A search of the web does not turn up any systematic analysis of why Congress is so unpopular. Some Democratic websites claim that the Democratic Congress was unpopular because it had not achieved what it was elected for -- withdrawal from Iraq. Others claim on popularity is due to failure to pass other legislation that particular groups may want. These results-oriented explanations failed to answer the important structural question -- why is Congress such a failure. I will attempt to provide such an analysis.

The conduct of hearings is abominable

Congressional behavior in hearings is embarrassing. They can't just start a hearing by asking questions. Every congressman has to make an opening speech. If they have five minutes to question a witness and get responses, they spend four minutes asking a question, and cut off answers so they can make additional speeches. It is obvious that these congressmen are not interested in hearing answers or learning about potential solutions to issues. Rather, they are making political statements designed to enhance their chances for reelection or to placate some interest group. Representative Henry Waxman is one of the most egregious in this respect. He has no interest in the hearing subject other than to make his own political points, or to embarrass witnesses.

Another problem is that so many of them come across as absolute dummies. Their questions are written for them by staff; sometimes they don't understand their own question; and more often, they don't understand the answers. Most of them can't ask follow-up questions. They are either not smart enough to understand the answer and how it relates to the issue before the hearing, or they don't care about the answer -- all they wanted to do was ask the question (as written for them) so they can get on television.

Back when I was dealing with congressional aviation committees, there were only two congressmen -- Newt Gingrich and Elliott Levitas of Georgia -- who actually understood answers and asked follow-up questions. (Gingrich, of course, stayed in politics; Levitas is a lawyer in a large Atlanta law firm.) The rest demonstrated ignorance beyond belief. Senator Ted Kennedy was a prime example of this group. He would read out a question written by his staff, receive a devastating answer, and just move onto the next written question because he didn't have the wits to follow-up the answer with a relevant question.

They can't do basic stuff

Congress can't do simple things like pass appropriation bills on time. In 2008, only one out of 12 major appropriation bills was completed before the beginning of the 2009 fiscal year. This deprives government agencies of the ability to plan future activities on any reasonable basis in deprives the American people of programs that may be useful. The failure to approve nominees for government positions or judicial office is another example of Congress’s inability to act. Undoubtedly, this process will be speeded up now that there will be a Democratic President and Democratic Congress, but the failure of Congress for many years to confirm nominees has been one of the factors in bringing it into disrepute.

They can't reach clear decisions on public issues.

The way much legislation is accomplished is appalling. Some congressman has a bad idea -- one that would not be adopted by a majority of the Congress. Therefore, the proposal cannot be allowed to come up for an up or down vote. Rather, it is held until some other bill that is far more essential is before the Congress, and it is then horse traded into the legislation. The congressman or a congressional group offers to support the legislation, provided their favorite proposal is incorporated in the bill. As a result, proposals that should never see the light of day become law. The public reacts with revulsion to this process.

They subvert the appropriations process through earmarks.

A good definition of earmarks is found on the OMB website, which states "Earmarks are funds provided by the Congress for projects or programs where the congressional direction (in bill or report language) circumvents the merit-based or competitive allocation process, or specifies the location or recipient, or otherwise curtails the ability of the Executive Branch to properly manage funds.”

This process is inherently corrupting. While a few earmarks may be based upon valid local needs, the vast majority are for projects that the local community won't support from tax money, and will build only if it receives federal largess. For example, in 2007, Senator Barack Obama submitted 112 earmarks totaling $330 million, including $1 million for his wife's hospital. Recognizing the embarrassment is caused, Obama submitted no earmark requests in 2008. Other congressmen, such as Randy Cunningham of California, have gone to jail for accepting payments and favors for inserting earmarks into legislation.

This process became a major issue in the presidential campaign after publicity about the "bridge to nowhere" and other extravagant and unnecessary earmark proposals. It is highly doubtful, however, the Congress will reform the earmark process. Individual members seem to believe that bringing home earmarks is essential to the reelection. It is doubtful that any change will be accomplished until voters throw out major abusers of the earmark process.

Lobbyists and fund raising have compromised congressional independence

While there is some truth to the claim that lobbyists achieve undue influence because of their ability to raise money, I think this is not one of the major reasons why the public has such disdain for Congress. The media loves to focus on this issue because there are often salacious details, but it is only one of many reasons for Congress's disrepute.

Blogging to be Resumed

I stopped blogging in June because everything I read said that you had to be intensely interested in your subject matter to be a successful blogger. I found that I just wasn't interested in current regulatory matters, such as rulemakings. However, with a new administration, I think there will be a lot more to write about. Moreover, I will broaden the scope of the blog a bit to discuss politics more generally. For example the first blog of the new regime will discuss why Americans hate Congress.

