GOING AFTER THE REGULATORS
As noted previously in this column (see "Trends," Nov. 1974, p. 56), there is growing concern among economists and policy makers about the effects of Federal regulatory agencies in building rigidities into the price system, thereby preventing the market from operating freely. In particular, such rigidities tend to keep many prices at artificially high levels (especially galling in these days of double-digit inflation). Thus, it is heartening to see this theme increasingly appearing in public debate.
At the president's "economic summit," leading economists led by Thomas Moore of the Hoover Institution endorsed a list of 22 "rigidities" they agreed should be abolished. Included were restrictions on truck cargoes and routes, import controls, milk and produce price support mechanisms, the Jones Act (requiring coastal shipping to move in U.S. vessels), the government's first-class mail monopoly, airline price-fixing, natural gas price control, etc. Moore's original list contained 32 rigidities, and Hendrik Houthakker of Harvard presented an even longer list of 45 such items, including union-inspired rules designed to keep the unemployed out of certain occupations, and the notorious Davis-Bacon Act. That the economists were nearly unanimous in their action is an indication that perhaps deregulation is an idea whose time is finally at hand. (Indeed, George Eads of the George Washington University economics department noted that "any economist venturing to support regulation today is apt to find himself in a very lonely position.")
Still, the problem remains: how to go about changing things, given the extremely powerful lobbies possessed by the beneficiaries of regulation?
One idea is to utilize other government agencies to fight the regulators and their cozy relationships with industry. Thus, FTC chairman (and REASON subscriber) Lewis A. Engman recently proposed that role for his agency. The FTC has embarked on a major study of the the costs of regulation to consumers (example: $16 billion a year in excess transportation costs), and plans to intervene on behalf of consumers in various agency rate-setting proceedings. Engman went out of his way to attack "government-sanctioned price-fixing" as a major contributor to high prices. "Our airlines, our trucks, our electronic media, and countless others are on the dole. We get irate about welfare fraud. But our complex system of hidden regulatory subsidies makes welfare fraud look like petty larceny.…Today's regulatory machinery does little more than shelter producers from the normal consequences of lassitude and inefficiency.…The fact of the matter is that most regulated industries have become Federal protectorates, living in the cozy world of cost-plus, safely protected from the ugly specters of competition, efficiency, and innovation."
Engman is not the only one carrying this message. In October Ralph Nader's Center for the Study of Responsive Law published a 950-page citizens guidebook to the "bureaucratic labyrinths" of the Federal regulatory system, and has called for a substantial amount of deregulation. The Joint Economic Committee of Congress says a new study commission should take a close look at "excessive or inept regulation" in the fields of transportation and communication. Finally, President Ford has called for the creation of a National Commission on Regulatory Reform, to identify and eliminate the hodgepodge of regulations that increase costs to consumers above free-market levels. Ford thus joins the groups listed above, as well as the Council of Economic Advisors, the Office of Telecommunications Policy, the Justice Department's Antitrust Division, and the Senate Antitrust and Monopoly Subcommittee in urging a massive overhaul of the Washington alphabet soup of regulatory agencies.
• "Attacking Sacred Cows," Time, Oct 7, 1974, p. 43.
• "A Summit Bonus," National Review, Oct. 11, 1974, p. 1154.
• "FTC Chairman in Unprecedented Attack on Government Agencies," UPI (Washington), Oct. 7, 1974.
• "Federal Commissions Draw Increasing Fire, Called Inept and Costly," Wall Street Journal, Oct. 9, 1974.
• "FTC Focuses on CAB Activities," Aviation Week, Oct 14, 1974, p. 22.
• "Coziness of Industries and Their Regulators Is in for Scrutiny," J.F. terHorst, Los Angeles Times, Oct. 17, 1974.
• "How to Regulate the Regulators," Time, Oct. 21, 1974, p. 58.
As noted earlier this year, laws controlling the price of money (otherwise known as usury laws) are wreaking havoc in many of the nation's money markets (see "Trends," Feb. 1974, p. 36). In Missouri, the eight percent ceiling has caused an end to mortgage loans within the state, forcing home-buyers to deal with out-of-state lenders and forcing Missouri lenders to loan only to out-of-state buyers. Among the many states with 10 percent interest ceilings, Tennessee has been especially hard-hit. However, one Tennessee banker thinks he has found a way around the price control law.
