Trends

THE HUMPHREY-HAWKINS PUNCHING BAG

In recent months, a pantheon of liberal economists has lined up to repudiate—in whole or in part—the Humphrey-Hawkins "Full Employment Bill." So deafening has been the uproar from economists and respected publications, in fact, that the bill seems unlikely to survive in its present form.

Harvard Professor Otto Eckstein, a former Democratic member of the Council of Economic Advisors, gave a flat "no" when asked if he supported the measure. "I don't have to," he said. "I'm not running for President." Other economists, while paying lip service to the ideals of the bill, consider it to be wildly inflationary. Professor Michael Wachter of the University of Pennsylvania says that reaching the three percent unemployment target set by the bill would trigger inflation of 15 percent or more.

The most disturbing sections of the bill to the liberals are those that would make the government guarantee everyone a job at "prevailing wage rates." To achieve the targetted unemployment rate, points out Professor Sar Levitan of George Washington University, the government would have to prod the economy into a 7.5 percent yearly growth rate for each of the next four years. The government could only achieve such growth rates through an explosive growth in the money supply, or by creating an enormous public jobs program.

One study by the Department of Labor claims that budget estimates of $20-40 billion a year for the program have "vastly understated" the costs. According to the U.S. Chamber of Commerce, the true price tag would be about $80 billion. Hubert Humphrey, of course, blithely denies that his measure would have any significant impact on the rate of inflation. But some of his colleagues are not so sure.

In June, Senators William Proxmire and Harrison Williams began working on new legislation to split the bill in halves. The first half, which would be rushed through in the fall, would be basically a symbolic exhortation on behalf of low unemployment rates. The detailed measures of the other half, including closer Congressional control of the money supply and a mechanism to establish national planning goals, would lie dormant for this session.

In view of the reception from academics and the liberal press, the most ominous measures may even be simply forgotten. As the Los Angeles Times editorialized, the bill "would be dangerously inflationary without necessarily accomplishing what it promises to accomplish." Jimmy Carter, who endorsed the bill to win the favor of organized labor, might be excused a smile of relief if Humphrey-Hawkins loses its teeth.

SOURCES:
• "What Humphrey-Hawkins Would Mean," Business Week, May 31, 1976.
• "Blunderbuss Jobs Bill," Los Angeles Times, June 22, 1976.
• "Moving to Water Down Humphrey-Hawkins," Business Week, June 14, 1976.

CUTTING BACK BUREAUCRACY

Efforts to cope with America's ever-expanding maze of government agencies and programs are continuing. In the past 15 years, while 236 new Federal agencies, bureaus, and departments have been created, only 21 have been abolished. There are now over 1,100 Federal domestic assistance programs, including 228 programs just funding local health care activities.

Two major Federal reforms are under consideration. One, proposed by the administration, would set up a four-year cycle for reform of all government regulatory agencies (including the newer agencies such as OSHA, EPA, and the EEOC). In each of the four years, certain specific agencies would be up for review; the president would be required to send reform proposals to Congress in January and if Congress did not act during that calendar year, the reform would automatically become the pending business on the floor of both houses until action was taken.

A more sweeping proposal is S.2925, cosponsored by 38 senators ranging from Barry Goldwater and Jesse Helms to Edward Kennedy and Hubert Humphrey. Titled the Government Economy and Spending Reform Act of 1976, it would apply to all Federal departments, agencies, and programs (except Social Security and interest payments on the national debt), not just to regulatory agencies as would the Ford bill. S.2925 would do the following:

• Subject the agencies to "zero-base budget" review every five years,

• Terminate all those that did not successfully complete such a review, and

• Consolidate Federal programs with overlapping functions.

Zero-base budgeting refers to the requirement that each agency or program justify its entire budget and existence, not just its proposed increase from the previous year. In each year of the proposed five-year cycle, a specific set of related program areas would be evaluated, to facilitate the identification of overlapping or competing programs. The impact of no expenditures, or various levels below or above the previous year's budget, would be evaluated by Congressional committees, with GAO assistance. S.2925 was approved unanimously by a Senate government operations subcommittee in May, and sponsor Edmund Muskie has expressed guarded optimism that it might become law this year.

The state of Florida has already beaten the Feds to the punch. Zero-base budgeting went into effect in the Florida legislature earlier this year, and all state agencies are being asked by the Appropriations Committee why they believe they should not be abolished in 1977. Preliminary indications are that many useless and redundant programs are being uncovered. In addition, a "sunset law" that would subject 100 regulatory laws to potential abolition every six years, will go into effect on Jan. 1, 1978 in Florida.

SOURCES:
• "Total Regulatory Reform Urged by Ford," Aviation Week, May 17, 1976, p. 34.
• "Taxpayers Support Spending Reform," NTU News, May 1976.
• "Bill to Cut Federal Programs Gains," Los Angeles Times, May 14, 1976.
• "Historic Budgeting Approach," The Florida Libertarian, May 1976, p. 5.
• "Laws That Self-Destruct," Ibid, June 1976, p. 6.

SALESMEN FOR ADVERTISING

In the heyday of John Kenneth Galbraith, defenders of advertising fought a lonely, losing battle. But now the conventional wisdom on the subject is collapsing on all sides. Instead of being viewed as a creator of unnatural appetites in an unwary public, advertising is finding new friends in consumer-protection and academic circles.

