Trends

SAVINGS TO THE RESCUE

Can a $100-billion deficit be noninflationary? That's what the Council of Economic Advisers was saying at year-end. It's true that if the Federal Reserve resists the temptation to monetize the deficit by purchasing federal securities with newly created money, there is no direct inflationary effect. But then the only other way to cover the deficit is for the Treasury to sell more government bonds. And won't that crowd out the very private borrowing needed to modernize and revitalize the economy?

Not necessarily. Not if private savings increase significantly, so as to provide ample new supplies of capital. The question is: How much will savings increase over the next few years? Are the supply-side remedies going to succeed in substantially increasing savings?

Many economists think they will. Michael Boskin of Stanford expects the new IRA provisions alone to boost savings by $9 billion a year. Martin Feldstein, president of the National Bureau of Economic Research, notes that if each of the 40 million people in company pension plans—all of whom are newly eligible for IRAs—puts an average of $500 a year into such an account, that would be $20 billion a year in new savings. That would increase the US personal savings rate a full percentage point—from about 5.5 percent to 6.5 percent.

Figuring in the effects of the entire tax package—capital gains tax cuts, reduction of the top marginal rate from 70 to 50 percent, IRA liberalization, and across-the-board marginal rate cuts—forecaster Michael Evans projects that the personal savings rate will climb to 8 percent by late 1983. That's well within the range of Canada's experience. When Canadian tax laws were amended to encourage savings in the early 1970s, the savings rate climbed from 5 percent to more than 10 percent by 1976.

Apart from tax-law changes, reductions in the inflation rate should have a profound effect, says John Rutledge of the Claremont Economics Institute. Rutledge has studied the connection between inflation and people's investment behavior. When inflation goes up, he finds, people shift resources from financial assets to tangible assets—gold, real estate, antiques. The doubling of inflation between 1972 and 1974 caused a 6 percent shift in this direction—some $400 billion. And that, in turn, caused credit to dry up and interest rates to soar.

Today, if the federal government keeps inflation on a downward trend (presumably by not monetizing the deficit), Rutledge sees the reverse happening. If the inflation rate falls to 6 percent by year-end, he expects a $400–$500 billion increase of credit supplies during 1982 as people sell tangible assets to invest in bonds, stocks, and other financial assets. That would solve the crowding-out problem handily.

A SPECTRUM OF DEREGULATORY OPTIONS

What price do we pay for de facto government ownership of the electromagnetic frequency spectrum? According to Douglas Webbink, deputy chief of the Office of Plans and Policy of the Federal Communications Commission, "It seems reasonable to believe that society may lose as much as billions of dollars a year in lost productivity" due to the lack of transferable property rights in particular frequencies.

For example, Webbink notes the 13-year delay in making available to users the new channels reallocated in the landmobile frequency band in 1968; as of 1981 most of the reallocated spectrum still had not been assigned to any particular users. Political management of the spectrum leads to endless wrangling over what is the "public interest," in contrast to the simple process of allocation by the forces of supply and demand in markets based on private property rights. Existing users of the spectrum have no incentive to develop new technology for making more efficient use of their frequency. But they do have strong incentives to spend money lobbying to keep new users out.

Webbink is fully aware of the various proposals to establish outright fee simple ownership of frequencies, but he considers them politically unfeasible at this point. So in a recent paper at a Washington conference (Oct. 19, 1981), he outlined a number of "less radical" proposals aimed at moving toward marketplace allocation. His list includes the following:

• Ensure that users have clear and unambiguous (even if time-limited) property rights, especially in areas (such as mobile radio) where such rights are now nonexistent.

• Allow users to buy and sell licenses—that is, abolish existing "antitrafficking" rules—without FCC approval.

• Limit or prevent the use of "petitions to deny," generally filed by competitors seeking to prevent new entry.

• Allow users to share frequencies in time and space, and allow them to subdivide and combine discrete channels.

• Repeal most technical requirements except those that prevent interference.

• Repeal many artificial regulatory distinctions between common carrier, broadcasting, and private radio.

• Abolish comparative hearings, substituting either auctions, lotteries, or first-come, first-served methods of assigning frequencies.

Webbink also discusses the idea of the FCC charging spectrum user fees but recommends against it, because there is no clear-cut way for the agency to decide on the appropriate level of such fees. The market, not the FCC, should decide how much a frequency is worth.

Some of Webbink's proposals would require congressional action to amend the Communications Act of 1934. But Congress is going to have to do that anyway. Webbink's list should give our legislators thought-provoking input in this process.

ENTERPRISING SCIENCE

A consortium of US and Costa Rican universities and research institutes wanted to preserve a site for large-scale studies of tropical ecosystems. So what did they do? They bought 1,500 acres of Costa Rican jungle—with funds largely contributed by individual scientists and private foundations.

In an open letter to scientists published in Science magazine, 13 biologists each pledged $1,000 to the project and appealed on behalf of the Organization for Tropical Studies (OTS) for further funds. In response to the letter, individuals contributed about $22,000 and foundations another $40,000. Added to already secured funds, this gave OTS enough to buy the $310,000 piece of property.

In a similar spirit of private initiative in matters scientific, at least one would-be entrepreneur wants to make a go at probing Halley's Comet, which will come near the earth in early 1986. The Reagan administration has nixed NASA funding for such a project, but California rocket engineer Stan Kent thinks that the probe could be done privately. Kent, founder of the Viking Fund that in 1980 raised $60,000 from private contributors to help keep NASA's Viking Mars lander in operation, suggests that the entertainment value of a Halley probe could make it profitable as a private enterprise. His plan is to shoot a spacecraft to the comet and beam back closed-circuit pictures to theaters, which would charge $15 a seat for the event. An RCA spokesman has said that the company would be interested in building the spacecraft but would not try to finance the project itself.

In addition to the Viking Fund, Kent has raised another $40,000 for NASA projects and a separate $50,000 that is going to American scientists who have instruments on a planned European probe of Halley's Comet.

WHAT ABOUT THE ROADS?

The idea that people should pay directly for using roads (see "Rush Hour Remedy," REASON, Jan.) strikes many people as quite radical. Actually, says Michael Beesley of the London School of Economics, that view now represents the consensus among economists. As Beesley summed up this consensus for the International Road Federation's (IRF) 1981 meeting in Stockholm, "The chief instrument of charging should be the economic user charge."

This point was seconded by another conference participant, Christopher Willoughby, director of the World Bank's Transportation, Water, and Telecommunications Department. Willoughby argued that the solution to road transport's present financial problem is to (1) convert gasoline taxes and registration fees into true user charges, (2) explain to users the link between user fees and the solution of congestion problems, and (3) allow private enterprise full freedom to enter the transit market.

Further evidence of the consensus that roads should be operated like businesses comes from several sources. John Semmens of the Arizona Department of Transportation has produced a working paper entitled "Highways as Earning Assets." It looks at the relative "profitability" of each road segment operated by the department, as a tool for deciding where to invest (or disinvest) the department's scarce resources. And Gabriel Roth of the World Bank's Economic Development Institute told the International Symposium on Surface Transportation System Performance last spring that financial profitability rather than cost-benefit analysis should be used as the criterion for making roadway investments.

But doesn't profitability presuppose private ownership? Glad you asked. That thought has occurred to Professor Beesley. In his IRF paper he chastised economists for failing to follow through with the full implications of rational pricing and profitability analysis. Fundamentally, he said, what's needed is the creation of independent "firms" to build and operate roads—Beesley calls them ROs—road owners. At present, he pointed out, construction decisions are made pretty much independently of future decisions about maintenance. And of course, financing is not linked directly to maintenance, either—the damage to pavement done by vehicles goes up as the fourth power of axle loading, but gasoline taxes utterly fail to reflect the differential cost imposed by heavy trucks.

Beesley sees each RO as having a natural monopoly in a particular urban area, on the model of water or gas utilities. As he sees it, there would be competition among ROs for skilled people but no direct competition in operating roads. He also recommends "more generous" means of compensating for adverse effects of roads—presumably such matters as air pollution and acquiring rights of way. While admitting that he doesn't have all the answers, Beesley suggests these points as areas worthy of further study. We heartily agree—and would direct his attention to the viability and benefits of competition between electric utilities in the same geographic area ("Two Utilities Are Better Than One," REASON, Oct. 1981).

ECONOMY IN POLLUTION CONTROL

The Environmental Protection Agency has come in for a lot of criticism lately, especially over its handling of the Clean Air Act. A Brookings Institution study ("Cleaning the Air: Reforming the Clean Air Act") by Lester Lave and Gilbert Omenn, argues that both the Clean Air Act and EPA's enforcement of it leave much to be desired. EPA has focused far too much attention on reducing emissions from new sources and far too little on old sources (which are often the worst offenders). It has set arbitrary standards for seven pollutants but has ignored other potentially more dangerous substances. And in some cases its standards have gone to extremes (for example, the ozone standard protects the most sensitive .05 percent of the population) regardless of the costs.

These criticisms parallel many of those made by political scientist Peter Aranson in his chapter on the EPA in the Reason Foundation volume Instead of Regulation. But, whereas Aranson suggests radical decentralization of pollution-control responsibilities, Lave and Omenn would continue to have EPA itself set air quality standards while decentralizing only implementation planning and enforcement to the state level.

Where all three authors agree—as do the contributors to the new Resources for the Future volume, Environmental Regulation and the US Economy—is that approaches based on economic incentives are preferable to command-and-control regulation. Marketable pollution permits, effluent charges, and an expansion of EPA's "bubble" policy (see Trends, June 1981) would all be steps in that direction.

Just such steps were announced by the EPA in December. The bubble policy—under which emission standards are set for an entire plant rather than for each of its emission sources, permitting the firm to make economic trade-offs—will be greatly expanded. Up till now, only plants already in compliance with the law and in states with EPA-approved air quality plans were eligible. Both restrictions are being done away with. In addition, a company whose emissions drop below required levels will be able to trade or sell its excess pollution allotments via "emissions banks" to be set up shortly. The result will be more pollution control for less money.

IS WELFARE NECESSARY?

That the health and longevity of a citizenry can be assured only by an extensive welfare state is an assumption that has gained the status of dogma throughout much of the Western world. Swedish economist Sven Rydenfelt, writing in the Wall Street Journal last September, put that assumption to the test.

His method: take an example of an extensive public welfare state—Rydenfelt's own Sweden—and compare its performance in securing the welfare of its citizens to that of a nation that has a strong tradition of private welfare but little public assistance. For an example of the latter, Rydenfelt chose Japan, where, in contrast to Sweden, it is the family or some other private entity—not the State—that takes care of those unable to take care of themselves. Using data from Sweden's National Central Bureau of Statistics and Japan's Ministry of Health and Welfare and applying the World Health Organization's two principal criteria for measuring a nation's welfare—mean life expectancy and infant mortality—Rydenfelt compared these statistics for both nations over the 1960–79 period.

In 1960, the mean life expectancy of a Swede was 73.5 years; of a Japanese, 67.9 years. By 1970, these figures rose to 74.5 and 72.5 for Sweden and Japan, respectively. But by 1979, Japan had surpassed the Swedish life expectancy of 75.6 years with the figure of 76.2. Over the same period, Japan made impressive progress in preserving the life of its infants. In 1960, when in Sweden there were 16.6 deaths during the first year of life per 1,000 live births, Japan had 33.8 such deaths. In 1970, these figures for Sweden and Japan dropped to 11.0 and 12.6, respectively. By 1979, Sweden had 7.5 infant deaths per 1,000 live births; Japan was not far behind with only 8.0.

Swedish media reports on the miraculous achievements of the Japanese economy, Rydenfelt observed, are usually "concluded by a litany about the deplorable situation of old people in Japan, people who lack state pensions, and therefore—according to the welfare state ideology—must live in misery and squalor"; these comments come as "a consolation and a support for faltering Swedish self-confidence." But as the figures show, Rydenfelt wrote, "this is evidently a myth, a myth the Swedes need and, therefore, cling to. If the myth had been true, mortality among old people in Japan would have been higher and life expectancy lower."

PRICING INFORMATION

The information industry—the production and distribution of statistics, indexes, and data—is a $10-billion a year business. And who has the largest single share of this business? You guessed it: Uncle Sam. There's a big problem with federal dominance of this market: the government doesn't compete fairly. Much of its information is sold far below cost or given away. That not only contributes to federal deficits; it also puts private-sector information firms at a distinct disadvantage.

Last fall, however, OMB Director David Stockman circulated a memo telling federal departments and agencies to assess the extent to which their information services either (a) failed to pay their own way, or (b) duplicated services in the private sector. And OMB staff member Kenneth Allen told a Washington conference in October that OMB is trying to develop a system of user charges for federal information services. Noting that a strong information marketplace has developed over the past decade, Allen asserted that the private sector theoretically could take over much of the government's information-providing business.

But no such privatization can come about as long as users are getting information for practically nothing. That's why it's essential to introduce realistic pricing of these services. Which is exactly what's happening with the Landsat program. As of October 1, 1982, the prices of these exquisitely detailed earth-resources photographs and computer tapes will be increased to about two and a half times their current levels. The increase will come about shortly after the new, higher-resolution Landsat-D goes into service, following its July launch.

Control of the Landsat program will pass from NASA to the Commerce Department in early 1983 as a step toward commercialization of the service. The final step, planned but not yet scheduled, will be privatization—turning the service over to a private firm. At that point prices will have to go up another notch, since they will then have to include the cost of building and launching the satellite, not just of receiving stations and processing operations.

ZAMBIA: WORKERS UNITE FOR CAPITALISM

Echoing the cries of Poland's Solidarity movement, Zambia's powerful trade unions are demanding that President Kenneth Kaunda's socialist government reduce its control of the nation's failing economy and allow private enterprise to pick up some of the pieces. So far, despite growing pressure from the unions and threats of strikes by workers in the mining industry, which provides more than 90 percent of Zambia's sorely needed hard currency, Kaunda has refused to give in to the unions' capitalist demands.

With ownership in 100 companies, the Zambian government directly controls 80 percent of the country's economy. But many Zambians now complain that goods are becoming more scarce and more expensive. Productivity, health care, and education are collapsing, they say—and they're blaming it on socialism.

Though the unions, which are the nation's only organized bodies other than the ruling United National Independence Party, have not yet waged a full-scale confrontation with the State, the union-government relationship increasingly is an adversary one. Kaunda has on several occasions taken punitive actions against dissident union leaders, which has had a unifying effect on the union rank and file. Observers predict that unless Kaunda can set right his government's economic failures—the results of socialist policies, critics charge—he must face mounting opposition from an increasingly capitalist trade-union movement.

ELECTIONS REGULATION LOSES VOTES

Despite last fall's 13-to-12 vote by the Senate Appropriations Committee turning back an initiative originated by Sen. Ted Stevens (R–Alaska) to cut off funding to the Federal Election Commission, political pressure against the FEC continues to mount.

Unless the 1971 Federal Election Campaign Act is revised to reduce FEC control over campaign financing, Senate conservatives plan a push to stop funding the FEC by the end of March. And a coalition of nearly 15 senators, aides to former Sen. Eugene McCarthy, and the American Civil Liberties (ACLU) led by Sen. Roger Jepsen (R–Iowa) has assembled with the goal of cutting back the FEC's power. McCarthy's 1976 presidential campaign has been a target of a two-year FEC investigation, and the ACLU's beef with the FEC centers around the commission's recent proposal to restrict companies' and unions' efforts to distribute election-related information such as a candidate's voting record.

