Despite the defeats of measures to limit taxes in several states (see Trends, January), the November elections produced several modest victories for the cause of liberty and free enterprise. In Massachusetts the voters overwhelmingly rejected a ballot measure which would have banned private ownership of handguns. Despite the backing of the Boston Globe, some law enforcement officials, and various establishment figures, most Bay Staters remained true to their individualist, revolutionary heritage and gave the measure the drubbing it deserved.

In California an attempt to institutionalize the violation of private property rights was soundly defeated. Proposition 14 would have put into the state constitution the recently-legislated farm labor law which, among other provisions, grants union organizers access to farmers' property without the latters' consent. Opponents of the measure conducted a principled campaign, stressing the importance of protecting private property, and won hands-down.

The voters of Arizona, Colorado, Montana, Ohio, Oregon, and Washington all followed the lead of Californians (last June) in rejecting measures that would have forced a halt to development of nuclear power plants by imposing requirements that the safety of such plants be attested to by two-thirds of the state legislature. Questions of safety and responsibility will remain the province of the courts, where they belong, rather than becoming political issues.

And New Jersey voters finally decided to permit casino gambling, limited for the present to Atlantic City. Two years before, a proposal to legalize casinos statewide had been defeated. This time around, the prospect of increased tourism due to this new dose of free enterprise seemed to impress voters as a way out for the fading resort city.

• "Bets, Bottles, and Bullets," Time, Nov. 15, 1976, p. 57.


New chinks in the crumbling wall of restrictions on price competition have been made by the courts. In California the Alcoholic Beverage Control (ABC) Appeals Board has ruled that the state law fixing minimum prices for beer, wine, and liquor, is unconstitutional. The 37-year-old law was found to be an illegal restraint of trade, amounting to "legalized price fixing," in a case brought by Bob's Liquors of San Francisco. The store's license had been suspended for 10 days after it had been caught selling liquor below the mandated minimum prices. The overturned restrictions have been costing Californians an estimated $81 million per year. Although the ABC office is expected to appeal the ruling, industry sources expect it to be upheld by the courts, clearing the way for free-market price competition.

Milk price controls also appear to be on their way out in California. The only question seems to be whether the courts, the legislature, or the Department of Food and Agriculture will be the body delivering the coup de grace. Suspension of retail milk price controls is considered to be a foregone conclusion by the Brown administration, to take effect early this year.

On the east coast, two steps have been taken to increase the freedom to advertise prices—a key aspect of price competition. A three-judge Federal court in Virginia ruled in November that it is unconstitutional for states to prohibit publication of a physicians directory that lists services and fees. The court based its ruling in part on the 1976 Supreme Court decision overturning state bans on drug price advertising on First Amendment grounds. If the present ruling is upheld on appeal to the Supreme Court, it will have nationwide impact. Another indication of the trend toward advertising by professionals is a recent recommendation of the District of Columbia Bar Association. That body has proposed that lawyers be allowed to advertise their fees and services on radio and TV, on billboards, and in newspapers. If accepted by the DC Court of Appeals, the rules would give Washington lawyers more freedom to advertise than anywhere else in the United States.

• "Liquor Price Fixing Held Illegal but Faces Court Test," Carl Cannon, Los Angeles Times, Dec. 3, 1976.
• "What Price Milk Decontrol? Only Time Will Tell," William Trombley, Ibid., Nov. 15, 1976.
• "Court Won't Bar Doctors' Advertising," AP (Washington), Nov. 11, 1976.
• "Ads by Lawyers Proposed by Bar in Washington," Los Angeles Times, Nov. 11, 1976.


The idea that government fiscal and monetary policies can significantly alter such things as GNP and employment has been an article of faith for most of the past several decades. Virtually all politicians consider themselves Keynesians and accept both the possibility and the desirability of the government's intervening to shape the economy. The principal dissenters to this belief system have been the monetarists, led by Milton Friedman, and the Austrians, such as Ludwig von Mises and F.A. Hayek. The monetarists have argued that policy-makers cannot forecast accurately enough to time their policy moves properly. The Austrians, however, have argued that the attempt is fundamentally not possible, since individuals and institutions will react in ways that defeat the aims of the policymakers.

