Working Within the System
An interview with Sam Peltzman
INTRODUCTION
In the midst of growing statism and diminishing areas of freedom, there exist individuals with insight and influence who are critical building blocks in working toward the free society. It is one of REASON's functions to present such individuals to its readers.
This month, REASON presents its interview with one of the country's bright young free-market economists, Sam Peltzman. Professor Peltzman is an associate professor of economics at UCLA. He has previously served as visiting professor at the University of Chicago (1968-1969) and recently took a year's leave of absence from his UCLA post to serve as Senior Staff Economist for the Council of Economic Advisors (1970-1971).
Professor Peltzman has published in such professional journals as AMERICAN ECONOMIC REVIEW, JOURNAL OF LAW AND ECONOMICS and the JOURNAL OF POLITICAL ECONOMY and he has co-edited, with UCLA professor J. Fred Weston, PUBLIC POLICY TOWARD MERGERS (Goodyear, 1969). He is a member of the Mont Pelerin Society, an international organization of influential free-market advocates.
Professor Peltzman received his Ph.D. degree in economics from the University of Chicago in 1965, where he was also active as business manager and associate editor of NEW INDIVIDUALIST REVIEW, the prestigious journal of classical liberal thought published from 1961 through 1967. He received his B.B.A. in economics in 1960 from CCNY, and despite being transplanted to the West coast remains a diehard supporter of the Mets.
A libertarian, Professor Peltzman is particularly interested in the field of governmental regulation of business. Educated in the empirical tradition known as the Chicago School of Economics, he favors rigorous empirical testing of economic theories, in contrast to free market economists of the Austrian School, such as Mises and Rothbard, who are methodologically opposed to empiricism as a means of attempting to verify a priori propositions.
Peltzman's pessimistic prognosis concerning the demise of passenger train service does not reflect his genuine enthusiasm for passenger trains, which has led him to travel thousands of miles to experience rides on leading railroad lines.
Peltzman left his tour of duty with the Council of Economic Advisors on the eve of Nixon's imposition of wage and price controls, and he shares no culpability for the New Economic Program. His experience in Washington and his contact with the realities of political expediency are matters of special interest to those libertarians who supported the Nixon administration as a means of reducing the ambit of government control.
REASON editors Robert Poole and Manuel Klausner interviewed Professor Peltzman in his office overlooking the UCLA campus. The discussion ranged from his views of inflation and the New Economic Policy to pollution and transportation policy with many topics of interest in between.
REASON: What are your views of the Nixon new economic program?
PELTZMAN: I'm against everything but floating the dollar, and now that's probably about to go.
REASON: What do you see as the real cause of inflation?
PELTZMAN: Obviously, the expansion of the money supply that began in '64 and '65.
REASON: It's quite obvious that many libertarian and Chicago School economists have been saying that and appearing to demonstrate it…
PELTZMAN: No one in the profession doubts this anymore.
REASON: That's what I wanted to ask. No one in the profession doubts it and yet prominent economists, particularly those with links to the Democratic Party, come out and make statements in support of programs to hold down wages and prices as if such programs could control inflation. Why? How can they say that and hold any professional standing in economics?
PELTZMAN: Well, I'll tell you. Let me try to put what they're saying in the best possible light. O.K. The kind of thing they're saying is something like this: We've had a process which we will admit back in '64 and '65 was engendered by, and I will be eclectic, a rapid rise in government spending and an acceleration of monetary growth, you can put the weights on those two things, again depending on who you're talking to, but no one will deny that one or both of those factors started the inflation. OK, this thing gets going. It's gone on for a few years, the rate of inflation has accelerated from around 1% back in those days to on the order of 4%, 5% and sometimes 6% in recent years. If you're a businessman or a labor leader making a contract today you are going to expect at least more than 1% and why not 4% and 5% to continue on into the period in which you're making contracts so people begin on the basis of this recent history to build up expectations about inflation. O.K. So you get Nixon coming into office in '68 and '69 and he's going to stop inflation by the traditional method. So the Fed [Federal Reserve] cuts back on money supply, but wages and prices keep on rising.…Well that isn't the way it's supposed to work. When you get some unemployment, prices are supposed to stop rising. Well, after this goes on a while, the reason adduced for the fact that the policy isn't working is that people have these expectations about continuing inflation and they're continuing to make contracts on the environment of these expectations so that the only thing that the monetary policy does is to, at least in the short run, engender a lot of unemployment and it doesn't begin slowing down prices and you begin to realize that it's going to take a hell of a lot longer for those price expectations to be reduced than you thought, number one. Number two, you've got an election coming up in 1972 and you can wait around for those price expectations to be sufficiently revised. So what you've got to do is change those expectations, and putting the best face on the present policy, what you're trying to do is get people suddenly, and in one stroke, to become convinced that there's going to be less inflation. O.K. And if you can do that, you also reduce the unemployment because sellers of goods and workers no longer hold out for higher prices and wages. O.K. That's the best way that I can put the argument. The policy would have to be supplemented, if you're going to carry out an intelligent policy, by reducing the growth of the money supply, so that in the future you can take off the controls, people's expectations about inflation will have been moderated, there's no push from the monetary side to further inflation and you're where you want to be. All right, that's the way I would rationalize the present policy.
