Trends

STATES' SECRETS FOR PROSPERITY

Is there a relationship between taxes and economic growth? Free-market economists have said there is—when taxes are high, economic growth is stunted; when taxes are low, economic growth is stimulated. Now, a study published in the Fall 1982 issue of the Journal of Contemporary Studies offers dramatic evidence supporting that proposition.

In "Rich States, Poor States," Richard K. Vedder compared the tax burdens and the economic growth rates of all 50 states, and his findings were, as he says, "striking." For example, the income tax burden in the high-growth states was an average of 55 percent lower than in the low-growth states, and the property tax burden was an average 37 percent lower. "If this relationship [between taxes and economic growth] is valid," he said, "it follows that the income-generating effects of public expenditures financed by state and local taxes are more than offset by the income-destroying disincentive effects of the taxes."

Vedder acknowledged that the high-growth states in the Sun Belt benefit from a better climate, lower energy costs, and less dependence on stagnating manufacturing employment, but he suggested that this is not the decisive factor in economic growth. For example, North Dakota and Alaska were high-growth states in the 1970s while Hawaii and Arizona were low-growth states. Furthermore, New Hampshire—a low-tax state—enjoyed almost twice the economic growth rate of heavily taxed New York, even though both have a similar climate and similar energy costs.

Vedder also discovered some interesting correlations between a state's economic growth and the kinds of taxes it imposes on its citizens. Evidently the biggest dampers on growth are income taxes and property taxes (Vedder notes that they "lower the rate of return on capital investment in either human or physical forms"), but sales taxes "did not seem to have the same debilitating effect." And some income-tax structures are less harmful to economic growth than others: states with "a steeply progressive rate structure tend to grow slower, other things equal, than states with flat-rate income taxes."

An advantage of the federal system, Justice Brandeis once noted, is that individual states can be seen as laboratories: when states test an idea that works, the rest of the country can adopt it, but if an ideal falls flat, most people haven't suffered from the experiment. In this instance, some states have tried high taxes and others have tried low taxes, and individuals have clearly been able to do better in the low-tax states. Their less-fortunate neighbors can profit by the experience.

DEREGULATION KEEPS POPPING UP

Regulatory power in Washington sometimes seems like a big, bloated balloon—squeeze it in one place, and it bulges at another. In January, legislation was proposed in Congress to consolidate the "remaining" functions of three agencies that may close down within the next few years—the Civil Aeronautics Board (CAB), the Interstate Commerce Commission (ICC), and the Federal Maritime Commission (FMC)—into what would be called the US Transportation Commission.

Reaction from industries governed by the existing regulatory bodies has been mostly unfavorable. The American Trucking Associations, for instance, protested ICC Chairman Reese Taylor's proposal to abolish that commission, claiming that swift deregulation has already let too many newcomers into the business with resultant "predatory" pricing. And airlines that have favored deregulation fear that a new commission will only create new regulatory tangles.

Despite such attempts to retain regulatory power by shifting it to a new agency with a new name, genuine deregulatory fervor still appears to be on the rise in Washington. It received a boost recently from a group of House Republicans—the Task Force on Congressional and Regulatory Reform—who in January released a report recommending extensive cutbacks in the federal government's regulatory power. Specific proposals include totally abolishing the ICC by 1987, phasing out the CAB one year ahead of schedule (that is, by January 1984), and eliminating most of the FMC's duties and shifting the others to the Transportation Department. (The report recommends cuts in many other areas as well, including abolition of the Postal Service's first-class-mail monopoly, immediate decontrol of all natural-gas and oil-pipeline rates, and experimentation with market pricing of electricity.)

Another boost also came in January from the Justice Department. Commenting that intense price discounting in trucking—since partial deregulation by the Motor Carrier Act of 1980—is healthy, the Justice Department advocated that the ICC promptly eliminate its remaining rate-regulation authority. The Justice Department issued its comments in ICC hearings on price decontrol, which were held in response to allegations of widespread predation and price discrimination over the past two years.

Finally, the ICC voted 3–2 in early March to deregulate railroad boxcar freight traffic and rail shipments of coal bound for export. Both decisions stirred up small hornets' nests—rail shippers and even much of the rail industry preferred the security of rates fixed by the government, and a spokesperson for coal shippers complained that the railroad industry's "captive" traffic in export coal will no longer have regulatory protection against "potentially excessive" rates. Such are the perils of reliance on the immortality of government perks.