In Congress, hearings by the Senate Rules Committee are expected to produce a convincing enough case to curb the FEC's powers, possibly by transferring the function of gathering data on candidates to the General Accounting Office. Almost certain to issue from the Senate hearings are increases in campaign contribution limits, which now are $1,000 per election for individuals, $5,000 for political action committees.

In a related issue, the US Supreme Court in December overturned a Berkeley, California, law limiting to $250 an individual's contribution to local initiative or referendum campaigns. By a vote of 8 to 1, the Court viewed the law as a violation of First Amendment guarantees of free expression and association. Similar laws in localities throughout California and the rest of the nation are thereby rendered unconstitutional.

BANKING FREEDOM DOWN UNDER

Something called the Campbell Report is the subject of much recent talk in both political and financial circles in Australia and elsewhere. Published in mid-November last year, the 870-page document details the case for deregulating the financial-services market in Australia. "The most efficient way to organise economic activity," the report boldly states, "is through a competitive market system which is subject to a minimum of regulation and government intervention."

The report's main recommendations for changing the nation's financial system:

• grant unrestricted licenses to at least a few foreign banks (which now are strictly regulated in their operations in Australia);

• abolish all interest-rate controls and subsidies;

• eliminate barriers that block non-bank financial institutions from offering banking services; and

• dismantle all foreign-exchange controls.

As if these proposals wouldn't stir up enough controversy, the report goes on to raise the hackles of stockbrokers by recommending that brokers' commissions be negotiable (rather than fixed), that brokerage firms be incorporated, and that entry to exchanges be eased.

While the report was heartily welcomed by most bankers and businessmen, politicians' reactions have not been unanimously enthusiastic. The proposal, for instance, to remove interest-rate subsidies to farmers and on home loans has not met with much political approval. Australian treasurer John Howard, who originally commissioned the report, said in response to the document's proposals that the government must consider "social and political sensitivities" and not only "economic efficiency." That may give a clue to how many of the report's suggestions will actually be implemented. But even the enactment of its most politically palatable parts—such as the entry of foreign banks—would be a move toward a freer market.

CT COST CUTTING

The computerized tomographic (CT) scanner is not only a medical breakthrough—it's also a means of cutting medical costs. That's the startling conclusion of a conference of medical experts, sponsored by the National Institutes of Health (Science, Dec. 18, p. 1327).

Actually, that conclusion will surprise few people in the medical community, but it flies in the face of bureaucratic orthodoxy. For the past decade the federal government has harassed hospitals seeking to acquire CT scanners, forcing them to go through a long, drawn-out, and costly "certificate of need" process to justify the acquisition. The legal cost of this process can be as much as $100,000—the price of a good head scanner. After all that time and money, the request might still be denied. Yet the rationale for the whole exercise was to hold down medical costs!

In fact, however, conference attendees pointed out that scanner use decreases medical costs. A typical diagnosis procedure for pituitary tumors used to require $2,000–$3,000 and a 5.7-day stay in the hospital. But the same result can be accomplished with a $180–$300 scan and only 1.5 days in the hospital, reported David Norman of the University of California at San Francisco.

Indeed, CT scanners have "transformed the diagnosis and much of the management of structural disease of the brain and its surrounding tissue," according to the conference report. Added Ronald G. Evens of the Washington University School of Medicine, "CT to a neurologist is like chest X-rays to an internist." Perhaps with these ringing endorsements of the cost-effectiveness of CT scanners, the feds will get out of the way and allow the medical community to go on about its business.

THE PRICE OF FREE HEALTH CARE

Medicare and Medicaid programs now involve 49 million participants. Both have turned out to be far more expensive than projected. While rising medical costs account for part of that, analysts have also pointed out that the original projections failed to take account of this phenomenon: people who are offered a free service can be expected to utilize it more than they did before it was free.

The relationship between payment for and use of medical services was recently tested in a major study conducted by the Rand Corporation for the federal government. Preliminary results were published in the December 17 New England Journal of Medicine.

