Trends

Denationalization Agenda

While deregulation has become the watchword in the United States, denationalization looks like the coming thing in the United Kingdom. The election of Margaret Thatcher as prime minister is expected to lead to a major shift in the role of the State in Britain.

Sources close to the Thatcher government have identified many specific targets for denationalization. Among the first firms to be offered to private investors will be British Petroleum, British National Oil Co., British Airways, and recently nationalized British Aerospace. Perennial money-losers like British Leyland and British Steel are not yet on the agenda, because of lack of investor interest.

Prof. Walter Eltis of Oxford University recently presented data showing that the average "surplus" produced by Britain's nationalized industries over the past 17 years has only been 11.1 percent, compared with 35.9 percent for private-sector firms. In the last five years or so, more and more nationalized firms, instead of producing surpluses, have grown dependent on government subsidies. Thus, "far from supporting the welfare state" (as taxpaying firms do), they "themselves became a major part of it," notes Eltis. It is this kind of industrial cannibalism—consuming the nation's capital—that denationalization is aimed at.

The Thatcher government is pledged to reduce the State in other ways as well. Government employment is scheduled to be reduced by 10 percent by not filling vacancies left by normal turnover. Unemployment benefits for striking workers will no longer be provided. And tax rates will be cut—the top rate from its present 83 percent down to 60 percent and the basic rate from 33 percent to 30 percent. No laissez-faire utopia, to be sure, but a healthy change from the steadily increasing statism of recent decades.

Conserving Wetlands—Privately

Those who consider the preservation of marshlands a "public good"—something that must be paid for by taxes because the beneficiaries are so diffuse—have never reckoned with duck hunters. This particular breed of sportsman turns out to be particularly far-sighted when it comes to ensuring the survival of the habitats that make possible his favorite passion.

So it was that 42 years ago a group of duck hunters organized Ducks Unlimited—a nonprofit, tax-exempt, international wildlife conservation organization headquartered in Chicago. Recognizing that there would only be an abundant population of ducks if somebody took action to preserve their habitats, the group set about doing just that.

Over the years DU has learned a great deal about marshes and other environments. It turns out that certain conditions of water and flow are much more favorable for waterfowl protection—and that floods can be disastrous for ducks, too. Thus, a great deal of the organization's efforts go into building dikes and improving slightly on nature to ensure abundant waterfowl breeding. In 1977 DU spent some $10 million on improving and managing Canadian wetlands. (Over 70 percent of North American waterfowl originate in Canada, so most of DU's efforts are focused there.) The group does not purchase land, relying instead on donations via easements and long-term leases.

Thus, without any government coercion, hundreds of thousands of acres of valuable wetlands are being preserved for present and future generations.

Utility Revisionism

One of the frustrations of modern life is having to deal with the local utility monopolies—the electric company, gas company, phone company, et al. No matter how bad the service or how high the bill, you have no alternative supplier to turn to, and no hope of one. The utility has an exclusive franchise, a legal monopoly granted by the State.

Traditionally, economists have supported such monopolization on the grounds that utilities are natural monopolies that, left to their own devices, will charge exorbitant rates and make huge profits. They therefore support the idea of state public utility commissions to regulate prices and service—in exchange for protecting the monopoly status from competitors.

But several years ago a few economists began to question this rationale. Just because a utility industry might end up, in equilibrium, with a single dominant supplier in an area does not necessarily mean it would be able to charge "monopoly prices," argued UCLA's Harold Demsetz. If there are no legal barriers to entry, he theorized, the threat of competition from potential bidders will force the existing firm to charge competitive prices. Instead of granting exclusive monopolies, the State should seek only to prevent the emergence of barriers to competition.

Many economists remained skeptical of this theory, but Gregg Jarrell of the University of Rochester decided to put it to the test. Digging back into the history of electric utility regulation, he found that most state public utility commissions were created between 1910 and 1914. Prior to that, control over electric utilities rested in the hands of city governments, most of which granted competitive franchises.

