Trends

Clark's Tax Cuts

Libertarian Party presidential candidate Ed Clark has released a 79-page white paper laying out in detail his tax-cut and budget proposals. To actually cut taxes, rather than reduce the amount of taxes collected, any proposed program would have to eliminate over $87 billion—the amount taxes are scheduled to increase next year (Trends, Sept.).

Clark's proposal seems to fit the bill nicely. Based on fiscal year 1982 figures, Clark would impose a 50 percent cut in federal income taxes in 1982 and increase the zero bracket amount to $7,500 (thus exempting millions of low-income people from paying any taxes, he says). Clark would also eliminate the inheritance tax, customs duties, and the crude oil excise tax (otherwise known as the "windfall profits" tax). He would implement the Capital Cost Recovery Act and a system of educational tax credits to be expanded on in his paper on education. Clark also mentioned a $50 billion military spending cut, with details forthcoming in a white paper on defense.

To compare Carter's 1981 budget with Clark's 1982 budget, let's look at some figures: Carter's estimated revenues are $600 billion; Clark's tax cuts of $180.7 billion would place his revenues at $419.3 billion. A conservative estimate of Carter's expenditures is $616 billion; with Clark's spending cuts of $201.4 billion (partly by abolishing the Departments of Energy and of Education), his expenditures would be $414.6 billion. The Clark surplus of $4.7 billion would be increased by the sale of government property (such as Amtrak and Conrail), adding an estimated $19.7 billion to the surplus. These amounts would be applied to make up for further cuts from 1983 on.

How Many Pilots?

For years the battle has raged: how many flight crew members are needed on twin-engine transports? The Air Line Pilots' Association has long contended that such planes as the DC-9 and 737 should carry three in the cockpit, though most airlines routinely fly them with the two crew members they were designed for. ALPA contends that the third man provides a valuable third pair of eyes, to aid in collision avoidance. Airline officials counter that a third crew member is a needless, costly luxury, especially given the increasing amount of automation on today's jets.

The issue has been brought to a head by the emergence of two new twin-engine jetliners: the Douglas DC-9 Stretch-80 and the Boeing 757. Both are designed for two-pilot operation, but ALPA has filed suit to prevent the Federal Aviation Administration from certificating them for such use. If it loses the suit, it will fight the battle airline-by-airline in contract negotiations.

All of which makes of great interest a statistical study released this year by Boeing. Reviewing accident data over the 11 years from 1968 through 1978, Boeing found "conclusively" that two-crew airplanes were involved in fewer accidents than three-crew planes. What about the "third pair of eyes" theory? Boeing analysts speculate that boredom and complacency overtake crew members with too little to do—especially when the work of two is spread out among three.

Workfare, Not Welfare

The July/August issue of Frontier magazine (the in-flight magazine of the airline of the same name) carried an article by news commentator Paul Harvey on the increasing popularity of workfare as a replacement to welfare. Harvey reports that the workfare policy is paying off in at least 21 states. In Tennessee, he says, the previously unemployed welfare recipients earned and paid taxes on a combined income of over $17 million last year. Furthermore, Tennessee taxpayers saved $4 million in grants under the Aid to Dependent Children (ADC) program, $1.3 million in Medicaid payments, and $2 million in food stamps. Harvey said that the Work Incentive Program in that state produced $7.10 in benefits for every dollar it cost, thus refuting the claim that it's cheaper to just give the money away.

The US Department of Agriculture is testing the idea of workfare in seven project sites (five counties and two cities). Although it cautions against judging from preliminary data, it has found that one-third of food stamp recipients in those places could be referred to a workfare program. Of the one-third referred, 65 percent work off the value of their food stamp benefits, while the remaining 35 percent drop out. (In rough figures, this means that out of 1,000 food stamp recipients, 330 could be referred for workfare; 215 would then work off their food stamps, while 115 would simply drop out of the program and, presumably, find work elsewhere.)

Postal Monopoly Broken in Britain

After 320 years of letter-delivery monopoly, the British Post Office will soon have to face limited competition if Industry Secretary Sir Keith Joseph has his way. The government is introducing legislation that takes away some of the Post Office's monopoly privileges, though not in letter delivery. The measures include empowering private operators to carry mail during postal union strikes and if the Post Office does not meet certain minimum standards of performance; allowing private companies to carry "time sensitive, valuable" mail for a minimum fee of one pound (about $2.40); expanding the freedom of private document exchange centers (which deal with business, professional, and legal mail) to allow them to deliver bulk mail; and, enabling charitable organizations to deliver Christmas postcards.

Although the proposed changes affect only about two percent of the Post Office's business, Keith Joseph's threat of competition has already resulted in "marked signs of improvement," according to the London Daily Telegraph. The changes are not expected to take effect for at least a year.

Saving Cities

What can government do about severely depressed areas, such as Miami's riot-scarred Liberty City? Florida governor Bob Graham's conventional-wisdom answer was to add one cent to the state sales tax to finance rebuilding. That idea drew a sharp retort from Henry Manne of the University of Miami Law and Economics Center: "If you want people to build, you lower their taxes, you don't raise them," Manne told reporters. "The answer is not to get government into the area, but to get it out. Suspend or repeal every building or zoning code, every kind of licensing and permit in that area for, say, five years. Just let people get in there and let loose—in other words, Hong Kong."

Manne's proposal—to make Liberty City an enterprise zone (see "Salvaging Our Cities," REASON, Apr. 1980)—was quickly endorsed by Libertarian Party presidential candidate Ed Clark. Visiting Miami in June, Clark said that government policies have, "by design or by accident, destroyed jobs, closed off economic opportunity, and kept the poor out of the economic mainstream." Making Liberty City the nation's first urban enterprise zone would be a "simple, radical, and practical" program that would create thousands of jobs, he said. Late in June Manne and several colleagues, including Stuart Butler of the Heritage Foundation (author of the REASON article), met with community leaders to explain the proposal.

The enterprise zone idea gained further visibility in July thanks to Congressman Jack Kemp. He was responsible for its inclusion in the GOP platform at the convention in Detroit. And Kemp has also introduced a bill in the House, cosponsored by liberal Democrat Robert Garcia, who represents the South Bronx. Under that bill—the Urban Jobs and Enterprise Zone Act—federal income and capital gains taxes would be reduced, and local property taxes in the zone would be cut five percent a year for four years. But the Kemp-Garcia proposal would not wipe out building and zoning regulations or minimum wage laws and thus represents only a partial enterprise zone. Nevertheless, the fact that it has attracted both liberal and conservative support is quite significant.

Alternative Education

Once every seven hours, a new private school is being founded somewhere in the United States, according to the Center for Independent Education (CIE). At this rate, it points out, private schools will outnumber government schools by 1990, reversing a trend that began in the 1960s when private school enrollment dropped from 13.6 to 10.1 percent of the national total elementary and secondary school enrollments. Between 1965 and 1975 alone, the number of students in private schools outside the Catholic parochial school system jumped from 615,548 to 1,443,000.

Advocates and practitioners of another alternative to public schooling, home study, have been finding increasing judicial support. In Carroll, Ohio, a family court judge ruled in favor of three related families who have jointly hired a state-certified teacher to educate their children at home for the last four years. Judge W. Don Reader noted in his decision that the violation of compulsory school laws does not constitute neglect per se—the charge often used against parents who educate their children at home. Meanwhile, the US Supreme Court upheld the Kentucky Supreme Court ruling (Trends, Mar.) that prohibits state regulation of private schools.

In another relevant finding, author Dr. Raymond Moore surveyed organizations that offer home study courses or materials, to find out how many people use them. The number of families that employ home study materials, he estimates from responses, is more than a quarter of a million.

More Clout for Cable

As forecast here in July 1979, the Federal Communications Commission has abolished two of the remaining restrictions on cable-TV. In a landmark 4-to-3 vote, the FCC decided that there is no justification for its "distant signal" and "syndicated exclusivity" rules. The former limited the number of channels from other cities that a cable system could offer, while the latter rule allowed a local TV station that had purchased exclusive over-the-air rights to a program to force a cable system to black out the program if it appeared on a distant station the cable system was carrying.

The decision came in the face of heavy lobbying for the status quo by the National Association of Broadcasters and the Motion Picture Association of America—one or both of which is expected to appeal it. Industry observers anticipate that the ruling will lead to further growth of cable systems, which will now exist in a largely deregulated environment.