CUTTING IN ON CABLE

Governments may be bad at most things, but when it comes to protecting their piece of the pie, look out. Cities make a bundle by selling exclusive franchises to cable TV companies and taking a cut of the action as a percentage of the cable companies' revenues. So citizens who try to bypass the system and set up their own independent service can expect the wrath of the local government. Such trouble is already brewing in several places.

The most visible controversy is taking shape in New York City. Owners of some private apartment and condominium buildings in areas of the city not yet served by cable (usually because award of the franchise is tied up in politicking) have tired of waiting for the service. So they've turned to an alternative technology: dish-antenna receiving systems. A dish antenna, placed either on the building's roof or on the ground, receives satellite signals, which are then transmitted by wire to residents' TV sets.

The city government, however, has declared that such arrangements, if not granted special permission, are illegal. But getting "special permission" means that buildings would have to apply for an independent franchise—a process of a complexity rivaled only by the farthest reaches of higher mathematics. Only buildings with 50 or less subscribers would be exempt from this requirement.

Though the city has talked tough on the issue, it has not yet brought legal action against those who have defied the rule. If the city were to press for action, a likely target would be the Bronx's Co-op City, a 15,000-unit complex that recently contracted to have a dish-antenna system installed. The price of the contract: $3.5 million.

Though many city and state officials stand firm on the city's right to regulate such private TV systems, a number of legal experts contend that the city has no authority here. A 1982 US Court of Appeals ruling supports this latter view. The ruling upheld a Federal Communications Commission decision to prohibit states from regulating master-antenna cable systems that serve large buildings.

NEW TRICKS FOR OLD URBAN DOGS

The idea of privatizing government functions or at least contracting them out to the private sector is gaining respectability these days in unlikely places. A dramatic example was a recent conference on urban space use sponsored by such believers in government as the Lincoln Institute of Land Policy and the Los Angeles County Department of Regional Planning. A REASON staff member who attended the conference found the themes of privatization and contracting emerging time and time again in presentations by attorneys, urbanologists, HUD functionaries, and city policymakers from mayors on down.

The Brookings Institution's Anthony Downs—a respected authority on urban neighborhoods whose perspective is generally liberal—argued that we need other responses to fewer government dollars than either raising taxes or cutting services. One such alternative, according to Downs, is private-sector provision of services. "[This has] the advantage of involving more competition among service suppliers than present arrangements," Downs said. "This approach could be much more widely applied, from collecting trash to furnishing transportation to educating children."

Architect and urban planner Oscar Newman gave a presentation on the privatizing of streets in St. Louis. Newman observed that the decline of St. Louis as a whole "epitomize[s] the impotence of federal, state and local resources in coping with the consequences of large-scale population change." But on the streets owned and maintained by the residents after being deeded back from the city, there are low crime rates, stable property values, and a sense of community.

Newman's splendid presentation—novel and perhaps a little startling to most of his audience—would have been old hat for REASON readers who learned the details of St. Louis's street privatization from a cover story a year and a half earlier (see "Getting Street-wise in St. Louis," Aug. 1981). Interestingly, however, a Los Angeles Times report on the conference neglected to mention that Newman was talking about privatized streets.

There were many other examples at the conference of authorities in the field of urban affairs showing a growing recognition of the private alternative to government "solutions." Even Los Angeles County assessor Alexander Pope was reportedly making some distinctly unbureaucratic-like statements. The Los Angeles Times quoted him as suggesting informally after one of the sessions that all building and zoning constraints "other than those affecting health and safety" be lifted to encourage low- and moderate-income housing. "Let's turn the private sector loose and see what it can do," Pope reportedly said.

For any advocate of free-enterprise solutions to social problems, such ideas were music to the ears.

BUILDING TRUST

The benevolent potential of government regulation has always been appealing to many people. But a case in Kansas City provides a peculiarly gruesome example of the results of such regulation at the municipal level.

The Kansas City Star recently published an exposé of the city's department of public works after a team of reporters conducted a two-month investigation. The reporters tailed 18 of the city's 46 building inspectors and found that the inspectors were "routinely falsifying work logs, more often than not spending their working hours bar hopping and merely driving by construction sites."