Another regulatory folly -- flourescent light bulbs

The energy bill passed by Congress contains a regulatory imposition right up there with legislating the amount of water in toilets. By 2014, the incandescent bulb invented by Thomas Edison will disappear, and the only light bulbs sold will be the new small fluorescent bulbs that are only made in China. The EPA has issued three pages of detailed instructions on what to do if one of these, which contains mercury, breaks -- evacuate the room, and turn off the air conditioning, among other things. For an entertaining speech by Congressman Ted Poe of Texas on the House floor about this fiasco, see You Tube.

More on Cellphone termination fees

The Competitive Enterprise Institute issued a statement today on the FAA hearing on cellphone termination fees, noting, as I did yesterday, the impact such a change would have on cellphone prices. The statement is as follows:

Washington, D.C., June 12, 2008—Today the Federal Communications Commission will hear testimony on “early termination” fees for customers who cancel their mobile phone, cable or Internet service contracts early. Critics of telecom service providers will charge that long-term contracts with cancellation fees are unfair, but in reality, such contracts help more people afford a higher-quality range of products.

In the case of mobile phones, many companies provide customers with low-cost or even free phones in return for customers agreeing to a service contract, often of one to two years. That agreement puts better phones in the hands of customers at every price level, while bringing into the market many who could otherwise not afford a phone at all.

Since the provider is counting on the future revenue from the contract as part of the bargain, they include the early termination fee as insurance that they won’t subsidize the equipment costs of customers only to have them immediately jump to other carriers offering yet other deals.

Moreover, despite opposition to early termination fees in the mobile phone market, they’re nothing new. Aside from telecom services, consumers have long had the choice of signing long-term contracts that involve early cancellation charges. Renters typically sign 12-month apartment leases, and are usually required to pay a breakage fee if they back out of their lease early. Similar contract clauses are often found in fitness center memberships and automobile leases.

In all of those cases, we expect consumers to figure out for themselves what is and what is not part of the contract they’re signing. As long as any potential fees are disclosed at the time of the agreement, they’re simply part of the deal. In the case of a provider attempting to levy a fee that wasn’t part of the original agreement, that’s a case for small claims court, not the further federal regulation of an entire industry.

FCC to Hold Hearing on Regulating Cell Phone Termination Fees

The FCC will hold a hearing tomorrow, June 11, on whether to take over jurisdiction of cell phone termination fees, which are not subject to state regulation. The major cell phone companies are, of course, in favor of this proposal, which as been promoted particularly by Verizon, because it would eliminate regulation by 50 pesky state governments, in exchange for a single regulator at the federal level. It would also preempt class actions, several of which have apparently been filed. See Wall Street Journal article, May 24, 2008.

Of course, regulation of termination fees would simply result in increased costs to consumers. Cell phone companies have justified termination fees as enabling them to offer low-cost or free cell phones to consumers. If termination fees are restricted, the costs of telephones and telephone service would undoubtedly increase. See also Open Market.org.

FAA Proposes Three Year Term for Aircraft Registrations, But Does Not Address Major Underlying Issue.

In February, the FAA issued a Notice of Proposed Rulemaking that would change the current system of registration of aircraft for an indefinite period of time to one that would have a three-year term for each registration (73 Fed. Reg. 10701, February 28, 2008). FAA's rationale for the change appears reasonable -- the current system does not work well, with the result that an enormous number of listings in the registration database contained incorrect information. As the FAA stated:

How accurate are the records today?

Since the annual registration eligibility
requirement ended in 1978, many
aircraft have left service, been sold, or
had owners who moved without
reporting their change of status or
address. Of the more than 343,000
aircraft registered, an estimated 104,000,
or about one-third, are possibly no
longer eligible for registration. Over the
last several years:

• 17,000 aircraft have been reported
as sold by their former owners without
the purchasers making application for
registration (with about 15,900 being in
the ‘‘sale-reported’’ category for more
than 6 months);

• 4,700 have started registration
without completing the requirements
(with about 2,100 being in the
‘‘registration-pending’’ category for
more than 12 months);

• About 30,100 aircraft are known to
have bad addresses well beyond the 30
days allowed for reporting changes;

• Almost 14,700 aircraft have had
their Certificates revoked due to bad
addresses, but remain in the system to
prevent reassignment of their U.S.
registration number (N-Number) until
the FAA is positive the aircraft is no
longer operating with that N-Number;

and

• Up to 41,000 additional
unidentified aircraft are estimated to be
inactive or possibly no longer eligible
for registration.