REASON: What would you view as the effect of catering to this psychology of business or of the public in trying to gear down from inflationary expectations?
PELTZMAN: The attempt to reduce these expectations by price controls?
REASON: Yes.
PELTZMAN: I don't think it's going to work.
REASON: Why not?
PELTZMAN: Because I don't think you get anything for free and in particular you don't change expectations at no costs which is almost what the NEP implies…that is, I can't think of any plausible reason why anybody should believe that monetary policy and fiscal policy in the future is going to be any different from what it was in the past just because you've gone through an episode in which you say prices shall not rise. So I think the more likely effect of these controls, to the extent that they're at all successful, when they're removed you're going to get the same, roughly the same rate of increase in prices that you were getting at the time of their imposition unless monetary and fiscal policy is changed.
REASON: Doesn't this say then that the policy makers realize this, they'll decide that you can't really remove the controls?
PELTZMAN: You have to make a guess. I would say yes, there's a good chance of that—yes.
REASON: What about the controls themselves as ameliorating the effects of inflation, assuming you don't have the reduction in the expansion of the monetary supply?
PELTZMAN: I said I don't think they're going to work. Perhaps I should have said that I don't think they're going to work in the large. They will surely have substantial effects in particular areas. For example, I think that the government can make the price indexes show less inflation by selecting the areas in which controls will be applied forcefully. But I think that in the real sense the rate of inflation won't be very much affected by the existence of controls.
REASON: Aside from credit expansion as a factor leading towards the high rate of inflation, might the fact that money might be in circulation with a higher or lower rate of exchange or turnover be a factor?
PELTZMAN: Oh it could. There's no doubt that it could. But I don't think there's any evidence that changes in the velocity of circulation have contributed at all to what's gone on in the last few years. In fact they've damped it. The rate of growth of velocity was on the order of, given the conventional definition of the money supply, 3% a year or so up until about '67. Since 1967, that growth rate has been only 1 or 2% a year, a factor which by itself tends to reduce the pressure on prices.
REASON: You alluded before to increasing government spending as a factor in causing inflation. What role would you say has been played by the costs of the Vietnam War on the present inflationary crisis?
PELTZMAN: I would say that the role is substantial but indirect. That is, I don't think that the increase in government spending as such touched off the inflation, I think it's the way the monetary authorities reacted to that. Specifically, a significant part of that increase in government expenditures was financed by money creation. And it is this unusually large increase in the money supply to which I would directly attribute the inflation.
REASON: To look at it from another perspective, would you say deficit financing would be an influence leading towards inflation?
PELTZMAN: No, not generally. If you finance the deficit by drawing funds from the capital market rather than by creating new money, you would not have had the inflation. You would instead have had a more rapid raise in interest rates for some period of time. But since the government's sale of debt would have drawn funds away from other borrowers, the aggregate demand for goods would not have increased, and so there would be no net inflationary pressure.
REASON: Political references have been made to "Nixon's recession." Do you care to comment on whether or not Nixon's recession is an accurate characterization because of his monetary and fiscal policies?
PELTZMAN: Well, yes. First of all, you know, the making of these policies is rather complex. For example, the effect the President has on the conduct of monetary policy is rather indirect, but I think it's accurate to say that the initial thrust of Nixon's economic policy was complemented by Federal Reserve monetary policy, that much is accurate, and I think that that monetary policy did certainly contribute to the '69 recession. Sure.
REASON: On one side of the political spectrum AFL/CIO has charged that Nixon with his wage/price controls is leading the nation towards dictatorship, and on the other side Paul McCracken has said that general wage and price control would be a serious threat to individual freedom. What's your personal reaction to the effect of wage/price controls on the freedom of Americans?
PELTZMAN: I think you have to break that into two parts. One, you really have to make a guess on the degree of enforcement. Suppose you had wage and price controls that were really enforced, whatever that means. The law said a price shall not be above a certain level and you got put up against the wall if you violate the law. Obviously, if Nixon did that kind of thing, I would have to agree with both of those statements. But there's another question you would have to ask yourself: what in fact is the likely course that these wage and price controls are going to take—and here I'm uncertain. Sometimes I tend to think that the whole thing will just break down or get changed very quickly. Sometimes, I think, as I may have mentioned before, that they will be seen not to work and the response to that will be not to liquidate them but to strengthen them. I have to say that the history of efforts, non-wartime efforts, in the direction of control, has tended to be the former, that they just tend to disappear and in that sense it's a game we're going through, an expensive game and an unfortunate one, but one that won't have any important long-term costs.
REASON: Would you be aware whether…
PELTZMAN: But I'm not sure…I mean I'm not sure which way this thing is going to go.
REASON: Would you be aware whether the economists at UCLA would share your view, or do any of them condone Nixon's imposition of wage/price controls?
PELTZMAN: Well, ten of them have already sent a letter to the WALL STREET JOURNAL criticizing the policy. Yes, I would say that most of my colleagues, or at least a good number of them, would share my doubts about controls.
REASON: Another question on the wage/price freeze: Recently Herb Stein was appointed chairman of the Council of Economic Advisers, and every article that I've seen about his appointment said that free-enterprise supporter Herb Stein now has the task of making the controls work.
PELTZMAN: Yes.
REASON: First, to what extent was or is Herb Stein an avowed free enterpriser, and secondly…
PELTZMAN: What's an avowed free enterpriser?
REASON: Well, it's never defined so I'm not really quite sure but presumably someone who is fundamentally opposed to the idea of wage/price controls…
PELTZMAN: Oh, O.K. Fine.
REASON: Believing that policy should be such that the market makes these kinds of decisions, with government policies confined to a relatively small role and not interfering substantially in the economy. First question then, is Herb Stein of that sort, and if he were, how could he take a job of "making controls work"?
PELTZMAN: Now that's a damn good question. The first answer is that up until August 15 of 1971, the Council of Economic Advisors—and Stein—were on record as being opposed to wage and price controls. I left there August 13. So far as I know Herb Stein would be an avowed free enterpriser. However that's evading your question a little bit, but I…
REASON: He was a member at the time.
PELTZMAN: Yes. He was a member of the Council and from every contact that I had with the members of the Council they were uniformly opposed to wage and price controls up until August 15, 1971.
REASON: How do you account for the turnabout?
PELTZMAN: Well, obviously from what I am saying I don't think that the initiative came from the Council of Economic Advisors and more generally from Nixon's economic advisors as such. I have to speculate here, because I am not certain, but I think it was Nixon's own decision, a political decision more than a decision based on a sudden conversion from one economic point of view to another. And if it's any comfort to anyone, I myself am personally convinced that all the guys around me then, that is his economic advisors, don't really think very much of the policy of controls. So I think the answer to your second question is that when the decision is made, you have to accommodate to it or get out.
REASON: I guess the choice was either to resign and let the fellows who favor controls do it, or do it yourself.
PELTZMAN: That's right.
REASON: It's kind of like the choice between arsenic or firing squad, but do you feel better off having avowed free enterprisers running the controls, rather than people who were avowedly in favor of making them work?
PELTZMAN: I suppose I am, but I'm sort of glad I'm not there for what little I would have to do with it. I can remember when I first heard the freeze announcement, my first reaction was "My God, will George Schultz resign?" because I know he was the one who was most strongly opposed to it. Of course he hasn't and he's been a very important force in setting up the Cost of Living Council, getting the freeze accepted by labor and setting up Phase II, and I suppose, maybe it's better that you have somebody doing that who's doing it in the knowledge that this thing had better be a temporary thing, and that it's really not a good policy, but let's make the best of it, let's mitigate its bad effects. But I don't know, I'm a bit torn. In a sense I'm tempted to take a much more radical position and say, you know, to hell with all of that, let it sink in its own contradictions—but other times I'm sort of glad that the good guys are in there.
REASON: Maybe you could describe at this point, Sam, what your role was, your activity with the Council of Economic Advisors. How did you make the decision to go to Washington and what did you do, and what were your expectations, and what happened?
PELTZMAN: You're asking several questions. First of all, my decision to go there was really a spur of the moment kind of the thing. I was sitting here in my office and Paul McCracken called me up and said how would you like to come to the Council and spend a year on the staff of the Council. Well I had never considered the idea, but I said I'd think about it and sort of on the spur of the moment thought, well why not.
REASON: Did you have any prior contact with McCracken?
PELTZMAN: Prior to that, no—none whatsoever. In fact with none of the members of the Council.
REASON: What year was it that you were there?
PELTZMAN: The exact dates were from August 13, 1970 to August 13, 1971. I want that in the record—I was there not one day after August 13!
REASON: In what capacity did you serve there?
PELTZMAN: O.K. now. I was not supposed to worry at all about the kinds of things we've just been discussing. I wasn't going to help them on monetary and fiscal policy at all. The area that I covered there was government regulation of industry. Essentially those particular markets on which government policy impinged directly.
REASON: How many people were you a part of, roughly?
PELTZMAN: I was a senior staff economist, which means that I advised the Council members, and in fact in my area most of my work was involved with one particular Council member, namely the one who worried about regulatory policies. Incidentally Herb Stein at the time was the member who was handling the so-called macro policy, budget, monetary policy.
REASON: Who was it that you worked for?
