Friday, June 4, 2010

What is the right counterfactual

It's not always obvious and the obvious - no treatment versus treatment is not always right. This post on airline deregulation was a good reminder:

The catch is that all such economic comparisons must be counterfactual: they must show an improvement not with respect to CAB [Civil Aeronautics Board]-set fares of the late-1970s, but rather with respect to what reasonably competent regulation could have produced under the other circumstances of the deregulated era. ... If the comparison exercise is tough by the (inappropriate) historical yardstick thanks to declines in (average) service quality and the airline industry’s trail of fleeced stakeholders, then the counterfactual comparison is going to be tougher still thanks to a couple of factors that should have produced large declines in airline costs and hence fares even in the absence of deregulation.

The factors of note are a pair of technological advancements — the development of high bypass ratio turbofans suitable for shorter-haul airliners and the demise of the flight engineer’s job thanks to cockpit automation, both of which have origins predating deregulation — and the long secular decline in oil prices through the deregulated era’s zenith prior the crash of the 1990s stock market bubble.

No comments: