Trends

Scrap the FCC

The moderator of NBC's "Meet the Press" thinks the Federal Communications Commission and its regulations "ought to be scrapped in favor of free electronic media licenses, on the sole condition that stations adhere to assigned frequencies." So said Bill Monroe, NBC executive producer, as he received the Paul White Memorial Award at the Radio-Television News Directors annual meeting in Atlanta.

"I believe that the present apparatus of broadcast regulation cheats the broadcast journalist of the independence promised by the First Amendment and so cheats the American people of the vigor and diversity they're entitled to from all of our nation's media," he said. Citing the scarcity of opinion and editorials on the air, Monroe put the blame squarely on the FCC's equal-time doctrine. "The very existence of the FCC, with its compulsion to sanitize the airwaves of the unequal, the unfair, and the impure—the very existence of this federal control commission discourages the idea of assigning keen, thoughtful people to say what they want to say." For a truly informed public, we need "not only the meat and potatoes of fact and opinion…[but also] the vitamins and minerals of argument and debate." And this we will not have so long as the FCC maintains its Big Brother-like control over the airwaves.

Battle over Tax Cuts

All summer long and on into the fall the battle over federal tax cuts has raged. For a change, the terms of the debate revolved not around whether to cut taxes but over which taxes to cut, how much to cut them, and what the effects on the economy would be. Indeed, a recently convened Time conference of business leaders and economists reached "a surprisingly broad consensus" that "the choking grip of taxation must be loosened to let the underproductive, inflation-riddled US economy breathe more freely and create more profits, capital, and jobs."

Leading the assault on high taxes has been University of Southern California economist Arthur B. Laffer. His now-famous Laffer Curve encapsulates the obvious idea that by pushing tax rates beyond a certain level, government actually reduces its total revenues by creating disincentives—to work, to invest, and to report income to the authorities. The principal embodiments of the Laffer view were two tax-cut proposals: the Steiger bill to return the maximum capital gains tax rate to 25 percent (from 49 percent) and the Kemp-Roth bill to cut personal income taxes by one-third and corporate taxes by $15.5 billion over a three-year period. Though neither measure was passed, both set the terms of the debate that led to this year's tax cuts.

The Kemp-Roth bill was supported by most conservative and free-market economists—including Laffer, Milton Friedman, Alan Greenspan, and Herbert Stein. The latter three expressed some doubt that Kemp-Roth would actually "pay for itself" in terms of higher revenues generated by increased business activity, as did the Kennedy tax cut of 1963. But, like Irving Kristol and many other advocates, they supported it as a politically wise move toward cutting back government.

Writing in the Wall Street Journal, Stein said that the real case for Kemp-Roth is that "when the wage-earner gets his paycheck and sees how much has been deducted for federal taxes, he is shocked and enraged." Why? Because "he earned the money fair and square. It is his. He has plenty of things that he wants to do with it. And he doesn't want the government to take so much of it away from him." Kristol, also in the Journal, called Kemp-Roth a "populist remedy for populist abuses," pointing out that politically speaking, "tax cuts are a prerequisite for cuts in government spending," rather than the other way around.

Indeed, those economists who forecast huge deficits if Kemp-Roth passed typically assumed in their econometric models that tax cuts would reduce, rather than increase, the GNP. Congressional staff economist Paul Craig Roberts has been busily pointing out this kind of Keynesian flaw over the past year, to the point where Data Resources, Inc., and Chase Econometrics have revised their models. The Congressional Budget Office is having to do likewise. Roberts penned a long defense of Kemp-Roth in the Journal (August 1) stressing the changes in incentives to work and invest that large-scale tax cuts will create. He finds, for example, that gross savings by individuals should increase by $35 billion in the first year of a Kemp-Roth-style cut. And he notes that by the seventh year, the government would be recovering, in higher collections, 72 percent of its revenue loss from lower tax rates. The remaining deficit, he writes, "is more than covered by the increase in personal savings, retained earnings, and state and local services. Thus, the deficit puts no pressure on credit markets—that is, is not inflationary."

The debate on capital gains was no less spirited, with populist politicians speaking of tax breaks for millionaires while economists demonstrated that the Laffer Curve is definitely at work in upper-income brackets. (Michael Evans of Chase Econometrics showed that, after the Kennedy tax cuts, collections from those with incomes over $100,000 nearly doubled.) A Yankelovich poll for Time showed that 66 percent of the public favors cutting capital gains rates. And even liberals like Los Angeles mayor Tom Bradley and California senator Alan Cranston came out for the Steiger bill, on grounds that investment in new firms (which creates jobs) has virtually dried up under present capital gains rates.

Thus, the modest tax cuts enacted this fall are likely to be just a prelude to what's to come in 1979: more, and deeper, cuts in both taxes and spending.

Deregulate Rapidly

When he was in academia, economist Alfred Kahn figured that removing regulations from the economy would have to be done gradually—to prevent weaker firms from being devoured by stronger ones, to give new competition a chance to get going, and to protect the public from "predatory" pricing practices.

But being on the firing line as a regulator has completely changed Kahn's mind. "What has been greatly illuminating to me," he told the American Economic Association's annual meeting, "is how thoroughly I have been converted to the view that the only way to move is to move fast" in deregulating. As readers of this column know, Kahn, as chairman of the Civil Aeronautics Board, has indeed been moving rapidly, outstripping Congress in his drive to deregulate commercial aviation.

The American Economic Association honored Kahn by choosing him to deliver their convention's major address, the Ely Lecture. According to Business Week's William Wolman, the speech "was met by loud cheers from economists across the ideological spectrum." Kahn's message was that the entire US economy—not just aviation—should be deregulated, and fast. Apparently his fellow economists are so impressed with what Kahn has wrought at the CAB that they strongly endorsed this prescription.

Break in the Ranks

Professors of Marxist economics are abandoning the most crucial feature of Marxist analysis of capitalism. The authors of the recently published Marx's Capital and Capitalism Today—Barry Hindess, Paul Hirst, Athar Hussain, and Anthony Cutler—argue that Marx's belief in the labor theory of value was a mistake. "The theory of value poses an obstacle to understanding how a capitalist economy works," says the University of Liverpool's Hindess. By invoking it in their analysis, "what Marxists can say about capitalism is very limited."

As reported in Business Week, this isn't the only element of Marxism that these new Marxist economists are rejecting. Hirst is quoted as saying that "there is no such thing as a general [Marxist] theory of prices or production," so that "the way in which firms make calculations depends on each particular situation." That this is crucial to Marxists will impress anyone who knows why there can be so much moralizing about "windfall profits," "exorbitant prices," "the filthy rich," and "unjust wages" within Marxist circles. All of these concepts depend logically on Marx's labor theory. If the workers' labor power does not determine the economic value of products and services, then all the alleged discrepancies between the wages of workers and the wealth of shareholders and company managers lose their theoretical support.

These "new economists" haven't abandoned Marxism, though, since they are devoted to socialism as an ideal. It is for this reason that their book is addressed mainly to fellow socialists, whom they chide for being absorbed with Marx's emphasis on industrialism and production, failing to stress, in contrast to Marx, the role of money and banking within a capitalist economy. One can only wonder how Robert Heilbroner will react, having just produced his latest (conventional) Marxist analysis of capitalism, Beyond Boom and Crash.

Privatization Gains

In the wake of California's Proposition 13, more and more local governments are turning to private contractors in order to deliver public services at less cost. Several recent developments illustrate this trend.

In July New York State's highest court, the Court of Appeals, upheld Westchester County's right to replace tenured civil servants with contracted services from a private firm. The decision allowed the county to replace nine watchmen with private security guards. It was hailed by municipal officials around the state and denounced vociferously by Jerry Wurf, head of a million-member public employees union. A front-page story in the New York Times on reaction to the decision quoted the Urban Institute's Harry Hatry predicting a nationwide renewal of interest in private contracting.

Later that month the Board of Supervisors of Los Angeles County (population 7 million) voted four to one to place on the November ballot a charter amendment to permit the county to contract for virtually all public services—wherever contracting would be more efficient and cost-effective. (Election results were not yet known at press time.)

