Trends
Anticompetition Barriers Dropping
The last few months have seen a continuation of the trend toward removal of barriers to competition among professionals—and in response, the offering of new services. The action is hottest in the legal field.
Now that advertising and low-overhead "legal clinics" are permitted, a host of new law services is springing up. The pioneer legal clinic, California's Jacoby & Meyers, expanded to New York City last January, opening 11 offices there. In both states, J&M uses television ads to attract clients with the promise of low-cost, efficient service. Despite criticisms from traditionalists about "assembly-line" service, a study by the University of Miami's Law and Economics Center found that clients of J&M are more satisfied than clients of traditional law firms. And J&M's fees are much less—$325 for an uncontested divorce in Manhattan, compared with around $1,200 at conventional law firms.
The newest type of legal clinic is the "Law Store," founded by two other California attorneys. After operating four shops of their own, they have concluded an agreement with Montgomery Ward to set up Law Store booths in Ward's department stores. The first two opened in June in San Diego, and more are planned for Los Angeles. The customer in the booth is connected by phone to a central Law Store office. Sears, Roebuck is reportedly planning a similar service.
Offering professional services in department stores is not that new an idea. Sears already has dental clinics in eight of its California stores, Montgomery Ward has three so far, and Unishops, Inc., has two in Cleveland. The shops' business will undoubtedly be helped by a recent agreement between the American Dental Association and the Federal Trade Commission. The consent order ends a 1977 FTC suit against the ADA on the issue of the latter's code-of-ethics restrictions on advertising. Under the agreement, dental associations must remove provisions that prohibit advertising or solicitation of patients by their members and must insert a positive statement that such advertising "shall not be considered unethical or improper."
That competitive spirit has yet to extend to the false-teeth business, however. In all but one state, the political clout of dental associations has made it illegal for denturists (technicians who make and fit false teeth) to deal directly with patients. The lone exception is Oregon, where last November a senior citizens' group helped to enact a referendum legalizing denturism. The new law goes into effect in mid-1980. The FTC's western regional office in San Francisco is considering a proposal to override restrictive state laws and legalize denturism everywhere.
Deregulation of the professions has come to accountants and professional engineers, as well. This spring the membership of the American Institute of Certified Public Accountants voted overwhelmingly to remove two provisions from their code of ethics that had restricted members from making direct approaches to prospective clients. Despite pressure from the Justice Department to make the change, the Institute's governing council had recommended against it. But the membership saw the competitive handwriting on the wall. (This was the last barrier to competition, the Institute's advertising ban having been repealed last year.)
In Ohio, that state's professional engineering and consulting societies have agreed to a settlement in a civil action brought by the state's attorney general charging restraint of trade. Under terms of the agreement, the societies are to drop from their codes of ethics all restrictions against competitive bidding and advertising. The result should be new opportunities for competition and potentially lower prices for the services in question.
Gold Comes Back
"Gold has crept back on the world monetary stage." So states the opening sentence of a special Financial Times (London) article published in June. The recent surge of gold buying, pushing the price through the $300 level, represents only the tip of the iceberg of a new role for gold, once more the major component of the world monetary system.
To begin with, US gold stockpile sales to help finance the government's current-account deficit have helped create new markets for the metal. Continued dollar weakness has prompted a huge increase in Arab gold purchases—much of it by central banks (though not that of Saudi Arabia). Thus, although no Arab government is yet directly demanding gold for oil, many of them cash in their dollars for gold after keeping them on deposit only briefly.
Second, more and more central banks are revaluing their gold holdings to current market prices instead of the absurd "official" price of $42 per ounce. As a result, gold reserves of the major industrial countries now approach $350 billion, compared with around $288 billion in foreign exchange (currency) reserves. Thus, gold is once again the world's major reserve asset.
Finally, the new European Monetary System has given gold a key role in its pool of monetary reserves. That, and the revaluation to market prices, gives central bankers an incentive to keep gold's price from falling.
As Business Week points out, the whole process "has virtually dashed any hope the US Treasury may have had of achieving its long-cherished goal of 'demonetizing' gold." Not even the elevation of gold-phobe Paul Volcker to the position of Federal Reserve chairman will alter gold's comeback as an alternative to depreciating paper.
