Trends

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R&D and Growth For many years—in fact, ever since World War II—we've been told that the taxpayers should finance research and development because the result will be economic growth and prosperity. But in the past decade indicators of such growth—US productivity increases, the proportion of US patents held by US citizens, and the number of new venture capital companies—have all turned sharply downward, even as R&D funding has increased.

So what are the science bureaucrats saying now? Russell Peterson, director of the Office of Technology Assessment, says that drawing a connection between research and economic growth could be dangerous, because it might fail to turn up solid evidence. Hence, he and other speakers at a colloquium sponsored by the American Association for the Advancement of Science urged that this "well-worn assumption of economic gain" be discarded as a "shibboleth." In the future, apparently, higher federal R&D budgets are to be argued for because the scientists are nice guys.

Postal Competition—A Mixed Bag Three would-be competitors to the US Postal Service have been forced to suspend operations. All three attempted to deliver first-class mail in defiance of the government's statutory monopoly.

In Los Angeles the business manager of the South Bay Union High School District was only trying to save time and money for his employer. That's why Hugh D. Cameron used a commercial courier service to deliver paychecks, memos, and other paperwork among the various schools and offices of the district. For seven years Cameron's plan saved thousands of dollars and ensured prompt delivery—but in August postal officials clamped down. Cameron could, of course, continue to use the courier service, they ruled—if he put a 15 cent stamp on each piece and paid someone to cancel them. Needless to say, the district decided to just use the mails.

In Charleston, South Carolina the criminal was a 14-year-old boy. Kenny Maguire believed all the American rhetoric about entrepreneurship. So he went into business for himself, delivering letters on his five-speed bicycle. Above Broad Street he charged 8 cents each, below it only 5 cents. He had just landed his biggest contract—to deliver 80 wedding invitations—when the heavy hand of the State clamped down, putting him out of business.

Early in August the doors also closed at P.H. Brennan Hand Delivery in Rochester, New York (see "Monopoly Breaker," REASON, December 1977). A unanimous US Court of Appeals ruled that the Brennans had "utterly failed to establish the unconstitutionality" of the private express statutes that grant the government's monopoly. The firm's customers were incensed, as were the Brennans. The company had begun to tum a good profit.

Meanwhile, in the magazine field, where there is no government monopoly, "alternate delivery" companies continue their rapid growth. The largest company, Southern California's Inland Carriers, Inc., delivers over 340,000 magazines each month. Better Homes & Gardens plans to expand its alternate delivery cities from 6 to 16 this year, delivering 500,000 copies each month by mid-1979. A Reader's Digest vice-president has announced that the company is "committed to alternate delivery on a permanent basis." Also entering the market are major book and record clubs, though still on an experimental basis.

The combination of soaring rates, poor service, and postal strikes is leading publishers to desert the postal service in favor of competitors. Consumers of first-class mail service would probably do the same—if Congress allowed them the choice.

Deregulation Spurs Boom Under the leadership of economist Alfred Kahn, chairman of the Civil Aeronautics Board, the CAB has substantially reduced government regulation of the airlines. The result has been fare reductions, new service, and an unprecedented boom in air travel. Domestic traffic in June was up 20 percent over the previous year, and the average load factor increased from 57 percent to 67 percent of available seats sold. Freddie Laker's transatlantic Skytrain is averaging a 96 percent load factor—and reached its first-year goal of 212,000 passengers five weeks early.

But Kahn & Co. aren't resting on their laurels. All summer long they continued to act, rolling back regulations and proposing still more changes to increase competition. For example:

• The CAB has indicated it will proceed, as planned, to allow all airlines that wish to begin service at Oakland, California, and Chicago's Midway Airport to do so. The Justice Department's Antitrust Division had earlier criticized the CAB for not instituting such "open entry" everywhere, right away.

• In August the CAB issued a final ruling to lift nearly all restrictions on charter flights. Gone are advance-purchase, minimum-stay, and minimum group-size requirements, and discount pricing rules are liberalized. And as of January 1, all but two of the myriad charter categories will be eliminated.

• Starting in October, airlines may cut fares by up to 50 percent on all flights and 70 percent during off-peak hours, without CAB approval. And they may raise fares by between 5 and 10 percent without approval.