Involving 7,706 people in six sites nationwide, the $63-million study showed that, whereas people who pay nothing for medical care visit the doctor an average of five and a half times a year, people who bear part or all of the cost go to the doctor an average of three and a half times per year. Adults on cost-sharing plans are also hospitalized less often than their counterparts who pay nothing out-of-pocket. (The hospitalization frequency of children is unaffected by cost sharing.) The net effect is that fully insured people spent 50 percent more on health care than those who shared the costs.

Critics of cost-sharing proposals as a way ultimately to reduce ever-rising medical costs claim that cost sharing may prevent some from seeking necessary care and thereby adversely affect these people's health. The Rand study did collect comparative health-quality information, but it will not be available for some months. These data should provide answers to whether the cost barrier results in significantly lower levels of health or, conversely, whether the additional use of the health-care system by those receiving free care is unnecessary.

With the Reagan administration cutting back on Medicare-Medicaid funding and searching for ways to encourage medical cost containment, the Rand study results are bound to figure in discussions of health care for the disadvantaged. Perhaps the simplest—and yet most radical—proposal of how to provide health care to those who can't afford it comes from a practicing physician. Writing in the October 1981 issue of Private Practice, Dr. Sanford Marcus suggests that physicians should follow his example: don't participate in the Medicaid program, but simply give 10 percent of one's time in free service to the poor.

Medicine, writes Marcus, has a long "history of giving freely of its service to the poor." That tradition continues but has been bureaucratized: Marcus calculates that, given present rates of Medicaid reimbursement, a physician whose caseload is 20 percent Medicaid patients will receive only 87.6 percent of what a full-paying patient caseload would yield. So rather than give a more than 12 percent discount—and have to suffer through all the paperwork that comes with the system—Marcus suggests that doctors tithe their services for the poor.

One of the socially desirable consequences of this, the doctor suggests, would be to restore charity to its proper place; for, he writes, "charity is, or should be, a completely private affair," one that "the Welfare State" has "elbowed aside as being old-fashioned and degrading to the recipients." Marcus adds that for the physician, "the personal satisfaction is enormous."

CAPITALISM CREEPS IN

It is no secret that the declining performance of central planning has pushed the leaders of several socialist nations to introduce elements of capitalism into their economies. What is news is how far some of the capitalist measures go. Recent examples of such radical reforms have emerged in China, Hungary, and the Soviet Union.

In a two-year-old experiment, a Shanghai diesel factory that does $65 million in business yearly has been allowed to keep a percentage of its profits, all of which used to be handed over to the state. Some of the retained profits are reinvested in the plant and some go for workers' welfare facilities—such as new housing—and for bonuses.

Management and workers both, says the plant's production director, now have real incentives to improve performance instead of merely meeting state quotas. Apparently, the state too is pleased: since the reform, state revenues from the plant—in taxes, not profits—have increased.

The Chinese government has also given urban workers the right to find their own jobs—and has eliminated its 30-year-old guarantee of a state job. The government admits that it can no longer give jobs to the country's rising number of unemployed, and it has urged the jobless to seek jobs in private and cooperative businesses. (In 1980 and 1981, this sector of the economy provided 50 percent of the nation's new jobs.) To increase the opportunity of employment in this sector, the government now allows businessmen to hire seven—rather than two—employees without being charged with capitalist exploitation.

Two other significant reforms are in the works. Many small state enterprises will be turned over to their employees as either cooperatives or privately owned businesses, in order to increase their productivity and responsiveness to the marketplace. And the service trades will be freed of centralized planning, allowing them to operate without the interference of daily government regulation.

In Hungary, citizens are now permitted—by a new law that went into effect the first of this year—to form private companies employing up to 30 individuals. The law also permits the formation of limited-liability corporations—a unique development in socialist-bloc nations. (Competitive enterprise is not a novelty in Hungary—major businesses are largely self-managed and operate with a price-based system, and profit-sharing makes up a major portion of a manager's pay.) An additional reform will abolish the dual exchange rate of the forint, Hungary's currency, in favor of a convertible currency with a uniform exchange rate, thus improving Hungary's international commercial status—particularly with the West.

