Trends

DECONTROLLING ENERGY

Liberals are embarrassingly split these days on the subject of energy pricing. On the one hand are environmentalists and other elitists who favor slowing energy growth and see higher prices as a means to that end. On the other hand are populists like Sen. Henry Jackson and some consumerists, who see red at the very mention of higher energy prices and "windfall profits." Recent months have witnessed increasing confrontation between these two viewpoints.

Early in the summer the Ford Foundation released an econometric study on energy growth projections, claiming that the U.S. can—and should—achieve an energy growth rate of 1.7 percent per year between 1975 and 2000, compared with the historic 3.4 percent rate. The study's authors point out that the historic energy growth rate reflects the artificially low prices of energy over the past 20 years, held down by FPC regulation of natural gas prices, government subsidy of energy R and D, public utility regulation of electricity rates, etc. In real dollar terms, the price of electricity has dropped 43 percent over the past 20 years. Consequently, energy users have become increasingly wasteful, as is anyone else faced with a cheap, abundant commodity. Yet according to the econometric model developed for Ford by Data Resources, Inc., price is a much more effective way to curb energy demand than previously thought. Hence, a good way to spur energy conservation measures is to allow prices to rise to free market levels.

Many voices are being raised to urge just that, for both oil and natural gas. An American Enterprise Institute study by Robert B. Helms has called for complete deregulation of natural gas pricing. The FPC itself has recently increased the price for "new" (post-1972) gas to 42 cents per thousand cubic feet (mcf) from the old range of 20 to 34 cents, but this is still far below the $1.25 per mcf that unregulated intrastate gas (about half of the total gas) is going for. And the FPC has yet to budge on the price of "old" (pre-1973) gas, which accounts for the majority of interstate sales.

A similar situation prevails with "old" and "new" oil. Unregulated "new" oil (post-1972) is selling for $10-10.50 per barrel, while price-controlled "old" oil (about 60 percent of the total) goes for $5.25. Naturally, this kind of price differential encourages producers to leave old wells alone and expend great sums drilling new ones, including offshore wells. Just this anomaly recently led the California Coastline Commission, which opposes offshore drilling, to urge deregulation of oil prices. Many independent oil refiners are also urging deregulation of old oil prices, since the bulk of the old oil supplies are controlled by the major oil companies; as a result, gasoline produced by many independents today sells for more than that of the majors. Treasury Secretary William Simon, formerly head of the Federal Energy Office, is the leading government advocate of complete deregulation, removing both price controls and the oil allocation program.

All of this is too much for the populist liberals. Sen. Jackson complains that the Administration advisers "are still committed to the 19th-Century notion of limiting demand by raising prices," and Lee White of the Consumer Federation of America states that, "With petroleum prices at an astounding level…I'm dumbfounded that anyone even mentions decontrol." Yet the free market forces seem to have the upper hand, at present. The man responsible for planning oil decontrol and deallocation, Assistant Treasury Secretary Gerald Parsky, states flatly: "Everyone agrees that we should get rid of price and allocation regulations; the only question now is how to do it." Parsky's optimism may be premature, but we hope he turns out to be right.

SOURCES:
• "How Much Energy Does the U.S. Need?" Stephen B. Shepard, Business Week, June 1, 1974, p. 69.
• "Study Urges Freeing Gas," UPI (Washington), Aug. 8, 1974.
• "FPC Grants Hefty Hike in Natural Gas Rates," Los Angeles Times, June 22, 1974.
• "Coastal Commissions Suggest Lifting of Price Controls on Oil," Santa Barbara News-Press, Sept. 11, 1974.
• "Moving Cautiously to Decontrol Oil," Business Week, August 31, 1974.
• "The Slippery Job of Decontrolling Oil," Business Week, Sept. 7, 1974.
• "Simon Urges Steps to End Price Curbs on Oil, Natural Gas," Los Angeles Times, Sept. 11, 1974.

KEEPING THE LIGHTS ON

It is simultaneously ominous and heartening to report the emergence of private, voluntary organizations in England devoted to maintaining essential services in the face of militant, nationwide strikes. Ominous, because it indicates how close to breaking down England has come, via ever-increasing government interventionism; yet heartening, in illustrating that there are still people in that country who are unwilling to give up completely to statism.

