ENERGY CRISIS: FIXING THE BLAME
In the winter of 1973-74, the Arab countries embargoed oil shipments to the United States. Most people still consider the Arabs to blame for the subsequent shortages of heating oil, gas station lines, and other manifestations of that winter's "energy crisis." But now two separate studies have been issued demonstrating that it was the Federal Energy Office, not the Arabs, that caused the shortages and gas station lines. Concludes MIT's Paul MacAvoy, director of one of the studies, "We give the FEO credit for having created the 'energy crisis' perceived by consumers."
How did the FEO manage this feat? By a series of bad policy decisions, impelled by typical bureaucratic caution and by political pressures hostile to free market solutions. Take the case of the long lines at the gas stations. The fundamental cause was the FEO's mandatory allocation of crude oil away from gasoline production in favor of home heating oil production, thereby purposely leading to reduced supplies of gasoline. But in addition, as Prof. Richard Mancke points out in a study for the American Enterprise Institute (AEI), the FEO's gasoline pricing policies caused the lines to be especially long at the end of each month. This was because the FEO allowed refiners and dealers to raise prices only at the start of each month. "With the costs of gasoline production soaring, this rule gave refiners a strong incentive to withhold gasoline at the end of a month for sale at the beginning of a new month, when they could charge a new higher price." Adds MacAvoy, the FEO "probably produced the lines at gasoline stations all by itself."
And that's only the beginning of the FEO's contributions. According to MIT's econometric gas and oil model, FEO price controls on old oil, by reducing the extent of secondary recovery from existing oil fields, reduced U.S. domestic oil production by 1/3 of a million barrels per day in 1973, and 1/4 of a million barrels a day in 1974—a significant contribution to the oil shortage. Moreover, FEO's program to force "crude-rich" refiners to share their oil with "crude-poor" ones strongly reduced the incentives of both groups of refiners to seek means of getting around the Arab embargo; the crude-rich companies had to sell a large portion of their expensive imports below cost to their competitors, while the crude-poor companies could sit back and wait for their competitors to deliver. And this is precisely what occurred, according to the MIT study. In November and December of 1973, before the FEO allocation program began, importers were still managing to bring in 87 percent of the normal volume of imports by working around the embargo. By February and March 1974, when the program was in full swing, imports fell to 73 percent of previous volume. If the FEO had left the companies free to fend for themselves, "Those with established channels of distribution and the ability to evade embargoes would have worked their way around the reductions and obtained more of the supplies for the United States," state the MIT researchers.
What should have been done? Both the MIT and AEI studies conclude that allowing the prices of crude oil and refined products to rise freely, both to discourage consumption and to facilitate allocation of scarce supplies to their most important uses, would have been far better than the FEO's program of controls. The incentives of higher prices and profits, by stimulating more domestic oil production, more imports, and more gasoline in the product mix, "would have eliminated lines at gasoline stations, [and] any other manifestation of an embargo imposed on the American consumer," concludes the MIT study. In short, the free market, if allowed to work, could have handled the situation far better than the misguided efforts of yet another Federal bureaucracy.
• "Performance of the Federal Energy Office," Richard B. Mancke, American Enterprise Institute for Public Policy Research, Feb. 1975 ($1.50).
• "The Federal Energy Office as Regulator of the Energy Crisis," Paul W. MacAvoy, Bruce E. Stangle, and Jonathan B. Tepper, Technology Review, May 1975, p. 39.
ATTACKING THE REGULATORS
In the past few months the chorus of voices attacking government regulatory agencies and policies has grown considerably. President Ford appears to be making "regulatory reform" a key campaign issue and is getting strong response from businesses and private citizens, whenever he speaks out on the subject. Increasing publicity is being given to the staggering costs which regulation, especially at the Federal level, imposes on the economy.
