OTRAG Update

The recent invasion of Zaire's Shaba province, site of OTRAG's launch center (see "African Deception," Reason, July) was masterminded by East German military advisors, not Cubans. So reports Colin Legum of the London Observer. An East German military delegation headed by Gen. Heinz Hoffmann was in Angola from May 8th to 12th, when the invasion was launched from there. Stated Legum: "The East German involvement in the anti-Mobutu struggle appears to be directly linked to the role they have played in trying to stop the West German company, OTRAG, from developing a new type of low-cost long-range rocket to lift 'spy' satellites."

OTRAG had planned two launches during the second half of May. The first occurred as scheduled, on May 20, but the second was postponed when the invaders captured Kolwezi, 190 miles away. OTRAG, like most other Western firms, evacuated its personnel at this point. The company announced that its May 20 launch was successful, reaching an altitude of 30 kilometers. The first orbital launch is scheduled for next year.

A subsequent London Observer article stated that OTRAG had confirmed negotiations for sale of a reconnaissance satellite to China, thereby further establishing a motive for the East German/Soviet opposition. It also speculated that the invasion, though unsuccessful, is causing OTRAG to reconsider the future of its Shaba launch center. Thus, it concluded, "Although the FNLC invasion of Shaba has at least temporarily failed, it may in fact have served the East German and Russian purpose of possibly putting an end to OTRAG's project in Zaire."

• "How and Why East Germany Masterminded Zaire Invasion," Colin Legum, San Francisco Examiner (from the London Observer), May 21, 1978.
• "Shaba Invasion Aimed at OTRAG," Aerospace Daily, June 2. 1978.

CAB Pushes Competition

While Congress continues to bog down in the details of its partial deregulation of the airlines, the Civil Aeronautics Board is going further on its own than the reform bill's provisions. Spurred on by its economist chairman, Alfred E. Kahn, and by Bureau of Pricing and Domestic Aviation director Michael E. Levine, the CAB has set the industry on its ear in three major policy areas.

First off, in April the Board issued a proposed fare reduction policy that would let airlines cut fares as much as 50 percent without needing CAB approval. And they would no longer have to price first-class service at least 50 percent higher than coach. At present, although the Board has been quite permissive in permitting fare reductions, each one requires specific approval. The new policy is scheduled to go into effect July 1st. The Board is also considering allowing fare increases of up to five percent without permission.

Secondly, the CAB is thinking about ending its support of the International Air Transport Association's joint fare-setting activities (price fixing). Existing CAB support permits US airlines to enter these agreements with immunity from the antitrust laws. In the last few years, though, IATA price fixing has been showing signs of strain, as pressure for discount fares and price-cutting increases.

Third, and most far-reaching, the CAB is about to test out a policy of completely free entry to airline routes. It has enunciated this policy in an "unusually philosophical document stressing the value of the free market over government regulation in assigning airlines to routes," authored by Levine. The policy will get its first official test in the case of service to Oakland. A number of airlines have proposed adding new routes connecting Oakland with 15 other cities. (In the past Oakland has had relatively poor service because the CAB directed most routes to nearby San Francisco.) Instead of selecting one or two airlines for the new routes, and making sure that those selected (1) would show a profit, and (2) would not divert traffic from other airlines, the new policy will let every airline that wants to serve the Oakland routes. The only requirement is that each be "fit, willing, and able." The Oakland proceeding will be a milestone for deregulation—"the most significant thing we'll have done so far," says Levine.

Already, though, the free-entry philosophy is spreading. The Board is close to a final decision on a proceeding to allow new air service at Chicago's little-used Midway Airport. Over 18 months ago two newly organized airlines approached the CAB with plans to serve Midway. When the word got out, three existing airlines—North Central, Delta, and Northwest—also filed route applications. Initially, even Kahn argued for a "protective corridor" approach under which existing airlines would be kept out for a year or two to give the newcomers a head start. But under prodding from Levine and his staff, the Board has come around to an open-entry position in this case, too. Board member Elizabeth Bailey argues that "We should use this as an opportunity to test our theory of really free entry."

In short, while a free market in aviation has not yet arrived, the CAB has made more progress in that direction in the past three months than Congress has made in the past three years.