New Light on Illegal Aliens

A new study of illegal immigrants from Mexico concludes that there are two kinds of immigrants: Chicanos, who want to fit into the American culture and stay here; and Mexicanos, who build traditional cultural enclaves here and dream of returning to Mexico one day.

The Mexicanos, who form the bulk of the migrants, want to earn money so that they can go back to Mexico relatively wealthy and with the prestige of having made it al norte. They do not want to become American citizens and so avoid putting down any roots in this country. As a matter of fact, the study shows, 77 percent would prefer permanent resident alien status to citizenship as long as they are allowed to travel home frequently.

The Mexicanos, unlike some Chicanos, are not interested in politics or political power, nor are they interested in welfare benefits. They simply want to work: 80 percent of the respondents said a residency status change would not affect their current jobs (most of them were factory workers) or their job aspirations. The only exception was Mexicano women, who stand to gain much more socially by staying north. (Divorce, for instance, is not allowed in Mexico, and while the traditional latino culture allows men to look elsewhere, women are expected to make the best of a bad marriage and look after the babies.)

The study was authored by Dr. Reynaldo Baca of California State University, Los Angeles, and Dr. Dexter Bryan of Cal State Dominguez Hills. Baca and Bryan say their research has more validity than previous studies because they have both operated for more than four years in the Los Angeles area, where their respondents reside. They also used the "snowball sample" technique, in which participants referred them to other possible respondents, to obtain the 1,414 responses used. Baca further points out that their study includes the largest sample of immigrant women ever studied, and since women and children are often bypassed in illegal immigration sweeps, they tend to have a better chance of staying in America.

Newscasters' EQ

Have you ever watched the evening news and raged over the newscaster's well-modulated but oh-so-wrong analysis of inflation? If you've suspected an unconscious government-media collusion on the story behind inflation, you may be right. Economic writer Tom Bethell has produced a study for the Media Institute that provides us with some mindboggling data.

As summarized in the Wall Street Journal, Bethell decided to verify the press's image of itself as an adversary, watchdog figure. He studied all the inflation news reported by the CBS evening news in 1978 and 1979 (about 200 stories), as well as four months each of NBC and ABC nightly news in the same period. (He concentrated on CBS because it is the only network to make transcripts of its news shows.) His conclusion: "When it comes to inflation, the networks are content to take government handouts and press releases and to broadcast them uncritically." Newscasters, he found, seem to have no idea that inflation is a monetary phenomenon. Instead, the most frequently named source of inflation is price increases.

Bethell found that a full three-fourths of inflation news originated with the government—although, he sadly notes, never from Federal Reserve data (including the weekly money-supply figures). The same percentage of stories exonerates the government from all blame, he says, "either by directing the viewers' attention to wage and price increases, or by uncritically presenting the case that the price level is at the mercy of external events such as OPEC price increases or bad weather."

Unexpected Allies

A scan of recent newspaper reports turns up unexpected evidence of the persistence of private enterprise worldwide, despite previous government attempts to run the economy.

The self-proclaimed "Marxist-Leninist" African state of the Peoples Republic of Congo, for instance, has a relatively free market in practice, if not in theory. The Congo is especially interesting, as noted in an excellent article by Jonathan Kwitny in the Wall Street Journal, because it sits smack across a river from Western-backed Zaire. Zaire is supposed to be the free-market, pro-West ally—it has reaped some $6.4 billion in aid from the West, and President Mobutu Sese Seko has been kept in power with the aid of American, French, and Belgian military forces, but people travel across the river from Zaire to Congo to trade and escape the Zairian secret police.

Congo has a per capita GNP three times that of Zaire, and President Denis Sassou-N'Guesso has guaranteed noninterference for private investors in agriculture, forestry, mining, and other industries. The proof of the pudding is, of course, market prices, and Congo wins hands down: a cup of beans, Kwitny tells us, is 27 cents in Congo and 34 cents in Zaire; a bolt of cloth from a local textile factory is about $18 in a Congo market, while Zaire has to import its cloth from Europe to sell at $75 a bolt. So despite the Congo's cooperation with the Soviets in such activities as funneling arms to Angola, Kwitny reminds us to look past labels and not reduce nations down to chess pawns either on "our" side or "theirs."