Comments were filed last week, primarily by scheduled carriers who argued that they were not causing the problem, and therefore should not have to change the three-year system. The Air Transportation Association filed a seven page, single-spaced, Comment (aren't DOT pleadings still required to be double space?) claiming that the new system would be a substantial administrative burden, primarily because it would be so difficult for the new registration certificate to catch up with the aircraft. This is important because it is an FAA requirement that the registration certificate be physically maintained in the equipment. This really does seem like a makeweight argument -- there is no doubt that airlines can establish administrative procedures for handling registrations.

ATA seems to missed its main argument -- rather than complaining about the burden of processing paper, it should have suggested that the paper itself be eliminated. In this Internet age, why do we need to keep paper copies of registration documents anywhere? Or at least, why do we need registration documents anywhere except in one central location at each carrier. Elevators have inspection certificates, but they are never on the elevator -- they are kept in the office and available for inspection. Why not the same procedure for aircraft registration certificates?

The simple procedure would be for the FAA to maintain an aircraft registration database, available on the Internet, so that anyone who sees an aircraft number on a plane can input it into the database, and get complete registration information. There is simply no need in this Internet age for a piece of paper to be carried on the aircraft.

It would be nice if the FAA were to create an Internet-based registration system. There would be no more need for paper forms -- the registrant would simply fill out the form on the Internet, and the data would go directly into the FAA database. There, it would be available to all FAA personnel and to anyone who inquired in the database without a particular aircraft. Perhaps FAA can create a next-generation registration statement instead of patching the current system.

Ratings Agencies to Cuomo: "Don't Throw Me into that Briar Patch"

New York State Attorney General Andrew Cuomo announced an agreement with the three major ratings agency that would supposedly reform their ratings practices on mortgage-related securities. Under the agreement, the ratings agencies, Standard & Poor's, Moody's, and Fitch would be paid for their ratings, even if they had no agreement with the security issuer or underwriter. This will presumably increase their independence because they will no longer have to compete for the business. Such competition is supposedly bad because it leads the rating agencies to shade their ratings to please their customers. Now the customers will be forced to pay everyone.

Wall Street Journal article is here; New York Times article is here.

What a deal! Competition is reduced, if not eliminated. It doesn't matter if another ratings agency has a reputation for greater objectivity, or more technical competence -- if I provide a rating, I get paid. And another provision of the agreement requires public disclosure of the fees received by all ratings agencies -- now I know how much my competitors are charging. After we see everyone's prices on a few transactions, it will be much easier to gently lead prices higher, particularly in such an oligopolistic market.

What could Cuomo's office have been thinking? The ratings agencies have achieved results that they could never achieve under the antitrust laws. And they achieved this without even having to pay a fine. It is not at all clear from the Attorney General's press release what law they are alleged to have violated. Cuomo appears to simply have wanted to restructure the market. Cuomo's press release thanks the SEC for their cooperation -- doesn't anybody at the SEC have any understanding of competition, either.

TSA Adopts Another Dim-Witted New Policy

While being wanded at Hartford yesterday, I discovered that the TSA is apparently adopting another policy designed primarily to inconvenience passengers. The agent asked me to take off my wristwatch. When I said that was a new one, he said it was standard operating policy. When I suggested that it couldn't be because it never happened to me anywhere else in the country, including the trip to Hartford from DFW, he called over a supervisor, who put both my watch and my wallet back through the machine -- a slight penalty for the temerity of inquiring about a new policy. After my wanding was completed, she talked to the agent and then explained to me that it was a new policy that would be implemented in a few weeks, and that they were selectively practicing the new policy at this time. If this is correct, expect to take your wristwatches off every time you go through security.

This raises again the basic question why TSA insists on a uniform search policy matter no matter how unlikely a person is to be a security risk. Because of my knee replacement, I get wanded as a 70-year-old white-haired guy every time I go through security, just as thoroughly as a swarthy 25-year-old swarthy Mediterranean type. What a waste of time and money. My understanding is that Norm Mineta insisted on such uniform treatment, in part because of his background in a Japanese internment camp in World War II. However, he is long gone from DOT, and it is time to take another look at that policy. It is economically wasteful, and distracts agents from examining persons who would appear to be much more likely to be a terrorist. I am sure that there would be interest groups who would scream that any deviation from uniformity in search is discriminatory. However, in this instance, discrimination is entirely rational.

American fights back about Groundings

After American received such tremendous adverse publicity about the grounding of its MD-80 fleet last month, the truth is starting to come out -- the real culprit is the FAA, which change long-standing policy because of its fear of congressional criticism.

