Economic Report of the President

sion relatively well. Although substantial losses are being experiencedby many carriers, most analysts consider the general condition of theindustry to be sound. Most importantly, substantial investment inmore fuel-efficient aircraft is continuing.Rising energy prices have caused a different problem for railroadderegulation. Federal legislation enacted in 1976 provided the railroadswith increased rate flexibility, but this initial dose of "deregulation"proved inadequate. In the meantime, the booming demand forcoal prompted the railroads to raise coal-hauling rates sharply. Thesehigher rates reflect the need to generate sufficient revenues to financelarge investments in additional coal-hauling capacity, but theymay also reflect some exercise of monopoly power. In any case, therapid increase in coal-hauling rates, and the fear of even more rapidincreases if the ICC controls were lifted, caused opponents of furtherderegulation to press for continuing ICC surveillance of coal-haulingand other bulk commodity rates. A compromise was reached thatpermitted a relaxation of the ICC's rate-approval authority on a prearrangedschedule. The railroads have been given significant freedomto alter rates to meet shifting market conditions, while rail usershave been given some protection against abuse of this freedom. Theresult should be better service and the substitution of coal for oilwhere lower total coal costs (including the cost of transportation)warrant.Unexpectedly sharp increases in energy prices are not the onlyfactor that has complicated regulatory transitions. Any unforeseen alterationin economic conditions can produce tensions. For example,the unprecedented swings in interest rates that occurred in 1980placed additional strains on the .already complex deregulation processof eliminating statutory differences between the various types offinancial institutions.This discussion leads to one conclusion. Inflexible transition pathsare likely to encounter problems, particularly if the period precedingderegulation is stretched out to protect the economic positions ofworkers, shareholders, or consumers. Flexible transition paths, onthe other hand, can allow industries to weather even large unanticipatedshocks by permitting innovation. Transition paths shouldtherefore be made as flexible as possible. Although the political difficultiesof doing so should not.be underestimated, it seems preferableto dismantle the regulatory barriers to efficient pricing relativelyquickly and to take separate action to provide compensation for capitallosses or to prevent windfall gains, if necessary.EFFORTS TO IMPROVE THE PROCESS OF SOCIAL REGULATIONWhile much of the economic regulation placed on the statutebooks over the years has been eliminated or substantially reduced,102