Two other reluctant converts are Guyana and India. In Guyana, after nationalizing 80 percent of its economy, government officials are being forced by bankruptcy to seek investments from international banks and multinational corporations—even two whose assets it nationalized in 1971. Meanwhile, Prime Minister Indira Gandhi's government in India has issued a policy statement allowing companies to import modern technology. The statement noted that the public sector has "performed poorly" in recent years, and while Industry Minister Charanjit Chanana made no promises, the new policy implies turning over some of the money-losing public units to private management.

And, during his trip to Brazil, even the Pope issued an appeal for social reforms ensuring access to private property. He stressed that reforms must permit all people to have access to property "since this constitutes…an indispensable condition for the liberty and creativity of man."

Is Everything Really Getting Worse?

You've seen them in bookstores and heard their authors on TV…the books telling us that population growth is outstripping our food supply, resources are being depleted, and the world is heading for disaster. You suspect they may be wrong, but you don't have any facts at hand to verify your suspicions.

If that's been one of your frustrations, check out an important article in Science. In the June 27, 1980 issue, economist Julian L. Simon explodes a number of popular myths on these topics. Some examples:

• "The deserts are spreading; the world's arable land is steadily decreasing." In fact, Simon's data show that the world's arable land increased by nearly one percent per year from 1950 to 1960 and by nearly 0.7 percent annually through 1970.

• "Food supplies in less-developed countries are decreasing." The facts are that per capita food production worldwide has increased by 25 percent in the last quarter century. While some countries have done far worse than average, such former problem cases as India now have substantial reserve supplies.

• "The danger of famine is increasing." In fact, agricultural economist D. Gale Johnson estimates that there has been a "dramatic decline" in famine since World War II. Only one-tenth as many people died of famine in the third quarter of this century as in the last quarter of the 19th century, despite today's much larger world population.

• "The United States's prime agricultural land is endangered as urban sprawl paves over the country." Actually, the total land used for urban areas and roads in the United States totals less than three percent of all land area. While about 0.9 million acres of rural land are converted to urban use each, a larger amount—1.25 million acres—is converted to cropland by draining swamps and irrigating deserts.

And on and on, through many other common misconceptions. Economics used to be called the dismal science; with a few more economists like Professor Simon around, economics may finally outgrow that reputation.

Roving CATs

CAT scanners—those computerized x-ray machines that work wonders—are very expensive. Accordingly, they are frequent targets for medical care cost-cutting efforts. The typical response of a government Health Systems Agency is to forbid more than one hospital in an area from buying a CAT scanner—giving an obvious advantage to whoever got there first.

The reaction of private, profit-making hospitals is quite different. No slouches when it comes to cost effectiveness, they seek to get the maximum use out of each $500,000 device. How? By making it mobile. American Medical Care International has 18 CAT-scanner vans on the road, serving 65 hospitals in California, Florida, and Texas. In June the firm ordered enough equipment to field 30 more vans, expanding its service to six more Sunbelt states.

To utilize the van's services, a hospital need only spend $5,000 for a special power hookup, plus operating costs of about $250 per patient. The result, according to AMCI, is surging demand for the service. The company projects that within five years it will be servicing 5,000 hospitals with its scanner vans. AMCI is just one of several dozen chains of profit-making hospitals. Their combined revenues climbed from $2.6 billion in 1972 to $10 billion in 1978. Considering this example of AMCI's creativity, it's easy to see why.

Rationing Perils

Not everyone welcomes the fact that President Carter was finally granted the standby gas-rationing powers he sought for over two years. (The plan allows the president to order rationing in the event of a petroleum shortage of 20 percent over a period of 30 days without having to get congressional approval, effective July 30, 1980.)

At a conference attended by about 60 academic and industrial energy specialists at Stanford University, Alvin Alm, a former assistant secretary for policy in the Department of Energy, flatly said that the present administration's rationing plan would lead to chaos. Alm said the plan is based on an unworkable system of distributing gasoline supplies according to car registration records; his research shows that only 80 percent of the coupons would go to their correct owners. The coupon system, Alm added, would create a new paper currency of coupons two and a half times more voluminous than the dollar currency now in circulation, and he doesn't think the government has the technical ability to supervise such a currency. As an alternative, he proposed lifting government price controls on oil and letting the market allocate gasoline. The entire conference, in fact, stressed nongovernmental solutions to the oil dependence problem and asked for: a relaxation of environmental laws, faster decontrol of oil and gas prices, and accelerated building of coal and nuclear electric plants.