In September the Gallup organization released the results of a nationwide survey on private contracting. When asked if they would like to see "public services such as garbage collection, street cleaning, and the like" taken over by private firms, 49 percent said either that they would or that these services have already been privatized in their community. Only 41 percent said no. And of those not already experiencing contract services, 42 percent thought they would be more efficient than municipal services, compared with only 28 percent thinking they'd be less efficient.

People, apparently, are surprisingly aware of the difference in performance and productivity between public and private providers of service. As the tax revolt spreads, more and more public officials are likely to get the message.

Emergencies End

Thursday, September 14, 1978, was a little-remarked but notable day in American history. On that date the four open-ended states of emergency declared by Presidents Roosevelt (1933), Truman (1950), and Nixon (1970 and 1971) came to an end. They were terminated by the two-year-old National Emergencies Act, a law proposed several years ago by Sen. Charles Mathias and signed "reluctantly" by President Ford in 1976.

The two-year delay between the law's passage and its effective date was designed to enable the administration to propose any new laws it believed were needed to replace the many executive orders in effect only due to the existence of the states of emergency. But a member of Mathias's staff reported that no significant new legislation had been requested. Thus, the president no longer has authority to institute martial law, seize private property, send troops anywhere in the world, seize control of all transportation and communications facilities, and restrict travel by citizens. Unless, of course, he declares another state of emergency. The act does not prevent that, but it does provide for automatic review of such a declaration by Congress within six months and automatic termination after a year unless the president notifies Congress to the contrary 90 days in advance.

But for now, at least, we can breathe at least a bit easier.

Professionals Step Up Ads

In the wake of a June 1977 Supreme Court decision, legal and traditional barriers to advertising by lawyers are rapidly disappearing. In August of 1977 the American Bar Association dropped its rule banning advertising on radio and in newspapers; this year the ABA's annual convention went all the way, permitting ads on TV as well. Within a week the US Justice Department dropped its two-year-old antitrust suit against the organization. In doing so, the department argued that such "dramatic changes" have taken place in the legal profession since the suit was filed that there was no longer any point in maintaining it.

At approximately the same time, the board of governors of the California State Bar adopted tentative rules that would permit lawyers to solicit clients directly. Before being adopted, the rules would have to be approved by the membership and the California Supreme Court; that could not occur before sometime next year.

Part of the rationale for permitting individual solicitation is to put the sole practitioner on a better competitive footing with large law firms or groups that are engaging in advertising. Group practice is spreading rapidly in the professions—medical, dental, and legal—and groups are often the leaders in using advertising. The Cross County Dental Group in New York's Westchester County, for example, has spent $10,000 on ads in the past nine months. The six-member group claims its fees are 30-40 percent lower than those of local private practitioners. Many new legal clinics also offer lower fees as a competitive advantage, letting people know this via advertising.

Thus, while advertising itself may not lower costs, it makes it possible to obtain increased business for new forms of lower-priced services, thus making these services more feasible to offer.

Physicians' Competition

In a report issued earlier this year, the Council on Wage and Price Stability (COWPS) charged that the medical profession is largely immune from the ordinary forces of supply and demand (see Trends, July, p. 12). As a result, said COWPS, physicians are able to set and achieve "target incomes" by increasing their fees and unnecessarily expanding their services. These findings have now been challenged as totally wrong.

Prof. Keith B. Leffler of the University of Washington's Economics Department analyzed the COWPS report for the Law and Economics Center of the University of Miami. In doing so, he found major errors of data analysis and alarming flaws in logic.

For example, the report misleadingly computes the increase in physicians' earnings over time by lumping together data on both specialists and general practitioners. Since the proportion of specialists has grown from 36.5 percent in 1949 to 82.8 percent in 1975, the averaged earnings would have soared (since specialists earn far more) even if individuals in both groups did not receive a cent more! A corrected earnings series shows that increases in physicians' earnings are not out of line with those of other occupations.

Leffler also analyzed whether restrictions on the numbers of physicians (as urged by the American Medical Association) could have increased physician earnings, as the COWPS report alleged. He found no evidence of such an effect; the only windfall gains in income occurred following passage of Medicare and Medicaid in the late 1960s.