What is especially disquieting about the investigation is that of the 18 inspectors, two had overseen the Hyatt Regency project—the same hotel whose walkway collapsed in 1981, killing 114 people. Indeed, one of the officials the Star discovered to be derelict in his duties was the city's chief inspector at a new hotel complex currently under construction in Kansas City. On a day when he reported that he spent seven hours inspecting about a dozen building sites, the Star found that he made only two quick stops, then spent the rest of the day with fellow inspectors at a restaurant and shopping before going home early in the afternoon, well before quitting time.

Could scandals such as Kansas City's be avoided by turning the rascals out and hiring honest and hard-working building inspectors? Perhaps, but that is ultimately only a cosmetic solution. The problem is that government building inspectors don't have any real incentive (other than fear of Kansas City Star reporters) to conduct competent and thorough inspections. An inspector employed by the city government has no true economic interest in whether a building lasts for two years or two centuries. The system essentially relies on inspectors being virtuous and decent—a sanguine and naive reliance at best.

Contrast this with the system in France, which puts the responsibility for a building's safety directly in the hands of the builders themselves (see "Housing: Tangled in Red Tape," REASON, Oct. 1980). A builder is liable for up to 10 years on main structural components and for two years on secondary components. As might be expected, this system has led to private liability insurance for builders, and the four largest companies offering such insurance hire their own inspectors to check on structures during construction. French banks usually don't offer mortgages on any building constructed by a builder who doesn't carry liability insurance, and casualty insurance companies won't insure such a building.

The advantage of the French system, of course, is that it gives private builders a powerful and direct incentive to build safe buildings. As the Kansas City experience shows, the French way is far more practical than relying on the decency of strangers on government payrolls.

FDA TRIES RELAXANTS

The Food and Drug Administration (FDA) is apparently revising some long-held, restrictive policies on drugs. For instance, the agency proposed last October to allow individuals to import certain nonapproved drugs for personal use. Assuming the proposal is cleared by the Office of Management and Budget, it should go into effect early this summer.

In addition, the FDA is proposing a considerable overhaul of its procedures for granting market approval for new drugs. Modifications would include reducing clinical trials of experimental drugs by one year and accelerating clearance of new drugs for general public use.

The agency last fall also modified its long-standing position on "the legality or appropriateness" of prescribing FDA-approved drugs for purposes other than those for which the agency has specifically approved the drug. These latter are the only uses that are legally allowed to appear on the drug's labeling. But because the agency now concedes that "accepted medical practice often includes drug use that is not reflected in approved drug labeling," the FDA now holds that " 'unlabeled' uses may be appropriate and rational in certain circumstances and may, in fact, reflect approaches to drug therapy that have been extensively reported in medical literature."

One subject on which the FDA still appears ambiguous is drug advertisements directed at consumers. Traditionally, though there is no specific law preventing drug manufacturers from promoting prescription products to the general public, only a handful have done so, and in a very limited manner. But as competition among drug products increases, some companies are more and more attracted to the idea. Many manufacturers, however, want the FDA's approval before they go ahead with such ad campaigns.

Earlier this year, there were indications that the FDA would in fact develop guidelines for consumer ads. But in mid-February, FDA Commissioner Arthur Hayes Hull, speaking before the Pharmaceutical Advertising Council, expressed doubts about the prospect of drug ads for consumers.

GIVING THE FEDS A RUN FOR THEIR MONEY

The federal government got into the business of insuring deposits at banks and savings and loans in 1934 as a post-crash measure. Two government insurance entities, the Federal Deposit Insurance Corp. (FDIC) and the Federal Savings & Loan Insurance Corp. (FSLIC), now have funds totalling $20 billion.

Now that banks and S&Ls can offer market rates on short-term insured deposits, many money-market managers—and even some municipal bond-issuing authorities—are shifting funds away from uninsured investments into federally insured accounts. This, plus last year's bank failures and the multibillion-dollar bailout for thrifts, has put tremendous pressure on the federal insurance system.

