Trends

A Monetary Golden Rule How to restore the US dollar to its former greatness as the world's basic currency—by linking it once again to gold—was the subject of a conference at the University Club in New York City in midsummer. Sponsored by the Committee for Monetary Research and Education, the conference attracted 140 people to hear economist Arthur B. Laffer present his gold-standard plan (see Trends, Aug.), followed by commentary from several distinguished speakers.

Lewis E. Lehrman argued that reinstatement of a gold standard means restoring the rule of law to monetary affairs. Economist Henry Hazlitt praised Laffer's proposal but expressed the reservations that a three-month transition period would be too short—he favors several years of balanced budgets as a precondition—and that there should be no fixed relationship between the gold price and paper-dollar prices. Prof. Donald Kemmerer cited several historical examples of a return to a gold standard—for example, Japan at the end of the 19th century—and argued that once there is popular support for such a move it can be done successfully despite resistance by the powers-that-be. Jude Wanniski concurred, urging that "if we really believe that this is something that must be done—not something we should put off for 10 years—we should attempt to implement it not next year, not 10 years from now, but try to get it into place next week."

OSHA Curbed A government foot-in-the-door of potentially huge significance was shoved out by the US Supreme Court this summer. The case involved the benzene rule promulgated by the agency everyone loves to hate, the Occupational Safety and Health Administration.

What OSHA wanted to do was to reduce the standard for workplace exposure to benzene from 10 parts per million (ppm) to 1 ppm. OSHA cited studies of workers in Ohio and Italy who developed leukemia after exposure to benzene at levels well above 10 ppm and argued that since "no safe level of a carcinogen exists," the standard should be set at the lowest level that is technologically feasible. Complying with the change would have cost the rubber and oil industries about $500 million in the first year, by OSHA's own figures.

That didn't square with the due process concepts of the Court's majority. As Justice Stevens pointed out, OSHA offered no real evidence that the costly standard would benefit anyone; indeed, he said, "Given OSHA's…policy, it was in fact irrelevant whether there was any evidence." Elaborating on the agency's insistence on risk-free factories, Stevens wrote, "A workplace cannot be considered 'unsafe' unless it threatens workers" not merely with a risk of harm, but with a significant risk, that is, one supported by evidence.

The Court's decision could well imperil OSHA's entire cancer policy, since it is based on the same premises as the benzene rule. The only uncertainty in this assessment is that only four of the five majority justices signed Stevens's opinion; Justice Rehnquist filed a concurring opinion arguing that the law creating OSHA is unconstitutionally vague. We may learn more when the Court rules on the coke oven emission standard (carrying a $250 million price tag for industry) during this fall's term.

Private Firms Pitch in for 1984 Olympics Los Angeles Mayor Tom Bradley's grandiose plans for a federally funded 1984 Olympics were deflated recently when an irate citizenry successfully mobilized with a petition to forbid tax-financed spending on the games. Then, early in August, McDonald's Corporation (of "Big Mac" fame) pledged to build a $4 million, 11,000-seat open-air swimming and diving stadium on the University of Southern California campus. Bradley had requested $19.4 million in federal funds to build a similar stadium, proving once again that bureaucracy is unnecessarily expensive.

The $4 million is only part of the total $11 million McDonald's has agreed to pay to become one of up to 50 commercial sponsors of the games—and does not include the free hamburgers it has indicated it will donate to athletes and the press. At press time, the following eight companies had joined McDonald's as sponsors: Coca-Cola ($15 million); Anheuser-Busch ($10 million); Canon U.S.A., Southland Corporation (7-11 Stores), United Airlines, and United California Bank ($6 million each); and Arrowhead Drinking Water, Inc. ($1 million).

The McDonald's Olympic Swim Center is said to be the first Olympic athletic facility ever to be wholly funded by private enterprise. After the games, it will be given by McDonald's to USC, which plans to develop a $30 million recreation center. USC is committed to pick up any cost overruns in the building of the stadium and to open up the stadium to summer use by youth in the surrounding community.

The Death of MAD President Carter's approval of Presidential Directive 59 in August marks the beginning of the end of two decades of Mutual Assured Destruction (MAD) as the basis of US strategic doctrine. How completely and rapidly the change will be implemented remains to be seen, but the shift is highly significant.

The MAD doctrine rests on the idea that the only form of "defense" against a nuclear attack is the threat of destroying the enemy's country by counterattack. In effect, each side holds the other side's population hostage, and missiles are targeted primarily against cities.