We all know what happened -- immediately prior to the American episode, the FAA was criticized by Congress because it allowed Southwest Airlines to keep flying 47 airplanes after missing FAA maintenance schedule deadlines for inspections of cracks in the skin. These claims were brought to the attention of the head office by two "whistleblower" FAA employees. See "Records: Southwest Airlines flew 'unsafe' planes.” The FAA proposed to fine Southwest $10.2 million. These issues were subject to a hearing before the House Transportation and Infrastructure Committee on April 3, 2008, at which there was substantial testimony that the FAA Principal Maintenance Inspector had too cozy a relationship with Southwest, and allow them to continue to operate the airplanes when, under FAA rules, they should have been grounded and inspected.

Having been once burned, the FAA determined to conduct "instant inspections" of a percentage of Airworthiness Directives directed to other airlines. In the case of American, they found that there were certain wires in the wheel wells of MD-80s that were not tied exactly is required by an Airworthiness Directive that have been issued in 2006. American was immediately forced to ground and inspect its MD-80s, inconveniencing 300,000 passengers. Under normal circumstances, the FAA and American would have worked out a schedule for inspections that would have allowed the airplanes to continue to operate and passengers to reach their destinations. But this is not possible in the politically charged environment after FAA was criticized for its alleged laxness in dealing with Southwest. It is not clear that the FAA ordered American to ground the fleet, but, since Southwest had just been fined $10.2 million, American really had no other choice in that environment.

In recent weeks, articles have begun appearing implicating the FAA for the tremendous disservice done to passengers by its failure to act reasonably in the case of American. On April 13, an article in the Fort Worth Star-Telegram noted that the FAA had been aware of the wiring problem since 2003, but had shown no urgency in adopting the Airworthiness Directive and in implementing a compliance schedule. American, in fact, had made the corrections to the wiring after Boeing issued a service bulletin, and long before the effective date of the Airworthiness Directive. Americans problem was that the Administrative Directive required modification of the wiring in a slightly different manner than had been required by Boeing in the service bulletin.

On April 19, a New York Times article entitled “Airline Faults Shifting Rules About Safety” noted American's concern that the agency was overreacting. It said:

But now the airline, which faces the prospect of more groundings in coming weeks as the Federal Aviation Administration broadens its sweep of inspections, says the FAA deserves much of the blame.

The agency has unfairly changed rules for how airlines must comply with safety orders, called airworthiness directives, and is making unreasonable demands about how much interpretation is allowed, according to engineers at American’s huge maintenance base here.

“We’re confused and frustrated,” said Greg A. Magnuson, lead engineer for MD-80 airframe and systems engineering. The F.A.A. has always given the company “latitude,” he said, for complying with directives by making small variations to resolve any contradictions or ambiguities. And now, those changes, which may be as simple as putting a bolt through a hole so it is facing forward rather than backward, are being highly scrutinized.

Finally, a Wall Street Journal article May 2, "FAA Takes Heat for Groundings", reports that American is set to allege in a report to DOT that its recent groundings could have been avoided if a tentative agreement between the airline and local FAA officials hadn't been reversed by headquarters. American will claim that FAA headquarters overruled local agency managers and insisted on a tougher enforcement plan literally overnight. Obviously, FAA officials in Washington have been spooked by the criticism it received over the Southwest matter, and wanted to avoid any further possibility that they could be attacked by Congress again. Rather than showing backbone, the FAA required the 300,000 passengers be severely inconvenienced.

We can now expect that the FAA will react with outrage against American, and defend itself by attacking American's compliance with the Airworthiness Directive. However, the tide is begun to turn, and the general public will recognize FAA's actions for what they were -- a cowardly bureaucratic response to avoid congressional criticism.

A Voice from the Past Wants Reregulation

Bob Crandall, former Chairman of American Airlines, wrote an Op-Ed column for the New York Times on April 21. His critique of current conditions is right on, and his proposals for improved infrastructure are reasonable, but some of his proposals for reregulation are way off base, and include ideas he was flogging twenty years ago.

His analysis of current conditions is concise:

“Our airlines, once world leaders, are now laggards in every category, including fleet age, service quality and international reputation. Fewer and fewer flights are on time. Airport congestion has become a staple of late-night comedy shows. An ever higher percentage of bags are lost or sent to the wrong airports. Last-minute seats are harder and harder to find. Passenger complaints have skyrocketed. Airline service, by any standard, has become unacceptable.”

He also correctly concludes that mergers such as Delta-Northwest are not the solution:

But the case for mergers is unpersuasive. Mergers will not lower fuel prices. They will not increase economies of scale for already sizable major airlines. They will create very large costs related to consolidation. And they will anger airline employees, who will perceive themselves to be hurt by the mergers.

