Trends

FTC under Attack

The agency that claims to be a champion of the consumer, the Federal Trade Commission, is coming under heavy fire from business and trade groups—and increasingly from Congress.

Most of the action to date has been in the House. For two years in a row the House has passed legislation that would allow either house of Congress to veto FTC trade rules and has held up FTC budget authorizations in an attempt to get the Senate to go along. And recently the house voted to forbid the agency from imposing new regulations on the funeral industry.

Now the action has shifted to the heretofore-reluctant Senate. The Senate Commerce Committee in November voted unanimously to forbid the FTC from

• adopting trade rules against "unfair" advertisements (such as those aimed at children),

• regulating the procedures of private standard-setting organizations,

• investigating the insurance business (which the agency is already forbidden to regulate by federal statute), and

• adopting a rule requiring warranties and inspections for used cars.

The committee also voted to limit FTC reimbursements to citizen groups for the expenses of testifying, setting the maximum at $50,000 per group in any one year. Pending before the Senate are over two dozen other limitations on FTC activities, including the House-passed legislative veto measure, which has 35 Senate cosponsors.

The FTC legislative veto measure is but one application of a broader proposal. Rep. Elliott Levitas (D-Ga.) has over 200 cosponsors for a measure that would allow either house to veto any significant regulation, regardless of the agency proposing it. Congress has already included provisions of this sort in the latest budget authorizations for three departments: Housing and Urban Development, and the major regulatory programs of the departments of Transportation and Energy. The Carter administration maintains that these restrictions unconstitutionally infringe on executive authority, but the issue has thus far not been tested.

As if the FTC did not have enough to worry about, its authority to issue industry-wide trade rules is now being challenged in court. Hertz Corporation contends that the agency's "holder in due course" regulation is "unlawful and in excess of the commission's statutory authority." It argues that the courts must look behind the rule itself to see whether the commission acted correctly in enacting it. If Hertz's view prevails in court, it could shift the burden of proof about the reasonableness of regulations from beleaguered firms to the FTC itself.

California Cable Deregulated—Almost

For most of 1979 the cable-TV industry in California lobbied hard for deregulation of rates—and very nearly succeeded in getting approval of a bill forbidding cities and counties from controlling cable rates. But under threat of a veto by Gov. Jerry Brown, the bill was drastically rewritten at the last minute. As a result, the new law that went into effect on January 1 provides many cable systems with pricing freedom—at the cost of their autonomy.

In arguing for deregulation of prices, cable operators advanced strictly practical arguments—that the benefits of advancing cable technology (more channels, satellite transmission, etc.) were being held back by unresponsive local regulators. In the end, the politicos took them at their word: they made rate deregulation conditional. In order to be freed of price controls, a cable system must offer at least 20 channels, use a satellite ground station, and make available community-service (public-access) channels. Moreover, if a cable system serves more than 70 percent of the homes in its franchise area, it will be considered a quasi-monopolist and allowed to raise its rates no more than 75 percent of the percentage increase in the Consumer Price Index.

On top of all that, the measure sets up an independent foundation to promote and give grants for use of the community-service channels by government agencies and citizens groups, funded by a tax of 50 cents per cable subscriber per year.

Thus, California's cable industry is entering a new era…but it's not quite what one would call "deregulated." Reregulated would be more like it.

What Price Speed Limits?

Everyone knows that speed limits save lives…don't they? Well, as with other bits of conventional wisdom, this one, too, may turn out to be wrong. That's the implication of a study of the West German experience, as reported by Paul Frere in Road and Track (Oct. 1979).

The evidence consists of several parts. To begin with, there's before-and-after data on the imposition of speed limits on urban streets and open highways other than autobahns. A 50-kph (31-mph) limit was imposed on the former in 1957 and a 100-kph (62-mph) limit on the latter in 1972. In both cases, injury-causing accidents dropped somewhat during the following year but then resumed their gradual uptrend.

More impressive is the experience with the autobahns (the equivalent of US interstate highways). For two years in the early '70s the government experimented with speed limits on various sections of the autobahns. The result was a decision to post a "recommended" speed limit of 130 kph (81 mph) but no mandatory limit. Analysis of accidents from 1972 to 1975 showed that 72 percent of all autobahn accidents involved cars traveling at less than 100 kph (62 mph)—yet cars going below that speed accounted for only 58 percent of the traffic. Clearly, the slower drivers accounted for the lion's share of the accidents. Only 6 percent of the accidents occurred at speeds greater than 130 kph (at which 7.7 percent of the traffic was going).