More Municipal Contracting
Readers of these pages have seen many examples in which city and county governments have achieved impressive savings for their taxpayers by contracting out services to the private sector. Getting efficient private firms to compete for the business generally leads to less-costly ways of fighting fires, trimming trees, collecting garbage, etc. California, in particular, seems to be taking the lead in expanding the use of contracting, spurred on by pressure from Proposition 13.
Even San Francisco, the costliest and most "big-government" city in the state, has begun turning to contracting. And it began in a sensible place—its budget office. In its initial report on contracting's potential, the privately run budget office projected a mere $500,000 in savings—from contracting such services as golf course maintenance, jail and hospital meals, some data-processing services, certain hospital inpatient services, and janitorial services. But the city's General Hospital is already saving $900,000 a year by contracting for janitorial and nursing services, so the total potential savings are obviously much higher.
Contracting is even becoming an election issue. In San Diego, two city council candidates are making private contracting a big part of their campaigns. Fran Condon has urged that building permit processing be contracted out. But candidate Joe Diaz would go much further. At a July news conference, he proposed that every function of city government be considered for private contracting—even the police department. If Pinkerton's or another private firm were interested and could save the city money, why shouldn't they be given a chance to do so, asked Diaz? He also announced that he had invited 10 top management firms to submit bids to run "any or all city programs."
Miami Tax Revolt
Antitax activists in south Florida may have started a bigger tax revolt than they realized. Last spring Albert Sarmiento and Harry Wilson began circulating petitions designed to cut Dade County (Miami area) property taxes in half, to $4 per $1,000 of assessed valuation. After gathering 15,000 signatures—5,000 more than required—and winning a court battle over getting onto the ballot, proponents and county officials made a startling discovery: there was an error in the petition's wording. Instead of cutting the tax rate to $4 per $1,000, it would cut it to $.004 per $1,000. At that rate, the total property tax take would be only $91,000—compared with $173 million now.
Wilson and his cohorts were perturbed, but glib county officials refused to change the wording. "I really think we have a pretty intelligent electorate," says Commissioner Bill Oliver. "Once this is explained, I'm sure they'll make a wise decision." But since property tax revenues only account for about 16 percent of the $1.1 billion county budget, eliminating them altogether would hardly be crippling. Dade County voters thus have the chance to pull off their own version of Proposition 13, turning a rather mild reformist proposal into a fairly radical one. Watch for the results on September 18.
Bigness Is Not Badness
Two recent antitrust cases resulted in victory for innovative firms that give customers new products at low prices—even though each had the misfortune of being the dominant firm in its industry. The victors were IBM and Kodak; the losers were disgruntled competitors who tried to obtain by force of law what they could not win in the marketplace.
The suit against IBM was brought by California Computer Products. In 1973 Calcomp had charged that IBM's new products, pricing, and leasing policies prevented Calcomp from effectively competing. In 1977 a district court dismissed the suit, saying IBM had a perfect right to cut prices and redesign its products without telling Calcomp in advance (so that it could redesign its "plug compatible replacements" accordingly). And late in June a federal appeals court upheld the lower court's ruling.
A similar issue was at stake in Berkey Photo's suit against Kodak. Berkey charged that Kodak had abused its dominant position in the market by introducing the Instamatic camera in 1972, without giving Berkey and others the design so they could make compatible products. Nonsense, ruled chief judge Irving R. Kaufman. "The mere possession of monopoly power does not ipso facto condemn a market participant." In fact, "the first firm, even a monopolist, to design a new camera format has a right to the lead time that follows from its success."
Bold Call for Freedom
Amidst all the discussion of inflation, price hikes, and fuel shortages, virtually nobody in the public eye has come out for the most obvious solution of all—clearing away the whole bureaucratic mess and returning to the free market. An important exception, however, is C. Jackson Grayson, Jr., chairman of the Price Commission during Nixon's wage-price controls and now chairman of the American Productivity Center in Houston.
In a full-page-column in Business Week (July 16), Grayson excoriated the current wage-price guidelines and their vain attempt to second-guess the market. Based on his own experience as a price controller, and the Heritage Foundation study Forty Centuries of Wage and Price Controls, he concludes: "Not only do the guidelines violate the basic economic laws of supply and demand, they also violate the basic political laws of consensus, power, and equity." That said, he urges complete decontrol of energy prices, abolition of all wage and price controls or guidelines, scrapping the Council on Wage and Price Stability, and a return to the free market.