Soviet workers who perform outstandingly may now receive wages of as much as 50 percent above the average, and inventors whose devices improve production will be given patent royalties. Directors of Soviet enterprises now have the authority to reward workers with pay raises; and as an incentive to save energy, managers now are authorized to distribute part of the savings in bonuses. The measures are designed to stimulate initiative and performance in an economy that is in a sharp decline.

TRADE QUOTAS: WHOM DO THEY HURT MOST?

"Voluntary" export quotas, or Orderly Marketing Agreements (OMAs), have been negotiated for many commodities exported to the United States, including steel, television sets, cars, certain foods, and textiles. Two claims regarding such quotas—that their costs to American consumers in higher prices are high relative to any benefits to American producers and workers and that large profits from ownership of quota rights have gone to foreign producers—have sparked controversy over OMAs. And though economists and other observers of international commerce recognize the importance of OMAs as nontariff trade barriers, little empirical analysis of such quotas and their economic consequences has been available.

Now, however, in a recent study released by the Center for the Study of American Business at Washington University (St. Louis), economist Joon H. Suh has provided quantitative data on OMAs covering Korean footwear exports to the United States. Suh investigated how the quotas have affected both Korean producers and American consumers.

The prices of the restricted products did indeed go up, found Suh. In the two years following the imposition of quotas on Korean nonrubber footwear, average prices increased 45 percent and 22 percent, compared to a 4 percent increase in the previous year. Moreover, the costs of quotas fall on American consumers "in a highly regressive way." Using data on average consumer purchases of footwear by income level, Suh calculated that a family in the lowest income group is forced by the footwear quotas to pay an implicit tax three times higher than a family with $25,000 or more income.

Suh also found significant economic damage to producers in the exporting country. First, smaller firms with less political power are discriminated against in the quota allocation process. But even the larger firms may not benefit: it depends on whether increased per-unit profits are large enough to make up for the mandated decrease in quantity. Suh found that the rate of return on the stocks of Korea's major footwear exporters dropped dramatically when the quotas were agreed on and remained below market stock levels during the study period (in contrast to the three previous years, when footwear stock performance closely tracked all stocks).

The study supports President Reagan's June 1981 decision not to extend OMAs in footwear. But Suh predicts similar effects—damage to foreign producers and an inequitable burden on American consumers—from other OMAs on consumer goods, including the recently negotiated restrictions on Japanese car exports to the United States.

ON THE SHORES OF LAKE TURKANA: EVOLUTION

As noted in our December cover story, one of the arguments advanced by "scientific creationists" is that the fossil record fails to provide direct evidence of the transformation of one species into another. Although not strictly correct, this criticism has gained some credence because of the lack (for very good reasons) of detailed examples.

But just such an example has recently been unveiled. As reported in Science (Nov. 6), Harvard paleontologist Peter Williamson has published a paper in Nature documenting the evolutionary steps from one species of snail to another. The site was Lake Turkana in northern Kenya. Williamson examined 3,300 fossils from 13 different species of snail, through a depth of 400 meters of sediment, covering several million years.

His findings lend support to the "punctuated equilibrium" model of evolutionary change. Rather than being a slow, continuous process as Darwin had assumed, evolution apparently consists of long periods of equilibrium or stasis, punctuated by "short" (5,000- to 50,000-year) bursts of change when new species develop. These periods tend to be periods of stress—in this particular case, there were two periods when the lake level dropped sharply. During such periods, especially in isolated populations, the normal homeostatic mechanisms break down, genetic changes occur, and new species develop out of old ones.

Detailed fossil records of such periods are hard to find for two reasons. First, new species tend to develop in isolated populations; it is only when the new species migrates into the "ancestral range" of its relatives that large numbers of it are found in the fossil record—apparently appearing out of nowhere without transitional forms. Second, the time periods involved are, as noted, short by geological standards (25,000 years compared to a million). Thus, a record of that particular slice of time may be difficult to find.