PELTZMAN: Hank Houthakker was the one that I worked most closely with, although I had a lot of contact with Stein and of course McCracken, who would have to oversee both of these areas. But the kinds of things that I worried about were things like antitrust policy, the regulatory agencies. In particular I spent the bulk of my time on transportation policy and the Interstate Commerce Commission, that kind of thing, but also, there's the Federal Communications Commission, Federal Trade Commission, the Antitrust Division, etc. The other major area that I got involved with, since it's a now burgeoning area of government regulation, was pollution. Pollution regulation, the Environmental Protection Agency, that kind of thing. I would say most of my time was divided between the regulation of transportation and the regulation of pollution. Those were the two big problem areas that I covered.
REASON: What kind of expectations did you take with you in anticipation of this job? What sort of things did you think you might be able to accomplish?
PELTZMAN: Well, there are two separate questions. I personally, at the beginning, thought that I could accomplish very little by way of changing government policies. That expectation was rather amply fulfilled. What I expected to get out of it, was an intellectual enlightenment on the way the government works, and I think my expectation on that also was amply fulfilled—I found it an extremely interesting experience, especially the kind of problems that I was working with. I mean all the time you were at the center of problems that very powerful lobbying groups and Congressional blocks were extremely attentive to. You don't have a monetary policy lobby in Washington, but you damn sure have a trucking lobby there, and watching the way that group interacts with, say, the Department of Transportation and the Interstate Commerce Commission and the White House and us, the Council, I found this to be a terribly fascinating experience.
REASON: One of the fairly significant things that came out of the Council, during the time you were there, was a de-regulation plan for transportation, which has subsequently been introduced in Congress in a very watered down form. Did you essentially hatch that idea?
PELTZMAN: I wouldn't say I hatched it. I was as you might guess right in the middle of that whole exercise, from the very first day I got there and, thank God for small favors, I suppose, I'm happy that it has finally been sent to Congress.
REASON: REASON has been tracking that for many months.
PELTZMAN: I think it's good that at least it's moving along.
REASON: Even at the beginning I imagine the various lobbies got wind of it.
PELTZMAN: Oh yes. They knew what was going on, as soon as we did anything, sure.
REASON: Did they try to use a lot of influence that would prevent it from even being released from the Council as a proposal?
PELTZMAN: First of all, it was the product of an interagency group. There is a Cabinet Committee for Economic Policy which had a sub-committee on transportation and it was that sub-committee that I was working with. Houthakker was chairman of that committee. It was developing proposals for change in transportation regulations and of course the industries likely to be most affected got wind of it. Well to be perfectly blunt about it, most of the powerful lobbying groups were out to kill it from the beginning. The truckers and teamsters, as well as the barge people felt that things are just fine the way they are, so why change it?
REASON: Could you summarize the thrust of the proposals?
PELTZMAN: As they finally emerged?
REASON: Why don't you state first, how they started out, then how they ended up.
PELTZMAN: Well, first of all, to say how they started out, where did the Council want it to go? There was a lot of difference of opinion within the government as this thing evolved. Where the Council wanted it to go, of course, was toward a rather wholesale revision in existing transportation legislation. Our economic report says that we should have more reliance on competition. Well, I suppose that if you wanted to know what goal—where we wanted to go—we wanted to go as far in that direction as one could.
REASON: From a political standpoint.
PELTZMAN: Well no, when you say where did we want to go, forget the politics. I would say it would be substantially complete deregulation of transportation. That is, we wanted rates to be set in the free market, let entry and exit be unregulated, and that kind of thing.
REASON: That sort of far reaching thing would essentially abolish the ICC [Interstate Commerce Commission].
PELTZMAN: Yes. Yes. Perhaps not formally, but it would eliminate its most important powers.
REASON: And did it extend to the CAB [Civil Aeronautics Board] and some of the other regulatory commission?
PELTZMAN: No. Just as a matter of detail the Cabinet instructed us to break up our efforts into surface transportation first and then other forms of transportation. So we never got into CAB regulation at all. At that level, I mean; we got into it when policy questions came up that involved the CAB, but not on this effort, this effort was focused on surface freight transportation. Again although there was a rail passenger act—and the Council got involved in that—this committee was limited to surface freight transportation.
REASON: By "surface" you mean basically trucking and railroads?
PELTZMAN: Trucking, railroads and barges.
REASON: What did you feel brave enough or did the Council feel it was advisable politically to propose, and then what happened to that? How did that get modified?
PELTZMAN: Well, right at the start of the effort we very seriously, quite seriously discussed going all the way, let's take that starting point. I mean the transportation industry especially at that time itself wasn't in terribly great shape and the environment seemed right for at least thinking out loud about how far we could go and we took a crack at sort of going all the way. One of the notable advocates of complete deregulation, one of my colleagues, George Hilton, was a consultant to our effort. I would say that within the government, within this interagency group that was considering the problem there was nothing like unanimous agreement that we ought to go all the way but, from the Council's side, we were pushing that point of view and then we began of course modifying it, we looked over the edge of the abyss and shrank back considerably, given what's finally emerged.
