Freeman

ARTICLE

Privatizing Airline Safety and Security

The FAA Has No Incentive to Perform

NOVEMBER 01, 2002 by PAUL A. CLEVELAND, THOMAS L. TUCKER

The events of 9/11 underscore the importance of improving the safety and security of air travel. The government’s response to the terrorist attacks employs a command-and-control approach. That approach ought to be questioned. After all, it was the Federal Aviation Administration’s system that failed on 9/11. Why should we expect additional controls to be more successful? Are there other choices?

Among potential options, Robert Poole has long proposed privatizing airline safety and security through the insurance industry.1 The financial risks involved provide the insurance companies incentives to regulate the airlines effectively and efficiently without imposing costly rules that serve little or no purpose. Competition and entrepreneurship would then shape the evolutionary development of air safety and security, rather than politics and monopoly bureaucracy. The fallacies in the command-and-control approach show why private security should be adopted.

To expose those fallacies we can examine the FAA’s own strategic plan for 2001.2 The introduction states, “The Federal Aviation Administration (FAA) consists of nearly 50,000 people dedicated to improving the safety, security, and efficiency of aviation and commercial space transportation in a way that protects the environment and national security.”3 Among the values it claims to respect are timeliness and accountability. It also asserts that it is “the leading authority in the international aerospace community.”4 This raises some questions.

First, what evidence can the FAA provide to support that assertion? The security failure of 9/11 stands as a major piece of evidence against it. In addition, the claim ignores all the knowledgeable people who actually work in the industry. It is unclear from FAA documents if the agency recognizes the value of these experts. If officials disregard those authorities, is it because the officials are in a better position to judge the measures most needed to secure the skies? If not, then their claim to being the ultimate authority on air safety, security, and efficiency is sheer arrogance.

Second, how were FAA employees held accountable for the security breach that led to the tragedy? Apart from some bad press initially, the institution and its personnel experienced few bad consequences from those events. On the contrary, Congress expanded the agency’s bureaucratic control. Thus the FAA actually prospered in spite of its failure. This would seem to call into question whether the agency’s commitment to accountability has any significant meaning. The question arises, to whom are officials of the FAA accountable?

Third, why should anyone believe that the institution is committed to respecting other people? The agency certainly showed little respect for pilots when it prohibited them from being armed in their aircraft. This rule treats pilots as irresponsible individuals who cannot be trusted with such weapons.5 Had the pilots actually carried firearms, it is unlikely that the hijackers could have succeeded with only box cutters. The pilots at least think so, since their union advocated lifting the gun ban. The FAA and the administration initially denied this request.

These questions can be easily answered when one realizes that the FAA and its workers are not liable for failure. The agency instead is rewarded.6 Those who have suffered losses have no redress.

Discovery and Innovation

The problem with the command-and control-approach to securing air travel is that it ignores the market process. Austrian-school economists have amply explained why, because of the “knowledge problem,” central planning does not work. The knowledge problem consists of people’s ignorance of all the factors related to their situations. While private market activity can readily overcome the problem through the use of the price system, central planning cannot.

Israel Kirzner has explained that the price system eases the knowledge problem not because prices embody accurate information, but rather because “disequilibrium prices . . . offer pure profit opportunities that can attract the notice of alert profit-seeking entrepreneurs. . . . To the extent that central planning displaces the entrepreneurial discovery process, whether on a society-wide scale of comprehensive planning or on the more modest scale of state piecemeal intervention in an otherwise free market, the planners are at the same time both smothering the market’s ability to transcend the basic knowledge problem and subjecting themselves helplessly to that very problem.”7

With this in mind, we can compare a private system with a command system for promoting air safety. To begin, perfect safety and security are not attainable by any arrangement. However, the security produced by the command system most likely falls far short of what a private market system could accomplish.

A private system would have important incentives enabling it to evolve better security practices. The reason for this is twofold. First is the liability exposure of airports, airlines, and insurance companies. While some measures may fail, such failure would prompt decision-makers to look for other options. Entrepreneurial activity would inevitably result in the development of better and more cost-efficient means of securing air travel.