The Department of Energy itself has pointed out the high costs of implementing such a rationing plan and the federal bureaucracy it would create. But, at hearings before the House Subcommittee on Energy and Power, Joe Cobb, director of energy policy for the Council for a Competitive Economy, was the sole witness for a free-market alternative to the rationing plan. In addition to pointing out the economic and political fallacies of the plan, Cobb warned that "millions of people will not even think about making their individual contingency plans if they believe you are already taking care of them."

And Now…Competing Utilities

In July, this column reported the views of energy analyst Roger Sant that electricity production can and should be opened to competition. A year earlier we reported on a doctoral thesis that documented competitive electricity distribution franchises in common use around the turn of the century. Could it be, we wondered, that the whole electricity business could be carried out competitively?

Hang on to your hats, folks, because we've located just such a situation. It turns out that Lubbock, Texas (population: 160,000) has not one but two electric utility firms. Both investor-owned Southwestern Public Service and city-owned Lubbock Power & Light serve the entire area of the city; each has its own poles and lines. Does the arrangement result in higher prices because of all that duplicate equipment? Apparently not, since the lively competition between the two firms keeps the rates low. Lubbock residents pay 5.43¢ per kilowatt-hour, compared with the 5.91¢ that other Southwestern customers pay in Amarillo, 115 miles to the north. For a typical Lubbock customer, that works out to about $60 a year in savings.

More important than dollars, the service level in Lubbock is uncommonly high. "You call one of them and they're out in a zip, and they better be," one customer told an Associated Press reporter recently. "If one is unresponsive, we just switch systems." Customers can switch whenever they like simply by giving three days' notice. Generally, each firm manages to hold onto about half the business.

On another front, competition in producing electricity is increasing rapidly, thanks to a little-noticed federal law. The Public Utility Regulatory Policies Act of 1978 exempts small power producers from public utility regulation and requires utilities to allow them to plug into their distribution systems. The local franchised utility must agree to purchase power from the small systems at rates based on their "avoided cost"—essentially, the marginal cost of producing an equivalent number of additional kilowatt-hours. Already, utilities like Wisconsin Power and Pacific Gas & Electric are buying electricity from cogenerators, biomass plant operators, and windmill owners.

HUD Hits Controls

The latest rage among many people concerned about the short supply and high cost of housing is to enact "moderate" rent control and condominium conversion ordinances. Both have come under strong fire from Housing and Urban Development Secretary Moon Landrieu.

Addressing a convention of the National Association of Counties in July, Landrieu emphasized the urgent necessity of getting the private sector to build more housing. "You can't do that if we burden the private sector with the constant threat of rent control," he stated. Landrieu also blasted "an emotional response—not a well-thought-out but emotional response—to condominium conversions" by tenants "who want none whatsoever."

Restrictions on condo conversions are argued for on the premise that the conversion of units from rentals to condos decreases the supply of rentals. And since other government controls have reduced the extent of apartment construction, many cities have very tight apartment markets, with vacancies running as low as one percent (compared with a more usual rate of three to five percent). But this argument is logically flawed: since most purchasers of condos are first-time home buyers, each such buyer vacates an apartment unit in order to become a condo dweller. The result of the transaction is to reduce the demand for apartments by the same amount as it reduces the supply, therefore not aggravating the shortage of rentals.

This proposition is confirmed by a 400-page HUD study of condominium conversions nationwide since 1970. Out of 366,000 units converted, the net reduction in rental availability was only 18,000 (4.9 percent), since nearly all the buyers were former renters. Some 61 percent of the buyers had household incomes under $30,000, demonstrating that condo conversions generally offer a way for relatively modest-income families to step up to home ownership.

What about those "displaced" by the conversions—renters who moved out rather than purchase a unit? Only 18 percent of them reported "adverse consequences" such as having to pay higher rent or moving to a poorer-quality apartment. And fully 90 percent of these former residents said they were satisfied with their new housing—about the same percentage as those who bought the converted units. Keep these facts in mind when someone proposes stringent regulations on condo conversions in your town.