REASON: You mean you shrank back seeing the legislative political problems, or because from an economic standpoint you had some qualms?
PELTZMAN: No. I think that from an economic standpoint, from that standpoint alone, the Council, myself, Houthakker, McCracken, you name them, anybody who ever got worried about this problem, never had serious qualms about substantially complete deregulation. Our qualms were about questions of equity and political feasibility. That is, we were not worried too much by the basic economic justification for deregulation, but rather by the kind of problem such as, is it really fair to deregulate entry in trucking overnight when Trucker X has paid for what he expects to be a perpetual right to enjoy a monopoly on certain routes?
REASON: Like taxi medallions in New York City.
PELTZMAN: Exactly. You know, should we do all at once or should we ease the burden a little bit, should we start small and then build up, that kind of thing. How do we time it? That was essentially the only kind of thing that…
REASON: Which in fact is a very complex and difficult issue.
PELTZMAN: Sure it is.
REASON: Where controls are so large and so ingrained.
PELTZMAN: Yes. I don't deny that these are important issues, but where we wanted to get to, I don't think there was any serious disagreement.
REASON: What sort of things really modified what your recommendations ended up aiming at?
PELTZMAN: Well, in its broadest sense, political realism modified it. From several sources. You had representatives for example, while we were discussing this within the government, you had the government agencies represented, who had, it would be fair to say, a better feel for the political lie of the land than we did. We're not really supposed to worry about political feasibility, although you very quickly do and you learn in that environment very quickly that there are certain things that you just don't tread on because they're not feasible but,…
REASON: When you say political feasibility…I have a general sense of what you mean but I really would like to hear it made more specific.
PELTZMAN: O.K.
REASON: Do you mean that it boiled down ultimately to losing campaign contributions from influential industry contributors?
PELTZMAN: I don't want to go that far because I never really knew, you know, how much the truckers were contributing to whose campaign, and how much the Teamsters and the Association of American Railroads were contributing to campaigns. No I wouldn't put it that way…it's simply what you think you can send up to Congress and have some chance of getting through. Those kinds of considerations.
REASON: But, that no doubt in turn would be determined by various contributors' lobbies…
PELTZMAN: No, not only that. It would be determined in part by that and in part by the constituency—even where they don't contribute directly, they vote or they organize the vote.
REASON: Certain industries have a lot of influence—and a lot of jobs—and might fear that they would be affected adversely by various changes.
PELTZMAN: Sure.
REASON: Perhaps it's implicit in what you've been saying already but maybe you could state specifically: do you have any overall view of the efficacy of government regulation in your area of transportation?
PELTZMAN: The efficacy of it?
REASON: Whether it's useful, helpful, desirable in any way?
PELTZMAN: Oh I think it's disastrous. Obviously. That's one of the reasons we went on this exercise…maybe disastrous is too strong a word. I think it's had very bad effects on the cost and quality of transportation. The extra costs are easily several billion dollars per year.
REASON: What about the area of pollution—what kind of activity did you have there specifically?
PELTZMAN: Well, that breaks down into a couple of areas. First, we were concerned with what general methods one ought to apply to the control of pollution, on a rather abstract level, supposing you were starting from the beginning, and we almost are starting from the beginning. Of course we did have such things as the Muskie Act that did set up its own institutional framework. But suppose you were starting from the beginning to set up a method to deal with the "problem" of pollution. What kind of system would one set up? What kind of a system of property rules would one set up?
The second kind of problem that we dealt with was on the more nuts-and-bolts level. Given the laws that are already in the books, given the way the thing is evolving, what's the best way of administering them? Again, if you read the Economic Report that I was involved with, we paid more attention to the first one—the general question of how one ought to deal with the problem, rather than how one ought to administer the laws that are on the books.
REASON: Was there a general conceptual approach that was taken in the Economic Report regarding how to deal with pollution?
PELTZMAN: Yes. The general approach that we took was that the problem existed because you had very poorly defined property rights in environmental resources and that this has led to certain ill effects, bad effects, pollution. Then, in order to mitigate those effects, the way to go was to define more clearly a set of property rights in environmental resources and define them in such a way that the property rights could in effect be exchanged in the marketplace. Rather than have the property rights defined from day-to-day by some government regulator in a way that would generate a lot of uncertainty and also a lot of inefficiency.
REASON: What about an application, for example, to water pollution. Would you envision carving out property rights in navigable bodies of water?