William Matthews, president of Union Planters National Bank of Memphis, has come up with the idea of an "indexed" loan. The loan agreement charges the 10 percent limit as the interest rate, but provides for the payment of an additional "fee" if the Consumer Price Index is greater when the loan matures than when it was granted. The fee would be the percentage difference in the CPI. During the term of the bank's first such loan, the CPI rose one percent, and the bank charged an additional one percent of the $50,000 amount. The borrower, Aztec Properties Inc., refused to pay the fee, and the bank has now taken Aztec to court in order to test the legality of the plan.
Bankers across the state are watching the case with interest, since it holds the potential for providing a way around the state's usury law. By tying the interest rate to a price index, which can rise or fall, the bank's plan resembles a gold clause contract (which were outlawed in the 1930's). If approved by the Tennessee courts, the plan could rekindle interest in such devices for countering the effects of inflation.
• "When Usury Laws Backfire Against Borrowers," Business Week, Aug. 17, 1974, p. 93.
• "A Way to Get Around State Usury Laws?" Business Week, Aug. 24, 1974, p. 20.
As with prescription drugs and various other health care services, the rationale of "professionalism" has long been used to justify laws preventing normal market mechanisms from operating, to the benefit of special interest "professional" groups. Thus, California (like many other states) has long banned advertising the prices of eyeglasses, despite studies showing that in states with such prohibitions glasses cost from 25 to 100 percent more than in states where advertising is allowed (see "Trends," May 1973, p. 36). The California ban has now been challenged, in several suits that could very well open yet another market to competition.
The case began when Opti-Cal, the state's largest optical chain, decided to test the law by exercising its moral right to advertise the prices of its products. Last August it placed ads in over 20 newspapers saying it would fill any optical prescription, frames and lenses both, for only $19.90. The offer was legitimate, and the glasses were of normal quality. When the state responded with an injunction, Opti-Cal continued the newspaper ads, using them to contend that the injunction violated the First Amendment, and was subsequently held in contempt of court and fined $2000. It has also continued to post large signs at its retail outlets advertising the $19.90 price.
While Opti-Cal was battling the courts, a consumer organization—California Citizen Action Group—filed suit in federal court in Los Angeles challenging the constitutionality of the laws banning advertising, not only of eyeglasses, but also of prescription drugs and "other commodities and services in the healing arts." The group's attorney, Charles W. Anshen (who has also been retained by Opti-Cal) states that "these laws which prohibit advertising are designed not for the protection of the public, but for the protection of the profits of special interest professional groups." Adds Richard Spohn of the Citizen Action Group, prices are "dramatically lower" in states where advertising is legal, where "consumers can shop around, and the healthy restraint of competition acts in their favor." The group's lawsuit alleges that the anti-advertising laws deny citizens their rights to information (under the First Amendment) and to due process (under the Fourteenth Amendment). Anshen notes with favor the recent Virginia case in which a Federal court ruled that state's ban on prescription drug advertising to be unconstitutional, and expects a similar ruling in the California case.
• "The Effects of Advertising on the Price of Eyeglasses," Lee Benham, Journal of Law and Economics, Vol. 15 (2), Oct. 1972, p. 337.
• "Suit Challenges Ban on Prices in Eyeglass Advertising," Dorothy Townsend, Los Angeles Times, Oct. 13, 1974.
• "Company Fined for Ads Giving Eyeglass Prices," Myrna Oliver, Los Angeles Times Oct. 25, 1974.
THE RETURN OF GOLD
Despite continued Establishment propaganda to the contrary, gold seems once again headed for a major role in the world's monetary affairs. According to investment analyst Dr. Harry Schultz, the Arab governments are moving closer to implementing a gold-backed currency of their own. In Nevada, a libertarian running on the Independent American Party ticket, Jim Houston, ran a close race for governor, on a platform calling for the establishment of a "Dual Monetary System," under which the Nevada government would issue gold and silver-based currency in competition with Federal Reserve notes. And Senator Barry Goldwater recently called for a return to a full-fledged gold standard (not merely a gold-exchange standard or dollar convertibility).