Two developments of the past decade have undermined MAD's viability. On the one hand, the growing quantitative superiority of the USSR's weaponry and its strategists' views about fighting and winning nuclear exchanges have led to scenarios in which the Soviets wage limited war against military targets (US missile bases, for example) in hopes that a US president would acquiesce rather than launch massive retaliation (thereby consigning our own cities to certain destruction). Such scenarios underscore the need to develop other forms of response than all-or-nothing retaliation.

The second development has been advances in the means of defending against ballistic missiles, among them high- powered lasers and particle beams (see "Ending Missile MADness," Jan. 1979). Such technology makes it possible to destroy nuclear warheads in the boost or ballistic phases of flight, rather than waiting until they have nearly arrived at the target (as the now-abandoned Safeguard ABM system had to do).

Carter's PD-59 calls for retargeting US ballistic missiles from Soviet cities and factories to a variety of military and quasi-military targets. It thus breaks with MADd doctrine, although it still represents an attempt to deter nuclear war by threatening retaliation. Defense Department research efforts on new anti-warhead technologies have recently been redirected toward a space-based system—a positive step—but funding is not at the level that many experts believe necessary to produce functioning weapons systems before the end of the decade.

Accounting for Standards Late last year the California State Board of Accountancy ruled that California accountants should follow standards set by the American Institute of Certified Public Accountants on disclosures connected with unaudited financial statements. Noncertified public accountants fought the decision, protesting that they cannot join the AICPA and would therefore be subject to rules set by a body in which they had no voice. The plaintiffs further argued that the ruling would help bigger firms to the detriment of the noncertified, smaller groups.

A Superior Court judge (now on the Third District Court of Appeals), Frances Newell Carr, recently stopped the State Board from enforcing those rules. Judge Carr said that it amounted to an improper delegation of authority. The noncertified accountants had also protested a second State Board decision adopting an AICPA standard requiring more paperwork on financial statements, but the judge ruled against withdrawing this one. The unhappy accountants pointed out that smaller clients cannot afford—and don't need—the extra paperwork.

In reporting on these decisions, the Western Law Journal noted that the larger issue involved is "whether government ought to set uniform standards over a profession where a range of practices has been traditionally regarded as acceptable."

Airline Deregulation: Is It Working? According to some industry analysts, 1980 may turn out to be the worst year in history for commercial airlines as a whole. The typical TV news report notes this prediction, notes also that airlines are now largely deregulated, and concludes that deregulation is causing the red ink.

Like so many superficial "analyses," however, this one is dead wrong. To begin with, while the industry as a whole is showing a loss, only some airlines are losing money. Others—mostly the regional carriers—are prospering. The regionals as a group carried nearly 18 percent more passengers in the first quarter of this year than they did last year—despite the recession. Fast-growing Air Florida's traffic is 90 percent ahead of last year, Southwest's is up 28 percent. US Air's profits for the first five months of 1980 were $19 million, compared with $5 million last year. Southwest's profits were up 63 percent for the first half.

Those airlines are profiting because their managements have made wise decisions in the new, competitive environment. Others—such as Braniff—have done poorly thanks to bad decisions (in Braniff's case, pell-mell expansion). Continental and Western are doing poorly enough to be proposing a merger, even though the government vetoed their previous plan a year ago.

Yet even officials of the money-losing airlines agree that it is the recession and soaring fuel costs, not deregulation, that are making it tougher to prosper. "I'm not sure we could have handled [those problems]" without deregulation, says TWA Vice-President Neil Effman. "Deregulation gave us the opportunity to restructure the airline," agrees Frontier VP Charles Demoney. Barely profitable Eastern's Vice-President Morton Ehrlich points out that "airlines have changed their product line…[for] improved efficiency." And Civil Aeronautics Board analyst Robert Frank calculates that, if airlines were still operating by the rules of 1976, "fares would have gone up by 53 percent by the end of 1979. Instead, fares went up 27 percent."

Another indication of the viability of deregulation is the entry of new airlines, something this country had not seen for 30 years. Since the deregulation act's passage in 1978, Midway Airlines has begun operations, several charter lines have added scheduled service (including World, Transamerica, and Evergreen), and now People Express is in the process of being set up.

Communist Capitalists Cuba, China, and Russia: indubitably Communist states with the correct revolutionary credentials. What these nations also have in common is a growing realization that The Revolution did not bring about the promised egalitarian peace and plenty. And so they are experiencing quite capitalist "regressions" in the hopes of alleviating some of their problems.