PELTZMAN: Well, essentially we offered two alternatives for a problem like that and maybe even three. One could go the way you suggested. That is, one could say O.K. look, dumping something into the water imposes damage. It's costly. It imposes a cost. The water isn't free anymore in that sense. How do we get people to recognize that it isn't free? Well you could say there will be some fixed maximum amount of pounds of waste that one can discharge into the water—1,000,000 pounds and divide by a million and print 1,000,000 certificates rights, property rights, entitling one to dump—each one allowing one to dump a pound per year or whatever into this river—this body of water and simply have the government auction them off—get them distributed and have them transferable.
REASON: This would be defined on a technological basis, sort of the carrying capacity of the water?
PELTZMAN: Well the number would be, yes. It would be defined on the basis of that level of water quality that you felt you wanted to attain. That's one alternative.
REASON: What was the other alternative?
PELTZMAN: Well the other alternative would be for the government simply to set the price. And say you can dump as much as you want at the going price.
REASON: Effluent charges?
PELTZMAN: Right.
REASON: What about a possible alternative of private ownership of navigable bodies of water. Was that also considered?
PELTZMAN: I don't remember how much of this eventually got in there. We did discuss privatization of common property as one method by which historically, the so-called externality problem is taken care of. And I think—I'd have to look this up—but I think we mentioned things like the new towns as an example of this kind of thing. Where we have one entrepreneur essentially buy title to the whole environment to internalize, or to make private, the kind of gains and losses that now go unaccounted for.
REASON: Have you or any of those people read Spencer McCallum's book on proprietary communities?
PELTZMAN: Not his book, but I'm familiar with his ideas. There's also a work by J.H. Dales, POLLUTION, PROPERTY, AND PRICES. He's an economist, but he writes the thing in a way that I think gets the point across to noneconomists.
REASON: Doesn't the present system tend to encourage pollution? For example, there's no cost to a person or industry which can dump its waste into an adjoining body of water and if he made any alternative system for distributing or getting rid of his waste it would cost him more than just dumping.…He probably would be opposed to any sort of changes.
PELTZMAN: Of course. Sure.
REASON: Has that part of the Council report received any better fate than deregulation?
PELTZMAN: Let's see. I would say not much better, again, there is a proposal that we discussed in that report that is winding its way through this torturous government process, that there is a commitment on the part of the Administration to support, namely a charge on sulphur oxides. That I think would be the only actual result.
REASON: There are problems with that proposal.
PELTZMAN: Yes. There's also some chance, and if it happens it will be more by accident than by design, that the administration will propose legislation—and may in fact have already done this—on ocean dumping, which, the way it's set up may permit the certificate kind of system to be implemented. The system's essentially one which requires a permit for dumping in the ocean. There's nothing in the legislation that I saw that would then prevent those certificates from being transferred. And, I myself was encouraged by the reaction that I got from the people in Washington to just simply leaving that ambiguity in—that is since you don't restrict it—it would require a positive legislative act to make the certificate nontransferable.
REASON: It seems that there were quite a few people receptive to market-oriented ideas—maybe there still are—in the Nixon administration. Do you think that this has had much of an effect on the whole course of the federal government?
PELTZMAN: Some. I myself was rather surprised and encouraged to find how large the number of people was, in rather high positions in the administration, who were market-oriented. Now that isn't saying a hell of a lot in that atmosphere because even the President himself has rather limited powers in a lot of these areas. I don't suppose that, if the President had gotten on television and proposed repeal of the Interstate Commerce Act, that its chances in Congress would have been overwhelmingly improved over what they would be if such a proposal were just floated by some Congressman at random.
REASON: Isn't this just because the structure is so complex and the agencies are so large and the rules are so…
PELTZMAN: Right. Yes sure, because the groups in whose interest it is to keep something like the Interstate Commerce Commission also have a strong incentive to know how the system works and to enter into a relationship with it that would prevent a disaster such as its abolition. Look, a lot of the legislation that the President has in fact come out very strongly for, hasn't done very well.
REASON: Sure. Some libertarians such as Murray Rothbard have argued that despite the presence of a lot of market-oriented people, that are brought in by Nixon's administration or by a similar administration—as opposed to the kind of people who would have been brought in if someone like Humphrey or Muskie had been elected, that despite this it would be better to elect the more left-oriented Democrats and let the internal contradictions of their policies trip them up eventually. What do you think of that? In view of what you said about the presence of all of these good people not having much effect, do you think it would make much difference had Humphrey and his type of people been in—would things really have been all that different at this point in time?
PELTZMAN: Well, there were two questions there. No I don't think that things would have been all that different up to the wage/price control thing. I think again the main difference there would have been that controls would have come perhaps six months earlier. There wouldn't have been that much difference. There would have been some difference in domestic legislation, but again, in what you eventually get in an area like transportation or even pollution, not much different. The first question is well, given that, should we even bother to make the effort? I'm torn there. I'm really torn there. Sometimes I'm tempted in that direction, but on the whole I would say no. I would say that the risk you run is too great. That if you—put aside Humphrey, I think what Murray's really talking about is somebody left of that—somebody that would really mark a departure from the middle of the road and put on controls and really mean it.