• The CAB has also proposed a major revision in international airline policy. Its draft US-German "open-skies" agreement, presented to the Germans September 12, would permit airlines from each country to serve any and all cities in the other country, rather than only those few designated by the respective governments. (At present, for example, Lufthansa is allowed access to only five US cities.)

• In the air freight industry—already deregulated as to entry and pricing—the CAB has now proposed to abolish the remaining system of requiring carriers to submit freight rates ("tariffs") in advance for industry comment and Board approval or disapproval. Instead, carriers would simply report new fares the day they were introduced.

• The CAB has also decided to encourage competition between regulated ("certificated") airlines and unregulated commuter lines. As a first step it has allowed certificated Air New England to begin operating unregulated commuter service.

Kahn seems to know exactly what he's doing. Evidently, he's firmly convinced that the free market can do the job better than a bureaucracy. "We are not equipped to run a single airline, let alone a nationwide air transportation system," he told the American Bar Association in a hard-hitting speech recently. And he told the Wall Street Journal, matter-of-factly, "I don't see any need for the CAB—quite apart from the fact that I have tenure at Cornell and don't need a job."

Privatized Air Base The only things the government can do competently are wage war and inflate the currency, right? Yet even this ancient bit of wisdom is open to question. Military operations tend to be as bureaucratic and wasteful as those of other government agencies. Hence, the significance of an ongoing Air Force experiment.

At Vance Air Force Base in Oklahoma, all personnel except the jet pilots are civilians. But they are not government employees. Instead, they all—guards, mechanics, bus drivers, KP staff, etc.—work for Northrop Corporation, one of America's largest defense contractors. Everywhere on the base blue signs carry the legend, "Operated by Northrop."

What difference does that make? Well, as might be expected, the private firm figures out how to do the same jobs at less cost. The Rand Corporation compared Vance with Reese Air Force Base—which is comparable in its mission, facilities, number of pilots trained, and number and kinds of aircraft. Vance AFB used only 74 percent of the personnel needed at Reese. And the Commission on Government Procurement found that, compared with seven other bases, Vance's costs were 20 to 30 percent less. "It has been an extremely successful program," said base commander Col. Thomas J. Magner, "and from an economic standpoint, the cheapest and most efficient way to go."

Whether the concept of contracting out military support services will be expanded is not yet clear. At present Vance is the only US air base operated in this manner. But the Defense Manpower Commission likes the idea and sees in it a key to cutting the burgeoning costs of military manpower. Despite a drop of 400,000 employees in the past decade, the Defense Department is spending $22 billion more for personnel. Saving 20 to 30 percent of that would be nothing to sneeze at.

European Freedom Economic freedom continues to increase in Europe, especially in France and Germany. In the wake of the Left's defeat in this spring's elections, French Premier Raymond Barre is abolishing price controls. Barre, a former economics professor and advocate of the free market, set in motion June 1st the dismantling of the 30,000 government price decrees that have been issued since World War II. First to be decontrolled were trucks, railroad cars, machine tools, ball bearings, watches, tires, synthetic rubber, canned goods, and other food products. All remaining controls will be ended by October.

Over the past three decades France's price controls have served to limit or eliminate competition, in effect cartelizing industries. Since the government usually allowed cost-based price increases, companies had little incentive to keep costs under control. The result appears to have been higher prices than if no controls had existed at all. And Barre has made much of the fact that prices have been more stable in countries without controls—such as Germany and Switzerland.

Indeed, West Germany continues as a leader of free-market policies. In the last few years the ruling Social Democrats have flirted with neo-Keynesian policies and found them wanting. "In West Germany, all three parties no longer believe in Keynesian policies—in deficit spending," economist Wolfram Engels told Business Week recently. Instead of deficits, the Social Democrats now favor tax cuts and other incentives for investment as means of attacking unemployment.

Policies of this sort are being advocated for all of Europe by the Shadow European Economic Policy Committee—an international group of economists cochaired by Prof. Allan H. Meltzer of Carnegie-Mellon University. The group's recommendation for ending stagflation: "Monetary targets should be stated, met, and gradually lowered; competition increased; and taxes, particularly on employment, should be lowered." To increase competition the group favors deregulating energy and agricultural prices and ending subsidies to failing industries. To inspire business confidence, governments should remove price and wage controls, reduce money growth, and reduce the growth of the public sector.