This Austrian insight has suddenly become the hottest new theoretical development in economics, thanks to Robert E. Lucas, Jr. of the University of Chicago and Neil Wallace and Thomas J. Sargent of the University of Minnesota. The three have developed the theory of "rational expectations," based on an analysis of how individuals form their expectations about the future and how these affect their responses to government policy changes. In brief, "rational expectations" holds that (1) any policy move that is widely expected will have no impact at the time it occurs, having been discounted in advance by the public, and therefore, (2) only policy moves that people do not expect will cause changes in current behavior.

These propositions imply that attempts at "countercyclical" policy—whether fiscal or monetary—are doomed to failure. On the fiscal side, for example, the on-again, off-again investment tax credit may work the first time, but soon becomes ineffective. Businessmen come to expect that an economic slowdown will lead to a tax cut, so they postpone investment in order to take advantage of it. This increases the severity of the economic decline. When the cut finally comes, they all rush to invest. Thus, the policy accelerates both the downturn and the upturn, instead of acting as a stabilizing force. Monetary policy similarly backfires. A countercyclical monetary response by the Federal Reserve Board, in which money supply is increased in response to an economic decline, is anticipated by the public and gets factored into their expectations of inflation. Thus, for monetary policy to work, it must come as a surprise and, says Wallace, "that's not a policy, that's throwing dice." But random policy changes produce uncertainty, thereby further reducing economic activity.

Although the rational expectations proponents are still building the empirical support for their position, they are convinced enough of its validity to be willing to make policy recommendations. Given the impotence of fiscal and monetary policy, the government's best course is to balance the budget and keep money growth stable. That would certainly be an improvement over the Keynesian circus now playing in Washington.

• "How Expectations Defeat Economic Policy," Business Week, Nov. 8, 1976, p. 74.


Doctored research efforts, intended to justify questionable Federal programs, have recently been exposed in two separate areas, civil rights and pollution control.

The U.S. Commission on Civil Rights spent $2.3 million on a study of public school desegregation. The report concluded glowingly that desegregation "works," i.e. 82 percent of the nation's school districts have been desegregated without major disruption (meaning 18 percent have had such disruption?) and "only" 10 percent have suffered reduced quality of education. But commission staffers have now revealed that they were ordered beforehand to rig the evidence in favor of success. At least one, Duane Lindstrom, has resigned in protest. Among the evidence he has made public is a commission memo instructing regional offices that "Your monographs will show that desegregation has been successful at the local level, for the reasons the commission reports, or that it can and will be more successful if local leadership responds as the commission recommends."

More serious in its cost impact is the faking of research findings in the EPA's $22 million Community Health Environmental Surveillance System (CHESS) study. First uncovered by Los Angeles Times reporters a year ago, the scandal has now been confirmed by a congressional investigating committee, which has termed the research program "useless for determining what precise levels of specific pollutants represent a health hazard." The investigators found that EPA researchers violated their own established procedures for testing the quality of pollutant measurement, used questionable statistical procedures, and made many serious errors in air monitoring, leaving unsupported many of their conclusions relating health effects to pollution levels. Yet these conclusions have been used as a justification for imposing multibillion dollar controls on power plant emissions. The reason for this sorry state of affairs is that EPA officials, anxious to have scientific justifications for their regulatory actions, exerted severe pressures on the research teams to come up with suitable findings. As a result, "the validity of findings was often overriden in the rush to get out reports."

Both situations illustrate once again the inherent dangers in bureaucratic solutions to social problems.

"Rosy Reporting," Time, Nov. 29, 1976, p. 51.
• "U.S. Study for Setting Air Standards Called Useless," W.B. Rood, Los Angeles Times, Nov. 25, 1976.


In a landmark ruling in November the U.S. District Court in Los Angeles found that the FCC had illegally and unconstitutionally pressured TV network officials to adopt the "family hour" policy of restricting the content of programs shown in the early evening. FCC chairman Richard Wiley had "threatened the industry with regulatory action if it did not adopt the essence of his scheduling proposals," the court found. "The Commission's pressure in this case was persistent, pronounced, and unmistakable." Testimony during the lengthy trial showed that Wiley had suggested that compliance might affect license renewals; it was also pointed out that the FCC had before it numerous other issues that could have had major economic impact on the three networks.

In his 223-page decision, Judge Warren J. Ferguson made clear that "the desirability or undesirability of the family viewing policy is not the issue. Rather, the question is who should have the right to decide what shall and shall not be broadcast and how and on what basis should these decisions be made." Accordingly, he did not order the present family hour ended, making it clear that it is up to the stations to continue or discontinue it, "independent of concern for government reaction."