A major portion of Leffler's study concerns the target-income hypothesis. To test this out he constructed a supply-and-demand model of factors potentially influencing physicians' earnings over the years in question (1947-76). Ordinary supply-demand factors, he found, account for over 98 percent of the year-to-year variation in doctors' earnings. In contrast to the COWPS report—which claimed that an increase in the number of doctors leads to an increase in fee levels—Leffler's data show that the reverse is true, as economic theory would predict. The reason why geographical areas with a higher concentration of physicians have a higher level of fees is that doctors move to such areas because fees are high there. And why are they higher? Because there is higher demand for their services there, often spurred by Medicare and Medicaid. Concludes Leffler, "The Target Income hypothesis is thus suspect on both theoretical and empirical grounds. Classical economic theory, by contrast, provides a useful description of the market for physicians' services."

Little wonder, then, that Leffler titled his critique "Explanations in Search of Facts."

Busing Flunks Out

As public schools reopened their doors this fall, forced busing programs came under renewed assaults. At the American Sociological Association meeting in San Francisco, Rand Corporation researcher David Armor reported the results of his study of busing and white flight. Analyzing migration patterns in 54 school districts across the country, Armor found solid statistical evidence that mandatory busing plans lead to white flight—defined as withdrawal of white pupils from the public schools. On the average, when such a plan is put into effect, the first-year enrollment drop is 13.1 percent; in the second year, 9.8 percent, with further decreases of 9.1 percent and 7.5 percent in the third and fourth years. Since these are average figures, in some cities the declines were much greater.

In contrast, when no force is involved—as in San Diego's voluntary busing plan—there is apparently no significant white flight. The contrast between forced and voluntary busing leads to some insight into parents' motives. "Racism as an explanatory factor," notes Armor, "is not alone sufficient to account for the fact that the vast majority of whites accept desegregated schools when brought about by voluntary methods but reject them when their children are mandatorily bused or reassigned to schools outside their neighborhoods."

Just such a rejection has been taking place in the populous San Fernando Valley area of Los Angeles. There, a massive court-ordered busing program was stoutly resisted, with some reports indicating as many as two-thirds of the white pupils assigned to be bused failing to show up for fall 1978 classes. Private schools sprang up all over the Valley, and over 350 parents volunteered the use of their homes for tutoring classes of six students each. Charging $20-$30 per week, the tutoring groups were quickly filled. California law requires only that youths be taught at least three hours a day, 175 days a year, by a credentialed tutor.

While all this was going on, the Washington Post was interviewing sociologist James S. Coleman—the man who laid much of the groundwork for busing with his 1960s studies indicating that racially mixed classrooms would lead to greater student achievement. "It has not worked out that way in many of the school desegregation cases since that research," Coleman conceded. "Thus, what once appeared to be fact is now known to be fiction." Some black students do benefit—those who are already better-than-average students. But the poorer black students do even worse than before. "It seems to all balance out," said Coleman, "which is quite the reverse of the implications of my own [previous] research."

Milestones

In Govt. We Trust? Not any more. Every two years since 1958 the Survey Research Center of the University of Michigan has been asking people, "How much of the time do you think you can trust the government in Washington to do what is right—just about always, most of the time, or only some of the time?" In 1958 about 76 percent said "just about always" or "most of the time." In 1964 that figure had grown slightly to 78 percent. But two years later it began to drop. It hit 55 percent in 1970, 36 percent in 1974, and 33 percent in 1976. No results for 1978 have been released, to date.

Monopoly Breaker. Terming the US Postal Service "the granddaddy of all monopolies," John Shenefield announced that the service had become one of his targets. And who is John Shenefield? None other than chief of the Justice Department's Antitrust Division, that's who. An aide to Shenefield says the division plans to argue for greater freedom for private courier services to compete with government in mail delivery, for free entry by the private sector into electronic mail, and for reducing the scope of the Postal Service's monopoly under the private-express statutes.

Aid No Aid. The huge amounts of federal aid to education have not improved the quality of American education. Rand Corporation researchers Paul Berman and M.W. McLaughlin found that improved student performance came about from committed, dedicated, creative teachers and administrators—not from federal funds or planning. No overall class of programs was developed that consistently improved student achievement. And those programs that were successful were generally not kept operating or not adapted to other school systems. "The net return to the federal investment was the adoption of many innovations, the successful implementation of few, and the long-run continuation of still fewer," the researchers concluded.