In his Government-Mandated Price Increases, fast becoming a classic study, Prof. Murray Weidenbaum documents the spiraling growth of Federal regulation, noting that no less than 29 major new pieces of regulatory legislation were enacted in the period from 1962-1973 (e.g. OSHA, the Consumer Product Safety Act, Age Discrimination in Employment Act, Clean Air Act, National Environmental Policy Act, Noise Pollution and Control Act, etc.). As of mid-1974, there were 5,146 different types of approved public use Federal forms (excluding all tax and banking forms) and it is estimated that business spends over 130 million workhours each year in filling them out. The army of Federal regulatory employees now totals nearly 64,000 people, and direct Federal expenditures on regulatory agencies exceed $2 billion a year. But that is only the tip of the iceberg, as far as costs are concerned. U.S. News & World Report reports that the Office of Management and Budget (OMB) estimates the total annual cost to consumers of government regulations, as follows:
- Economic regulation (transportation, labor, energy, agriculture, banking, etc.): $45 to 60 billion
- Environmental regulation: $50 to 60 billion
- Health, safety, and product regulation: $10 billion or more
Thus, the total impact is on the order of $130 billion, which amounts to $2000 for every American family.
Despite Ford's recent "summit" meeting with the heads of the major regulatory agencies, the odds for abolishing any of them outright are poor. What is more likely is a loosening or repealing of specific regulations and policies, especially those whose costs can be shown to be far greater than their benefits. Business Week recently focused on the cost-benefit approach in citing Prof. Sam Peltzman's continued studies showing that (1) the 1962 amendments to the Food and Drug Act have cost far more in delaying the introduction of beneficial new drugs than they have saved in shielding consumers from harmful drugs, and (2) Federal auto safety standards have not reduced the overall highway death rate, but have apparently made drivers over-confident, leading to greater risk-taking and more accidents involving pedestrians.
Weidenbaum also recommends that only regulations whose benefits clearly exceed their costs be retained. Last November President Ford ordered OMB to require Federal agencies to submit economic impact statements on major regulatory actions that could increase costs and prices, but the agencies have dragged their feet. Several major pieces of currently-pending legislation contain provisions requiring such economic impact statements.
Meantime, beleaguered industries are fighting back with their own economic impact studies. The Outdoor Power Equipment Institute, representing 70 lawnmower producers, recently hired Stanford Research Institute to evaluate the impact of proposed mandatory safety standards for lawnmowers, being developed for the government by Consumers Union. SRI estimated that the standards would put 25 lawnmower companies out of business, cost $520 million per year in higher prices, and raise the price of a typical $100 power mower as much as $86. Although the standards would reduce injuries from new mowers about 50 percent, the higher costs would encourage more people to repair and hang onto old, less-safe lawnmowers longer. New mower sales would drop 35-55 percent the first year, and 25-40 percent in subsequent years.
As the scope and magnitude of government regulation continues to increase, the market for such economic impact studies should expand sharply. More solid data of this type may at last begin to turn the tide, and begin a reduction in the regulatory octopus that threatens to strangle American business.
• Government-Mandated Price Increases, Murray L. Weidenbaum, American Enterprise Institute for Public Policy Research, Feb. 1975 ($3.00).
• "The 'Regulators'—They Cost You $130 Billion a Year," U.S. News & World Report, Jun. 30, 1975, p. 24.
• "Are Government Programs Worth the Price?" Business Week, Jun. 30, 1975, p. 114.
• "Forcing Regulators to Weigh Costs," Business Week, Apr. 7, 1975, p. 34.
• "Proposed Lawnmower Rule May Boost Prices by $86," AP (Washington), May 11, 1975.
New York City's fiscal woes are forcing people in that city to look once again at the "radical" idea of allowing private companies to pick up the garbage. Articles in recent issues of both the New York Times and Daily News have resurrected a 1971 study by then-deputy city administrator Emmanuel Savas which showed that while it cost the city's Sanitation Department $49 per ton to collect garbage, private firms could do the job for only $17.50 per ton. Savas' study led to proposals for an actual test of outside firms versus the Sanitation Department, but the plan was quashed at the insistence of powerful Uniformed Sanitationmen's Association president John DeLury.
