Trends

ANALYZING BIG OIL

During the past year many suggestions for new government controls on the oil industry have been offered: breaking up the larger companies, regulating them like public utilities, or even having the Federal Government enter the business of producing and selling oil and gas. These proposals are based on the image of an oligopolistic, cartelized industry fattening its profits at the expense of consumers and governments. That this image is quite false has been documented recently by Neil H. Jacoby, dean of the UCLA Graduate School of Management.

Jacoby's landmark study, titled "Multinational Oil," covers the structure and behavior of the world oil industry over the past 25 years. He concludes that over this time period the industry has become increasingly competitive: "Dozens of new multinational firms have entered the oil business. The market shares of older companies declined markedly. Even though a general price inflation began in 1965…the prices of all petroleum prices fell all through the 1960's. The profits of the world oil industry provided only a normal return on investment. There was no evidence of a corporate cartel or of monopoly profits."

Another myth dispelled by Jacoby is the idea that the oil companies created the current energy crisis by encouraging the huge OPEC price increases. This charge is utterly false; indeed, the oil companies vigorously resisted the OPEC increases because, despite the short term effect of increasing their 1974 profits, the price rises will reduce the growth of the market for petroleum products, and will diminish their income in the long run. Interestingly, despite their anti-oil rhetoric, Senators Frank Church and Henry Jackson reached the same conclusion as a result of their committee investigations. It was a government cartel—not a corporate cartel—that raised oil prices.

Finally, Jacoby points out the comparative value of private enterprise over governments as international oil producers. "Private enterprises are better qualified than government bureaus to accept the long risks of finding and developing oil resources. They can allocate multinational investments more efficiently. Private management—disciplined by competition—brings greater flexibility of action.…Private oil enterprise makes it possible to transfer from the political to the commercial arena many international problems that would otherwise generate frictions among governments."

It is competition, not a state-owned oil company, that provides the ultimate "yardstick" by which to measure company performance. And competition in the international oil industry is apparently alive and well.

SOURCE:
• "Oil Industry's Performance Was 'Beneficial to Consumer'," Neil H. Jacoby, Los Angeles Times, Mar. 9, 1975.

VOLUNTEER MILITARY SUCCESS

The libertarian members of the President's Commission on a Volunteer Military several years ago argued that the coercive power of the draft was unnecessary, and that intelligently-designed incentives and modern management methods could produce a high-quality Army of volunteers. After a year and a half of experience without the draft, the conclusion is that they were right. Secretary of the Army Howard Calloway calls the all-volunteer Army "an unqualified success" and he is supported by the director of the Rand Corporation's Training and Manpower Management Research Program, Richard V.L. Cooper.

Results to date have been impressive.

After a slow start in 1973, the Army achieved its full recruitment goals in 1974. Its improved selection policies have resulted in a more intelligent crop of recruits than under the draft: the proportion with IQ scores in the lowest 10 to 30 percent has decreased from 19 percent to 9 percent over the past year. And the percentage of blacks has increased only slightly, from 19 percent to 22 percent of the total Army force. Thus, the fears of Senator Kennedy and others about a largely-black Army, or one with lowered standards, appear to have been groundless.

How has this been accomplished? Basic pay has been substantially increased, as have fringe benefits. Substantial bonuses are offered for joining a combat unit and for reenlisting. More skill training is offered, and 327 out of 345 job categories are now open to women. Training and living conditions have also been significantly improved. (As one result, the rates of court-martial and AWOL's are down significantly.) To improve quality, the Army is now able to discharge (honorably) any recruit within 180 days if he or she does not measure up "physically, mentally, or morally," during basic training. At one base, nearly 10 percent of the recruits were thus discharged last year. To help pay for all this, the Army is cutting fat. Noncombat forces accounted for 41 percent of all personnel in 1972; this year they will represent only 29 percent.