Two organizations have thus far come to light, both headed by retired military officers and therefore dubbed "private armies" by the press. Great Britain 75 is the creation of Col. David Stirling, creator of the British equivalent of the Green Berets. Stirling's concept is for GB 75 to enlist engineers, computer experts, scientists, technicians, helicopter pilots, truck drivers, and other specialists. In the event of a crippling strike, they would cross picket lines to bring supplies and specialists to struck plants. GB 75's top priority is to keep electricity being produced. The other, similar group, variously reported as "Unison" or "Civil Assistance," was founded by Sir Walter Walker, former NATO commander in chief for northern Europe. Walker hopes to enlist up to 3 million people, and reportedly has some 100,000 supporters already.

Against Great Britain's background of strikes, bombings, unemployment, bureaucracy, and a 20 percent rate of inflation, the formation of volunteer groups to keep the lights burning seems prudent—and perhaps a preview of what may be needed elsewhere.

SOURCES:
• "Plan Leaked for Private British Army," Tom Lambert, Los Angeles Times, Aug. 23, 1974.
• "Can Democracy Survive Inflation?" James Reston, New York Times News Service, Aug. 30, 1974.
• National Review Bulletin, Sept. 20, 1974, p. B137.

WHAT PRICE ZONING?

The concept of externalities has been used by some economists to justify the use of police power to restrict the uses to which urban property may be put. The argument rests on the commonsensical notion that certain types of land use (e.g., boiler factories) can result in harmful external effects on neighboring properties. Thus, the argument is made for setting up in advance a system of laws (zoning) to prohibit supposedly incompatible uses. But "common sense" is not always a reliable basis for laws, especially where the laws involve a form of prior restraint that strikes deeply at the concept of property rights. Hence, the importance of the first empirical study of the alleged externalities covered by a municipal zoning ordinance.

Frederick H. Rueter studied the municipal zoning ordinance of Pittsburgh, Pennsylvania. Reasoning that the specific prohibitions codified in the ordinance must define the types of externality being guarded against, he set out to determine the relationship between the market value of a given piece of property and the degree to which 53 factors such as those specified or implied in the ordinance were present on adjacent properties. (Most of Pittsburgh's land uses were established prior to the passage of the ordinance.) Using a mass of data from 12 residential zoning districts, Rueter set up a regression analysis to estimate the predicted relationships.

The results were striking. In a large fraction of the cases, factors presumed to be external diseconomies turned up as external economies—i.e., exerting a positive value on adjoining property values, rather than a negative one. These results often differed between similar zoning districts, suggesting that, in fact, they are random effects. Rueter concludes that "there is much more independence from external diseconomies in urban property markets than the zoning ordinance anticipates." And, "the value of residential property seems to be affected much more significantly by the attributes of the improvements to that property and by aggregate economic conditions than it is by any features of the neighborhood which have been tested here."

Rueter points out that gross diseconomies (like boiler factories) are prevented by economic factors—it simply makes no sense to locate a factory in a residential neighborhood. But politicians can use the fear of such diseconomies to justify setting up a land use control bureaucracy that is an endless source of political power. Analyses like Rueter's expose these spurious excuses for restricting property rights.

SOURCE:
• "Externalities in Urban Property Markets: An Empirical Test of the Zoning Ordinance of Pittsburgh," Frederick H. Rueter, Journal of Law and Economics, Vol. XVI (2), Oct. 1973, p. 313.

FREEDOM TO ADVERTISE

The self-serving anti-advertising rhetoric of two professions—pharmacy and law—is crumbling with increasing speed. Consumer groups, government agencies, and media organizations are all taking part in a series of actions to repeal laws which prohibit advertising in the name of professional ethics, protection of consumers, and other spurious grounds.