Beyond tort liability, passengers themselves would have a greater interest in identifying air carriers with the best safety records. This would likely give rise to information bureaus that would track airlines. In another context Daniel Klein points out why this would occur: “[H]ow much do I know about, say, therapies for ulcers? Perhaps very little. One thing I do know, however, is that I know little about therapies for ulcers. In fact, I am the world’s foremost expert on the topic of my knowledge of ulcer therapies. . . . Knowledge of our being ignorant is often almost as valuable as not being ignorant, because the knowledge of ignorance directs us . . . to overcome ignorance. Not having much information about ulcer therapies matters less than our judgment of whether we are well informed. Indeed, wiser is the person who is ignorant and knows it than the person who has some information and thinks he is fully informed.”8

As a result, there would be an opportunity for firms to fill the void with useful information that could enhance consumer judgment. The problem with government control is that it stamps an imprimatur on any airline flying, in a one-size-fits-all approach that leaves passengers with no choice but to choose to fly or not. Thus we can ask, “Is the government really a more knowing assessor of relevant tradeoffs involving hazards, a better steward of knowledge, a speedier, more pointed, and more opportune messenger?”9 As the late Aaron Wildavsky wrote, “Safety results from a process of discovery. Attempting to short-circuit this competitive, evolutionary, trial and error process by wishing the end–safety–without providing the means–decentralized search–is bound to be self-defeating.”10

Benefits of Privatization

Past experience with private safety regulation through the insurance industry demonstrates its value. Poole shows how the National Board of Fire Underwriters (NBFU) established private inspection of U.S. fire departments beginning in the early nineteenth century.11 Insurance rates offered to fire departments were adjusted on the basis of compliance with the Board’s recommendations. Thus departments had ample incentive from the liability standpoint to adopt the best-known safety practices. The NBFU evolved into the Insurance Services Office (ISO), which continues to conduct detailed analyses of city fire departments to determine the practices that minimize liability. ISO develops ratings that are used by insurers to set premiums.

This same approach could be used in the airline industry. The FAA would be cut free from its bureaucratic setting, and, following Poole’s suggestion, insurance companies would replace politicians as the ultimate authority overseeing FAA actions. The agency would be responsible to the insurers, which would hire it to conduct inspections and oversee operations to determine acceptable risks. It could not hide behind its government affiliation if its policies failed to provide adequate safety in air travel. In other words, the FAA and its officials would be accountable since they could be penalized individually and collectively by its customers.

The value of this approach is that it replaces subjective and capricious political controls with clear market incentives for progress. Insurers would drive the organization to adopt policies that produce the best safety results. Furthermore, since the airlines are free to shop for the best insurance rates, all insurers would have a strong incentive to press the FAA to search for the best safety practices. Today FAA officials have no particular incentive to heed the insurers. The main interest of officials now is largely bureaucratic, and thus its practices are typically expedient. This does not translate into the best policies because there is no financial consideration.

A privatized organization would likely adopt the latest technology, where the value relative to cost was demonstrable. Moreover, it would operate efficiently because of its need to generate revenues from private insurers.

Currently, the impact of politics is obvious in some regulations that make no sense. For example, there is a rule that forbids airlines from pushing away from gates until all passengers are seated. This rule seems laughable given that buses and trains routinely let passengers make their own decisions about taking their seats. Before the rule was adopted, Southwest Airlines (noted for its on-time performance) regularly pushed away as passengers were finding seats. They were only required to be seated before takeoff. No one was ever injured. After the new policy was imposed in 1986, at least 4.2 minutes was added to each turnaround, costing Southwest at least $150 million in 1994.12

This regulation could be imposed only in a political process. Given the record, it is not likely that a private insurer would be concerned with the minor risk exposure of relaxing this rule.

Opponents of privatization have several concerns, such as what would happen in a crisis if the FAA were private. This is not really an issue. Initially, nothing would have been different on 9/11. The government would have grounded aircraft because of the national emergency, and a private system would not have obstructed that decision. In fact, both United and American, the two airlines whose planes were used in the attacks, grounded their fleets before the government’s order was issued.