In short, the Army is demonstrating that attracting personnel for the difficult job of defense is no different in principle from attracting them for any other difficult job. Coercion is totally unnecessary.

SOURCES:
• "Volunteer Peacetime Army Strongest Yet, NATO Told," Joe Alex Morris, Jr., Los Angeles Times, Feb. 3, 1975.
• "Volunteer Military System Is Success, Rand Exec Tells Manpower Panel," John Dreyfuss, Los Angeles Times, Jan. 29, 1975.
• "This Is the Army, Mr. Jones?" Time, Feb. 10, 1975.
• "It's SRO in Today's Army," Business Week, Feb. 24, 1975.

AN END TO FAIR TRADE?

Ever since 1937 states have been allowed by the Federal government to pass laws permitting "resale price maintenance," otherwise known as "fair trade." The Miller-Tydings Act of 1937 provides exemption from the antitrust laws for contracts between manufacturers and retailers by which the latter agree to sell only at agreed-upon list prices. In itself, there is nothing immoral about such a contract, even though consumers might not like its effects. However, the picture was radically changed in 1952 when Congress passed the McGuire Act, which made it legal for a manufacturer to bind all retailers in a state merely by signing such a contract with any one retailer. Now the power of the state was used to coerce merchants who simply responded to the market by offering discount prices. This coercive "nonsigner" provision was common in the 1950's (at one time 45 states had such provisions), but has gradually been repealed in most "fair-trade" states. It still remains in effect in 13 states (California, Arizona, Wisconsin, Illinois, Ohio, Tennessee, Virginia, Maryland, Delaware, New Jersey, New York, Connecticut, and New Hampshire).

In recent months both fair-trade laws and the nonsigner provision in particular have come under increasing attack. Leading the chorus of critics is Lewis Engman, chairman of the Federal Trade Commission, together with Sen. Edward Brooke and Rep. Robert McClory. Engman has thrown the weight of the FTC behind the campaign to repeal both the Miller-Tydings and the McGuire Acts, which is the goal of legislation introduced by Brooke and McClory. Consumers Union has also joined the attack, as has the Justice Department (which found that prices on fair-traded items were 19 to 27 percent higher in fair-trade states). The 1969 economic report of the President estimated their annual cost to consumers at $1.5 billion.

Hopefully, the coercive McGuire Act will be promptly repealed. Unfortunately, if the Miller-Tydings Act's fair-trade provision is also repealed, one of the few remaining loopholes in the antitrust laws will be plugged, and freedom of contract will be dealt yet another blow. The distinction between coercion and contract has yet to be learned by our legislators.

SOURCES:
• "Congress May Retire Depression Era's Fair Trade Laws," Marketing News, Feb. 28, 1975, p. 5.
• "Repeal 'Fair-Trade' Laws," Lewis A. Engman, Los Angeles Times, Mar. 11, 1975.
• "Will Congress End Fair Trade?" Business Week, Feb. 17, 1975, p. 82.

GAS DEREGULATION AT LAST?

As economists have pointed out time and again, decades of price control by the Federal Power Commission have led to natural gas being greatly under-priced, and therefore in very short supply. A further result has been steadily declining exploration for new gas, since companies' funds could earn a better return elsewhere. Today's growing natural gas shortages have finally brought these points home to the FPC: in March, the agency formally requested Congress to permit it to decontrol natural gas prices at the wellhead, for all "new" gas production in interstate commerce. (Intrastate gas production is unregulated, and the gas sells for nearly twice as much as gas sold interstate.) The FPC's request is consistent with President Ford's recent call for deregulation of both "new" gas and "old" oil.

