Jimmy Carter faced a tremendous economic problem throughout his presidency from 1977 to 1981 – stagflation. The incredible combination of double-digit annual inflation with economic stagnation and unemployment was the problem his presidency was meant to solve but didn’t solve. In 1980, Carter’s last full year in office, inflation exceeded 10 percent a year for the second straight year and the economy entered a recession.
In a key area, however, Carter presented his phenomenal rejection of stagflation, the great disinflationary boom of the 1980s and 1990s that began shortly after he left office. Carter was certainly the greatest deregulator of any president, including Reagan.
Carter was a zealous champion of his cause, and one of those was deregulation. He freed two industries of enormous importance, airlines and trucking, from strict federal regulations and set the stage for the equally imperative deregulation of industries, including phones.
In the 1970s, the blanket regulatory apparatus of the New Deal still dominated air travel and transportation operations. By the 1930s, in the face of deflation and collapsing profit margins, the government had become so paranoid that it guaranteed certain running businesses certain price structures and market monopolies. The experience of farmers not even being able to recoup their costs when farm prices plummeted in the Great Depression convinced President Franklin D. Roosevelt’s brain that federal guarantees were necessary to keep key engines of the American economy in business.
In the case of the airlines, the airlines only had route maps that were close to them and could not charge below a set high price. In the mid-1970s, airlines tried in various ways to invade competitors’ route maps and compete on quality as they were prohibited from price competition. Images of luxury planes serving prime ribs served by uniformed waiters are memes on the internet. However, to ask “look what they took from us” misses the point. Airlines subject to price regulation had to compete with what was left, which was quality.
As historian Thomas H. McCraw put it Prophets of Regulationhis 1985 Pulitzer Prize book: “By restricting economic competition, federal regulations encouraged greater competition in bells and whistles: fancier inflight food and drink, more movies, additional staff—all smaller forms of customer service.”
Trucking had a similar experience. Regulations dating back to the 1930s guaranteed certain airlines routes and healthy pricing policies. The heavily urban environment around 1940 limited the damage to this facility. However, when suburbanization began in the 1950s, the costs and bottlenecks became overwhelming.
Prior to Carter’s inauguration, there had been a bipartisan push to scrap these costly New Deal remnants. The Democrats generally went ahead. Senator Edward M. Kennedy of Massachusetts was a leader along with his assistant and future Supreme Court Justice Stephen Breyer. When Carter took office, he installed a chief deregulator, the colorful Cornell University economist Alfred Kahn, who was more than up to the task. Carter’s appointment of Kahn was a feat and a testament to Carter’s leadership abilities.
Kahn combined an academic’s understanding of the inefficiencies of regulation with an uncanny ability to deal with officials and officials in Washington and business leaders across the country. The deregulation of both industries, airlines and trucks, was completed by legislation introduced and passed between 1978 and 1980.
The incumbents in these industries occasionally tried to fight back, but even they were weary of the panicked Procrustian regulatory apparatus of the 1930s. One problem was that their unionized employees knew their pricing structure on file. This put management in a difficult negotiating position — the company couldn’t threaten to maintain its pricing power because the Feds guaranteed it. Meanwhile, all manner of venture capital amassed to break into these industries once the Roosevelt-era restrictions were removed.
Beginning in 1980, airlines could generally charge what they wanted and travel where they wanted. The same applies to freight forwarders. The big bang of deregulation happened the year Ronald Reagan took office. During the 1981-89 Reagan administration, the plans were implemented. Flying has been democratized like never before. Gone were the high prices and the prime rib to compensate instead of lower fares and lots of customers. Trucks criss-crossed the country, as befits a suburban and mobile nation, creating mega-success stories at companies like Wal-Mart and amazon.com.
In November 1980, the Reagan transition team’s infamous “Dunkirk” memo warned of a regulatory “tool-up” that would hit the nation. Some staffers were concerned that the Carter administration had built regulatory enhancements into the agencies that would come automatically in the 1980s. That fear was misplaced. Carter gave Reagan the phenomenal gift of deregulation. Combined with marginal tax cuts, most of which took effect in 1983, the economy experienced a slowdown in growth not seen since the roaring 1960s, if not the roaring 1920s. All the capital that Reagan freed up through his tax cuts found room to roam in the deregulated world Carter had created.
Why was Carter committed to reversing business regulation? Because he was embarrassed – and he rightly felt that deregulation would dampen inflation. He was also embarrassed by the tax law, its complexity, the immensity of its deductions and the falsification that existed in relation to the discrepancy between the rates reported and the rates actually in effect. He never came up with the obvious solution of lowering tax rates, save for a capital gains rate cut that was placed on his desk against his will. But he certainly deregulated. The story of the incredible disinflationary economic boom of the 1980s and 1990s is incomplete without Carter’s deregulation.
See our recent book on the history of income tax: Taxes have consequences.