Opponents also raise concerns about bribery and corruption within a private clearinghouse for safety rules. But, this too is a non-issue. Corruption is a threat for all human institutions, “public” or private. Both the historical record and economic logic indicate that private organizations are generally less corrupt than government agencies. Private organizations that provide advice about product quality, such as Consumer Reports and Moody’s, depend on their reputations for their existence. If it were revealed that they had been bought off in order to secure a favorable judgment, consumer trust would be shattered and their operations would be jeopardized. That’s a strong incentive to stay honest. However, that is not the case with government officials and bureaucrats. While bribery might prove disastrous to some individuals in the public realm, it does not generally damage the institutions even where bribery is rampant. As a result, corruption and bribery flourish far better in the public sector as compared to the private sector.

Arthur Andersen vs. the FDA

The experience of Arthur Andersen is instructive. Andersen’s fate appears certain given the heavy losses suffered because of the accounting scandals. At this writing, the company is probably finished because liability issues loom large and clients are taking their business elsewhere. Compare this with the scandal involving the Food and Drug Administration (FDA) in 1992, when numerous employees were found accepting bribes to facilitate the approval of certain generic drugs. Rather than leading to the collapse of the organization, the agency received a budget increase to help solve its corruption problem. Moreover, then-FDA commissioner David Kessler was the only Bush appointee to be reappointed by Bill Clinton. A private company involved in such a scandal would probably not survive. But even if it did, its top executives would be fired for allowing such behavior to occur. Evidently, in government corruption is a key to success.

Beyond this example, it can be maintained that public authorities generally are more corruptible. Consider the FAA’s reaction to the 1996 crash of a ValuJet airplane. At first, the agency backed the company, but then abruptly abandoned this position by grounding the airline’s entire fleet. That led to the demise of the firm even though subsequent information revealed that the company’s liability was negligible. While details are sketchy on why the FAA changed its stance, there are some interesting political facts. ValuJet was a non-union airline. The crash occurred in a presidential election year, and the labor unions supported President Clinton. While this may all be coincidental, it seems fair to note the incentives politicians and bureaucrats have to gain from corruption.

A final concern opponents raise is that in a privatized world different firms may adopt different safety strategies. While true, it is also true that the airlines have more incentive to adopt strategies that will achieve the greatest safety at least cost. It is unlikely that one firm’s policies will vary wildly from those of other firms unless they are clearly superior. An airline’s track record is crucial in gaining the confidence of customers and securing insurance against liability. The benefit of privatization is that any advancement that can improve safety per dollar spent will be adopted by other air carriers quickly. Under government control, such changes are likely to take ages to bring about.

Paul Cleveland is an associate professor of economics at Birmingham-Southern College and an adjunct scholar of the Center for Economic Personalism. Thomas Tacker (tacker@erau.edu) is a professor of business at Embry-Riddle Aeronautical University.


Notes

  1. 1. Robert W. Poole Jr., “Toward Safer Skies,” in Instead of Regulation, ed. Robert W. Poole Jr. (Lexington, Mass.: D.C. Heath and Co., 1982).
  2. 2. “FAA Strategic Plan,” Federal Aviation Administration, Washington, D.C., January 2001.
  3. 3. Ibid., p. 7.
  4. 4. Ibid., p. 9.
  5. 5. For an excellent discussion about why such rules amount to a frontal assault on human dignity, see Daniel B. Klein, “Liberty, Dignity, and Responsibility: The Moral Triad of a Good Society,” The Independent Review, Winter 1997, pp. 325-52.
  6. 6. For a complete treatment of the process by which crises give rise to government expansion, see Robert Higgs, Crisis and Leviathan: Critical Episodes in the Growth of American Government (New York: Oxford University Press, 1987).
  7. 7. Israel Kirzner, The Meaning of Market Process: Essays in the Development of Modern Austrian Economics (London: Routledge, 1992), pp. 160-62.
  8. 8. Daniel B. Klein, “Quality-and-Safety Assurance: How Voluntary Social Processes Remedy Their Own Shortcomings,” The Independent Review, Spring 1998, pp. 549-50.
  9. 9. Ibid., p. 546.
  10. 10. Aaron Wildavsky, Searching for Safety (New Brunswick, N.J.: Transaction Publishers, 1988), p. 288.
  11. 11. Poole, pp. 231-32.
  12. 12. Robert Kneisly, Samuel Fairchild, and Audrey Spolarich, “The Case for Regulatory Sunset,” Handbook of Airline Economics, ed. Darryl Jenkins (New York: McGraw Hill, 1995), pp. 217-18.

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