Crandall believes that market-based approaches are not adequate to produce the aviation system that this country requires. He strongly supports the conversion to the Next Generation ATC system, and complains that Congress has not appropriated enough money to implement it promptly. In the meantime, however, he believes airline schedules at major airports should be reduced. Since airlines cannot unilaterally reduce flights without being placed at a competitive disadvantage, the only solution is for the government to limit flights to the level that the system can handle.

Crandall would also impose new financial standards on new entrants to ensure they have adequate capital. He notes that nearly 200 new entrants have disappeared since deregulation, after cutting prices in order to survive and imposing substantial losses on more solvent competitors.

Finally, he includes a laundry list of regulation that was at issue when he was running the airline, but which seem to have been long resolved – less reliance on offshore maintenance bases, stop the U.S. giveaway of access to the largest and most profitable market in the world, reform the bankruptcy laws so a carrier that files bankruptcy has to shut down, and binding arbitration of labor disputes. All these ideas may have had merit in the past, but the idea of implementing them now, with so much history since they were proposed, is simply not possible.

Good WSJ Column on Regulation Limiting Competition

The Wall Street Journal today has a good opinion piece by Clark Neily on attempts by interior designers to obtain state regulation. Their purpose is naked protectionism.

I think opinion articles are not behind their subscription firewall.

Regulatory Overkill

The Wall Street Journal today contains an interesting column, entitled Regulatory Overkill, by Alan H. Meltzer, professor of political economy at Carnegie Mellon University. He rebuts current claims that we need more economic regulation of financial markets, by noting several instances in the past 30 years where new financial regulation was met by innovative circumvention in the marketplace.

For example the Basel agreement of the 1970s required governments to create equivalent risk standards in all the principal lending countries. The agreement required banks to increase their capital if they increased mortgage loans and other risky assets. In response, the banks develop new instruments that moved risky loans off their balance sheets. He provides several other examples of similar marketplace responses. He concludes:

“Regulators and most politicians are good at developing rules and restrictions, but poor at thinking about the incentives that the market will face. If the incentives are strong, the market circumvents the regulation.”

DOJ approves Sirius/XM merger

The Department of Justice today issued a statement that it had closed its investigation of the Sirius -- XM Radio merger without taking action, finding that there was no evidence that the merger would substantially reduce competition. It found that the parties did not substantially compete with each other with respect to existing customers (because each customer has a sunk cost of the equipment he has installed in his car). With respect to new customers, the Department stated:

"For potential new subscribers, past competition has resulted in XM and Sirius entering long-term, sole-source contracts that provide incentives to all of the major auto manufacturers to install their radios in new vehicles. The car manufacturer channel accounts for a large and growing share of all satellite radio sales; yet, as a result of these contracts, there is not likely to be significant further competition between the parties for satellite radio equipment and service sold through this channel for many years."

Most important, it found that the market for retail competition was not limited to the providers of satellite radio. It said:

"In the retail channel, where the parties likely would continue to compete to attract new subscribers absent the merger, the Division found that the evidence did not support defining a market limited to the two satellite radio firms that would exclude various alternative sources for audio entertainment, and similarly did not establish that the combined firm could profitably sustain an increased price to satellite radio consumers."

The merger still has to gain the approval of the Federal Communications Commission.

DOT and European Commission to Conduct Joint Study of Airline Alliances

DOT and European Commission issued simultaneous press releases Tuesday announcing a joint study of the the competitive impact of Airline alliances. This is great news because the anti-competitive nature of airline alliances is well known -- otherwise, why would airlines have had to ask for antitrust immunity. Under immunized agreements, carrier such as Delta and Air France, or United and Lufthansa, agree on prices and schedules that they will operate on major transatlantic routes. DOT approved such agreements under the theory that the joint monopoly to major gateways would be disciplined by the effect of competition on other routes to Europe. There never was any proof to support this claim, and it is encouraging that regulatory agencies on both sides of the Atlantic will now examine the results.

The EC press release summarized the goals of the study as follows:

The European Commission and U.S. Department of Transportation (DOT) have launched joint research aimed at deepening their understanding of transatlantic air services. The research will explore the robust growth of airline alliances, the effect of alliances on airline competition, and possible changes in the role of alliances following the EU-US Air Transport Agreement. A final report summarising the main findings of the research will be published in mid-2009.

The wheels of the agencies grind slowly, but consumers can hope that they will ultimately result in increased competition on the Atlantic.