Deregulation of natural gas cannot come too soon, according to MIT economist Paul MacAvoy. Under a recent grant from the National Science Foundation, Mac- Avoy's team of energy experts has built a computer simulation model of natural gas supply and demand. The model projects a 30 percent shortage by 1980 if the present regulatory policies remain in effect. The 10 trillion cubic foot shortage would be worst in the North Central U.S., where it would reach 40 percent, and would be 20 percent in the Northeast, 15 percent in the Southeast, and 10 percent in the West. Permitting free market conditions for new gas is the only effective way to permit supply to catch up with demand, MacAvoy has concluded. The estimated price rise of 65 percent by 1980 would sufficiently increase the incentive to producers, and would simultaneously dampen demand and promote conservation.

MacAvoy's colleagues at the MIT Energy Lab have also pointed out "serious errors and oversimplifications" in the Federal Government's $8 million Project Independence Study. For example, the report incorrectly assumes that increased gas prices will not stimulate increased production, and that use of (price-controlled) natural gas will not increase as oil prices go up. ("This is like saying that people won't switch to chicken if the price of hamburger goes up," noted Prof. Henry D. Jacoby.) All of which makes one wonder on what basis Ford and the FPC advocate deregulation. Perhaps despite the government's gross economic ignorance, they have simply decided that gas deregulation is an idea whose time has come.

SOURCES:
• "FPC Asks Removal of Natural Gas Controls," James L. Rowe, Jr., Washington Post, Mar. 5, 1975.
• "30% Shortage Projected for Natural Gas by 1980," AP (Cambridge), Mar. 10,1975.
• "Government Energy Report Error-Ridden, Study Says," AP (Cambridge), Mar. 18, 1975.

CHARGING FOR ROAD USE

Although the direct costs of highway construction are met by gasoline taxes paid by highway users, this system hardly approximates a free-market pricing system. A good price system balances demand and supply, minimizing shortages and surpluses. Yet our major urban road systems are characterized by extreme supply-demand imbalances, known as rush-hour congestion. Road use at rush hours is essentially "free"; the freeway is in essence a commons, and the result is vast over-use. Likewise, the air in our cities is also a commons, with every driver free to use it as a dump for waste products from his automobile.

A proposal to solve both of these "commons" problems by means of pricing has recently emerged from a study at Claremont Men's College in California. To begin with, the researchers calculated the total costs involved in freeway use, taking greater Los Angeles as a study area. Drivers pay little of the costs of congestion and air pollution damage. Further, since freeways are designed to handle peak-load conditions, peak-load users receive proportionately more for their tax dollars than off-peak users. The Claremont researchers estimate that total hidden subsidies to road users amount to some $650 million per year, which works out to $185 per household or $100 per vehicle.

To deal with these hidden costs, the study group proposed a pricing system that would vary the price (toll) based on such factors as the extent of congestion, air quality conditions, and the vehicle's pollution characteristics. The key to making the pricing system work is automatic metering of vehicles. The technology to do this, called Automatic Vehicle Identification (AVI) has been researched by Prof. William Vickrey of Columbia University. The AVI system would include a radio transponder on each vehicle and induction-loop interrogators at entrance and exit ramps, together with an overall computer monitoring and billing system. Such a system could be installed for a total cost of $5 per vehicle per year, over a 15-year life. Each user would receive a monthly bill based on the nature and extent (times of day, etc.) of his road use.

The expected results of such a system would include (1) reduced peak-hour road-use, (2) peak-hour congestion and smog cut by 20 to 30 percent, (3) increased use of car pools and public transit, (4) increased average speeds at rush hours, (5) higher speeds for buses (which are 5 to 10 times cheaper than fixed-rail transit),

(6) reduced need for fixed-rail systems, and (7) greatly reduced need for additional costly freeway expansion. Besides these benefits, the acceptance of demand-based pricing for urban roadways would transform them from a "public good" into one which has all the characteristics of a normal market good. It therefore makes the idea of privately-owned roadway systems quite feasible, as well.

SOURCES:
• "Metering Could Ease Freeway Problems," Ward Elliott, Los Angeles Times, Mar. 9, 1975.
• "The Pricing of Urban Transportation: Economic Desiderata, Technological Possibilities, and Political Constraints," William Vickrey, #73-ICT-111, American Society of Mechanical Engineers (345 E. 47th St., New York, NY 10017, $3.00).