To stem this rush to government insurance, some regulators—including FSLIC Chairman H. Brent Beesley—want to institute reforms that would discipline the system. One proposal is to charge graduated premiums for federal insurance, based on an institution's financial soundness, to replace the present practice of charging all institutions the same rate without regard to their condition. Predictably, some institutions fear a system that would rank them on the basis of quality. Not only has guaranteed insurance stimulated a rush to federally insured deposits; it has also over the years promoted unsound policies among banks and S&Ls. Witness last year's Penn Square fiasco (see "How Not to Ensure Bank Failures," Trends, Nov. 1982).

In contrast to the run on federal insurance, however, some investment firms are turning to private deposit insurance to compete with banks' and S&Ls' federally-insured funds. Vanguard Group, for one, has approached St. Paul Fire & Marine Insurance Co. to insure one of its mutual funds up to $500 million. The plan must get approval from the Securities and Exchange Commission before shares can be sold. It is also reported that Travelers Corp. is considering an insured-fund offering.

Unlike deposits with federal insurance, which limits liability to $100,000 an account, Vanguard's fund would have no such limit per account. And while the investor's average administrative cost for an uninsured money-market account in 1982 was about 0.72 percent of the investment amount, Vanguard expects the cost on its insured fund to be between 0.75 and 0.80 percent.

THE DANGERS OF PHONEY PRIVATIZATION

Rome wasn't built in a day, and it takes more than an afternoon to privatize sensibly a government-owned utility. The British, who are debating the nuts and bolts of privatizing their nationwide telephone system, are learning this firsthand.

The Thatcher government is committed to selling British Telecom (BT) to private investors, doing away with its monopoly status, and licensing BT to operate under a newly created Office of Telecommunications. But BT is angling for a few little monopoly-like perks here and there that are even beyond the wildest dreams of the still-mighty Bell system here.

For example, while Americans have been able for some time to buy and sell their own telephones independent of Bell, BT insists that it be allowed to provide "the first telephone" in every home. If a private firm wants to manufacture and sell telephone equipment in Britain, as has been common in the United States for years, it must submit the equipment to BT, its biggest rival, for approval and pay them 30,000 pounds just to examine it. (According to the Economist, a British official has been trying to explain to a small company called Thames Valley Communications why it should fork over that huge sum of money for BT to look at, and possibly reject, its communications equipment.) And BT is scheduled to provide interconnection for its competitors in network services and cellular radio at "appropriate terms"—and BT itself gets to decide what "appropriate terms" are. No wonder the Economist fears that "a liberated British Telecom will turn out to be an even more powerful monopoly than it is today."

But there are solutions. In February, Birmingham University Prof. Stephen Littlechild published a report on BT privatization that has fortunately won favor with Technology Minister Kenneth Baker. Littlechild, an economist of the free-market "Austrian" school, maintains that privatization of BT is not enough. For privatization to work, he suggests that the government should strip BT of its special privileges and pave the way for a competitive market in telecommunications.

To this end, Littlechild proposes doing away with BT's right to supply the first telephone on any premises; abolishing the BT monopoly on the maintenance of call-routing equipment, such as small company and office switchboards; permitting companies to share private telephone networks; and permitting anybody who rents BT telephone circuits to be able to resell them.

The head of BT, a wily operator named George Jefferson, may be able to circumvent the pressure for a truly competitive private market in telecommunications. On the other hand, maybe Littlechild and other advocates of competition will win out in the end. It's a battle worth watching.

PART OF THE RIGHT SEES PART OF THE LIGHT

Twenty years ago Milton Friedman wrote in Capitalism and Freedom: "The term conservatism has come to cover so wide a range of views, and views so incompatible with one another, that we shall no doubt see the growth of hyphenated designations, such as libertarian-conservative and aristocratic-conservative." Friedman's prediction may be coming true.

In February, a handful of influential conservatives including Terry Dolan of the National Conservative Political Action Committee; Reps. Ron Paul (R–Tex.) and Mickey Edwards (R–Okla.); pollster Arthur Finkelstein; Alan Gottlieb of the Citizens Committee for the Right to Bear Arms; and investment banker Ricky Greenfield drafted a statement of principles as the first step toward formation of the "Freedom Conservatives of America." Although it's consistent with mainstream conservative thinking on foreign and defense policy, the statement includes interesting deviations from beliefs cherished by the New Right.

For instance, it declares that "genuine conservatives must oppose those self-styled conservatives who would use government power to legislate morality"—a thinly veiled reference to groups such as the Moral Majority and Christian Voice with whom some of the statement's drafters have been closely allied in the past. And in a section on economic policy, it opposes "bailing out multibillion dollar corporations…at the expense of the average taxpayer."