The theoretical defense comes largely from Professor Phillip Nelson of the State University of New York. Extending the earlier analyses of Professors Yale Brozen and George Stigler, he argues that advertising undermines, rather than promotes, monopoly. For years, economists of an interventionist stripe castigated most advertising as a way of fostering imaginary distinctions between products. According to this view, consumers were bamboozled into brand loyalties that discouraged new competitors from entering a market.

Nelson replies that advertising conveys a very important, if implicit, message to the consumer. Because no advertiser will waste money to heavily promote inferior goods, the consumer can be almost certain of receiving greater value for his money by purchasing a well-advertised product than an unknown one. Companies publicizing an inferior product may persuade a consumer to try it—once. Says Nelson: "Companies are trying to get consumers to try their products, but they live or die from repeat purchases."

While heavy advertising is a virtual guarantee to consumers of quality, Nelson finds an even more fundamental defense of advertising campaigns: their anti-monopolistic effects. He observes that the more consumers learn about the quality of goods, the more sensitive they become to prices. Advertising enhances awareness of quality differences, and thus allows people to make better calculations of the value available at different price levels.

The anti-monopolistic effects of advertising have become apparent even to various government agencies. In June, the Justice Department filed a lawsuit against the American Bar Association, accusing the group of unreasonably prohibiting lawyers from advertising fees. (The ABA had voted earlier this year to allow lawyers to advertise fees and services—but only in ABA-approved journals). The Justice Department, noting that the ABA prohibitions are given the force of law by state legislatures, declared the ban to be an illegal restraint of trade. In California, in a similarly unusual display of good sense, a Superior Court judge revoked a decree prohibiting advertisements by a large optical firm. The judge indicated that the state law forbidding eyeglass ads was unconstitutional in the light of recent Supreme Court rulings.

An article in the Journal of Law and Economics published in October of last year, shows how much consumers stand to gain if the advertising advocates continue to get their way. Analyzing the cost of services in markets dominated by "professions" that ban advertising, the authors conclude that over-pricing is rampant. They note that the number of people using eye care services appears to be about half of the number who need it, largely because of sky-high prices. Overall, they say, "prices appear to be 25 to 40 percent higher in the markets with greater professional control."

SOURCES:
• "A New View of Advertising's Economic Impact," Business Week, December 22, 1975.
• "Justice Department Files Suit to Allow Lawyers to Advertise Fees," AP (Washington), June 26, 1976.
• "Optical Firm Wins Right to Advertise," Los Angeles Times, June 17, 1976.
• "Regulating Through the Professions," Lee Benham and Alexandra Benham, Journal of Law and Economics, October 1975.

CREEPING CAPITALISM IN LATIN AMERICA

Facts of life have begun to dawn upon the rulers of two socialist countries south of the border. In Uruguay, a once prosperous nation whose economy was ruined by rampant taxes and economic controls, the government has decided to take its hands off most of the financial sector. And in Castro's Cuba, the workforce now finds itself tempted into higher productivity by a system of material bonuses.

The turnabouts reflect an admission by both governments that the carrot works better than the stick. Uruguayan workers, during the 1950's and 1960's, repeatedly voted to expand the bloated public sector—driving productive business into the ground and raising taxes and inflation to confiscatory levels. A collapse of the democratic system in 1973 brought to power an autocratic clique, one of whose first tasks was restoring the economy.

Since then, controls have been stripped away. Uruguay's rulers envisage their country becoming a Switzerland-style financial center, as a result of new bank secrecy laws and an end to curbs on free movement of capital. Their approach is already paying off: foreign deposits in the country sextupled last year. Domestically, personal income taxes and inheritance duties have been eliminated, and import and export restrictions are being relaxed. Inflation has fallen from 107 percent to 60 percent in the past two years.

Uruguay retains some controls—particularly on bank interest rates and purchases of capital goods abroad—and continues to support a swollen social security system. But economic policymakers have admitted that these too are counter-productive, and have recently introduced a bill that would repeal the interest rate controls.

While Uruguay has been making giant strides towards the free market, Cuba has taken a baby step, albeit a significant one. Under a new policy promulgated by Fidel Castro, Cubans who produce more than the norm for their job receive more than praise. They get a financial bonus. On the other hand, those who produce less than the norm have their wages cut.

In the past nine months, this heretical policy has shown dramatic results. One-third of the country's two million workers now participate in the system. Longshoremen productivity is reported to have doubled—and milk producers increased their productivity by 81 percent while cutting salary costs by 44 percent. The incentives resemble those in effect in other workers' paradises such as East Germany and the Soviet Union. They put another nail in the Marxist credo of "from each according to ability, to each according to need."

SOURCES:
• "Uruguay Wants To Be Key Monetary Area," Los Angeles Times, February 9, 1976.
• "Work More, Earn More Plan Boosts Cuban Output," Los Angeles Times, June 11, 1976.

MILESTONES

Tying the CAB's Hands. Although no measure has much chance of passage this year, three proposals to curtail the power of the Civil Aeronautics Board are before Congress. One comes from the CAB itself; although vaguely worded, it would ease entry and exit restrictions in the industry and permit marginally more rate flexibility. Another comes from Sen. Howard Cannon, head of the Senate aviation subcommittee. His bill would do little to ease route restrictions, but would allow far more pricing freedom than does the CAB package. The White House proposal (see July Trends), which predates the other two, would phase in relative freedom over pricing, routes, and entry over several years. Administration officials say the CAB's proposals will be acceptable, however, if ambiguity can be eliminated about the speed and procedures for deregulation. (Source: "Reform To Get Legislative Boost," Aviation Week, June 28, 1976.)