For these reasons, German traffic officials decided that making the 130 kph limit mandatory would yield a negligible reduction in accidents. At the same time, it would impose inconvenience and frustration on long-distance motorists, lead to a reduced sense of responsibility on the part of drivers (and possible deterioration in active car safety), and require higher police budgets. Thus, German autobahn drivers remain free to set their own limits.

Tax Cut Benefits

Those arguing for cuts in federal taxes frequently claim that a reduction in present high rates of taxes will lead to beneficial increases in investment, helping to restore vitality to our stagnating economy.

Some evidence of such an effect has turned up recently, concerning the 1978 cut in capital gains tax rates. The October 1978 cut had a massive impact on the venture capital market. Whereas private partnership venture capital investments had been a mere $22.5 million in 1974, zero in 1975, $25.7 million in 1976, and $20.2 million in 1977, in 1978 they suddenly increased to $215 million, mostly in the fourth quarter when the tax cut occurred. For 1979 the figure is expected to be around $300 million.

A less dramatic indicator is the extent of initial public offerings of common stock. The average number of such issues from 1974 to 1977 was just 44 per year, and in the first half of 1978 there were only 18. But in the second half, the number jumped to 40 and increased again to 59 in the first half of 1979. Moreover, from November 1, 1978, to September 30, 1979, the stock market index of over-the-counter stocks rose nearly 31 percent, that of the Amex 57 percent, indicating renewed interest by individual investors. (By contrast, stocks on the New York exchange, where institutions dominate, rose hardly at all.)

Currently, another investment-related tax-cut proposal is before the Congress. Called the Capital Cost Recovery Act, it would allow firms to depreciate assets far more quickly, thereby (say its supporters) spurring replacement of obsolete plant and equipment. The measure would replace the present "useful life" rules with a so-called 10/5/3 rule: commercial structures could be written off in just 10 years, equipment in 5, and cars and light trucks in 3.

A study of 10/5/3 by Data Resources, Inc., predicts that it would generate $10 billion in additional investment during each year of its phase-in period and $21 billion a year thereafter. After accounting for increased personal and corporate income tax revenues due to increased production, the net tax take would be about $11 billion a year less. Some economists question these numbers. But few challenge the measure's basic premise: that in these inflationary times, present depreciation methods are grossly unrealistic and that cutting the tax on capital goods will lead businesses to invest in more of them.

Private Forecasting

The six-member National Weather Service observation team at Washington National Airport is being phased out for a private contractor and, eventually, automation. The weather service provides briefings to pilots at the government-run airport. Over the years, it has also assumed responsibility for forecasts to the general public.

Grumblings from the affected employees have prompted William Eggert, chief of the data systems division of the NWS and coordinator of the transition, to point out that at least $85,000 will be saved by the move. The private firm, Nash Roberts Jr. Consultants, Inc., won the bid at $67,000—fully $170,500 less than the $237,500 it costs now. Two government employees will be retained to continue to provide aviation briefings and to respond to public inquiries, pushing the costs up to a total of $152,000, still a significant savings.

Criticism of the eventual transition to an automated system has led the NWS to question the nature of information required for aviation forecasting. While Eggert acknowledges critics' charges that such things as types of cloud formation can't be assessed by a machine, he counters that that information is not necessary for forecasting. An automated system would cost about $150,000 to install and $10,000 a year to operate.

Telex Competition

Competition in telecommunications—already in existence for long-distance telephone service—has come to the telex field, as well. Three new firms are now providing international telex service at prices from 35 to 50 percent less than those of the FCC-regulated carriers. And they're doing it without apparent need of FCC approval.

International teletypewriter exchange (telex) service has traditionally been provided by firms such as ITT World Communications and Western Union International, which own or lease their own communications links (cables, satellites, etc.). They are licensed as common carriers by the Federal Communications Commission—which means they have to file their rates with the agency and serve all customers on an equal basis. As in many other regulated industries, the firms end up charging virtually identical rates instead of competing on price.

The new firms are quite different. All three utilize regular telephone service to provide their trans-Atlantic connections, interfacing with European telex networks. Southern Pacific Co., for example, stores outgoing messages in a computer in Patchogue, New York. About once an hour its British affiliate, VTL Data Processing, calls up the computer to receive the messages, then retransmits them over its 57 leased European telex lines. SP's rates are 40 percent less than those of the established firms—$1.50 per minute for service to West Germany, for example. It achieves these economies, in part, by utilizing lower-cost European telex lines than its established competitors and by offering only "store-and-forward" service (storing up messages in the computer and sending them once an hour)—that way it avoids the expense of maintaining full-time communications links.