Jarrell decided to test whether state regulation did what its advocates said it did—lower prices and restrict profits, while expanding output. To do so he collected data on utility operations for states that regulated early and states that regulated later. His hypothesis was that regulation—if conventional theory were correct—would have come earliest in states where the utilities' monopolistic nature was having its strongest effects—high prices, high profits, and less output. But it turns out that just the opposite occurred. The earliest-regulated states were those with much lower prices (46 percent), lower gross profits (38 percent), and higher output (23 percent). Moreover, after five years of state regulation as legal monopolies, prices and profits of the regulated utilities rose while output fell. What occurred, in other words, was that regulation replaced competitive conditions with enforced monopolistic conditions. Instead of correcting for monopoly's defects, it created and enforced them.

Next time you complain about the size of your electric bill, remember that you have nowhere else to turn not because of a natural absence of competition but because of an enforced monopoly—one that's apparently quite unnecessary.

Trucking Deregulation Moves Ahead

Despite the Carter administration's backing off from its earlier advocacy—as the price of a settlement with the Teamsters' Union—truck deregulation is making slow progress. At the federal level, Sen. Edward Kennedy has taken the lead, introducing in May a comprehensive bill to deregulate the industry by 1985. The bill goes far beyond Kennedy's earlier proposal to lift antitrust immunity from trucking rate bureaus. In many ways it parallels the successful model of airline deregulation that the senator helped push through last year.

In the measure's first phase, as of 1981 the burden of proof for both entry and pricing would be shifted from new entrants (who now have to prove a need for the service) to existing carriers (who would have to prove the new service unnecessary). Price-fixing by rate bureaus would be outlawed, and rates could be increased or decreased within a "zone of reasonableness" without approval of the Interstate Commerce Commission. The second phase, as of 1983, would allow any carrier that is "fit, willing, and able" to provide service, rather than just those holding costly ICC permits. And ICC authority over mergers would be shifted to the Justice Department, like all other industries. Finally, in 1985 all ICC authority over trucking would be ended, with safety monitoring transferred to the Transportation Department. Pricing would be left entirely to the marketplace.

Meanwhile, support for deregulation is building up in California. Late in May the state Public Utilities Commission voted 4-1 to begin dismantling its own trucking regulations. Effective next January 31, minimum rates for 900 firms that haul oil and petroleum products will be abolished. And in July the PUC expects to remove minimum rates on 19,000 firms in the general freight category. The PUC's moves are intended to stimulate competition and lead to lower prices.

Although the California Trucking Association threatened to sue, independent truckers were delighted. A convoy of 27 independents carried out a noisy but peaceful demonstration in downtown Los Angeles May 29, urging similar deregulation on the federal level. Wayne Kennedy, an owner-driver from Cherry Valley, told reporters that truckers from across the country had organized a "freedom express" to indicate their unhappiness over restrictive federal regulations.

South Africa Progress

Contrary to what you may read in the papers, the news from South Africa isn't all bad. In fact, reports REASON's Leon Louw, in the past two years there has been more decontrol in South Africa than anywhere else in the world. For example, rent controls are being phased out over a five-year period, and a committee is studying how to abolish the remaining price controls. In fiscal and monetary policy, the government's share of the GNP has been cut this year, for the first time since World War II; tax rates have been cut; and the government has committed itself to "financial discipline"—only small increases in the money supply, so as to limit inflation. Agricultural controls are being reduced and subsidies phased out, and restrictions on transportation competition are being relaxed.

About the only positive trends being reported abroad are the recent moves to reduce petty apartheid and to move toward a free market in labor. Two recent commissions have made strong recommendations for repeal of racially restrictive laws. The 14-member Wiehahn Commission urged that laws reserving certain job categories for whites be abolished, that laws requiring workplace segregation be repealed, that trade unions be open to all races, that the closed shop be outlawed, and that black unions be given legal standing (the same as white unions). The government's labor minister accepted the recommendations "in principle" and scheduled early parliamentary action.

A week later the Riekert report proposed a number of changes aimed at reducing apartheid restrictions, including an easing of strict controls on entry of nonwhites into urban areas (the hated "pass laws"), ending the ban against wives without passes living with husbands who have passes in cities, and allowing more businesses in black urban residential areas. The report was declared "acceptable to the government" by its economic affairs minister.

Although some whites (including hardline union leaders) blasted both reports as going too far, and some blacks damned them as tokenism, many white and black leaders welcomed them as evidence of progress toward a more rational approach to the nation's difficult racial problems.