Milestones

26 to Go. In July, New York State became the 24th to legalize the medical use of marijuana. Marijuana is said to prevent the nausea accompanying chemotherapy and to ease eye fluid pressure in glaucoma cases.

Out of the Mouths of Babes. Charging that the Department of Energy is making a deliberate "effort to discredit regulation" via its gasoline price control system, the vocally anti-oil Energy Action Educational Foundation is now recommending that Carter abolish the controls. Director Edwin Rothschild says that "deregulation…is preferable to the current chaos."

One Cheer for the FTC. The Federal Trade Commission says that import restrictions on five products alone cost American consumers $2 billion annually, while benefits (in terms of workers' earnings) amounted to only $281 million. The FTC thus urged the government to move toward a "free-trade" economy by reducing tariffs and quotas. (The products studied were CB radios, color TV sets, textiles, nonrubber shoes, and sugar—all of which receive some form of government protection).

Two Inheritance Initiatives. Not content with Gov. Jerry Brown's approval of a measure that reduces the inheritance tax for Californians, two separate groups are sponsoring initiatives to abolish the tax altogether. When Assemblyman Don Rogers (R-Bakersfield) kicked off his campaign with Lt. Gov. Mike Curb to get 346,119 valid signatures in order to place his initiative on the November 1981 ballot, it was not widely known that an initiative to end the tax had already been successfully fielded by San Francisco lawyer David E. Miller. Miller advises voters to vote "yes" on both measures if they show up on the same ballot; Rogers recommends his. The one getting the most votes prevails.

Japanese Self-Defense. A national security think tank in Japan urged the Japanese parliament to increase its military defense budget by $1.8 billion, raising defense spending to 1.07 percent of GNP from the present 0.9 percent. Research Institute for Peace and Security head Masamichi Inoki predicted that Japan's per capita GNP will surpass that of the United States during the 1980s and that equal partnership would probably be a strain.

Brothel Bust Protested. Out of the 2,500 residents of the city of Deadwood, South Dakota, some 1,000 signed petitions to restore the brothels that were closed by state authorities in May. Deadwood is one of the "gold rush" towns, whose brothels were part and parcel of its Old West pitch to tourists (they also added $1 million a year to the economy). State authorities had decided the existence of brothels "injures the morality and reputation of the city of Deadwood."

Surprising Surplus. The minimum number of signatures has been gathered for a petition to put binding 25 percent tax-cut initiatives on the November ballot in DuPage and Lake counties, Illinois, a move sponsored by the National Taxpayers United of Illinois. NTI head James Tobin is also kicking off tax-cut initiatives in Peoria and Tazwell counties. In Tazwell, he says, a $5.6 million unencumbered surplus (cash and investments) at the end of last fiscal year could have been used to abate all property taxes and operate the county government for at least 17 months.

Golden Hopes. Rep. Ron Paul (R-Tex.) has announced plans to merge his two gold standard bills into one. The omnibus bill would end legal tender laws, which require people to take government money as payment for services, and would make Federal Reserve notes convertible to gold at a market rate. At the same time, the Wall Street Journal applauded the Republican Convention's platform plank calling for a return to a "dependable monetary standard" (i.e., the gold standard).

Privacy Upheld. Superior Court judge Edward J. Wallin ruled that inspectors from California's Industrial Welfare Commission cannot examine the wages and working conditions of workers on the job without first obtaining a search warrant if the employer does not voluntarily consent to the inspection. The IWC sets and enforces minimum standards for wages and working conditions for some 6 million workers in California. It is appealing the decision.

Indexing About-Face. When opponents of tax-slashing Proposition 9 in California argued against that initiative, they assured citizens that one of its provisions—to index the state income tax—was already the subject of a state law that Gov. Jerry Brown had backed as a temporary measure in 1978. Well, Prop. 9 didn't pass, and Brown vetoed the bill that would have made indexing permanent. Bracket Creep will again be a feature of California's income tax starting in 1982, unless the legislature is successful at a veto override.

End-of-Year Sprees. The Senate Subcommittee on Governmental Operations said federal officials anxious to spend all their budgeted money have wasted more than $2 billion annually in hurried spending in the final weeks of the fiscal year. It chastised the Office of Management and Budget for not addressing this problem, which exists in "identical form in nearly every federal agency." Millions of dollars more are wasted on overtime payments for processing the paperwork involved in the year-end contracts.