Senator KENNEDY. Mr. Peck is our next witness, a former member of the Council of Economic Advisers.

Then Professor Noll, if you would be kind enough-Professor Noll received his Ph. D. in 1957, was on the senior staff, Council of Economic Advisers, through 1973, and senior fellow, and currently professor of economics at the California Institute of Technology.

Thomas Moore, would you come up? Mr. Moore is professor of economics, at Stanford University.

Mr. Peck, do you want to start?

STATEMENTS OF MERTON J. PECK, PROFESSOR OF ECONOMICS, YALE UNIVERSITY; ROGER G. NOLL, PROFESSOR OF ECONOMICS, CALIFORNIA INSTITUTE OF TECHNOLOGY; AND THOMAS G. MOORE, SENIOR FELLOW, THE HOOVER INSTITUTION ON WAR, REVOLUTION, AND PEACE, STANFORD UNIVERSITY

Mr. PECK. Yes, thank you, Senator.

I have a short statement I would like entered into the record, but I will not read it. The reason is that the testimony of the previous witnesses from the Department of Transportation, Council of Economic Advisers, the Federal Trade Commission and the Department of Justice have made many of my points. To read my statement now might seem to be preaching to the converted. Much of my statement would be cumulative.

I would like to indicate, however, that the economic literature in recent years has made two points: First, regulation is economically inefficient; it costs the consumer too much. Second, the solution to this inefficiency lies, in general, in more competition and less regulation to provide the consumer additional price and service options.

Those two points were made well, I think, by the preceding witnesses. Looking at their footnotes, I discovered an amazing fact. People do read economists' writings, and those writings are reflected in the testimony of the previous witnesses.

I would add three other points. First, we have all observed that airplanes fly half empty, and the numerous flights reduces waiting time but raises costs. A Yale student of mine, Michael Pustay, has calculated the value in reduced waiting time relative to the cost of more flights. He found that in 1969 the excess capacity flown, if waiting time is valued at $10 an hour, added about 10 percent to airline fares.

In transcontinental markets, it added even more to the costs. His results suggest the following conclusion: In 1969, the American airlines were flying the right number of flights for the $60,000-a-year man, to whom convenience matters more than cost. Everyone also was offered too many flights and too high fares.

Now I would like to turn to another point. I think congressional hearings are a highly desirable forum in which to raise the critical issue of regulatory reform. You mentioned earlier, Senator, the regulatory proceedings themselves as a way to change policy. I have appeared as an expert witness in regulatory proceedings. I have been impressed with the care and diligence of regulatory officials as well as their concern with the public interest. But I find the issues are too narrowly drawn to make regulatory proceedings a good place in which to examine broad issues.

I would add one final point made in my statement. I recall President Kennedy's transportation message of 1962, which was a forceful plea for deregulation. If one heard only the first day of the hearings on that message, with witnesses all in favor of it, one would conclude deregulation was going to come within a week or two. It turned out that the first day was not representative, and the legislation that accompanied that message did not do well in Congress.

It seemed to me then that President Kennedy's plea for deregulation was good economics. It may even be better economics today. Senator KENNEDY. Professor Noll.

Mr. NOLL. Senator, we have engaged in a little bit of collusive behavior of our own, and I think it would be more appropriate if Mr. Moore came before I did.

Mr. MOORE. Thank you, Senator. I would like to summarize my

statement.

My research and other research all on the question of regulation is going to point to the same thing: regulation produces waste, higher prices, and often poor service. My research has been in the area of ICC regulation, regulation of trucking in Europe, regulation of electricity utility rates by State Commissioners, occupationally sensing, and the regulation of stock market margin requirements. I might indicate my study of ICC regulations has indicated in 1968 ICC regulations inflicted costs on the American economy in the order of $3.8 to $8.8 billion. Today the figure would be considerably higher

I would like to turn to my experience in vestern Europe, which I have just come back from, studying the regulations there.

I found that regulation has the same pattern there as it does here. In those countries like West Germany, they have very strict regulations, and prices are much higher, almost 40 percent higher, than in free market countries.