Space Company Launched

One of the boldest industrial ventures in history has just been launched—a company whose eventual goal is the construction and sale of solar power satellites. Incorporated last August and having completed its registration with the Securities and Exchange Commission, the firm—International Satellite Industries, Inc.—is making its first ($3 million) stock offering.

That's a long way from the estimated $90-$100 billion in research, development, and construction needed to bring the first such powersat into being. But the company's ambitious plan recognizes the need to work up to its goal in steps. In its early phase ISI plans to accumulate capital by selling stock. The proceeds will be invested in companies working on, and likely to benefit from, large-scale space industrialization. ISI will invest the interest in its own space-related R&D, patenting the results. Over a 15- to 20-year period the company will acquire increasing knowledge of the powersat's feasibility and be able to make a go/no-go decision. If the idea doesn't pan out, the company will liquidate and divide the assets among its shareholders. If powersats look profitable, it will convert to an operating company, taking on debt and equity financing to proceed to the construction phase.

The company's directors include former astronaut Philip Chapman, currently a physicist at Arthur D. Little, Inc.; H. Keith Henson, a computer manufacturer and a founder of the L-5 Society; Boeing's powersat manager Ralph Nansen; Princeton physicist Brian O'Leary; Lockheed program manager Edward Stearns; and attorneys Edward Finch and ISI founder Christian O. Basler. It will be interesting to follow ISI's totally private efforts to develop space technology over the coming years.

Phony Campaign Reform

One of the most persistent misconceptions of today's politics is that taxpayer financing and restrictions on individual contributions will make elections fairer—which usually means increasing the feasibility of challenging incumbents. Not so! says Heritage Foundation analyst Thomas Ascik in a recent study.

Using a present bill (HR 1) as an example, Ascik points out that its matching-fund provision (government matching for all $100 or less contributions received by a candidate) would favor incumbents. Why? Because data from 1976 and 1978 show that incumbents are generally far more successful in raising such contributions. That's partly because of the many perks of office—voter mailing lists, free mailing, free media coverage, etc. And since incumbents are historically more likely to win, special-interest groups tend to favor them over challengers.

The proposed HR 1 would also restrict the candidate and his family from putting more than $25,000 into his own campaign. But data from 1976 and 1978 show that it is challengers who need to rely most heavily on personal resources—since their success in raising outside money is more limited.

Rather than limiting individual contributions or spending taxpayers' funds, Ascik suggests raising the current $1,000 ceiling on personal contributions to any one candidate. That, he thinks, would do far more to give challengers—the underdogs—a fighting chance.

New McCarthyism Hits Universities

Government affirmative action programs imposed on universities are destroying academic freedom, causing harm "that lasts for a long time, longer than the villainous harassment of Senator Joseph McCarthy." So said respected sociologist Edward Shils, in a lecture sponsored by the federal government's National Endowment for the Humanities. Castigating government for trying to make universities into instruments of social reform, Shils argued that pursuit of these goals has come to be "seriously in conflict with the no less important ideal of the pursuit and application of truth."

And that's hardly the only voice being raised these days against an increasingly obtrusive government presence. Even schools that do not accept federal funds on principle, like Hillsdale College (see "The College That Told Uncle Sam Where to Go," REASON, Aug. 1977) and Grove City College, are coming under the affirmative action guns because some of their students receive federal loans or tuition grants. And this spring the Department of Health, Education and Welfare has ordered the University of North Carolina to reduce program duplication between its largely white and its largely black campuses (both of which are open to all on a nondiscriminatory basis), and to refrain from starting any major new programs at its largely white campuses. Like Hillsdale and Grove City, UNC has decided to fight back. It has hired former ACLU counsel Charles Morgan to argue its case against HEW's mandates.

"Governmental intrusion is a considerable and growing concern," says Stanford president Richard Lumann. Especially given the increasing dependence of most schools on federal funds—as much as 50 percent in the case of MIT and 46 percent at Princeton. It looks as if university presidents have finally realized that the one who pays the piper really does call the tune.

What Price Resource Conservation?