But Savas hasn't given up on the idea of capitalism in the garbage business. Now a professor of public systems management at Columbia University, he is conducting a 16-month study of solid waste collection, funded by the National Science Foundation. In the process, Savas has come up with some interesting facts. While it costs the Sanitation Department $297 per year to provide twice-weekly garbage collection to single-family homes in Queens, three miles away in a similar neighborhood in Nassau County, a private firm provides three-times-a-week collections for only $72 per year. In San Francisco, where two private firms pick up all the garbage, the cost averages only $40 per year. (That city's public works director has stated that if the city entered the field, "The rates would go through the roof," because municipal employees have no incentive to work efficiently.) In Houston it is common for homeowners to join with neighbors and award a contract to a private carting firm; those that do, receive a reduction in their city taxes. In Montreal, the city is divided into 198 districts: the city collects garbage in 18 but in the other 180, private contractors do the job, some covering as little as one district.
As a result of his survey of 1300 cities, Savas is more convinced than ever of the need to move away from municipal monopolies in such areas as garbage collection. In the last five years, he points out, there have been far more strikes by municipal sanitationmen than by private carters. As for the charge that the Mafia attempts to control private garbage firms, Savas has this reply: "If an organization headed by Carlo Gambino in fact picks up garbage at one third the price of an organization headed by John DeLury, then it may be in the public interest to buy from Carlo Gambino, if there are no other strings attached."
Whether the power politics of New York City will permit the introduction of capitalist garbage collection remains to be seen. But for other cities, less thoroughly in the grip of unions, private enterprise garbage collection offers hope for meaningful cost—and therefore, tax—savings.
• "Public vs. Private Collection of Refuse: In Some Cities, It's No Longer a Debate," New York Times, Jul. 10, 1975.
• "The Garbage: Is There a Better Way?" New York Sunday News, Jul. 13, 1975.
• "Let's Find Out," editorial, New York Daily News, Jul. 14, 1975.
CAB AGAINST THE WALL
In July this column reported that the Civil Aeronautics Board (CAB) was in a fight for its political life. Recent events have underlined this assessment. Over the summer months the CAB has:
- Appointed a special advisory committee to streamline its regulatory rules, with University of Chicago Law School professor Edmund Kitch as executive director;
- Proposed an experimental test of deregulation on two or more long-haul routes and four to five short-haul routes (Public comments are being accepted through Sept. 15.);
- Disapproved the continuation of a pact between American, TWA, and United to limit capacity on transcontinental routes, because of its "innate anticompetitive nature" (after having endorsed the existence of the pact since its inception in 1971). The Board noted that a competitive air transport system is "inherently more efficient and responsive to the needs of the public."
Much of this activity appeared to be related to the long-awaited release of the report on the CAB by Sen. Ted Kennedy's Subcommittee on Administrative Practices. This report, the "greatest in-depth analysis of airline affairs since regulation of the industry began in 1938" [Business Week], is devastating in its criticisms of the CAB, on solidly free market grounds. The report plainly identifies the Board's cartel-like relationship to the airlines, and asserts that increased competition would be likely to result in up to 30-40 percent lower fares. It explicitly calls for more competition via pricing flexibility and open entry into the airline business.
But much of the thunder of the Kennedy report was stolen by the release of a report which said much the same thing—from an arm of the CAB itself. A special CAB staff group on regulatory reform released their report at the end of July, calling for a complete phase-out, over the next three to five years, of both rate regulation and protective entry and exit control. This goes well beyond the concept advanced by both the Administration and the Kennedy report of allowing price flexibility only within a "zone of reasonableness." The staff report recommended only the setting of a rate ceiling, with no restrictions whatever on price cutting. According to the staff group, the airline industry has "the classic properties of a structurally competitive industry"; all that's needed to take advantage of this potential for competition is for the CAB to get out of the way. "The regulatory environment itself tends to prevent the achievement of maximum efficiency and adaptability to competitive challenge," the group's report stated. Without regulation, "the average price of air service as well as its average cost would be lower, because of greater efficiency and the availability of a larger supply of more economical but lower-quality air service than is at present offered."