Cuba, scene of the recent northward exodus, decided this year to permit its citizens to buy and sell in free retail markets for the first time since the 1959 revolution. Normally, a farmer or cooperative of farmers would grow a crop on contract for the government, using funds from a government agricultural bank to pay for planting and cultivation and then selling the crop to the government for a fixed price with a small profit built in. It probably sounds good on paper, but the enormous success of the new free markets indicates that it may not be too efficient an allocator. Despite its Communist label, 75 percent of Cuba's produce and coffee, and 20 percent of its sugar crop, is grown on privately owned farms.

State planning in the Byelorussian Republic of the USSR, meanwhile, is also having its ups and downs. Young graduates there are simply failing to. show up at their assigned mandatory posts. (All graduates of higher education in Russia are required to work for about three years in whatever post the relevant ministry assigns them to, anywhere in the USSR.) In 1978, five percent of the total number of graduates in Byelorussia (over 3,000 people) ignored their assignments, and government officials are busy finding excuses for the dropouts.

In China, however, the job market problem is quite different. With rampant unemployment to the tune of 10 to 20 million, China has been forced to allow citizens to now choose their own jobs for the first time—and even to create them, if necessary. One suspects that the current Chinese definition of "private business" would make Adam Smith turn in his grave, since the so-called private producers draw on government loans and are strictly licensed and "do not exploit others, abide by state decrees, and work all by themselves," as the director of the Bureau of Labor put it. The Chinese government is also creating more jobs by forcing the already employed to share existing jobs through reduced work hours and increased days off. According to the Beijing Daily, the government's failure to find work for everyone is to be blamed on China's population, which is "too big."

China's slide down the slippery slope to moderation is practically guaranteed by the recent selection of a relatively young (61) and progressive new premier, Zhao Ziyang, a protégé of Deng Xiaoping, and an advocate of "capitalist-road" reforms (Trends, June). Zhao takes over from doctrinaire Maoist Hua Guofeng, who will remain party chairman and ceremonial head of state. It is encouraging to note that this bastion of Communism is having to turn to capitalist ways to get ahead but sobering to realize that its dedication is not to freedom at all but to efficiency at any cost.

Private Port in Britain In the midst of the notoriously strike-prone British docks, where up to eight different unions wrangle nonstop for a better deal and government boards desperately strive to escape bankruptcy, there is one enormously successful, quietly strife-free port: Felixstowe. Felixstowe also happens to be the only large British port that is privately owned.

There are several obvious reasons for Felixstowe's unique success. For one, the owners of Felixstowe welcomed the coming of containerization back in the 1960s and built Britain's first container facility. Other docks, at the behest of the unions, fought containers because they are not as labor-intensive as traditional methods; they are now suffering from reduced demand for those traditional methods. Second, Felixstowe's excellent labor relations is reflected in its productivity, which is substantially higher than in most British ports. There is also only one single union for the longshoremen. And there is, of course, the natural appeal to foreign customers of dealing with a businessman rather than a bureaucrat. As the port's managing director, Geoff Parker, points out, "All our decisions are taken on a purely commercial basis, without political interference. We can deal immediately with any problem that crops up."

Mail Delivery Was Never Like This The Motor Carrier Deregulation Act recently signed by President Carter provides a perfect example of how the far-reaching effects of economic restrictions can short-change consumers in various subtle ways. Take United Parcel Service and its main competitor, the US Postal Service.

Before the act was passed, UPS was prevented in 10 states from moving on the ground any packages that had a prior or a subsequent movement by air. (The 10 states: North Dakota, South Dakota, Nebraska, Kansas, Colorado, Oklahoma, Arkansas, Texas, Louisiana, and Mississippi.) Now that the act has ended the restrictions, UPS has expanded its two-day air parcel delivery service to include those 10 states, bringing its total to 48 states covered.

On another front, the number of fourth-class mail packages delivered by the Post Office has been dropping steadily, from a little less than 1 million pieces in 1970 to 600,000 in 1979. UPS, on the other hand, has grown from 480,000 packages delivered in 1970 to over 1.4 million in 1979. It is the third largest transportation company in the United States (in terms of revenue), after Trans World Corporation and United Air Lines, and is privately held, with most of its stock owned by its founder and the rest by employees. Despite the fact that the Postal Service uses revenue from first-class mail service to subsidize its fourth-class parcel delivery, UPS is able to compete by using cheaper part-time workers (the postal workers' union has negotiated this option away from the Postal Service) and maintaining almost 100 mechanized sorting hubs, compared with the Postal Service's 21 centers.