The past decade has seen a greatly increased interest in conservation. Computer models, consumer advocates, and gurus all tell us we are using up vital mineral resources, selfishly depriving future generations of these irreplaceable materials. It is true that in some sense the earth's resources are finite—but agreeing to that is not the same as justifying a particular conservation effort. The question that must ultimately be asked is this: Does it make economic sense to forgo present consumption of a particular resource?

Three economists—Gerhard Anders, Phil Gramm, and Charles Maurice—recently set out to answer that question. Their reply appears in a paper, "Does Resource Conservation Pay?" put out by the International Institute for Economic Research. To answer the question they looked at historical data to determine, for specific minerals, whether extracting them and investing the proceeds or leaving them in the ground for the same length of time and then extracting them would lead to greater future wealth. For 14 depletable resources they calculated the value in 1975 that could have been realized by investing the value of a unit of each resource in 1900. This they compared with the actual value of the resource in 1975. For four alternative interest rates, the results in every case were that extracting the resources made far more sense than conserving them.

It is not hard to see why such results would occur. Once a material is found to be a "resource," it is by definition something of value. Making use of it while it is valuable is a sensible policy, given that technology is continually changing, making some things more and others less valuable. The authors point out that a 19th-century policy of stockpiling whale oil would have been an economic disaster, because petroleum and other fuels came along, making whale oil obsolete.

Government, in particular, has no particular means of foretelling the future, so as to determine what resources may be valuable 20 or 40 or 60 years hence. Calls for government-mandated resource conservation can be seen as particularly wrongheaded and likely to make future generations poorer, not richer.

Where to Invest

Used to be that managers of pension funds fulfilled their responsibilities to manage prudently by investing in things like high-grade corporate bonds. Yet a fund manager investing only in such bonds over the past decade would have just kept even with inflation—earning a 6.1 percent compound annual return, the same as the CPI growth. Common stocks in the same period averaged a pitiful 2.8 percent annual growth.

Hence, many financial managers are paying increasing attention to "nontraditional investments." A Salomon Brothers study that's receiving widespread circulation shows that since 1968 gold has increased at a compound annual rate of 16.3 percent, stamps at 15.4 percent, diamonds at 12.6 percent, silver at 9.1 percent, and Chinese ceramics a whopping 19.2 percent. T. Rowe Price Associates has teamed up with London bank Robert Fleming Holdings, Ltd., to provide pension funds with advice on investing in foreign stocks. The New York Mercantile Exchange is planning a futures contract in diamonds. Many Keogh plans and IRA managers are now accepting gold, silver, diamonds, stamps, and coins. And Alaska governor Jay Hammond has asked for legislation permitting the state's public employees' and teachers' retirement funds to invest in gold bullion, foreign currency CDs, and real estate. "Traditional outlets simply can't maintain the purchasing power of the pensioners' dollars," says state investment officer Michael J. Riley.

More Competition for Ma Bell

The extent of competition in long-distance communications continues to grow, egged on by a once-reluctant Federal Communications Commission. In April the long struggle of MCI Communications Corp. finally ended, when a court-ordered access agreement was signed by AT&T and its three (so far) long-distance competitors. The pact set up rates for access to Bell's local phone networks by MCI, Southern Pacific Communications Co., and ITT. Initially the rates will be 33 percent more than AT&T's own local customers pay, rising to 80 percent more over a three-year period. Before the courts intervened, Ma Bell was trying to charge 300 percent more, as a way of preventing the competitors from operating.

All three newcomers are now in operation, MCI's Execunet in 45 cities, SP's Sprint-5 in 52 cities, and ITT's City-Call in 11 cities so far. Minimum monthly fees are $75, $25, and $50, respectively. All three offer substantial savings—15 to 86 percent—over phone company direct-dial long-distance rates.

ITT is also planning to introduce a facsimile system for electronic mail service later this year. Unlike systems based simply on phone lines, the Faxpak system routes facsimile transmissions through a computer, so that normally incompatible machines can be linked up; the computer puts the image in a different format as necessary. The new service competes with a similar store-and-forward facsimile service called Faxgram, offered by Graphnet Systems, Inc.

Similar developments are under way in Canada. In May the Canadian Radio-Television and Telecommunications Commission issued a ruling requiring Bell Canada to provide local access to its principal would-be competitor—CNCP Telecommunications, a joint venture of the Canadian National and Canadian Pacific railroads. CNCP provides Telex, facsimile, computer data, and TV signal transmission services, in competition with Bell Canada. The ruling means that any telephone subscriber will now have dial-up access to the CNCP system.