Taking these "politically impossible" steps, he argues, would lead to an "American miracle" on a par with the West German "economic miracle"—after controls were removed all at once in 1948 (see "The German Non-Miracle," REASON, Apr. 1978).
Postal Service—Give and Take
Fighting to preserve its existence and its monopoly, the US Postal Service has given ground in one area—"urgent" letters—but moved to expand in another—electronic mail.
Conceding that the Private Express Statutes should not be used to prohibit services the USPS cannot provide, the agency has proposed new rules permitting private firms to deliver "extremely urgent" letters. Mail would qualify if it met either of two tests: (1) the mailer is willing to pay twice the normal first-class rate or $3, whichever is greater; or (2) the mail's value would expire unless delivered within a very tight time frame (e.g., daily bulletins of new listings to real estate agents).
But what the USPS gives with one hand, it takes back with the other. The other hand has been lobbying furiously to get a foothold in electronic mail, rather than leaving this new form of communication to the private sector. Certain large mail users (including Reader's Digest Co.) have been joining in the chorus, fearful that if private electronic mail drains off business from the postal service, rates for the remaining users will have to be raised. What the USPS has been after is a commitment from the Carter administration ensuring them a piece of the action.
In July they got just that—albeit hedged with certain restrictions. The White House policy statement would limit USPS activity to "Generation II" electronic mail, in which hand delivery of the message still takes place. (Generation I refers to existing telegram service, Generation II to electronic data transfer between post offices followed by hand delivery, and Generation III to full-fledged two-way electronic data transfer between users.) Generation III would be reserved for the private sector, and the Private Express Statutes would not be extended to Generation II, thereby permitting public-private competition. Moreover, the policy statement would forbid subsidization of USPS Generation II services from either tax funds or other mail revenues. Private firms are nonetheless skeptical, fearing that once the camel's nose gets into the tent.…
Meantime, the Postal Service is attracting attention to its experimental transatlantic INTELPOST service—a prototype Generation II system between Great Britain and the United States. INTELPOST is a joint effort between USPS and the British Post Office. The latter, though a government operation, operates in the black because of profits from its monopoly telecommunications services, which cover its postal losses. In the wake of a strike earlier this year, many Britons are calling for (1) spinning off the profitable telecommunications operations, and (2) repealing the Private Express Statutes. The government's new industry secretary, Sir Keith Joseph, recently called for a feasibility study of allowing private operators to deliver mail. It would be ironic, indeed, if transatlantic electronic mail ended up being provided by a private (or privatized) British entity interfacing with an American government bureaucracy.
Underground Economy Worries Feds
Earlier this year the Internal Revenue Service admitted the existence of a $100 billion a year "underground economy" in this country—the exchange of goods and services outside the notice of government and therefore beyond the reach of tax collectors (see Trends, May 1979). Now the General Accounting Office has confirmed that $100 billion figure, estimating that as many as 20 million people are involved. GAO's Allen Voss told a congressional committee that about $40 billion of the total represents earnings of those who filed no returns, with $50 billion coming from underreporting.
One aspect of the underground economy is barter. Today's computer systems facilitate the exchange of commodities. Several large-scale computerized barter brokers, such as Salt Lake City's Exchange Enterprises, are in operation in the West. While there is nothing illegal about barter, and no inherent mechanism for tax avoidance, the absence of cash transactions seems to facilitate nonpayment of taxes.
Another alleged component of the underground economy is independent contractors. These are people who receive no salary but work for others as independent business people—independent truckers, most cabdrivers, real estate and insurance sales people, carpenters, loggers, etc. The IRS is convinced that many of these people underreport their incomes. And it (consequently?) is arguing that many of them are really employees and therefore should be having taxes withheld from what they are paid. As a result, it is trying to push through Congress a law requiring those hiring independent contractors to withhold 10 percent of what they pay them and turn it over to the government.
In response, industry associations (insurance, real estate, trucking, logging, pulp and paper, etc.) are seeking passage of an alternative measure that would clearly define who qualifies as an independent contractor. The Gephardt bill defines five criteria that such a person would have to meet:
• He sets his own hours of work.
• He has his own place of business.
• Income fluctuates based on work performed.
• He has a written contract.
• Information returns are filed by the company hiring him.
The IRS strongly opposes the bill, fearing that it would lead to even more people qualifying as independent contractors, thus expanding the underground economy still more.