• "Airlines Could Freely Set 50% Rate Cuts Under CAB Proposal," Wall Street Journal, April 17, 1978.
• "Setting Air Fares Jointly May Lose Support of CAB," Ibid., May 22, 1978.
• "CAB Moves to Throw Routes Wide Open for Competition," Ibid., May 8, 1978.
• "CAB Proposes Granting Oakland Routes to All Carriers Asking to Fly Them," Ibid., May 31, 1978.
• "New Carriers Face Challenge at Midway," Aviation Week, May 1, 1978, p. 26.

OSHA Barred

In a stunning victory for property rights and civil liberties, the US Supreme Court has ruled 5-3 that Labor Department investigators must have search warrants to make unannounced inspections of business premises. The Court held that the Constitution's prohibition on unreasonable searches applies to business property as well as to homes. Therefore, inspectors for the Occupational Safety and Health Administration (OSHA) must go before a judge or magistrate to request a search warrant before conducting investigations. Only if the owner agrees in advance to a spot check would no warrant be needed.

The case before the Court involved the Labor Department's appeal of a similar ruling in 1976 by a three-judge federal court. Idaho contractor Bill Barlow had refused to allow OSHA inspectors to enter his business unannounced, citing the Fourth Amendment as his authority. The Supreme Court concurred with Barlow's defense of his rights. "The authority to make warrantless searches devolves almost unbridled discretion upon executive and administrative officers, particularly those in the field, as to when to search and whom to search," wrote Justice Byron R. White for the majority.

According to the Associated Press, "The Court's ruling virtually guts the Labor Department's strategy" of enforcing OSHA regulations via the threat of surprise inspections. US Chamber of Commerce president Richard L. Lesher termed the decision a "blow for freedom"; he was seconded by the National Association of Manufacturers. OSHA chief Eula Bingham, however, promised to seek a lot of warrants.

• "Court Rules Against Surprise Inspections," AP (Washington), May 23, 1978.
• "Bill Vindicated," Time, June 5, 1978, p. 16.

Welfare—The Grim Facts

Welfare—and what to do about it—is a perennial problem. Several recent studies shed new light on the subject but provide no solutions. Still, a precondition for solving a problem is understanding its full dimensions, and it is helpful, as well, to know what will not work in solving it.

To begin with, it is time people became aware of the full magnitude of existing welfare programs. A research team at Pace University's Graduate School of Business recently released the results of its inventory of federal income transfer programs. During fiscal year 1977 the federal government operated 182 distinct programs of income transfer and poverty relief. Altogether, appropriations for those programs totaled $250 billion—69 percent of total federal tax receipts.

The study's authors, William J. Lawrence and Stephen Leeds, point out that there is no underlying rationale for this plethora of programs. As one result, says Dr. Lawrence, "The overlapping of benefits of many of the programs often leads to work disincentives which foster dependency on welfare."

What can be done? One proposal is the administration's "Program for Better Jobs and Income," the major elements of which are an extensive public service employment program and a negative income tax. The public service jobs portion was subjected to detailed economic analysis by David I. Meiselman of Virginia Polytechnic Institute. Prof. Meiselman concluded that its net first-year cost would not be the mere $2.8 billion claimed by the administration but three to four times that amount. And the full potential cost of the program, several years down the road, could reach $80 billion a year.

Another element of the administration's plan is the guaranteed annual income or negative income tax. Under this approach, various existing welfare benefits (food stamps, services, cash grants) are replaced by a single guaranteed amount of money. For several years the federal government has been experimenting with this approach. So far, the results show it to be a flop.

One big concern was what would happen to work incentives under a guaranteed income. A Rand Corporation analysis of a three-year experiment in New Jersey and Pennsylvania showed that white male heads of households, on the average, reduced their work week by five to seven hours. "This represents a large and statistically significant labor supply withdrawal," said study director John Cogan of Rand. Cogan's efforts represent a more accurate analysis of the New Jersey-Pennsylvania data than several earlier studies which showed less of a work disincentive. Earlier studies, for example, included in the data on workforce participation all eligible families, even if they chose not to participate because they had nothing to gain monetarily. This misleadingly inflated the measured hours of work by those in the experimental group.

Yet another unexpected result turned up in the Seattle-Denver guaranteed income experiment. There, researchers from SRI International discovered, rates of divorce and family dissolution increased sharply when the government guaranteed a minimum family income. White families in the experiment averaged 58 percent more marital breakups than similar families in a control group; for black families, the difference was 61 percent. SRI's Robert Spiegelman pointed out that the results were directly contrary to the popular notion that income guarantees would ensure the stability of poverty families.