But the beauty of Williamson's find is precisely its freedom from these problems. The transitional stages are present, as are short-lived species that lasted only as long as the periods of stress. Next time you need an example of transitional forms between species, remember the snails of Lake Turkana.

LESS GOVERNMENT IN THE YEAR 2000?

Over the next 10 to 20 years, America's communities will be forced to adopt a survival strategy that includes reducing public expenditures, curtailing the demand for public services, recovering independence from the federal government, and decentralizing regional government. This is the thesis of a study by the International City Management Association's (ICMA) Committee on Future Horizons of the Profession, authored by the association's associate director, political scientist Laurence Rutter. Many of the trends Rutter observes—and the specific tactics he suggests to deal with them—may point toward a future of less government.

A continuing pattern of limited economic growth will force communities to rely more on "increased involvement of the private sector in traditionally public sector concerns," notes Rutter. "Contracting out will be much more popular," he writes, and "volunteerism will become necessary if not fashionable." In the coming era of cut-back services, Rutter suggests, "citizens and commercial establishments can undertake a great many activities for which they may not be willing to pay taxes"—for example, sweeping streets, caring for public trees in front of homes and businesses, and maintaining neighborhood parks.

Rutter also foresees the development of alternate forms of already-existing services to meet new needs of a changing, shifting demography. In transportation, for instance, new demands will be made by a growing number of active elderly citizens; these may be met by jitneys, shopping center buses, and subsidized cabs.

To regulate the demand for certain public services, Rutter endorses the institution of user fees. These may be applied to services as varied as trash pickup (higher fees charged for more frequent collection) and police patrol—"In Maryland, for instance," Rutter writes, "the state police literally lease their officers on a county-by-county basis in a 'resident trooper program.'" Some counties are willing to pay to have a trooper stationed in their area; others are not. Rutter also points out that in the near future community governments "run considerable risk of being swallowed up by the central government," due to a trend of increased dependence on federal funds. To thwart the unsettling prospect of communities having "the vast majority of their essential activities…circumscribed by the central government," Rutter advocates that local governments "buy back their independence": communities should learn to take "a particularly cold look at grants from the central government."

Rutter observes that "many virtues of small-scale policymaking and service delivery have been overlooked." The rediscovery of the effectiveness of local government—as opposed to central government—will move communities in the direction of decentralizing services and programs.

The ICMA study—entitled The Essential Community: Local Government in the Year 2000—provides a fascinating scenario of the future of communities and how they must govern themselves accordingly. The alternatives that the study sets forth deserve the attention of every community that now faces extinction by the unchecked growth of Big Government.

MILESTONES

Rail Sale. In a tentative agreement with the Federal Railroad Administration, two private railway companies will buy many Consolidated Rail Corp. (Conrail) lines in New England. Providence & Worcester Co. will take over—for $75,000—Conrail lines in Rhode Island; the price of Boston & Maine Railroad's acquisition of Conrail lines in Connecticut and Massachusetts isn't set yet. This would be the first selling off of the federally funded lines.

Resisting Prosecution. In its preparations for the prosecution of draft-registration resisters, the Justice Department has used Social Security information that was provided to the Selective Service System (SSS). The White House, however, has subsequently announced that it considers the transfer of Social Security information to the SSS a direct violation of the Privacy Act of 1974.

Bonds of Gold. Sen. Steve Symms (R–Id.) has introduced a bill to authorize the issuance of government bonds that could be redeemed in gold or cash, whichever the holder chooses. The bonds, to be issued in denominations of one, five, and ten kilograms of gold, would bear interest of two percent per year with a 50-year maturity. Bond revenues would be used for public expenditures and to retire the national debt.

Reporting Retrenchment. In December the Federal Trade Commission dropped a rule that required companies to provide detailed data of the profits of each line of business. The rule had been strongly criticized as imposing costly paperwork on business and providing only for possible FTC "fishing expeditions."