Bus Deregulation Arrives
At least for the summer, interstate bus transportation is operating in a nearly free market. On July 12 the Interstate Commerce Commission voted 4-2 to deregulate such bus service immediately, through September 25. As a result, bus operators may provide service to any city or town they want and along any route they wish to travel, without ICC approval. The only restrictions are (1) that the fares be based on the companies' existing rate structure, and (2) that no current routes be abandoned.
The deregulation came in response to a petition by Trailways, citing gasoline shortages and the resulting shift of demand from cars to mass transit. On July 16 Greyhound and seven other bus firms filed suit to block the ICC's action, but at press time, the US district court involved had taken no action.
Although the deregulation, officially, is only temporary, many suspect that it may become permanent. Among those who think so is ICC commissioner George Stafford, who voted against it because he suspects that will be the case—and in that case, wanted more time for public input. So it may be that buses have now joined airlines and air freight among those industries returned to the free market.
Energy Controls under Attack
Despite President Carter's choice of more government programs as the solution to our energy woes, more and more experts are concluding that controls are the problem, not the solution.
The General Accounting Office, for example, reviewed four alternative mechanisms for reducing oil imports: price decontrol, import quotas (which Carter wants), import fees, and a crude oil equalization tax. The study weighed the energy and economic effects of each policy and concluded that decontrol is the best. "Overall, GAO believes that deregulation holds about the right combination of benefits vs. costs for the nation," the report concluded. "Deregulation is the most effective of the three pricing options aimed at cutting oil imports, reducing them between 20 and 100 percent more than crude oil equalization taxes and import fees."
In a similar vein, the Wall Street Journal reports that many government economists are concluding that Energy Department regulations are creating rather than resolving shortages. "Without the Energy Department, we would have gasoline," it quotes one such high-level economist. He points out that the United States is virtually alone in having gasoline lines—even though most European nations are more heavily dependent on oil imports. Economists consider DOE allocation policies the principal cause of gasoline shortages. Even though most oil companies have about as much crude as last year, the regulations force them to deliver less to their regular customers, diverting the rest to specially favored segments of the market. And they prevent companies from shifting supplies quickly to relieve spot shortages. Moreover, DOE pricing rules encourage importation of light crude—produced by "pricing hawks" like Libya and Nigeria—rather than cheaper heavy crudes. In short, says former Council of Economic Advisors member Paul MacAvoy, "The regulations create a major emergency out of a small one."
Capitalism Creeping into Communism
Across the communist world, from Eastern Europe to China, the communist principle "from each according to his ability, to each according to his need," is being turned on its head. Out of new respect for the reality of self-interest and the value of incentives, officials in the socialist states are encouraging free-market activities.
The most recent developments have occurred in China. There, both private farm plots and village marketplaces are making a strong comeback. Both were abolished in 1958 during the Great Leap Forward; to save millions from the resulting starvation, Mao began allowing their return in the early '60s. But the Cultural Revolution in 1966 once again suppressed them. It is only today, with Mao dead and his more open-minded successors in power, that the markets and private plots are flourishing. The New China News Agency reported this spring that 20 major cities now sport regular weekly "free markets," as do 30,000 spots in the countryside. Prices in these markets are uncontrolled by the State.
Chinese tax policies encourage productivity. Economist Jude Wanniski has pointed out that communal farms are taxed only on the basis of area; thus, higher production is not discouraged by higher taxation. And the output of private plots is not taxed at all. Individual commune members in many areas are now paid on the basis of their individual output, rather than all being paid equally. Little wonder, then, that Chinese agriculture is booming.
Bulgarian officials have recently drawn the same conclusions about agricultural incentives. Its new economic system will tie farm worker's salaries to their individual output. All agricultural organizations will be taxed on land area only and allowed to keep all profits. Moreover, they are now permitted to market their products abroad without going through the Foreign Trade Ministry and to keep their hard-currency earnings for their own use.
Hungary is probably the furthest advanced toward the market of any Eastern bloc nation. The government is introducing incentive pay in State-owned enterprises, encouraging the growth of private shops and businesses, and turning a blind eye to a huge underground economy that plays an increasing role in providing services.
The first of these initiatives amounts to a revival of the once-discredited New Economic Mechanism introduced in 1968, which abandoned strict central planning and gave significant autonomy to local managers of State firms. But because of worker resentment of incentive pay and ideological attacks from communist intellectuals, NEM was dropped in 1973. It is now making a strong comeback, as Hungary seeks to compete in the export market with efficient industries. Next January government subsidies on most products will start being phased out and the tax system reformed to provide more incentives for productivity. Incentive pay is back, and even layoffs of unproductive workers are being encouraged.