At this writing, it is unclear what activities the Freedom Conservatives of America will undertake, although there is discussion of a monthly newsletter, a book with individual chapters written by its prominent members, and campaigns for issue-oriented election referenda. In any event, it is a positive sign that some conservatives of this stature are moving publicly toward a more consistent regard for free minds and free markets.

GETTING LAND SALES OUT OF THE RUT

Of all the land in the United States, nearly one-third of it—742 million acres—is in the hands of the federal government. Through its Asset Management Program (AMP), the Reagan administration plans to sell some of this land to private owners, with the proceeds going to help retire the national debt. For fiscal year 1983, AMP was designated to raise $1.3 billion from "surplus" land sales. Thus far, however, the program has raised nearly nothing.

Neither the National Forest Service nor the Bureau of Land Management—which together administer almost 80 percent of all federal lands—has yet sold a single acre. And the General Services Administration (GSA), which administers a variety of federal properties, has donated assets—to state and local governments—of greater value than what it has raised through sales.

Moreover, the land-sales program has run into various obstacles. Recently, for example, the GSA had to back off from a proposed sale in Rhode Island because of opposition from citizens and politicians.

Part of the opposition to federal land sales is due to a lack of objective criteria by which land can be designated as "surplus." Johns Hopkins economist Steve Hanke, who has written extensively on privatizing public lands (see "Privatize Those Lands!" REASON, Mar. 1982 and "Grazing for Dollars," July 1982), recently proposed a solution to this problem in the Heritage Foundation's Agenda '83. "All lands subject to review [under AMP] that do not yield a real rate of return of 10 percent in public ownership should be classified as surplus and privatized," writes Hanke. He chose 10 percent "because it reflects the real return before taxes on private sector investments."

To ensure that actual market values are used to calculate returns on public lands—instead of biased, bureaucratic appraisals—Hanke recommends that land values be determined through good-faith offers from the public: the highest bid on a parcel of land would be its value. This system, says Hanke, should determine the sale price of federal land as well.

One aspect of private claims to public lands—the ownership of water resources on federal rangelands—has been gaining some clarity. For the past year, the Bureau of Land Management, which administers 170 million acres of grazing land in the West, has allowed both private individuals and state governments to file for title to artificial ponds and developed wells on federal arid grazing land. The new policy represents a break with long-standing doctrine that gave the federal government full claim to all water on public land.

OSHA REINED, SAFETY GROWS

"You don't hear any OSHA jokes anymore," a former chairman of the Council of Economic Advisers, Murray Weidenbaum, told the Washington Monthly. A few years ago, there were quite a few of them around. The Occupational Safety and Health Administration was notorious for devising regulations, for example, governing toilet-seat shape and the safety hazards of cow manure.

Some 928 OSHA regulations were eliminated under the Carter administration—but under Reagan-appointed administrator Thorne Auchter, OSHA's powers and budget have been scaled back considerably more. The US Chamber of Commerce recently described the differences between Auchter's policies and the policies of his Carter-appointed predecessor, Eula Bingham. In contrast to the past, OSHA now stresses voluntary programs for employers, self-inspections, and record checks in lieu of inspections for those employers with good safety records.

Although defenders of OSHA's past policies have often claimed that the proper and most effective guardian of workplace safety is the government, statistics seriously undercut that contention. At the same time as OSHA's powers and budget have been pruned, measures of workplace safety have actually shown an improvement. The average number of workplace injuries per 200,000 work-hours in the United States declined from 9.2 in 1979, when Bingham was administrator, to 8.1 in 1981, when Auchter was administrator. The rate of injuries with lost work time declined from 4.2 to 3.7 per 200,000 work-hours in those same years and the rate of lost workdays from 66.2 to 60.4.

There's no question that workplace safety is an important issue for employees. But these figures show that the lives and health of American workers apparently do not depend on the budget allocations and enforcement policies of OSHA. In fact, not having to devote so much attention to such trivia as toilet seats may have freed employers to pay more attention to general safety.