SP and its fellow innovators, Consortium Communications International and Via Titus, Inc., have not been classed as common carriers and thus far have not advertised for customers. Hence, they have remained exempt from FCC regulation. Disturbed by the cut-rate competition, the big three established carriers have filed complaints with the FCC against Consortium, claiming that it is operating illegally by not being FCC-licensed. Given the FCC's recent moves to open long-distance telephone service to competition, it seems unlikely to be willing to protect the large firms' shared monopoly from the newcomers' aggressive competition.

Tax Revolt Here to Stay

A study conducted by the Rand Corporation and funded by Rand and the Ford Foundation reports that the tax revolt is not an isolated case of discontent but rather indicates a new era of scaled-down government. The mood of tax containment, says the study, explains the fact that the fraction of the gross national product accounted for by state and local government spending has dropped for the first time in 30 years. Local or state fiscal limits can now be found in half the states, and taxpayers are more reluctant to approve bond issues or to vote for free-spending candidates. Explaining the discontent, the study points to (1) polls showing that taxpayers are questioning whether they are getting their money's worth for taxes paid, (2) inflation, (3) the last 50 years' increases in the burden of taxation, (4) shifts in government expenditures, and (5) the lopsided compensation of federal employees, currently averaging 140 percent of that in the private sector (state and local compensation is about even with the private sector).

Counting Oil Prices

Energy boondogglers should take note of two results of higher oil and gas prices: a jump in domestic drilling activity and steadily declining consumption of these two sources of energy.

According to a Business Week report, the number of drilling rigs in operation in late 1979 topped a 22-year record. And the explanation for the increasing exploration for oil and gas is the higher prices for some producers: oil from wells started after January 1, 1979, and oil from stripper wells is not price-controlled; the government-set maximum natural-gas price increased from $1.55 per thousand cu. ft. in 1978 to $2.29 in the fall of '79, and some categories of gas have now been completely deregulated. In addition to higher prices, the report cites the major oil companies' widely publicized profits in 1979—and a $2 billion increase in exploration activities in their revised 1979 budgets. And some experts think an even bigger jump in drilling is yet to come. With plenty of rigs available (in contrast to 1973, when the first oil squeeze hit), producers say there's nothing that could stop the current boom—except punitive tax legislation.

And while producers do their part on the supply side of the equation, consumers have been reacting equally naturally to higher prices. Between 1973 and 1978, notes economist Michael K. Evans, energy consumption (measured per dollar of gross national product) did not increase at its previous average rate of 0.6 percent per year but declined by an average 1.4 percent a year. And in 1979 the drop was even bigger. In answer to "defeatists of all stripes" who insist that the pricing system cannot solve the energy crisis, Evans declares that "raising energy prices and rewarding those who, by design or accident, happen to own claims on oil and gas reserves" is the way to get OPEC off our backs.

Smog Alerts

Despite recent studies finding that airborne pollutants are good for plants, other reports decry Southern California's indigenous acid smog and place crop losses due to air pollution at up to 50 percent.

In a study done at Argonne National Laboratory, researcher Patricia Irving surprised herself and others with the finding that, for some plants, sulfur dioxide and nitrogen oxide emissions (the pollutants in acid rain) provide key nutrients that help plants grow. Previous studies found these elements to be harmful, she asserts, because they were administered in unrealistically high doses. A soybean plot supplied with water of the acidity level of vinegar showed a seven percent bigger crop than one watered with unpolluted rain. The TVA, one of the biggest coal users in the country, has come up with similar results.

Another new aspect of the acid-rain debate is "acid smog"—a Southern California phenomenon. A recent study by Caltech scientists confirmed that the area has its own, nitrogen-high, version of the Northeast's acid rain (where coal-burning utilities account for the high sulfur content). And since it doesn't rain that much in Southern California, there's also lots of acid smog—20 times the amount of acid rain in Los Angeles. What does it mean for vegetation and health? The researchers say they don't know yet, but they imply that it's a cause for some concern. Perhaps they will be as surprised as the Argonne researcher when they turn to this question.

Meanwhile, crop research experts warned a Kern County, California, symposium that annual crop losses due to air pollution are at least 10-12 percent in Central and Southern California and "could go as high as 50 percent" in some areas. Dr. James Demmett of UC Davis claimed that air pollution is causing the loss of 20 percent of the alfalfa and 10 percent of the citrus in the San Joaquin Valley, 30 percent of the citrus in Los Angeles County, and 40 percent of the citrus in San Bernardino County.