FCC Imposes Three Billion in Costs on Cell Phone Companies without Economic Analysis

The Federal Communications Commission has, with little advance notice, issued a new regulation requiring all cell phone towers, no matter where located, to have a backup power supply of at least eight hours. An Associated Press article today describes the regulation, the opposition of wireless operators, and a stay issued by the DC Circuit Court of Appeals pending oral argument, which is scheduled for May.

The rule results from the proceedings of an independent commission set up by the FCC to study communications problems that arose during Hurricane Katrina. The recommendation for backup power was one of many made by the commission and considered by the agency in a rulemaking proceeding. In July, 2007, the Commission issued a final rule in the proceeding instituting a nationwide regulation requiring backup power for cell phone companies and other communications providers. (72 F.R. 37655) Several organizations petitioned for reconsideration because the regulation violated the Administrative Procedure Act (72 F.R, 57879), and then filed petitions for review with the appellate court, when their claims were rejected.

The striking thing about the rulemaking is that there is absolutely no discussion of economics, even though the rule imposes enormous costs on the industry. The AP article notes that there are 210,000 cell towers and roof-mounted cell sites nationwide, and quotes one industry estimate that the per-site price will be up to $15,000. This suggests an outer range of costs imposed by the regulation amounting to $3,150,000,000. Some towers already have backup power, so the final results would probably not be this high. But, nevertheless, one would hope that an agency would undertake some economic analysis to weigh the proposed benefits against the costs of the regulation.

The proposed rule is also a nationwide bludgeon that does not seem necessary. There are undoubtedly some cell phone towers that overlap others. I recall looking at a tower map on the Internet with respect to my home in suburban Washington, and finding that I was within the range of five different towers. To all of these require emergency backup power? Moreover, there are many towers in rural areas where there would be relatively little damage from loss of service. Does every tower along Interstate 25 in northern New Mexico require backup power?

There is also no consideration of the relative risk of a natural disaster. There may be a risk of hurricanes along the Gulf and East coasts, and earthquakes on the West Coast, but the vast middle of the country is quite stable, with only occasional flooding and tornadoes. Only in Washington would a regulator think that a uniform national law is required.

SEC regulation created ratings monopoly

An excellent editorial in the Wall Street Journal today outlines the problems created by the SEC regulations that sharply restrict the number of ratings organizations. As the WSJ describes the history:

"Since 1975, the Securities and Exchange Commission has limited competition in the market for credit ratings by anointing only certain firms as "Nationally Recognized Statistical Rating Organizations" (NRSROs). A 2006 law has begun to lead to faster approvals of new entrants, but this follows decades of protection for the incumbent firms. The SEC went an entire decade, beginning in 1992, without allowing a single new competitor into the market".

The result is that the two largest ratings agencies, Standard & Poor's and Moody's, are involved in the ratings of well over 90% of corporate bonds. Of course, the price for such services is much higher than it would be if they were broader competition.

The SEC is apparently begun to study regulations that would have a more direct impact on investment policies of financial institutions. Rather than requiring investments in securities receiving certain ratings from the NRSROs, they are creating new descriptions of what they want financial institutions to do. One professor has recommended elimination of the whole NRSRO designation:

"NYU professor Lawrence White recommended elimination of the NRSRO designation at a Senate hearing last fall. He forecast the results: 'The participants in the financial markets could then freely decide which bond rating organizations (if any) are worthy of their trust and dealings, while financial regulators and their regulated institutions could devise more direct ways of determining the appropriateness of bonds for those institutions.' "

The ratings agencies are proposing other forms of regulation that would not do away with include increased competition. It will be interesting to see how the SEC resolves this rather arcane issue.

JFK Slot Limitations Protect the Rich

I have just been catching up on the JFK slot limitation rulemaking decision that was issued on January 15. I wondered at the time why there had not been more of an uproar among carriers who have fought so hard to eliminate the slot control rules over the years. Reading the decision provides the answer -- it does not really restrict incumbents, but protects them against new entry, particularly from Virgin Atlantic, which had wanted to expand JFK -- West Coast service. The major carriers were like Brer Rabbit -- oh please don't throw me into that briar patch of regulation.

At scheduling meetings called by the FAA, incumbent carriers withdrew a proposed 2008 increases in schedules and retimed the existing operations, but were not forced to reduce any current operations. The FAA describes this as follows:

During the individual air carrier sessions, American Airlines, Delta Air Lines, and JetBlue Airways, which together now account for approximately 75% of the total operations at JFK, withdrew the schedule increases that they proposed for summer 2008 during the airport's peak hours of3:00 p.m. through 7:59 p.m. They also retimed operations from those hours, in some cases below the levels that they operated during summer 2006. Other participants were agreeable to retiming some scheduled operations to reduce scheduling peaks and to produce a more efficient overall schedule. Because the summer 2007 schedules already exceed the announced targets during some hours, proposed new operations could not be accommodated at those times. The FAA offered alternative hours when the airport had capacity, however, to the air carriers seeking to retime previously conducted operations or to add new flights to their summer 2008 schedules.