Our $250 billion welfare monstrosity is not solving the problem of poverty. But it looks as if more public service jobs and a guaranteed annual income will not solve it either.

An Inventory of Federal Income Transfer Programs, William J. Lawrence and Stephen Leeds, Institute for Socioeconomic Studies, April 1978.
• Welfare Reform and the Carter Public Service Employment Program: A Critique, David I. Meiselman, Law & Economics Center, University of Miami, February 1978.
• Negative Income Taxation and Labor Supply: New Evidence from the New Jersey-Pennsylvania Experiment, Rand Corporation, April 1978.
• "Guaranteed Income," Los Angeles Times, May 2, 1978, p. 2.

Phone Battle Continues

The long-running battle between tiny MCI Communications Corporation and American Telephone & Telegraph Company has gone a few more rounds. MCI operates a long-distance microwave system that transmits data and voice messages between 24 cities, competing with AT&T's long-distance telephone service. But to link up to customers, MCI's Execunet service must use local connections provided by the local monopoly telephone company. After winning a several-year court battle against AT&T over its right to do business at all, MCI thought it had it made.

But then AT&T began the next round: denying MCI access to local interconnections. Despite winning a favorable federal appeals court decision against AT&T last year (which the Supreme Court declined to review in December), Ma Bell was not deterred. No sooner had the Court announced its view than AT&T petitioned the Federal Communications Commission to rule that making connections for its competitors would be against "public policy." The FCC agreed to halt further connections, pending completion of its just- begun two-year study of competition's potential impact. So back to court went MCI, winning yet another favorable ruling in April, overruling the FCC's action. AT&T then appealed this decision to the Supreme Court. In May, the Court finally came to grips with the case—and ruled in favor of MCI.

Jubilant, the company began signing up for local service in 10 more cities—only to run into yet another round from AT&T. Ma Bell has filed for new rates for these interconnect services, proposing to charge interstate rates for this local service. MCI has fired off protests to the FCC and will end up—once again—back in court. All of which illustrates how America's largest corporation practices "free enterprise."

• "MCI's Long-Distance Phone Service Wins Second Appeal," Wall Street Journal April 17, 1978.
• "High Court Clears AT&T Competition for Long Distance," Ibid., May 23, 1978.
• "AT&T Requests Rivals Pay More for Local Service," Ibid., May 31, 1978.

Milking Nearly Everyone

What federal regulatory apparatus benefits virtually nobody—not even those it was designed to help? The answer is milk regulation. Enacted during the Depression, federal regulation of the dairy industry benefits neither consumers, distributors, nor even farmers (except in their role as landowners)—and should be phased out. So concluded a study conducted by the Justice Department during the final days of the Ford administration.

The regulations comprise a three-part system, including price supports, government purchase of surpluses, and restrictions on the quantity of milk produced for home consumption. Overall, the Justice Department team found that this system of regulations has caused or contributed to (1) excessive prices, (2) inefficient, inequitable, and regressive attempts to raise producer incomes, (3) exaggerated fluctuations in the prices received by farmers, (4) artificial localization of supply areas, and (5) monopolistic pricing.

The study group's report has been published as part of the Ford Administration Papers on Regulatory Reform, a series edited by economist Paul W. MacAvoy. MacAvoy was a member of the Council of Economic Advisors and co-chairman of the Domestic Council Review Group on Regulatory Reform under President Ford.

Federal Milk Marketing Orders and Price Supports, American Enterprise Institute, November 1977.

Gambling Revisionism

The conventional wisdom about crime keeps getting chipped away as a result of new studies. One of the more important has just been completed by sociologist Jonathan Rubinstein and economist Peter Reuter. Their unprecedented study of gambling in the New York City area paints a picture completely at variance with accepted "knowledge."

For decades the FBI and city police have been telling us that organized crime tightly and ruthlessly controls gambling and loan-sharking, especially in big cities. Hard evidence to this effect was not forthcoming, however; the conventional wisdom was based largely on police press releases. But Rubinstein and Reuter, using subpoena powers from the New York State legislature, obtained access to confidential files of New York City area police departments. They also interviewed numerous bet-takers, bookmakers, loan sharks, etc.

