March 3, 1997

Competing airports

In "Clearing the Skies" (Winter 1996), John Campbell looks at the problem of congestion at Logan and underutilization at smaller airports nearby. Here is my view as airport operator in Portland, Maine.

I believe that there are 150,000 passengers each year who should be boarding their aircrafts in Portland, but are driving to Logan instead. Some choose Logan to avoid small turboprops or because it offers nonstop service to virtually every major U.S. market. But the main reason is Boston's often cheaper airfares.

Airport managers must explain to carriers why these Logan fares are not in their best interest. Large carriers do not have time to analyze our market, so we try to do it for them. Take, for example, Portland passengers traveling west on Delta and changing planes at their Cincinnati hub. This is high-yield, high-profit traffic for Delta, which contributes to their dominance of the Cincinnati hub and market. If passengers drive to Logan instead, they will choose a competitor 19 percent of the time. Both Delta and Portland suffer. If this leakage is allowed to accelerate, a downward spiral in Portland's air service might be triggered.

Thomas F. Valleau, Port Director Portland, Maine

More joy

Jane Katz summarizes the dimensions of discretionary spending in "The Joy of Consumption" (Winter 1996). But she approaches this by looking at what consumers "need" or "want," though business practices are equally powerful in their impacts. Tastes are an important determinant of consumption, but they may be created by the firms catering to them.

The Coca-Cola Company is a good illustration. This effective company made a place for itself in consumption statistics (and financial statistics -- with market capitalization near $150 billion) without benefit of biological or cultural need for its product, just a brilliant business strategy that contrived to make many people want to consume Coca-Cola and others to finance, bottle, and distribute it. Fashion cycles in women's clothing, athletic footwear, and many other products result from a complex interplay among firms as they design, advertise and promote, distribute, or pirate the product. Planned obsolescence, market segmentation, and brand extension also shape tastes and consumption patterns.

The relationship between consumer and producer influences is probably one of chicken and egg. Which is more important? While it is hard to be sure, my impression is that producers dominate the process.

Sidney Schoeffler, Principal, MANTIS, Inc. Boston, Massachusetts

Low inflation policy

I would like to thank Rebecca Hellerstein for her excellent survey, "The Impact of Inflation" (Winter 1996). One area that received little attention is the implication of low inflation for monetary policy.

Low inflation may make the conduct of monetary policy easier. Gone will be the noise caused by inflation and the confusion it introduces in individuals' decision making. But low inflation may also complicate policy. Monetary policy has had a clear objective over the past fifteen years lower inflation without undue cost in jobs and output. As the battle over inflation is won, the trade-off between output and inflation becomes more subtle. The Fed must thread the needle between inflation and deflation, between recession and expansion. Markets may focus more than in the past on subtle signals to gauge future policy, and the Fed may have more opportunities to become a source of instability. We saw a glimpse of this possibility in the recent response of asset markets to remarks by Chairman Greenspan. Greater transparency in the decision-making process may help, though it is not clear how much is possible. We should not complain too much, however. These are the problems of a successful economy.

Professor John Leahy, Economics Dept. Harvard University

Compared to what?

I am rather stunned by J. Bradford de Long's statement in "The Misfortunes of Prosperity" (Winter 1996) that, "Any previous epoch would take the current rate of growth as a miracle." This is a damaging misreading of American economic history. There is no equally long period since the Civil War in which the American economy has grown as slowly as it has since 1973. The principal reason is the extraordinary, persistent slow growth of productivity in the past quarter-century. While labor productivity -- output per hour of work -- grew at 2.25% a year on average since 1870, it has grown at 1% a year since 1973. Even those who plead that the data are mismeasured concede that such errors would largely understate historical data as well, leaving the productivity slowdown in place.

The result is that real GDP per capita is growing at .5% a year slower than its long-term average. To put that in perspective, if GDP per capita had grown .5% a year faster, the federal deficits of the early 1990s would have disappeared as tax revenues rose, and we would enjoy a budget surplus today of about $200 billion, enough to alleviate worries about Social Security and Medicare or to invest in badly neglected public goods.

No, we are not simply a spoiled people. We are living with new circumstances.

Jeffrey Madrick, Editor Challenge Magazine


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