REASON: Someone who would appoint Galbraith as head of CEA?
PELTZMAN: Yes. That kind or even worse. I just think the risk in that is too great. But I'm tempted in that direction. And more so after spending a year in Washington.
REASON: That especially is what I wondered, whether that experience had changed your view on the chances for unraveling the intervention.
PELTZMAN: Sure. I've become more pessimistic. I was damn pessimistic when I went there but I became still more pessimistic that the system somehow can reform itself in ways that I think are desirable. I think though my net reaction to it is well, it's bad but you're not going to get much better. And I suppose Murray's braver than I am.
REASON: Do you think that the members of the Council of Economic Advisors or the staff are very ideologically oriented?
PELTZMAN: No.
REASON: Do you think that what free market commitment there is, is based on ideological or economic grounds?
PELTZMAN: If you're asking me about members of the Council then I would say that by and large the commitment is based on a view of what the most efficacious way of running a society is rather than any strong ideological belief in free markets—although I suppose there was some of that in all the people on the Council, but I think it's the first that's the much more important.
REASON: I wanted to ask a question on another subject. In your article in NEW INDIVIDUALIST REVIEW on the CAB, I noticed that in a number of places you used terms like "public interest" and "general interest", and I wondered if over the years, especially with your experience in Washington, with the lobbies and the various interest groups, using terms like that, whether you thought that terms of that sort really had any operational meaning, or whether they were just phrases that could always just be used politically to advance one's own cause. Do you think that there's any useful meaning to the term?
PELTZMAN: Do I think it's a useful term? Hmm?
REASON: Yes. Can "public interest" mean anything really definable?
PELTZMAN: Can I define what it means? I think so, yes. I think I can define it in a rather narrow technical way.
REASON: Could you do so?
PELTZMAN: Yes…well, I would define it in a way rather traditional for economists. When you're talking about a change of any kind such that I can make some people better off and no one worse off, I would say that's in the public interest. That's a change in the public interest. And I can conceive of situations of that character. Are you talking about the CAB? Eliminating the CAB and making certain side transfers—that would be in the public interest in the sense that everybody would benefit and nobody would lose—no exceptions.
REASON: Well of course it might be to somebody's detriment in the sense of people who have invested . . .
PELTZMAN: All right. That is, I'm saying that if you got rid of airline regulations, O.K.? There would be a series of gainers and losers. If somehow you totaled up the losses of the losers and you went to the gainers and you said I'm going to collect a lump sum from you equal to those losses as the price for making the change—that the gainers would say yes, go ahead and bill me and the losers would be no worse off. But it's in that very narrow sense that I would say it would be in the public interest.
REASON: Even…
PELTZMAN: No one ever does that, by the way.
REASON: But that's not what's generally meant by the public interest.
PELTZMAN: No. That's right. If one wanted to continue with that same line of discussion. What is generally meant—well, using that kind of definition, what is generally meant by the public interest when economists use this sort of conceptual framework is that you can make somebody better off without other people being worse off. Not that in fact you make those side payments that leave the losers no worse off. You see what I mean? If you somehow summed up the gains and summed up the losses, the gains would exceed the losses, but the losers would bear the losses.
REASON: More gainers than losers?
PELTZMAN: Yes.
REASON: That's the way it's supposed to be anyway—of course in many cases, even those who use it to allegedly mean that, in fact don't mean that.
PELTZMAN: I know.
REASON: It means the opposite. So in that sense, I think that it's a term that has almost lost any sort of legitimate kind of meaning…
PELTZMAN: I would agree, yes.
REASON: Getting back to transportation policy—what do you think of the government's Amtrak—the railroad passenger operation?
PELTZMAN: There is no sound reason for the government to subsidize rail passenger service, and I think it's unfortunate that it started to.
REASON: Was that one of the fights you lost?
PELTZMAN: Yes, we and George Schultz tried to get that stopped and failed.
REASON: Who was really pushing Amtrak and why? There isn't really that strong of a national rail passenger lobby as such.
PELTZMAN: That's right. The major force behind it in the government was the Department of Transportation, at least as I saw it. Like the Department of the Interior likes to have water projects, DOT wanted some tangible sign of their existence, and this was one of them—the rest of the administration was pretty much skeptical about the justification for rail passenger legislation. I can go into it but I don't really want to go into how the Department of Transportation—the mover inside the government that could get the thing through Congress and then get the President's signature on it—induced the President to sign it. I can only say that—and this was reported in the press so I'm not really revealing any secrets—that both the Council of Economic Advisors and the Office of Management and Budget urged the President to veto the bill. He didn't for a variety of reasons do that—as we saw it rail passenger service was very much like the buggywhip—a service that once was valuable and now wasn't worth its cost. The way to deal with that is simply to let it die. A lot of those who secretly agreed with us but supported Amtrak, argued that in fact that you had to have something like this, precisely to attain…
REASON: To kill it off.