What they found in sports betting was "autonomous, highly competitive small businesses, working on remarkably thin profit margins, frequently going broke." Operators enter and leave the field freely and in large numbers. There is very little violence or coercion, and little police corruption. The numbers game is much the same, with "perhaps a little more violence and corruption than in bookmaking, but still far short of the common concept."

Why, then, the common picture of a highly profitable, ruthless, mob-run enterprise? Rubinstein and Reuter theorize that this image has suited the purposes of criminal justice officials (who have control over most of the data). After all, it keeps their budgets going up and helps them justify wiretapping laws and conspiracy statutes. Besides threatening both the pocketbooks and the civil liberties of the citizenry, this false image has led to popular support for attempts to regulate gambling by setting up state lotteries and off-track betting. Rubinstein and Reuter consider these government monopolies more likely to breed corruption of officials than competitive private sector gambling.

• "Unorganized Crime," Alan L. Often, Wall Street Journal, May 11, 1978.

HMO Problems

Many people who are concerned about the high cost of medical care argue that one reason costs are so high is that doctors have the wrong incentives. Since they are paid only when people get sick, it is argued, doctors have little incentive to keep people well. Consequently, they say, medical care would be both better and cheaper if doctors worked for a set salary, paid in advance by the patient like an insurance premium. Then they would have an incentive to keep the patient well, thereby holding down costs.

This concept lies at the heart of the health maintenance organization (HMO) and other prepaid health plan approaches. While the evidence on HMO cost-effectiveness is mixed, thus far, at least traditional fee-for-service doctors don't desert their patients in their quest for (gasp) higher pay. But that is exactly what the 55 doctors who work for Washington's Group Health Association did in April. After four months of salary negotiations broke down, the (unionized) physicians went out on strike for a $7,000 a year increase (from $53,000 to $60,000). The strike left 109,000 prepaid clients wondering…about their physicians' incentives.

• "Health Plan Doctors in DC Area Strike," UP1 Washington, April 16, 1978.


• Competing Booze. California's law setting minimum prices for liquor is unconstitutional. So ruled a unanimous state Supreme Court, in a case dating from the 1975 refusal of Christine and Richard Corsetti to charge state-ordered prices. The court found that such price-fixing violates a 1975 amendment to the Sherman Antitrust Act that eliminates certain exemptions, and also the 21st Amendment (which repealed Prohibition). (Source: AP [San Francisco], May 31, 1978.)

• Challenging No-Growth. A savings and loan association has issued a legal challenge to California land-use control policies. Glendale Federal has sued the city of San Juan Capistrano in federal court. The S&L contends that the city's no-growth ordinances, which "preclude the use of all or large portions of 1700 acres" it owns in the city, constitute a taking of land for public use without compensation. This, it contends, violates the Fourth Amendment as well as the federal Civil Rights Act. The court denied a move by the city to dismiss the case. (Source: Los Angeles Times, April 30, 1978.)

• No to Bilingualism. Bilingual education classes are costly and have been controversial since they were introduced some years ago. Now, a $1.5 million study of 38 such projects in 117 schools has found no gains in student achievement compared with regular classes. In some cases, the students taught only in English actually did better. Conducted by the American Institutes for Research, the study was funded and released by the US Office of Education. The federal government is spending $135 million of our money on such programs this year. (Source: AP [Washington], May 10, 1978.)

• Busting the Cities. If a city government operates a business enterprise—a utility, airport, transit system, etc.—it must abide by the antitrust laws the same as private businesses. So ruled the US Supreme Court by a 5-4 margin. The case was brought by Louisiana Power & Light Company, which charged that two Louisiana cities which operate their own electric utility were engaging in anticompetitive practices. Specifically, the cities tried to prevent the company, by law, from constructing a new power plant. No way, said the Court's majority: "The economic choices made by public corporations…are not inherently more likely to comport with the broader interests of national economic well-being than are those of private corporations." In other words, cities, if you're going to play at being industrialists, you've got to play by the same rules as everybody else. (Source: Los Angeles Times, March 30, 1978.)

• PSRO's Last Chance. That new regulatory body looking over the doctors' shoulders—the Professional Standards Review Organization—is more costly than it's worth. That's the conclusion of the Office of Management and Budget, which has recommended euthanasia for PSROs. But HEW Secretary Califano has interceded, granting the PSROs a one-year reprieve in an attempt to show that they can be effective after all. (Source: Science, May 26, 1978, p. 885.)