Pirate TV Station in Israel Pirate radio stations are sweeping the airwaves of Europe, and now an Israeli pirate radio entrepreneur wants to go one step further: he intends to erect a floating, 18,000-watt pirate TV station off Tel Aviv. Abie Nathan says he can put together this shoestring operation with $800,000 initially and a total staff of 30. It would reach 2 million of Israel's 3.6 million residents. Nathan currently operates a pirate radio station that carries rock music and is pro-peace. It has the tacit approval of the authorities, but the same authorities may prevent Nathan from offering Israelis the choice of a second TV channel.

The present government channel is required to broadcast long hours of "educational" shows on such topics as Judaism and Jewish history. Earlier this year a parliamentary committee recommended that a second channel be authorized—presumably commercial and privately operated—but the proposal is opposed by officials of the Finance Ministry (with the exception of the minister himself) and the opposition Labor Party. A law is also being drafted to declare Nathan's unauthorized floating operation illegal.

If it wins the 1981 elections, the Labor Party says it will then cancel any new channel's license. Despite this threat, there are many contenders for the second-channel license. And there is, of course, Nathan, who hopes to get his pirate station going at sea and then move it onshore in Tel Aviv if he gets the license.

Private Water Pluses California's water shortages could be solved by the creation of a "water market" that shifts water titles from the state's water districts to individual water users. Individual users, particularly farmers, would then be free to use what they need and to sell the balance to the highest bidder. So recommends a three-year, $450,000 seven-volume study by the Rand Corporation.

The recommendation would be implemented by changing many details of the state water law, state and local water agency practices, and pricing and allocation methods. A hypothetical example contrasts two farmers, one in the water-rich Sacramento Valley (Farmer A), and the other in the water-poor San Joaquin Valley (Farmer B). The choice of what crops to plant depend largely on water availability; so although Farmer B would like to plant highly profitable tomatoes, his water allocation allows him to plant that crop only on a small portion of his land. Under a privately owned water system, the study points out, Farmer A could sell his excess water to Farmer B—perhaps even finding it more profitable to partially plant his land in a crop that would consume less water than his current crop and then to sell his "saved" water to B.

The point, says the Rand study, is not that Farmer A is wasting water but that he is using it inefficiently because water is not priced at its real value. If market prices were allowed instead, Farmer A would have more incentive to be prudent. Rand estimates that the annual water assignment of a typical 160-acre farm could have a resale value of almost $13,000.

Private Space The trend toward privatization of spacecraft continues apace. The National Aeronautics and Space Administration is actively promoting a primary role for the private sector in building and operating satellites. Under NASA's new "joint-venture" philosophy, space systems with revenue-generating potential will now be developed only if the private sector pays part of the cost. This will be the case with a new large-scale (80-foot-long) communications satellite platform. The idea is to mount a number of different satellites on a single platform, allowing them all to share the same orbital slot. Once a prototype platform has been tested in orbit, participating firms will be free to continue using it, paying back NASA out of their revenues.

Another NASA program that is being privatized is the Landsat remote-sensing system. As a first step, NASA has turned over control to the National Oceanographic and Atmospheric Administration (which operates weather satellites). But "the private sector will eventually own and operate the Landsat system," affirms NOAA administrator Richard Frank, just as it took over the communications satellite field. Among the firms that have expressed interest in taking over Landsat are Comsat General, GE, Hughes Aircraft, Western Union, Lockheed, TRW, and IBM.

Indeed, the satellite business is thriving to such an extent that it now supports a weekly magazine. Satellite Week was launched early this year by Television Digest, Inc., to keep track of the burgeoning industry. Managing Editor Jonathan Miller sees "a major commercial movement" into such areas as electronic mail and other new forms of communications services and speculates that private firms may even, without NASA aid, develop such far-out systems as worldwide two-way wrist radios.

Privatization continues in the European space program, as well. Last spring 35 industrial concerns and nine banks from 11 European countries signed the incorporation papers of Arianespace—a new commercial firm that is taking over production and launching of the Ariane rocket. Capitalized at $35 million, the firm will make its first launch in late 1982 or early 1983, after 10 Ariane launches by the European Space Agency, which developed the booster. The firm expects to start making a profit after its thirtieth launch.

Rail Deregulation Back on Track A dispute over the price of shipping coal to utilities in Texas has failed to derail a bill that would substantially deregulate American railroads.