IMPORT QUOTAS: A FINGER IN THE DIKE

American industry and labor both have long led the protectionist mania to limit imports into the United States. Business, of course, is worried that foreign competition will bring down prices; labor, that American jobs will be lost. Orderly marketing agreements (OMAs), by which a foreign country agrees to limit its exports to the United States, are one supposed way of stemming competition from abroad. But do OMAs really accomplish their protectionist goals?

Two University of Southern California economists—Victor Canto and Arthur Laffer—report in January's Business Economics that such import quotas do very little to retain jobs or even to support high prices for domestic manufacturers. The economists took the example of color TVs. After Japan captured 18 percent of the US market in 1976 by exporting 2.5 million color TVs to the United States, the US government persuaded the Japanese government to limit exports from Japan to 1.56 million sets annually for the next three years.

Though by 1978 sets imported from Japan fell to below the import quota, an immediate increase in imports from Taiwan and Korea nearly compensated for the decrease in imported Japanese color sets. So in 1980, OMAs with these countries too went into effect. Imports again appeared to abate.

Foreign companies, however, found that they could circumvent the restrictions by producing partially completed sets in the United States, exporting them for completion, then reimporting them for sale. Since the OMAs did not cover reimported TVs, a 5 percent tariff was simply attached to the added value of the sets.

Did the OMAs work? No, say the economists. Domestic jobs for producing color TVs declined by nearly 15 percent from 1977 to 1980, while color TV prices rose only slightly. The restrictions had "no major effect on color TV prices, employment, or output in the U.S.," conclude Canto and Laffer.

WILL LABOR MEND ITS WAYS?

Say you're a woman with a few young children, your husband doesn't earn quite enough to meet all the bills, and the only job skill you have is sewing. Because of the children, though, you either can't or don't want to leave home every day to work. So suppose you find out that a nearby clothing manufacturer has work for an embroiderer, and you realize it's something you could do in your own home and get paid for. Well, you could—but not without violating federal law.

In 1943, with the passage of the Fair Labor Standards Act, the federal government—agreeing with the views of organized labor—decided that working at home could be bad for you. Predatory employers might not pay you enough and your home could in effect turn into a sweat shop, worried the government. So it banned industrial homework in seven categories: knitted outerwear, women's apparel, jewelry, gloves and mittens, buttons and buckles, handkerchiefs, and embroideries. Then, in 1981, when the Department of Labor learned (via network TV reports) that Vermont workers who knit outerwear in their homes actually enjoy the arrangement—they find it convenient and well-paying enough—Labor lifted the long-lived ban on that category of homework, still leaving the bans on the other six categories.

In February, however, the Center on National Labor Policy filed a lawsuit against the Department of Labor, in behalf of 10 workers in Ripon, Wisconsin—who do embroidery work in their homes—and a manufacturer who uses the services of these workers. John Imbody, CNLP's public relations director, told REASON that while the suit is specifically aimed at lifting the ban on the category of "embroideries" it also contests the constitutionality of homework bans in general. Imbody reports that CNLP also is seeking new Labor Department hearings on the bans—a favorable outcome there might obviate a lawsuit.

But don't expect organized labor to sit around and do nothing about this possible threat to its power. In fact, says Imbody, in recent Labor Department hearings, AFL-CIO officials have suggested extending the homework bans to the field of electronics. With the potential for increased homework in this area and others—especially those where home computers can be used—unions are understandably nervous about losing their ability to organize workers and increase their power base.

MILESTONES

Inheritance tax passes away. There will be little mourning among Illinois citizens for the state's recently repealed inheritance tax. In addition to burying an annual $100-million tax burden, the repeal will almost certainly draw investments into the state from neighboring states where inheritance taxes are alive and well.

Miracle on 43rd St. The New York Times, in a February editorial entitled "Decontrol Gas, Unburden the Poor," endorsed Reagan administration plans to deregulate natural gas. Wrote the Times: "Most producers and consumers would benefit if all regulation ended."

Space express. Federal Express, reports Aviation Week & Space Technology, is negotiating the purchase of a minority interest in Space Transportation Co., based in Princeton. SpaceTran, as the company is known, plans to launch commercial satellites.

Midwives fight back. When two midwives in Nashville set up practice three years ago, they contracted with a doctor to provide medical backup in case of emergency—whereupon three hospitals denied them privileges and the doctor lost his malpractice insurance. The midwives have now sued the hospitals and the doctor's insurance company charging antitrust violations.