Such policies are even being advocated in Italy. And sometimes from the most unlikely quarters. Luciano Barca is the top economist of the Communist Party, and a member of the Chamber of Deputies. According to Barca one of Italy's top priorities must be to "reduce the deficit of the public sector." Now that is progress in economic enlightenment!

More Competition in the Professions Barriers to free-market conditions in the various professions continue to fall—by a variety of means. In the past few months the removers have included the courts, federal agencies, and professional organizations themselves.

In April the US Supreme Court ruled 8-0 that the ban on competitive bidding for engineering services is unconstitutional. The ban has long been part of the code of ethics of the National Society of Professional Engineers and is sanctioned by various state licensing laws. A similar ban on competitive bidding, this one on accountants seeking contracts to perform audits, was challenged in court by the US Justice Department. In a landmark ruling in federal court in Austin, the Texas Board of Public Accountancy's no-bidding policy was ruled in violation of federal antitrust laws. The Justice Department subsequently warned state and local governments that "antitrust has come to Main Street"—i.e., that anticompetitive laws and regulations are now fair game for attack.

Shortly thereafter, the Federal Trade Commission issued its long-awaited nationwide ban on state regulations preventing price advertising of eyeglasses. Until then, 40 states had still banned such ads. But the American Optometric Association immediately filed suit in federal court to block implementation of the FTC action. Showing far more enlightenment, the national convention of the American Institute of Architects decided to adopt an advertising policy similar to that recently approved for attorneys by the American Bar Association. That policy forbids "hucksterism" but permits advertising office hours, specialties, hourly rates, and fees for specific services.

The changes in these professions should result in a healthy expansion of competition—which generally results in a wider array of services and lower average prices.

Fighting Back Two prominent persons have recently spoken out, urging business leaders to fight back against government regulation instead of simply sitting back and taking it.

Augustine R. Marusi, chairman of Borden Inc., has announced that company policy henceforth will be to defy regulatory bureaucrats when, in Borden's opinion, the company has a better technological solution to a safety or pollution problem than the one the bureaucrats demand. Borden will implement its own solution and force the agency to back down or sue.

The policy decision resulted from an incident in which Borden was forced to spend $250,000 on a treatment plant, when the firm's own engineers had come up with a recycling plan that, for far less money, would have achieved the same reduction in pollutant output.

Conceding that most businesses can't afford the specialists and legal staff to defy the bureaucracy, Marusi said the burden of challenging "stupid" rules and orders must fall on the larger companies. Bureaucratic rigidity, he told a meeting of the Institute of Management Sciences, has become "the biggest anticompetitive force in America."

Former Council of Economic Advisors chairman Herbert Stein made a similar plea in the pages of the Wall Street Journal. Criticizing corporate leaders who go along with government dictation of "voluntary" wage and price restraints and think they are defending themselves by endowing chairs of free enterprise at universities, Stein called for businessmen to dissent—and loudly. "This means not only not cooperating [with government directives]; it means getting together to affirm that they will not cooperate, on grounds of principle."

Stein went on to point out that such action would not violate the antitrust laws or any other laws. Although the government can require reports and subpoena witnesses, "It cannot require anyone to come to lunch at the White House, to negotiate with a government official, or to conform to his standards of price behavior."

Perhaps if business leaders took such action, they would find themselves treated in an unaccustomed manner, both in Washington and in the public mind: with respect.

Subsidizing Inefficiency What do taxpayers get for the $290 million they are forced to spend each year subsidizing 10 US shipping lines? Besides higher freight rates and tax bills, they end up with inefficient, unproductive shipping. So concludes an administration task force. Comparing the three nonsubsidized firms—SeaLand Service, U.S. Lines, and Central/Gulf Lines—with the 10 subsidized ones, they found that the former are more efficient, more flexible, and substantially more profitable.

The subsidy program began in 1937 to help US-flag ships compete with lower-cost foreign ones. But companies choosing to accept the subsidies must also accept government rules regarding service. Among other things, these rules require them to serve marginal routes considered by the government to be essential to US foreign trade.