Perhaps most significant of all, the Federal Government recently held a private, non-publicized conference with industry leaders to discuss the role of gold after U.S. legalization. Some 70 government and business leaders heard former Treasury undersecretary Paul Volcker, Treasury director of gold and silver operations Thomas Wolfe, South African Finance Ministry secretary Gerald Brown, and broker/Harry Schultz associate James Sinclair debate and discuss the role of gold for six hours. Sinclair emerged from the private meeting "more positive about gold than ever," according to Schultz.
• International Harry Schultz Letter, #326, middle October, 1974.
• Various newspapers, Reno and Las Vegas, Nevada, October/November 1974.
• Press Freedom. The FCC's odious Fairness Doctrine should be abolished, according to Sen. William Proxmire. In an October speech, the Wisconsin Senator noted that newspapers manage to be fair without government control, and "I contend that radio and TV would be fair without government control.…No newspaper has to answer to a government agency because of complaints from readers," he noted. "There is no reason why the First Amendment should not fully apply to broadcasters as it does to publishers." Proxmire also pointed out the inevitably political nature of government control of the media. "A reasonable assumption is that such power, although infrequently used, must affect the way broadcast newsmen do their jobs.…If our print media were controlled by the government…we would have propaganda. We would have a press spreading the word that government would want us to have," he added. (Source: "Proxmire Proposal to End Fairness Doctrine," AP, Washington, Oct. 2, 1974.)
• Drug Laws. Yet another knowledgeable public official has decided that the government's attempt at prohibiting marijuana by means of the criminal law is off base. In a speech to a closed meeting of the International Narcotic Enforcement Officers Association, the outgoing head of the Law Enforcement Assistance Administration, Donald Santarelli, urged that police not enforce the laws against simple possession of marijuana. Although unwilling to advocate outright repeal in the present context, Santarelli cited the high cost of enforcement, the unfairness inherent in the uneven and sporadic enforcement of such laws, the severity of making juveniles into felons for committing a simple victimless act, and the hostility towards law enforcement in general that is engendered by enforcement of such unpopular laws. Santarelli still serves as a consultant to LEAA, and his views may carry considerable weight at the policy-making level. (Source: "Moratorium Urged on Marijuana Prosecution," Ronald J. Ostrow, Los Angeles Times, Oct. 7, 1974)
• Politics. A new political group has emerged in recent months, advocating that all incumbent politicians be voted out of office. The group, called the New American Revolution, wants to transform election day into "Rejection Day" by getting voters to vote against all incumbents who have served two or more terms, and to vote only for candidates who promise to limit themselves by law to two terms. The group's founder, Tony Hodges, charges that incumbent politicians have become a "royal class" insulated from their constituents and beholden only to special interests. Hodges advocates that the people "remove the government" by means of the ballot box. (Source: "'New Revolution' Groups Wants to Oust Incumbents," Daryl Lembke, Los Angeles Times, Oct. 23, 1974)
• Professions. Three California women have filed a taxpayers' suit seeking to stop enforcement of the state's laws against prostitution. The three, who are ACLU members, charge that enforcing these laws wastes taxpayers' money and deprives prostitutes of free speech, privacy, and their right to due process of law. The suit names as defendants the Alameda County district attorney, the county's director of health care services, and the cities of Oakland, Berkeley, and Emeryville. (Source: "Three Women Challenge Antiprostitution Code," Los Angeles Times, Oct. 4, 1974)
• Transportation. Despite the destruction wrought by nearly a century of Federal regulation, there are still businessmen willing to seek profits by operating railroads. Even the bankrupt New Haven Railroad is being sought by one such entrepreneur, Frederic C. Dumaine, president of Amoskeag Co., owner of the profitable Bangor and Aroostook and part-owner of the Maine Central (35 percent) and the bankrupt Boston and Maine (22 percent). Under Dumaine's plan, these three lines would be combined with the New Haven and the Delaware and Hudson to form a profitable, stockholder-owned New England railroad system. All of this would be accomplished without government aid, and would relieve the Penn Central trustees of the headache of the bankrupt, decaying New Haven system. (Source: "Dumaine's Rail Plan," Business Week, Aug. 24, 1974, p. 26)
This article originally appeared in print under the headline "Trends".