The official private sector is being encouraged, too, by means of favorable tax treatment, easy credit, and priority for supplies and office space. On the farm, all workers are allowed private plots and permitted to keep any profits earned from sale of its products. The 13 percent private land produces one-third of Hungary's produce and half its beef.
But the real growth is occurring in the "second economy." A Hungarian sociologist estimates that two out of every three workers supplement their income by private employment—at up to eight times government pay scales. Nearly all repair service work—TV, automobile, plumbing, appliances—is done by the underground economy because State services are slow and incompetent. People earn so much in the (untaxed) underground economy that Hungary's consumer-goods sector is booming. Since, as a result, the people are increasingly content, the Communist hierarchy seems to view the whole phenomenon benignly and may actually be encouraging it as a means of defusing any political opposition.
Milestones
Working for Gold? A New York labor union has taken a stand against depreciating paper money. The 46,000-member Professional Employees Federation, representing professional, technical, and scientific employees of New York State, has demanded that its members be remunerated in "mediums of exchange other than the presently used US Federal Reserve dollar. Such alternate mediums of exchange include, but are not limited to, gold, silver, platinum, bullion and coin, and/or one or more foreign currencies." The proposal—essentially to index the wage rate to a nondollar, hard-money alternative—originated as an employee suggestion from one of the members but has now been made an official bargaining position.
Tax Cutting Hits New York. Tax-cut momentum has extended to high-tax New York State.Gov. Hugh Carey has signed a bill reducing the maximum personal income tax rate from 12 percent to 10 percent over a two-year period. The measure was promoted as a way of improving the state's economic climate by making it a more attractive place to live.
Fishing Expeditions Vetoed. Search warrants cannot be open-ended. So voted the US Supreme Court, in overturning the conviction of a New York adult bookstore operator. The search warrant in the case—which had been issued by the town justice—gave police authority to search for and seize anything that might violate New York's obscenity law. In its unanimous decision, the court ruled that it is unconstitutional to issue such warrants that allow police to go on fishing expeditions. "This search warrant and what followed the entry…are reminiscent of the general warrant or writ of assistance of the 18th century, against which the Fourth Amendment was intended to protect," wrote Chief Justice Warren Burger.
Taxi Deregulation. San Diego has joined a small but growing number of cities that have deregulated their taxicab industries. Last year, when the former Yellow Cab monopoly went bankrupt, the City Council began allowing independent cabs to operate. In May of this year, the council more than doubled—from 6 to 15—the number of additional cab licenses that can be issued each month. And in July it raised the maximum permitted fares above market levels in order to stimulate competition—the ceiling rate went from $.70 to $1.50 per mile. "Obviously, no taxi driver is going to charge that kind of rate," said Councilman Tom Gade. "The theory is that a high rate will allow competitive fares between taxi companies."
Repeal Interest Tax. "Americans are saving the smallest percentage of their income of any of the major industrialized nations. And who can blame them? Not only do we have inflation…but the government has the gall to tax, at heavy rates, the small returns that savers receive." So saying, Rep. Ron Paul introduced a bill to exempt from federal income tax all interest income received by individuals—from banks, S&Ls, credit unions, CDs, bonds, or Treasury notes.
Utilities Not Loan Companies. The California Public Utilities Commission had no business ordering utilities to make loans to consumers (at eight percent!) to pay for home insulation systems. So ruled the state's supreme court in a 6-1 decision. While the commission may recommend such programs, it has no authority to mandate them, the court decision said.
House Defends Schools. By a 297-63 vote, the House of Representatives has voted to deny funds to the Internal Revenue Service for implementing regulations aimed at reviewing the tax-exempt status of private schools and revoking it in cases of alleged racial imbalance. Although several bills dealing with the IRS regulations themselves are pending, supporters of private schools decided quick action was necessary to block the IRS from putting the regs into effect before Congress has a chance to act on them.
Gun-Control Effects. What effects have the tougher Massachusetts gun-control laws had on violent crime? According to a study by Northeastern University, while assaults with guns did decline by 15 percent since the new laws were adopted in 1975, assaults with other deadly weapons increased by 24 percent in the same period. Next maybe they're going to ban hammers and baseball bats?