But Dr. Arthur A. Millecan, Jr., of California's Department of Agriculture, noted that for some crops, technology has made it possible to adjust to airborne oxidants: to "plant more resistant varieties, use antioxidant sprays,…and alter farming techniques, such as holding off fertilizer and water for periods of time." And in reporting on the Kern County symposium, the Los Angeles Times interjected its own parenthetical note that "despite the asserted crop damage" California agriculture was enjoying one of its best years, with shortfalls in citrus and avocado production attributable to a freeze last winter.

China Tries Capitalism

Some youths open a cafe across the street from an older, more established cafe. The new cafe remains open later in the evening, offers a more varied menu, and gains all the customers. This is nothing new in the United States, but these two cafes happen to be located in Communist China. The older cafe is a State-run franchise and the new cafe an example of the new benevolence toward capitalistic ventures. For China is joining the ranks of other socialist and communist countries that are being forced by reality to recognize the benefits of free-market work and exchange incentives.

Reality is particularly pressing in China because of massive unemployment problems. Upon graduating from a university, young people often spend 7 to 10 months finding work, and China will have to provide jobs for 40 million people in the next decade, as automation displaces workers. So jobless youths are being encouraged by the Communist Party to go into business on their own or in small groups. The new enterprises get their start-up capital from private sources such as families and banks, unlike the State-financed collectives.

Another move is to allow commune factories, instead of automatically turning everything over to the State, to sell their surplus produce—whatever exceeds production targets—in street markets. Here, they join a lively commerce in produce and meat from private plots, which now account for some three to six percent of all cultivated lands. Prices at the street markets average 20-30 percent higher than at State stores, but the quality and variety—and the possibility of bargaining over the price—attract plenty of customers.

Capitalist technology and management practices are also being brought to State-run enterprises. Both in the factories and agricultural communes, there is a move toward decentralized decision making, with freedom for local creation of economic incentives to boost the quantity and quality of production. Cash bonuses, time-and-motion studies, and piecework wage systems are making headway in State-run factories. For a high-performing worker, cash bonuses can amount to 30 percent of the base wage.

China is also wooing foreign investments, to add to the 800 joint ventures already operating in Guangdong Province, by the Hong Kong border. With such ventures, the Chinese expect to open up foreign markets to their products and thus earn the foreign exchange needed for modernization, but also to gain access to management techniques and new technology.

Following up on a joint venture law passed in July, the Chinese are working out laws to provide investor incentives, specify investors' rights to arbitration, and allow for management autonomy. And there are signs of recognition of the need for legal provisions for resolving disputes connected with the delivery and supply of materials.

With their commitment to modernization, the Chinese have had to open their eyes to economic realities. And that, quite naturally, seems to be forcing an awareness that smooth economic functioning requires a political structure that recognizes rights.

Britain Steps Up The Attack

With several recent moves, Britain's Conservative government continues to show its determination to revitalize the economy with the fresh air of deregulation.

In November, Prime Minister Margaret Thatcher's government introduced legislation that would block enforcement of US court judgments against British firms in antitrust cases. The legislation, expected to be approved by Parliament, is a dramatic new turn in a long-standing international legal battle over antitrust and regulatory jurisdiction. While applicable to all foreign governments, the proposed law is, by the British government's own admission, aimed at US courts and regulatory agencies, which have claimed jurisdiction over British companies that operate outside the United States but are subsidiaries or affiliates of US firms, have 25 percent US ownership, or carry on any activities judged to have an adverse effect on US commerce or foreign trade. The law would prevent enforcement in Britain of US antitrust judgments and punitive double or triple damage awards and would exempt British firms from complying with US subpoenas or court orders for information and documents in antitrust and regulatory actions.

On another front, airline entrepreneur Freddie Laker is optimistic about Britain following the United States' lead in airline deregulation. Laker expects the government's approval of his proposal to extend his low-fare service to 37 European cities and hopes for its strong backing when he goes before the European Economic Community for approval. His move into Europe could spur aviation deregulation there, too, says Laker, because other carriers will have to compete, whether officially deregulated or not.

The British government has also taken steps to bring some competition to its postal service. In September, Keith Joseph, secretary of state for industry, announced plans for splitting Britain's Post Office into two corporations, one handling letter delivery and the other telecommunications, including telephone service. Both would remain State-owned, but telecommunications would be opened to domestic and foreign competition in the next two to five years. While the government had been considering selling shares in the telecommunications arm of the Post Office to the public, as proposed for other nationalized industries, the final plan less radically opts for increasing efficiency by exposing it to competition with private enterprises.

