Although the presidency of Jimmy Carter (1977-81) is widely regarded as a failure, the deregulation movement that was largely initiated during his term in office was and remains a very successful policy. This essay focuses on airline deregulation in particular. There are several reasons for this emphasis.

First, airlines were the first of the transportation industries to experience deregulation. Second, airline deregulation and transportation deregulation in general produced unambiguous benefits. In contrast, the benefits of financial deregulation initiated in the same period are much cloudier. Finally, the measures adopted were largely those proposed by the community of economists who had studied the performance of the airline industry. Indeed, the leader of the Civil Aeronautics Board in the initial stages of deregulation was Alfred Kahn, an economist who had quite literally written the book on regulation.

The context of this policy success was the unsatisfactory performance of the American economy during the 1970s due to "stagflation." The deregulation movement represented an attempt to remove microeconomic rigidities in the economy so that the economy would be less inflation prone. Although the current consensus appears to be that stagflation had monetary roots, eliminating these rigidities nonetheless represented an important step in modernizing the U.S. economy.

The essay begins by discussing two of the preconditions for the deregulation movement of the 1970s: the unsatisfactory performance, relative to recent experience, of the U.S. economy and the growing scholarly consensus in favor of liberalizing the existing regulatory mechanisms. Next I examine the process of deregulation first through administrative liberalization and later through statutory enactments. Then I detail the specific provisions of the Airline Deregulation Act of 1978 and outline the empirical economics literature regarding the effects of airline deregulation. (1) A brief conclusion summarizes what lessons may be learned from this policy.

Economic Performance and Microeconomic Rigidity

Economic regulation at the federal level first came to the United States with the passage of the Interstate Commerce Act of 1888, which was aimed at railroads. This legislation and the regulatory commission established in it created the template for subsequent federal regulatory actions. Economic regulation was extended to other transportation industries (motor carriers, interstate pipelines, airlines, etc.) during the 1930s. The postwar performance of the U.S. economy appeared to validate the mix of market and government regulation that emerged from the 1930s.

However, the postwar "Golden Age" stumbled to an end during the 1970s. For instance, none of the last five years of the 1960s had an annual unemployment rate higher than 3.8 percent, whereas no year in the 1970s had an annual unemployment rate of less than 4.9 percent. The performance of inflation was similarly dismal. Only 1972 offered an inflation rate (measured by the gross domestic product [GDP] implicit price deflator) that was lower than the worst inflation performance of the latter 1960s (4.9 percent in 1969) (U.S. Council of Economic Advisors 2013, tables B3 and B42).

This toxic combination of simultaneous historically high rates of inflation and unemployment earned the sobriquet stagflation. The so-called Phillips...