Virgin Atlantic was the big loser, since its plans for operation were severely curtailed:

The FAA cannot accommodate Virgin America's suggestion that each air carrier

receive 30 operations at JFK during the peak hours. Because Virgin America, like all other U.S. and foreign air carriers, had the opportunity to add operations at JFK during the hours when they could realistically conduct them, it appears that their request more specifically seeks 30 operations during their preferred hours. As one of three major New York-area airports and a key international gateway, however, JFK is not a typical facility. During the summer of 2007, JFK enjoyed service from no fewer than 83 different U.S. and foreign air carriers. Of these, only four offered more than 30 daily operations at JFK. As an airport that is so significantly oversubscribed, it is simply impossible to grant every air carrier 30 operations at the times that they would prefer.

Thus, incumbent airlines continue to operate basically as they did before and are protected from new entry. The FAA did not seem to consider the basic question whether there should be any regulation at all. It simply assumed that passengers would choose not to be delayed, even if they have to pay higher fares. It never seemed to face the question of what was the appropriate trade-off between lower fares for consumers and schedule delays.

Why is the NAB fighting so hard?

The Orbitcast blog has an interesting article that may explain the NAB's ultimate goal in opposing the Sirius/XM Radio merger. In reading NAB's pleadings in the merger proceeding, I had noted references to the fact that Sirius and XM would have a monopoly on the spectrum used for satellite radio, and suspected but that was the real reason for its opposition. Now, Orbitcast has an article entitled "Source: Surrendering spectrum is the "end game," in which a source says that NAB and Clear Channel have been working towards the goal of forcing the merger partners to surrender spectrum.

I'm glad to see my suspicions confirmed. This is a good example of why you often can't take pleadings at face value in the regulatory process.

Sirius -- XM Radio -- Why Won't Anyone Simply Tell the Truth

The FCC has had the proposed merger between Sirius Satellite Radio and XM Radio under consideration for almost a year. As in the most major regulatory proceedings, parties and economists have filed numerous lengthy papers, and all parties have beaten the bushes for support from Congressman, trade associations, and local governments. Yet the proceeding is somewhat unusual in that the major arguments of both sides are based upon totally false premises. Rather than admit they are failing businesses, Sirius and XM have been forced to argue that they will provide superior service as a consolidated entity. Since this argument is of dubious validity, they have fallen back on a promise to provide a broader range of prices for consumers by breaking up each supplier's current single monthly price structure into various levels so that consumers could choose packages that would include fewer channels than they have now.

The arguments of the opponents, led by the National Association of Broadcasters, appear equally specious. In order to defeat the merger, they have to argue that there is a separate satellite radio product market in which Sirius and XM would obtain a monopoly. If this were true, there is no reason for NAB to even be in the case, since its members supposedly do not compete with the satellite broadcasters. Of course, this is not the case, and the market includes satellite radio, local broadcasters, iPods and Internet.

While the satellite radio providers may not meet the definition of "failing business" under the antitrust laws, it is clear that they are failing. The business model on which they were based in the mid-90s has been blown to smithereens by the iPod, and the availability of free local radio has restricted their ability to price their services to achieve a profit. If people want to listen to unlimited music, they can simply plug their iPod into the radio unit on their dashboard or in their home. The potential for satellite radio outside the automobile has been destroyed by the growth of the Internet, which has made hundreds of radio stations from all over the world available to individuals in their homes. As a consequence, the potential for satellite radio has fallen far short of initial expectations.

Both Sirius and XM have suffered enormous losses over the past several years:

Net Loss

($ millions)

Sirius XM

2004 $712 $615

2005 862 666

2006 1,104 719

In the first nine months of 2007, Sirius improved to a loss of only $399 million, while XM lost only $298 million in the first six months of its fiscal year. Sirius's accumulated deficit over its lifetime is $4.23 billion.

Why haven't they made the "failing business" argument? It may be that they don't technically comply with the antitrust definition, because they may have to show that they make good faith efforts to find other purchasers. More likely, they do not want to admit defeat because that would make it extremely difficult to raise enough money to limp along in business.