Meanwhile, with its 1981 budget (covering April 1980 through March 1981, Mrs. Thatcher's government is refusing to soften its criticized restraint. Proposed public expenditures (in constant dollars) would come to $7.2 billion less than the Labour Party had planned and would show only a $40 million increase over the expected $144.54 billion for 1980. According to the government "white paper" outlining the budget proposals, the rationale for restraint is to force down inflation by tight control of the money supply and of government borrowing and to reduce taxes, especially on income, as an incentive to the private sector.

Truck Deregulation Stalled

Promising movements toward deregulation of trucking at both the national and state level are being stalled. In both cases, legislators are paying heed to complaints from those protected by the existing regulatory structure and are ordering the regulatory agencies to hold up on their efforts to relax controls.

At the federal level the Interstate Commerce Commission has been put on notice by Sen. Howard Cannon, chairman of the Commerce Committee, to avoid making any major deregulatory moves that would preempt congressional action. Outgoing ICC chairman Daniel O'Neal and incoming chair Darius Gaskins have agreed to hold off decisions on several such proposals until June 1, the date by which Cannon wants Congress to pass some form of truck deregulation bill. But the ICC plans to continue action on "many other important, but less far-reaching" proceedings.

A similar drama is taking place in California. Last August the state Public Utilities Commission set in motion a "phased deregulation" effort under which minimum rates for truck shipments were abolished and truckers were to set rates via competition. Heavy lobbying by the Teamsters Union and a number of trucking firms led to passage by the state Assembly of a bill to impose a two-year moratorium on any such changes. Proponents of the delay claimed that reliance on competition would "make our industry unstable and that does not serve the public interest." The PUC, by contrast, estimated that competition would lead to rates at least 10 percent lower than at present, and that that would certainly be in the interest of most Californians. At press time, the moratorium was being considered by the state Senate.

Milestones

Brown on Gold. At the National Committee for Monetary Reform conference in New Orleans, 3,000 gold bugs heard political chameleon and California governor Jerry Brown come out for gold. In a surprise move, Brown said, "The reentry of gold into the monetary system may be necessary." Calling US gold sales a "gimmick," Brown added that 'it is a very foolish thing for the government to sell off gold, as if gold is never going to play a role in the reform of the international monetary system."

Gold Ownership Bill. In a related development, Rep. Ron Paul's Gold Ownership Act of 1979 has passed the House of Representatives. Since the 1930s, the Treasury has had authority to confiscate gold holdings—which the bill, incorporated in a Federal Reserve measure, aims to rescind. Sen. Jesse Helms is scheduled to introduce the bill in the Senate.

Restoring Incentives. Hungary announced its plans to drop rigid wage controls and let employers pay higher wages to reflect higher profits. At present, the wage difference between skilled and unskilled labor is only 30 percent.

Latin Privatization. The city government of Buenos Aires, Argentina, is looking for a large private company "capable of developing efficient service" to buy its 22-mile municipal subway system. The system has been running (inefficiently, it seems) since 1913.

Citizen's Choice against Taxes. A blue-ribbon commission has been formed by Citizen's Choice—a broad-based public-interest group—to investigate IRS methods and lobby for tax and spending cuts. Noting that voluntary compliance is the traditional basis for tax collection, founding chairman Jay VanAndel warned that the frequent IRS harassment and inconsistencies could destroy incentives to willingly comply with the IRS. The commission has also called for an immediate $25-30 billion tax cut.

Ending Interest Limits. Sen. William Proxmire's Banking Committee successfully wrote a bill aimed at making banks, credit unions, and savings and loan associations more competitive by ending federal limits on interest paid to savings accounts (Regulation Q) and by allowing interest on checking accounts. The bill passed 76 to 9 and is now in conference with the House. Under the bill, all limits would end by 1990.

Economics 101. The Wall Street Journal, in a recent editorial, criticized congressional solutions to the Chrysler imbroglio. Noting that market forces channel capital to efficient managers, the editorial pointed out that congressional intervention—whether it be taxes, price regulation, or credit allocation—obstructs that efficiency. It stated that if the sophisticated capital markets are saying they don't have confidence in Chrysler, federal guarantees can only delay inevitable bankruptcy. The editorial suggests bankruptcy as the best solution, so that capital can go to more successful enterprises.