Another solution to the access question is to bypass the phone company altogether. American Satellite Corporation is now offering such a system using rooftop satellite antennas. Western Bancorporation has become one of its first users, linking offices in Portland, Seattle, Phoenix, and Los Angeles by satellite. Eventually the firm plans to link 22 banks with 800 branches using the system—at 40 percent savings over the telephone and postal systems. A rival system using satellites and rooftop antennas is under development by Satellite Business Systems.

After some years of resisting these erosions of Ma Bell's monopoly, the FCC seems to be throwing in the towel. In May it tentatively approved a plan to greatly ease the paperwork requirements imposed on competing carriers—and is considering a plan to deregulate them altogether. At the same time it is planning to allow AT&T, at long last, to begin offering data-processing services, so long as they are provided by separate subsidiaries not subsidized by monopoly services. This move should significantly increase competition in the booming data communications market.

The way things seem to be going, in another 10 years the words telephone and monopoly will seem very out of place linked together.

Tax-Cut Benefits

Those who pooh-poohed Kemp-Roth and the Laffer Curve—whose proponents argue that cutting back high tax rates will lead to prosperity—may have to eat their words. Economists Robert Genetski and Young Chin of Chicago's Harris Bank examined the rates of economic growth in all 50 states and compared them with changes in their tax burdens. The result? States with tax cuts have had better-than-average rates of economic growth. Those whose tax burdens increased sharply—New York, New Jersey, Connecticut, Rhode Island, and Massachusetts—experienced economic decline. "Those states which are successful in cutting relative tax burdens will experience higher economic growth rates than the nation as a whole," concluded Genetski and Chin, "while those states which do not…are likely to suffer below-average economic growth."

Your move, Professor Galbraith.

Milestones

Contracting garbage. Manhattan borough president Andrew Stein has proposed that four of the borough's 12 sanitation districts be turned over to private enterprise. Under Stein's plan the monopoly of the city's inefficient sanitation department would be broken, and both garbage collection and street cleaning in the four districts would be put out for competitive bids.

Tolerating pot. California public opinion on marijuana has undergone a major change in the past decade. The California Poll reports that only one-third of the state's adults favor strict enforcement of the marijuana laws, compared with three-fourths of them 10 years ago. One factor seems to be a rise in consumption: some 42 percent now acknowledge marijuana use, compared with only 28 percent as recently as 1975.

Appropriate reward. If Congressman Ron Paul has his way, members of Congress would have a direct incentive to stop inflation. Under a bill introduced in May, the salaries of senators and representatives would be reduced each month by the percentage increase in the Consumer Price Index. "This is the quickest way I know to educate Congressmen in the realities of economics," says Paul.

Liberty Amendment victory. After 20 years of near obscurity, the Liberty Amendment (to repeal the personal income tax) has won acceptance by an eighth state. On April 17 the Arizona legislature voted to ask Congress to call a convention to repeal the 16th Amendment.

Fluoridation illegal. Those opposed to government fluoridation of public water supplies appear to have found a new weapon in Public Law 93-523, the Safe Drinking Water Act of 1974. A section of the act provides that "no national primary drinking water regulation may require the addition of any substance for preventive health care purposes unrelated to contamination of drinking water." Another section provides that state regulations shall be "no less stringent than such [federal] regulations." Thus, it appears that state or federal imposition of fluoridation is illegal.

Nevada vs. feds. The Nevada legislature has passed a bill authorizing a state lawsuit challenging federal ownership of much of the state's land. It specifically challenges the Bureau of Land Management's right to 50 million acres of Nevada land—about 63 percent of the state. The bill's sponsor says that New Mexico, Arizona, Utah, Oregon, and California legislators are considering similar actions.

Union Fees Overturned. A federal district court in Maryland has ruled that the use of compulsory union dues for any political purposes violates the First Amendment rights of employees who object. The suit pitted 19 telephone company employees, aided by the National Right to Work Legal Defense Foundation, against the Communications Workers of America. Judge Stanley C. Blair ordered the union to refund to objecting workers all fees that exceed the union's costs of collective bargaining.