The product market arguments in opposition to the merger are equally specious. The applicant's argument was as follows:

As of December 31, 2006, XM and Sirius combined had approximately 14 million subscribers. One study predicts this will grow to 25 million by the beginning of 2010, and others have projected similar growth. Although satellite radio has proven to be an appealing and popular new product, the current 14 million subscribers pales in comparison to terrestrial radio’s approximately 230 million weekly listeners (and is also dwarfed by Internet radio’s 72 million monthly listeners). Both companies offer many channels of music and a range of other programming, including national and international news, sporting events, and talk shows. Both also offer consumers a variety of ways to access this programming, including in their cars, on their computers, at home, and in a portable capacity. Despite strong initial growth, satellite radio’s market penetration remains quite limited: A recent Arbitron study found that satellite radio accounted for just 3.4 percent of all radio listening, spread out among the approximately 300 channels that XM and Sirius combined currently offer. (Sirius -- XM Application, pages 22-23)

In response, the NAB said:

As the American Antitrust Institute has explained, terrestrial radio is not a substitute for satellite DARS. As a preliminary matter, it is important to recognize that terrestrial radio is not a single entity in the local markets in which each radio broadcaster competes. Rather, each local market consists of multiple terrestrial radio licensees competing vigorously with each other. With respect to channels and content, local broadcast stations (individually or collectively) cannot offer the hundreds of channels offered by satellite DARS providers. Nor can they provide geographically continuous service; each licensee serves a limited geographic area and there is no local radio owner with nationwide coverage. They also do not offer the range of out-of-town sports programming or niche programming offered by satellite DARS, and cannot offer the kind of risqué programming offered by satellite DARS, which is unconstrained by indecency regulation.

Moreover, it is significant that terrestrial radio is a free, rather than subscription, service. If satellite DARS and terrestrial radio were substitutable products, it would defy common sense for anyone to pay $12.95 or any other price if they could get an essentially equivalent product for free. Satellite radio subscribers may also listen to terrestrial radio but that is because it is always there for free as another, different or complementary listening option, not because the subscriber is “switching” from one substitutable service to another. As Sirius CEO Mel Karmazin has pointed out, “satellite radio subscribers are heavy listeners to radio in general, and spend even more time listening to AM/FM radio than they do satellite programming.” (NAB Motion to Deny, pages 13 – 14)

One can only say that the NAB argument is pretty weak. I know from my own experience as a Sirius subscriber that I listen to both satellite and terrestrial radio when driving around in my car. I listen to Sirius classical and country music stations, but switch to AM radio for talk radio programs, and to FM for a particular country music station that I like. Certainly, both satellite and terrestrial radio compete for my patronage. NAB is really arguing that satellite has different types of programs. However, the product -- radio -- is still the same. NAB seems to be arguing that, in order to be competitive, each local radio station would have to offer multiple channels. There is no basis for such a claim -- there can be dozens of radio stations in an area that, together, and offer a wide variety of radio programming.

In addition, free terrestrial radio would seem to be a pricing constraint upon satellite radio. Both satellite companies provide service that is worth $12.95 per month, but neither has been able to raise the price. Since both are losing such large amounts of money, you would think that they would be raising their prices in lockstep. Instead, both have stuck with $12.95 for at least a couple of years. If they raise that price much higher, they would probably lose customers who would cancel contracts and go back to terrestrial radio.

It will be interesting to see how FCC disposes of this case. It would be a much simpler proceeding if Sirius and XM would simply admit their financial difficulties.

[note: since this is my first substantive post,it is clear that I need to do more about font sizes and columns. I can only say that this is a learning process and offer my apologies.]

Introduction to this Blog

This is my first article in my first attempt at a blog. I am a retired airline regulatory lawyer with a lingering interest in my old line of work. I hope to use this blog to highlight some of the more egregious regulatory activities. I will not limit myself to the federal government, but will also try to include state and local activities.I am a firm believer in the law of unintended consequences, and will hope to analyze regulatory proposals or decisions in its lights. However, I will not limit myself to critical analysis of proposed regulations -- that would be too boring.

The dictionary definition of "Follies" is as follows:

1. A lack of good sense, understanding, or foresight.
2. 1. An act or instance of foolishness: regretted the follies of his youth.
   2. A costly undertaking having an absurd or ruinous outcome.
   3. Perilously or criminally foolish action.
   4. Evil; wickedness.
   5. Lewdness; lasciviousness.
3. follies (used with a sing. or pl. verb) An elaborate theatrical revue consisting of music, dance, and skits.
1. Obsolete
   1. Perilously or criminally foolish action.
   2. Evil; wickedness.
   3. Lewdness; lasciviousness.
   
   

While the definition will give me ample opportunity to discuss crazy regulations, I may also just watch the passing parade and comment on regulatory development at various agencies. I don't know where this blog will take me, but it should be an interesting journey.