But that's not the only reason for their poor performance. The cushion of subsidies encourages sloppy management and lack of cost controls. "The huge subsidy payments camouflage inefficiencies," says U.S. Lines president Edward J. Heine, Jr. "Companies become so preoccupied with putting together figures for the Maritime Administration to keep subsidy levels as high as possible that they reach a point where they really don't have a handle on their actual expenses."

The presidential task force is due to recommend reductions in the subsidies by early November. No one expects them to recommend abolition of the program—despite the fact that a shipping-industry trade group just got caught with its hand in the cookie jar. The National Maritime Council, a trade group promoting higher subsidies, has itself been subsidized by the Commerce Department for several years, it was revealed. Federal employees (of Commerce's Maritime Administration) were doing the council's membership billing and correspondence, and a federal employee was serving as its executive director. When congressional staffers uncovered this cozy setup, Commerce Secretary Juanita Kreps severed the relationship "because questions had been raised."

Milestones • Two Chinas. It looks as if Taiwan and mainland China may learn to coexist after all. When Libya and China established diplomatic relations in August, conspicuously absent was any change in Libyan relations with Taiwan. In the past, both Chinese governments have insisted on being recognized as the sole government of all of China—meaning that both insisted that any government establishing full diplomatic relations with the mainland government break with Taiwan's. Apparently that policy is being consigned to the proverbial dustbin of history.

• Whom Do You Trust? Not the agents of the State. At least that's how indigent defendants look at it. A three-city survey conducted for the Justice Department found that 49 percent believed that their government-funded public defenders were "on the side of the State." But only 6 percent felt that way about private lawyers.

• Firearms Freedom for All. Contending that gun controls violate the civil rights of everyone, including those who live in violence-prone slums, the Second Amendment Foundation hosted a strategy conference in St. Louis uniting liberals and conservatives. Among those attending were representatives of the American Civil Liberties Union and veterans of the Southern civil rights movement. One of the points stressed was that enforcement of gun registration or confiscation laws would necessarily involve massive violations of civil liberties. The same point was made in the September issue of Harper's by REASON contributor Don B. Kates.

• Black Consciousness. "It's time to get off the money supply roller coaster that we have been on since the late 1960s," said congressional Black Caucus leader Parren J. Mitchell in a speech at the University of Wisconsin in August. "The principal fuel on which inflation feeds is money.…Once we recognize that rapid money growth can unleash inflation but cannot solve our unemployment problem, we can break through the psychological barrier which has prevented us from developing a full employment, noninflationary…strategy that works." Mitchell thus joins the NAACP in coming around to distinctly free-market views.

• Still Innocent. NBC's TV movie Born Innocent may have depicted a teenage rape. But merely depicting such an action in news or drama does not constitute incitement to commit such actions. Thus, ruled Judge Robert Dossee, NBC's actions in airing the show were protected by the First Amendment. Defense lawyer Floyd Abrams termed the decision "a marvelous vindication of First Amendment principles." The plaintiffs had sought $11 million, alleging that the movie had incited the rapists of a nine-year-old girl four days after Born Innocent was aired.

• Making Criminals Pay. A nonprofit public-interest law firm has begun a project to assist victims of violent crime in suing their attackers for damages. The Washington Legal Foundation, based in the nation's capital, hopes to instigate "a wave of litigation," making such suits "as popular as suing for medical malpractice or for auto accidents." According to WLF general counsel Daniel Popeo, "The big fallacy in public thinking…is that violent criminals are judgment-proof, that they are too poor to collect damages from." Not so, says Popeo. Criminals often have assets—real estate, a car, an inheritance. And their wages after release from jail can be attached—for up to 20 years in many states. Thus, WLF plans a major effort to teach violent criminals (and the general public) that crime does not pay.

• OSHA Exemption. Over two million small businesses will be exempted from all regulation by the Occupational Safety and Health Administration, if the House concurs with a Senate-passed bill. The measure would exempt all low-risk workplaces with 10 or fewer employees from OSHA inspection. OSHA spokesperson Frank Geer, obviously needing to bone up on his political philosophy, complained that the measure would deny workers "fundamental human rights."

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