In April the Senate had passed by 91 to 4 an administration bill to reduce the Interstate Commerce Commission's control over railroad freight rate setting. A House bill that went further (ending all ICC rate control after three years) cleared the Commerce Committee in May. But when it reached the House floor in July it was crippled by an amendment, tacked on at the behest of lobbyists for coal-using utilities and some shipping groups, that put a limit on non-ICC-approved rate increases. The bill's sponsor, Rep. James Florio (D-N.J.), then withdrew the bill but was pressured by the Carter administration to attempt a compromise. Early in September the House passed such a measure, voting 337 to 20 to allow railroads to increase rates without ICC approval subject to a cap that would be raised over the next four years. The earlier Senate-passed bill would retain even less regulation of freight rate setting, and it remains for the conference committee to iron out the differences.

Meanwhile, the ICC itself is continuing to cut back its own regulations. In August the commissioners voted 5 to 2 to withdraw their sanction—effective October 12—of the charters of the three regional rate boards by which railroads collusively set rates.

Poor money-losing Conrail, however, continues to lose business and rack up more red ink. The long congressional delay in enacting deregulation (which would enable Conrail to abandon money-losing branch lines and raise rates as needed) is leading many to predict the demise of this experiment in quasi-nationalization. One alternative now being talked up is to sell off Conrail's profitable portions to healthy railroads and abandon the rest. Potential buyers include the new lines being formed by proposed mergers: Santa Fe/Southern Pacific, Union Pacific/ Missouri Pacific, Burlington Northern/ Frisco, Chessie System/Seaboard Coastline, and Southern/Norfolk & Western. While the first three are western lines, the expectation is that they may welcome the chance to become the first transcontinental railroads by absorbing certain of Conrail's routes.

Milestones • Carter's Constituency. A staggering 40.3 percent of the delegates to the Democratic National Convention are direct government officeholders or employees. (In contrast, only 7 percent of the population is employed by government.) The National Education Association and the American Federation of Teachers (the big-two schoolteachers' unions), for example, claimed 372 convention delegates between them—10 per-cent of the total. Austin Ranney, senior political scholar at the American Enterprise Institute, suggests that Carter won handily because so many people on the floor had a personal stake in many of his spending programs.

• German Restrictions Lifted. The Western European Union has lifted the 26-year-old restrictions on West Germany's naval construction, a move that has angered Moscow and boosted West German morale. The ban had been imposed as a precondition for joining the WEU and NATO. The West German government has indicated its readiness to take a more active role in the defense of Europe, and NATO officials noted the growth of the Russian navy as a factor in the decision.

• Anti-Sales Tax Initiative. Norman White, Republican candidate for a California Senate district, is sponsoring an initiative that would constitutionally guarantee that "no sales or use tax shall ever be collected from any person in the state." The campaign needs to gather 553,790 signatures by December 29 to qualify for the ballot. California has a six percent sales tax.

• Higher Pay, Not Draft. General Thurman, the Army's recruiting chief, has come out against a peacetime draft. Thurman says that higher pay and a revival of post-service educational benefits would be enough to sustain a quality volunteer force. Today's recruits receive the equivalent of only 84 percent of the civilian minimum wage, he added.

• More Enterprise Zones. Rep. Ron Paul (R-Tex.) has introduced into Congress the Free Market Zone Act of 1980 (HR 7875), which would apply to inner cities and Indian reservations. Regulations and laws would be repealed in those zones for 20 years, property taxes cut 50 percent and Social Security taxes abolished, zoning and land-use ordinances nullified, capital gains taxes on individuals abolished, and the federal minimum wage law and OSHA regulations lifted in the zone. Paul's bill goes considerably further than Jack Kemp's enterprise zone bill (Trends, Oct.).

• Another Voice for Diversity. Rep. Lionel Van Deerlin (D-Calif.), chairman of the House Commerce Committee's Subcommittee on Communications, continues to fight for the abolition of the Fairness Doctrine (Trends, Sept.), which requires the broadcast media to give air time to those with opposing viewpoints on issues of "public importance." "If Jefferson were around today," Van Deerlin says, "he wouldn't stand for applying the freedoms of speech and press to the print media alone. The more we can do to encourage diversity in programming through multiple outlets, the less the government will have to concern itself with patrolling the airwaves."

• TV Quota Lifted. President Carter lifted import quotas on Japanese color-TV sets and granted quota increases in the number of TV sets Korea and Taiwan can ship to the United States. Japan has never gone to the limit of its quota; seven Japanese companies have, instead, built factories here that sell to about one-third of the domestic market.