Ferguson's decision is a small but important step in the fight to put broadcasting on the same basis as the print media, firmly shielded by the First Amendment from the heavy hand of government.

• "TV's 'Family Hour' Ruled Unconstitutional by Court," Los Angeles Times, Nov. 5, 1976.


The State's near-monopoly on education has suffered two defeats in recent months, one at the ballot box and one in the courtroom. In Ohio the state Supreme Court overturned a lower court ruling against a private, religious school that is not state chartered. Lower courts had ruled that children attending the school were truant, because the school did not meet the state's detailed requirements for private schools. The Supreme Court, however, found that "the compendium of [160] minimum standards promulgated by the State Board of Education, taken as a whole, unduly burdens the free exercise of religion." The case for the private school was argued by William H. Ball, the attorney who had previously defended the rights of the Amish to operate their own schools. Ball termed the victory "a strong recognition of parental rights, and…of the right to operate a private school without being drowned in governmental control." Ohio thus joins New Mexico and Vermont as states where private schools may be operated legally without conforming to state-imposed standards.

The other setback for State schools occurred in Oregon. Under Oregon law voters must approve the budget of each school district every year. In recent years, due to voter resistance to ever-increasing taxes, such approval has been harder and harder to obtain. When the schools opened last fall, 37 of the 334 districts had not yet received voter approval. Special elections in September left seven districts still unable to function; of these, four finally received approval in the November election, but three others were turned down once more. One of these, the Eagle Point district, shut down in October and is remaining closed through at least January—the earliest a new election can be called. As the Los Angeles Times put it, what is happening in Oregon "is a reflection of the nation's discontent with public education—what it costs and what it teaches, or doesn't teach."

• "Ohio Supreme Court Favors Christian School 6-0," Christian School Comment, Vol. 7, No. 2, Oct. 1976.
• "Oregon Town's Residents Say 'No' to Schools," Los Angeles Times, Nov. 13, 1976.


Getting government to end its costly and ineffective prohibition of private drug use is a long and difficult struggle. Two milestones in this struggle have been achieved in recent months.

In Washington, D.C., a teacher has been given the legal right to use marijuana to treat his serious case of glaucoma, after doctors testified that other treatments had proved ineffective and that without the drug he would go blind. The D.C. Superior Court ruled that the "defense of necessity" applies to Robert C. Randall, in that the harm he seeks to avoid is serious enough to outweigh his "offense." And the National Institute of Drug Abuse is now providing Randall's marijuana from its Mississippi plantation—in effect, giving him a legal prescription. An estimated one million other Americans suffer from glaucoma, an incurable eye disease that is one of the leading causes of blindness.

In another development, the National League of Cities came very close to endorsing complete decriminalization of all drugs, including heroin, at its 1976 Congress of Cities of Denver. The proposal was strongly endorsed by the League's committees on policy and resolutions. Advocates such as Mayor Richard Hatcher of Gary, Indiana, called the huge amount of drug-related crime and deaths "an insufferable burden on urban economies," and urged decriminalization as a "giant step" to remove the financial incentives from the drug trade. If approved by the 3000 delegates, the proposal would have become official League policy, to be lobbied for in Congress. But when it came to a vote, decriminalization was narrowly defeated, as being "far too broad and far too sweeping." Instead, the delegates endorsed, without debate, experiments in legal heroin maintenance, in order to learn more about the possible impact of decriminalization. Although defeated, the fact that decriminalization was seriously considered and nearly endorsed probably signals the beginning of the end of drug prohibition in America.

• "Pot Necessary, Judge Says of Glaucoma Victim," AP (Washington), Nov. 25, 1976.
• "Key League of Cities Panels OK Drug Decriminalization," AP (Denver), Dec. 1, 1976.
• "League of Cities Won't Back Drug Decriminalization," Ibid., Dec. 2, 1976.


IRS Exposed. The General Accounting Office has found that the IRS in 1973 and 1974 ignored its own audit rules. Instead of directing its audit emphasis against groups with low records of "compliance" (i.e. paying taxes on time, and honestly), the agency went all-out against middle-income individuals and medium-income firms, the groups with the highest overall compliance rates. During the two years studied by GAO, the IRS exceeded its audit quotas by 20-25 percent for these two groups, while failing to meet its quotas for other groups. The failures were traced to the agency's attempt to justify a request to Congress for more auditors, the GAO found. (Source: Washington Post, Nov. 25, 1976.)