The action is greatest in the pharmacy area. Some 20 states still have laws banning pharmacies from advertising prices of prescription drugs or posting price lists in stores, but the laws are toppling one by one. Last year the Pennsylvania Supreme Court ruled that state's anti-advertising law unconstitutional; in January the Wisconsin Supreme Court threw out that state's anti-advertising law; in March a U.S. District Court ruled Virginia's law unconstitutional; and in May a Denver District Court judge did the same with Colorado's anti-advertising law. In Connecticut the legislature has made it legal for druggists to post price lists, and is now considering a bill to allow full drug advertising. And in California a coalition including consumer groups, the California Newspaper Publishers Association, and the California Broadcasters Association has filed suit challenging the constitutionality of the sections of the Business and Professions Code which make advertising and discounting drugs misdemeanors. The suit claims that Pennsylvania residents pay an average of 38 percent less for prescription drugs than Californians, due to the absence of advertising in California.

In Washington, both the Justice Department and the Federal Trade Commission have spoken out in favor of advertising and against the state laws. The FTC is investigating the retail drug industry for "deceptive or unfair acts in connection with the disclosure or nondisclosure of price information." If all states permitted drug advertising, the FTC estimates that consumers would save $1 billion per year in drug costs.

Lawyers, too, are beginning to feel the heat. The Justice Department has suggested that bar associations (which are sanctioned by force of law) consider eliminating from their codes of ethics prohibitions on advertising and solicitation of clients. Joe Simms, special assistant to the head of the Antitrust Division, says that advertising of legal services, including fee levels, would promote competition and could lead to lower prices. "It may well be… essential to reevaluate existing constraints on competition in the legal profession and test them against the standards universally applied…to the marketplace," Simms said in a recent speech to the New York Bar Association. "The consumers of legal services are just as entitled to the benefits of competition…as are the consumers of other services."

SOURCES:
• "Retail Drug Pricing," Business Week, June 1, 1974, p. 34.
• "Prescription Drug Advertising Barriers Apparently Falling," Brian Sullivan, Santa Barbara News-Press, June 26, 1974.
• "Consumer Groups File Suit to Legalize Prescription Drug Ads," Myrna Oliva, Los Angeles Times, June 26, 1974.
• "Freedom for Lawyers to Advertise Proposed by Official," Linda Mathews, Los Angeles Times, August 22, 1974.

MILESTONES

Vitamins. The FDA's attempt to regulate high-strength vitamin supplements as drugs has been voted down by the Senate, 81 to 10. House action this session on a similar bill is uncertain as of this writing. The Senate bill, sponsored by Sen. William Proxmire, would prevent the FDA from classing as drugs all vitamins of greater potency than 150 percent of the recommended daily allowance (RDA). The FDA plan had been scheduled to go into effect on January 1, 1974, but has been delayed by a Federal Court injunction until July 1, 1975. Congress has received over a million letters opposing the FDA's plan. (Source: "Senate Votes Bar on FDA Regulation of Some Vitamins," Wall Street Journal, Sept. 25, 1974)

Communications. The General Accounting Office has recommended an experiment to test the feasibility and potential benefits of renting a portion of the radio frequency spectrum. The idea, of course, is that pricing of scarce resources such as radio frequencies would promote more efficient use than the present bureaucratic allocation process. GAO recommended that the FCC proceed to institute a rental plan for the 2700 to 3700 megahertz band, which is allocated for radar and used mainly by the Federal Government. "The fiscal implications or administrative and technical practicalities of such an experiment should be explored if we are to make the most effective and efficient use" of the frequency spectrum, GAO concluded. (Source: Industrial Communications, No. 37, Sept. 20, 1974, p. 4)

Privacy. The FBI has been ordered by a federal court in Washington to remove from its computerized files the arrest records of those persons who were later exonerated of the charges. The ruling affects the FBI's massive National Crime Information Center (NCIC), a computer system to which most of the nation's police departments are linked by teletypewriter networks. The Court of Appeals for the District of Columbia ruled that the FBI can no longer act merely as a passive collector of information from police departments, because of their potential for harm as well as good. Rather, it must act to ensure that disposition information is supplied, and where not, to remove the records to prevent harming the innocent It has been estimated that from 30 to 50 percent of the NCIC arrest records contain no disposition records. (Source: "FBI Must Erase Crime Records of Not Guilty," COMPUTERWORLD, May 1, 1974.)