PELTZMAN: Right. To kill it off.
REASON: How did that happen?
PELTZMAN: The Interstate Commerce Commission procedures were simply too slow and you had to somehow get a package through Congress—again there's a perfect example of this kind of political doublethink in which you say you were going to preserve rail passenger service but at the same time you'd cut it in half. In fact, that's what Congress did—they really did. They cut passenger service in half. But I guess as we saw it, once you got a government corporation running the service, and the inevitable, the continual decline of the demand for passenger service created financial problems for the corporation, the danger was that you would then convert the basic issue from one of "should we have rail passenger service?" to the question of "should we have a federal corporation go bankrupt?" And we were afraid that saving the government's prestige would be very costly. I think my estimate at the time was that the corporation as it was funded would have to come to Congress for supplemental appropriations, that it would have to go bankrupt without supplemental appropriations, within three years. Well, it's already happened within a year, so I was very optimistic. But the Department of Transportation was telling us that the thing would be profitable in five years. I don't think they or anyone else really believes that. We felt at the time that the best thing to do would be to let the railroads' losses mount, and the ICC, which was in fact responding to the losses at the time, would eventually have to simply grant more and more of the railroads' discontinuance petitions. We felt that keeping it in that kind of an arena would make it less likely for uneconomic passenger service to be perpetuated than would continual subsidization of the service by having a government corporation. But I don't know—it may fade out of the picture and I may be overly pessimistic. The losses are just so staggering that Congress may balk at keeping it up.
REASON: Do you see any future at all for the passenger rail service?
PELTZMAN: Very little. Very little, if any. There's a serious question about whether if it's not subsidized, whether there's any future for it.
REASON: What about the Autotrain concept where transit is provided both for passengers and cars?
PELTZMAN: That's intriguing. That may be one of the very areas where you'll have some—where there will be some supply. But think about the special circumstances that are required for the success of an operation like that—you've got to have a number of people going from Place A to Place B and who want cars, at place B. And plan to spend a lot of time there, so car rental is relatively expensive. Well that's going to knock off almost anything but vacation—seasonal vacation travel kind of thing. That is an extremely limited market. Passenger service may be viable in the Washington/Boston corridor although there are some doubts even about that, but it may be viable there because of the fixed cost involved in airplane travel—the question is how much quicker can it be made than bus travel at how much cost? And that's the real imponderable there. The Department of Transportation's own figures on their Metroliner experiment between Washington and New York show that it's breaking even on just its operating costs. Some doubt whether it's going to repay the capital costs of buying new equipment. If you allocated to passenger service any substantial part of those costs of running the line that are common to freight and passenger service, there is very serious doubt that it would ever break even. But if it will ever work, that's about the only case. Short distances, very high speeds, so you can offset the advantage of the airplane.
REASON: The alternative mode of travel is private cars or buses—highways, many of which are supported or funded by federal highway funds. Did you also consider the role the federal government plays as far as the national highway system?
PELTZMAN: Sure. But that doesn't bias things in favor of the rail passenger system at all. Not in any particular way. You know, the crude user charge that we have for the highways, the gasoline tax, even though it's crude, it's still a measure of what it costs, and that measure of what it costs for a car to go over a highway may even overstate it a little bit.
REASON: Not for freight though, to the extent you have heavy trucks…
PELTZMAN: In fact there—you have a completely different ballgame. A lot of stuff that moves over very long distances by truck, under a competitively organized regime may in fact move by rail—you may get a move back of some of that to rail. I was just talking about passenger service.
REASON: But then, wouldn't that make it easier for the passenger service to continue—if you could allocate costs. If you had more revenue coming in from shipment of freight?
PELTZMAN: It may make it easier for the Interstate Commerce Commission to impose a tax on the freight traffic to keep the passenger service up but it doesn't make it any more viable economically.
REASON: Well, I'm thinking as far as the allocation of costs for capital improvements or the capital equipment itself—if the passenger service could hold its own with respect to operating costs.
PELTZMAN: Yes. There's actually no question that the passenger service can't hold its own even on that very limited basis. You know the ICC figures for the last year before Amtrak showed that if you just took those costs—not even those costs which could be avoided in the long run if you went out of the passenger business—but those costs which are solely related to passenger service—just the guys who are driving the locomotives and the materials used up in providing passenger service—just count that and subtract the revenues and that's minus $200,000,000 last year! Amtrak got rid of half of the service and its loss is $170,000,000 this year. So the out-of-pocket loss is growing at a fantastic rate. Admittedly you're not going to cut off half the loss by cutting service in half, so it's an unfair comparison; it wouldn't automatically go down to $100,000,000. But you cut off a substantial part of the service, and the loss is almost back up to where it was before Amtrak got started with it—and growing at an enormous rate.