MILESTONES

• Medicine. HEW's latest attempt to regulate the practice of medicine, by requiring a "utilization review committee" to pass on a doctor's decision to admit patients to the hospital, has been challenged as unconstitutional by the American Medical Association. The AMA, joined by 10 patients and 5 physicians, contends that the requirement violates the 1st, 5th, and 9th Amendments to the Constitution. The suit seeks both a preliminary and a permanent injunction against enforcement of the new regulations. (Source: "AMA Suit Charges Medicare Regulations Unconstitutional," UPI (Chicago), Feb. 21, 1975)

• Civil Rights. The City of Berkeley's "equal opportunity" hiring program has been ruled unconstitutional by a Superior Court judge in Alameda County, California. "Those portions of the program that provide for racial quotas, noncompetitive examinations, and preferential hiring based on race or sex to the exclusion of merit, experience, and record, must be deemed arbitrary and discriminatory," the judge declared. He found that the program, which required the city to employ the same percentage of each race and sex as exists in the community, violated the 14th Amendment and the Civil Rights Act of 1964. (Source: "Berkeley Ordered to Stop Equal Opportunity Hiring," AP (Oakland), Feb. 14, 1975)

• Taxes. A legislative audit of California's income tax operations has disclosed the interesting fact that some 288,500 persons who owed taxes in amounts up to $100 did not file state tax returns for 1972. Due to personnel shortages, the state's Franchise Tax Board decided not to take any action against the under-$100 cases, preferring to spend its enforcement funds on larger cases. Thus, over a quarter million Californians successfully resisted state income taxation in 1972. (Source: "State Losing $60 Million Annually in Income Taxes," William Endicott, Los Angeles Times, Jan. 29, 1975)

• Research. What billions of dollars in Federal funding have failed to accomplish, a small private firm has achieved for an R & D expenditure of $18 million. KMS Fusion, Inc. has successfully demonstrated a process for using laser energy to implode a pellet of fusion fuel and produce thermonuclear energy—an important step on the road to controlled nuclear fusion power. KMS's initial announcements last spring were greeted with skepticism from the largely government-supported scientific community. But the skepticism was dispelled at a meeting of the American Physical Society last fall where KMS researchers presented their results to 1200 physicists. Apparently, private enterprise research will now be taken more seriously. (Source: "Laser Fusion: One Milepost Passed—Millions More to Go," Science, Dec. 27, 1974, p. 1193)

• Censorship. Another government restriction on communications freedom has been abolished, this time in Italy. That country's Constitutional Court has overturned a 1973 government decree that forbade private cable television and relay station operators from bringing programs from other countries into Italy. The ruling was in response to an appeal by a Turin cable company and operators of over 2000 microwave relay stations located on Italian hilltops. Italy's state radio and television monopoly, RAI, will now have to face competition, if only from abroad. (Source: "Italian CATV Ban Revoked," Urban Telecommunications Forum, Oct. 1974, p. 11)

• Health. California laws forbidding doctors and patients to use the controversial drug Laetrile (Bi7) as an anticancer agent have been declared unconstitutional by a Municipal Court judge in Los Angeles County. Judge Sam Cianchetti ruled that the statute, which prohibited use of any drug or health treatment not approved by the State Department of Health, was overbroad and interfered with the physician's fight to treat a patient as he believes necessity, as enunciated by the U.S. Supreme Court in decisions on abortion and birth control. Unfortunately, in a case based on similar arguments in a Superior Court in San Diego, the same doctor and five others have been convicted on felony charges of conspiring to sell Laetrile. Thus, the ultimate legal status of Laetrile remains unclear (Source: "Laetrile Charges Dismissed," Los Angeles Times, Feb. 4, 1975)