Why I don't believe the "airlines are kiling medium-sized cities" story

Tyler Cowen posted this in one of his assorted links:

http://www.washingtonmonthly.com/magazine/march_april_2012/features/terminal_sickness035756.php?page=all&print=true

I read it, and the economics make absolutely no sense. The conclusion
is close to the exact opposite of what should be happening.

Unless I'm missing something about entry barriers into new routes -
and even if starting a new airline is hard, there are plenty of
existing carriers, large and small, capable of taking on new routes
with ease - then why should any cities be substantively underserved?
If routes are disappearing, it's because the demand isn't there at any
price greater than variable costs to overcome the fixed costs of
operating. If the demand isn't there at any cost, then it's far less
likely that airlines are throttling cities, but instead that cities
are dying independently and airlines are adjusting to new economic
conditions. This could cause a vicious cycle, but airline
consolidation can't be the proximate cause. Instead, it means the city
isn't as dynamic as he lets on, or has commerce that isn't willing to
pay for plane tickets amidst rising oil prices, which aren't the fault
of airlines and mostly result from the explosive growth we've seen in
emerging markets the last decade (as well as some fun currency
manipulation from a number of Asian countries).

It's not hard to earn fares covering costs if people are willing to
pay more than average total cost to get from point A to point B. The
airlines have costs, the airlines have fares, and demand based on
those fares. Air travel is an insanely competitive industry, and also
a very data-intensive one, so if there's demand based on fares, there
will be service. The short answer is that if cities are losing service
it's because people aren't willing to pay to get to and from that
city. "Monopoly consolidation" doesn't seem to matter much here,
either - if the airlines were wildly profitable, then you could worry
about consolidation leading to the underservice of cities. But I don't
see a whole heck of a lot of monopoly or oligopoly power being
exercised when I look at airline financial statements. Do you?

On that note, there are a lot of digs at Wall Street that I don't
really understand - I guarantee you that almost nobody on Wall Street
has the slightest idea what airlines should do on routes to medium
sized cities, and most of them probably don't care. The vast majority
of them are creditors, thanks to the industry's debt load, and all
they care about is that they want to see airlines service their debt,
and that's it. This is almost exclusively based on profitable
operation, which means that in this particular case, Wall Street and
Airlines have the same incentives - serve everyone who can be served
at a profitable enough level to overcome the cost of capital. Equity
investors are not far off, except they also care about growth, which
is even better for these medium cities. If routes can be profitably
undertaken out of mid-sized cities, almost everyone on Wall Street
wants to see those routes served. So that anti-Wall Street commentary
seemed more geared to scoring cheap shot populist points, which makes
him sound much less reasonable and makes me trust his statements less.

I can only conclude that the author wants airlines to be forced to
serve cities unprofitably... but that's a handout from coasts to the
interior unjustified on any economic basis - it's highly inefficient
to take from growing, dynamic areas and give the money to stagnating
ones. It's also against the spirit of capitalism to force people to
invest in unprofitable routes, and is akin to expropriation of assets
belonging to airline employees, shareholders and creditors. In short,
that proposal is exactly the inappropriate behavior of government that
has led to the lobbying-based inefficient government we have today.

This isn't to say that the status quo is an ok situation, but if
you're worried about air service, you need to look at the source of
the problem. In this case, I think he's right to say that "high fixed
costs" reduce service to medium-sized cities as variable costs (mostly
energy costs) go up exogenously. But the solution to that isn't more
regulation. If you look at the real fixed costs in airline service,
much of them are regulatory based. Sales, IT, baggage handling,
refueling equipment, maintenance shops and hangars, terminal costs,
flight control fees, insurance and the planes themselves are to some
degree variable and to some degree fixed costs, and many of those are
micro-regulated to the nth-degree. While I understand the importance
of the safety-related parts of these, there are a number of "consumer
protection" components as well. Given your average flying experience,
it probably is protecting consumers to ensure that they can't fly. But
I'm not sure that's what the consumers want.

(By the way, incidentally, did you know that no more than 25% of a US
airline can be owned by foreign interests? That's close to completely
indefensible protectionism of domestic carriers and prevents foreign
companies - Virgin, easyJet, RyanAir, etc - from really investing in
America's air network and making it more competitive. Virgin
absolutely would if they could - they own the maximum 25% of Virgin
America. Maybe that's a first step... they'd be using American workers
and following American regulations anyway. It's no different than
Americans working in a Toyota factory.)

on the Buffett Rule

My brother asked me about the Buffett rule. This is what I responded.

The biggest problem with the buffett rule is that it's very hard to implement it in such a way that it doesnt smash small businesses in the face, because a lot of them end up taxed through the individuals that own them. so that's a major, major issue - if you want to reduce unemployment, you need small business healthy, and taxing them that highly is a poor decision.

even if that were possible to avoid, i dont see the point of a 30 percent minimum tax on millionaires, seriously. it would raise miniscule revenue because there just aren't enough millionaires. It would introduce a massive incentive discontinuity so that someone would work very hard to "reduce their income" (usually by deferring it) to under a million if they were just above it, and that's really inefficient. you also want people to be able to take risks with the possibility that if they pay off, they wont be smashed in the face - it's already asymmetrically awful enough to lose on a startup, why make it worse? and in general, why do you want to introduce disincentives to work for the most productive members of society (because, generally speaking, if you're paid a milion dollars a year, youre doing SOMETHING difficult to do or that's hard to replace).

it also strongly discourages immigration of talented people, because we would then have the highest corporate tax rate in the world AND a nontrivially high tax on individual tax, and you have to pay both... so someone who starts a good business would end up paying like 65%ish of what they earn, and that's not even counting state taxes. Some Americans just won't start businesses or expand theirs or work harder, some will leave, and lots of the type of immigrants we want won't bother moving here, they'll go elsewhere or stay where they are.

it's very populist, and everyone loves the idea that they can pay for themselves with "other people's money", especially when those other people, in their mind, "won't notice it's gone". I'm not sure it's very efficient for society, and I think the house republicans were right to block it.

and as far as warren buffett is concerned, i understand he's playing by the same rules as everyone else when he doesnt pay much in taxes, but if he objects to how little he pays, he's welcome to donate more to the treasury or the cause of his choice - believe it or not, the treasury does take donations.

hell - i really don't see the point of raising taxes at all on productive activity with unemployment as high as it is. I'm just not sure the Obama administration and the Democrats currently in Congress really make the connection between redistribution and slower growth/higher unemployment. It doesn't have to be that way, and it hasn't always been this bad, but that's how it is right now.