With the CAB's own staff group taking such a hard-line position, it may be time for CAB critics to raise their sights and demand nothing less than the agency's outright abolition.
• "Regulatory Reform Drive Pushed," Aviation Week, Jun. 30, 1975, p. 27.
• "The Opening Shot to Reform the CAB," Business Week, Jul. 7, 1975, p. 54.
• "CAB Asks Deregulation Test Comment," Aviation Week, Jul. 14, 1975, p. 25.
• "Kennedy Report Rips CAB Practices," Los Angeles Herald-Examiner, Jul. 21, 1975.
• "Rate-Setting End, Free Entry Favored in CAB Staff Report," Aviation Week, Jul. 28, 1975, p. 28.
Health. The Food and Drug Administration has lost another round in its battle to prevent people from taking care of themselves. A Federal judge has ruled that the FDA cannot restrict the sale of the Ova II do-it-at-home pregnancy test kit. The judge ruled that Ova II's manufacturer has the right to market the kit without the long and costly process of filing a New Drug Application with the FDA for approval. Reason? The kit is not a drug and is therefore outside the FDA's jurisdiction, ruled the judge. The agency had previously seized several thousand kits to prevent their sale. (Source: "Pregnancy Test Kit OK'd," UPI (Washington), Jul. 18, 1975)
Education. What is the greatest threat to Harvard University over the next generation? Student riots? Money shortages? Declining enrollments? Wrong. According to a recent speech by Harvard president Derek Bok, the greatest threat is "government intervention." Despite the irony of Harvard's interventionist chickens at last coming home to roost, it is perhaps a significant sign of the times that even the president of Harvard is having second thoughts about the role and power of the Federal behemoth. (Source: "Less Government?" The Christian Science Monitor, editorial, Jul. 11, 1975)
Postal Service. Frequent strikes by Australian postal workers have led to a rapid expansion of the private courier business in that country, increasing from only 200 trucks to 2000 in the past 10 years. Frustrated mail users pay $2 and up for guaranteed next-day letter delivery between such points as Sydney and Melbourne (440 miles) and within each city. The courier business, which earned $22 million last year, is growing by 15 percent a year. Meanwhile, the government postal service lost $72.4 million in the last fiscal year. (Source: "Australian Couriers Cut Into Post Office Business," AP (Sydney), May 16, 1975)
Employment. The Federal government may no longer arbitrarily deny jobs to homosexuals, the Civil Service Commission has ruled. The Commission stated that only if a person's sexual orientation interferes with his or her work may the person be dismissed or denied employment. A "rational connection" must be shown between a person's homosexuality and job performance in such cases. The ruling brings Federal government employment policies in line with a series of recent court decisions. (Source: "Homosexuals' U.S. Job Rights Upheld," AP (Washington), Jul. 4, 1975)
Censorship. A Jacksonville, FL ordinance that forbade drive-in theatres from showing any films containing nudity has been ruled unconstitutional by the U.S. Supreme Court. The ordinance restricted a form of expression solely because of its content, held Justice Powell's majority opinion, and therefore violated the First Amendment. The city's intent to protect citizens from unwilling exposure to offensive materials was not sufficient grounds to discriminate against all films that contain nudity, since people can easily avoid such exposure. And by singling out nudity, the ordinance could not be justified on traffic safety grounds, since many other distractions in films could also lead to accidents. (Source: "Supreme Court Voids Ban Against Nudity on Drive-In Screens," U.S. Law Week, Jun. 24, 1975)