England, for example, has deregulated trucking entirely, and it illustrated an appropriate one for this hearing because many of the same points that you were raising this morning and others raised about deregulation were raised about deregulating trucking. Professor Noll, who has argued that he would get predatory pricing cutthroat competition, monopolizing, services would disappear to small countries, safety would decline, but when they deregulated trucking, none of these things happened, prices did come down, but profits surprisingly enough were not appreciably affected. Service appeared to improve, their service to small communities, even in northern parts of Scotland, were maintained, and in fact improved under deregulation, and the safety record also improved. That was due partly to some additional statutes dealing with safety and trucking.

So that none of these things that are alleged to happen happened there. There is no reason to believe they would happen in the airline industry.

The second point that I want to make is that regulation as a process is inherently faulty. There is nothing that you could do, no rewriting of the statute, no appointment of better commissioners is going to do more than make marginal improvements. The regulatory process as it is developed must in fact emphasize the economic health of the industry. The regulators cannot tolerate major firms failing. Your hearings last fall indicated that the CAB was attempting to put a floor under charters.

Too, as your own report said, to maintain or increase the profitability that Pan Am-let me see had in order to help Pan Am with its financial problems.

This is inherent in regulation. Regulation also by its very nature in a competitive industry often results in the regulated not even getting the benefits, because price competition which others have talked about this morning has been eroding.

Roger Noll is going to elaborate a little more on this and the problems with the regulatory policy.

Mr. NOLL. Thank you. I, too, as Professor Peck, have a written statement that I do not intend to bore you with in completeness. I have given a corrected version to professor Breyer which I hope you will put into the record.

Senator KENNEDY. Yes. It will be included in the record.

Mr. NOLL. Since this is in fact a committee on administrative practices, I would like to focus on the way the administrative practices operate and what kind of efficiency effects they have.

I think, as judged from the testimony so far here today, economists and even lawyers and political scientists who have studied regulation have focused too much of their attention on performance of the industry and too little of their attention on the nature of the process itself. One is normally faced with a conclusion which says regulation of the industry is costing us a billion dollars, therefore, let's stop having fools, and incompetents, and politicians appointed and fix the whole thing up or they will say let's tinker with the administrative procedure so the procedure can be made better.

CERTAIN COSTS ARE INTRINSIC TO REGULATION

What I would like to give today is a view on why I think this is a mistaken view. I have known fine men on regulation commissions who came out after their term simply shaking their heads, not understanding why they weren't able to accomplish all the things they were hoping to accomplish when they went in.

The problem lies in the institution itself. There are a number of dilemmas in setting up an industry to control market behavior that are simply unresolvable.

COSTS DUE TO REGULATORY DELAYS

It first arises from incompatability of decisions, that make decisions with staff, that individuals are accorded due process, that decisions are based upon evidence, and that when someone raises an issue in a proceeding that is to be accounted for by the person making the decision.

It is inconceivable the kinds of power to redistribute wealth that inheres in regulatory institutions would be delegated to any bureaucracy without subjecting the decisions to judicial review and without giving affected individuals the right to plead their cases before decisionmakers.

To safeguard the rights of individuals against capricious and ar-) bitrary decisions of an agency requires establishing decisionmaking procedures that normally cause decisions on important issues to be protracted. This can create serious problems in three types of circumstances, when rapid inflation pushed costs up and firms cannot respond to cost increases by raising prices until a protracted regulatory review has been completed; when a technological development that would

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An example of what basically happens is that a few well represented groups, by virtue of the procedure of the agency, get to structure what the issue will be in the proceeding and they get to provide most of the information upon which the decisions will be based.

The outcome is best illustrated by the recent debate over the regulation of cable television.

The recent debate over the regulation of cable television is an illustrative case in point: The final regulatory rules were worked out by a coalition of broadcasters, cable system owners and program producers. While each of these groups cast their arguments defending their own positions in terms of the beneficial effects a system satisfying them would have on society at large, and while the FCC devoted some staff resources to investigating the stake of viewers in the issue, nevertheless the final compromise was hammered out exclusively by the wellrepresented special interests, and was adopted by the FCC explicitly because none of the three groups would appeal the compromise, legally or politically.