« A market-based apparatus might lead to better service and? — most important — safer air travel. »

USA Today
Airline security: Let’s go private
By Arnold Kling and Nick Schulz

After the underwear bomber’s attempted mass murder, Americans are losing patience with the airline security system. It is bad enough that our screening process makes innocent people work far too hard to prove that they are not terrorists. It also manages to make it too easy for actual terrorists to be treated as innocent.

President Obama said the security system failed « in a potentially disastrous way. » He’s right. So how can we improve it?

The security process needs several things it is lacking. It needs continuous adaptation, with a strong focus on satisfying customers and improving results. It needs to find new and better methods of meeting the demands of customers who value safety as well as speed and efficiency. It needs to function in a dynamic environment, disciplined by rigorous competitive pressure.

In short, it needs the market.

Keeping the focus: safety

Let’s stipulate at the outset that many details would need to be worked out and could be determined only after a market-concept is embraced. That said, here’s how it could work and why it would be an improvement over the status quo.

Responsibility for the design and implementation of airline security should be handed back to the private sector. But make no mistake: This system would look nothing like the pre-9/11 private system that treated terrorism like the distant threat we believed it was. The Transportation Security Administration (TSA) was created by Congress, after all, for one reason: The previous system failed catastrophically. But the attacks didn’t succeed because it was a private system. The attacks succeeded because — quite simply — we lived in a pre-9/11 world, one in which knives and box cutters could be carried aboard U.S. airplanes.

A post-9/11 market system would combine the benefits of a competitive system with the much-stricter federal oversight necessary to ensure a basic standard of travel security. Airlines would select firms to screen passengers who will fly on their planes. Let’s say that it would be up to each airline to contract with at least one security firm at each airport. The airline would pay the firm a set dollar amount per passenger, and this cost would be passed along through ticket prices.

Of course, security firms that offer low cost to airlines and low hassle to passengers would, all else equal, be able to win more business from airlines already looking to cut expenses. But if security companies are competing to keep costs and hassles to a minimum, what would keep security itself from becoming too lax?

Several incentive mechanisms, some of them market-based, would keep private sector firms focusing on safety. First of all, the flying public may show a preference for airlines that employ security firms with rigorous procedures just as today many drivers prefer safer cars that get lower gas mileage.

Second, if a private firm were to allow a single failure or even a near-miss, it would immediately lose the confidence of fliers. Airlines would switch to other suppliers, and the flawed firm would go out of business.

Security companies also could be required to be liable for damages up to, say, $25 million from terrorism, and to post bond to cover that liability. (It is harder to sue the government for damages than the private sector.)

The government’s role would include two functions. It would collect intelligence on high-risk suspects (as it does today) and share this intelligence with private airline security firms — which will require the firms to have robust data security. And government would audit private security companies, with the power to impose fines if lapses are found. The government could still ensure, for instance, that every firm at least meet the minimum standards that the TSA employs today.

The audits would cover data security (government intelligence information used by the firms and personal privacy must be protected); the design of processes for segmenting passengers according to risk; the design of screening procedures that are appropriate for each level of risk; and the implementation of those screening procedures.

The policies and procedures would no doubt vary for different security companies. But this is a feature, not a bug, because only through differentiation and innovation can new techniques emerge to meet evolving demands of safety and efficiency. For example, one firm might rely heavily on passenger interviews, as the Israeli airline El-Al is known for. Another firm might rely more on the latest scanning technology. Companies might vary their rules for boarding and carry-on luggage by passenger risk category — low-risk passengers could take their liquids and gels and keep their shoes on, while high-risk passengers would have to check such items or scan them.

Improvement via competition

We do not know what sorts of policies and procedures would emerge. The point is that good solutions are more likely to emerge regularly and consistently under a robust market dynamic than under government monopoly. Competition will force even the lowest-quality provider to raise standards year after year by adopting the good ideas that emerge from their competitors. This is why even a cheap automobile today has more amenities than a luxury car of 30 years ago.

What’s more, our national security establishment is increasingly seeing the benefits of competition. DARPA, the agency responsible for developing some of the military’s cutting-edge technologies, has instituted its Urban Challenge, which offers cash prizes to the private sector competitors who fight it out to solve technology problems. The notion of using market dynamics to meet pressing national security needs is not academic.

While most passengers don’t realize this, the TSA itself permits a handful of airports, such as Kansas City and Rochester, to use private security contractors under its Screening Partnership Program. But much more should be done to unleash a genuinely competitive market so that the benefits of competition — in terms of improved service and technological innovation — can be realized more swiftly.

No security system will be perfectly safe, of course, including a market-based system. And many changes would no doubt need to be considered, including to airport infrastructure. But the advantage of a market system over a « one-best-way » government monopoly is that the incentives to innovate and find new solutions for safety as well as convenience are sharpened and refined by steady competitive pressures.

Arnold Kling and Nick Schulz are the authors of From Poverty to Prosperity: Intangible Assets, Hidden Liabilities, and the Lasting Triumph Over Scarcity.