Essential Air Service Subsidies; J. Semmens

Since most of these points receiv ing scheduled service between 1968 and 1978 were also receiving subsi dies for this service, the decisive cri terion for future subsidy is a histor ical demonstration of previously unviable or inefficient air service operations. In other words, past waste serves as the justification for future waste. 587 588 THE FREEMAN October There should be no misunder standing of what is being subsi dized, though defenders of the pro gram do their best to disseminate misleading interpretations of the meaning of "essential air service." What is being subsidized is business and tourist travel. This program is not giving aid to the destitute. It is not feeding starving children. It is simply utilizing taxpayers' money to allow businessmen and tourists to pay less than the full cost of their transportation. The subsidy can be substantial. On one series of routes in New England it amounts to about $40 per passenger. In Montana, it amounts to $90 per passenger, in Arizona to $200, and in one section of Nebraska over $600 per passen ger.

This is unconscionable waste. What justification can there be for requiring that taxpayers finance some Arizonan's vacation to the tune of $200 or some Nebraskan's busi ness trip to the tune of $600? There is no justification. There is no reason why the users of air service should not pay the full cost of that service. Advocates of the subsidy point out, quite correctly, that requiring riders to pay the full cost will reduce the number of trips made. So what? There is nothing inherently bene ficial about air travel. Trips should only be made if the benefits out weigh the costs. This weighing pro cess is distorted when part of the cost is covered through an involun tary payment by a third party namely the taxpayer. More trips than would be justified by the benefits are taken because the user is not paying the full cost. This wastes scarce re sources and reduces the general welfare of the society.

Aware of the pitiful current oper ating results under the "essential air service" program, some of its proponents have sufficient gall to claim that the real problem is un dersubsidization. The CAB, they as sert, is too niggardly in its subsidy awards. If the CAB would only au thorize sufficient funds for larger aircraft and more frequent service, we could really develop the sched uled air service system. The sub sidy, these people assure us, is an "investment" that will payoff in the long run. These claims are unfounded and the reasoning is fallacious. By way of illustration, let's examine an ex ample from Arizona. Recent subsi dized service to Prescott has been performed with an eight-passenger Cessna 402 at a load factor of about 20%. That is, less than two passen gers per flight are enplaned or de planed at Prescott. Advocates of a larger subsidy argue that the small plane discourages many would-be passengers. To buttress their case they point out that enplanements at Prescott in 1968 were ten times greater than the most recent year 1981 ESSENTIAL AIR SERVICE SUBSIDIES 589 (6000 vs. 600). In 1968, a larger air craft and more frequent arrivals and departures produced more passen ger trips. Undisclosed in this sim plistic comparison is the fact that in 1968 the load factor was only 8%.

This is the equivalent of three pas sengers boarding the 40-seat air craft employed. Thus, in 1968 three of 40 seats were filled vs. two of eight in 1979. This example would appear a rather convincing demonstration of the inelasticity of demand for air service. No sane person could seri ously propose to add 30 seats in or der to fill one, and claim that this is a wise "investment." Investments that will payoff in the long run will be undertaken by private capital. There is no need for subsidy. Private firms are adequately familiar with start-up costs for new products and services. Firms have been known to sustain several years of losses in or der to build a market. In fact, the lack of willingness of a private busiSubsidies for Ghosts ness firm to engage in providing a service unless subsidized is a con vincing expression of the firm's be lief that there will not be a longrun payoff on their investment.

In the past year, the federal gov ernment has spent nearly $90 mil lion in subsidies for scheduled air service. This expenditure has in volved a coercive expropriation of funds from the general public in or der to finance inefficient and waste ful air service. The nation is ill served by this policy. The market place is well-suited to the task of selecting and funding in vestments that will increase con sumer choice and welfare. The "es sential air service" subsidy can only interfere with the market's ability to ascertain and meet society's gen uine needs. There is no reason for the retention, and ample justifica tion for the elimination, of this sub sidy program. Congress would do well to dispense with the "essential air service" program. i IDEAS ON LIBERTY IF the people of an overpopulated community are subsidized with grants from the outside, regardless of the purpose for which the money might have been intended, they will not be encouraged to move to greener pastures or to develop the resources of their own area; for in either case, they stand to lose the subsidy. Thus they are subsidized in partial idle ness in their old economic rut, and the nation is poorer for lack of the wealth which they might otherwise produce.

OSCAR W. COOLEY Perry E. Gresham Natural Uberty THE NAME of Adam Smith, long ne glected, has recently come back into fashion. The supply side economists all claim him as the great father of their ideas. In part they are correct, for Adam Smith pioneered the mod ern exposition of the division of la bor, the necessity for capital and the saving which develops it, the impor tance of liberty, the magic of the market, the role of competition and all the factors that go into produc tion. The new interest in the famous Scot, however, does not correct the false image which has developed the past two centuries. The irony of history has left us with a profile of Adam Smith which is both false and unfair. He was the friend and champion of the poor, yet Dr. Gresham is President Emeritus and Distinguished Professor, Bethany College, Bethany, West Virginia. His latest book, With Wings as Eagles, concerns the joys of aging.