Food Fallout

Hoorah for David Lips's and REASON's disclosure of a counterproductivity in government food-stamp programs ("How to Get Out of the Food Stamp Trap," Aug.). It was a real eye-opener.

REASON subscribers may want to follow up on the negative fallout from the overall US food program. I recommend Jack A. Nelson's Hunger for Justice (Orbis). It examines how government policy not only causes high food prices and therefore hunger in the United States but also drives Third World people to desperation and rebellion.

Tom Keene
Latin America Assistance
San Antonio, TX

Powerful Investigation

Kudos to Patty Newman and the Investigative Journalism Fund for "Harvest of Power" (Sept.). I urge all REASON subscribers to dig out the September issue and read that story a second time, to grasp the implications it raises. I have contributed to the Investigative Journalism Fund several times, and this piece is well worth my entire investment!

Terry A. Hurlbut III
Houston, TX

Advertising—Who Pays?

John K. Williams's excellent defense of advertising ("And Now, A Pitch for Advertising," Sept.) still misses one important point. He accepts the distinction, made by the opponents of advertising, between "production" and "selling" costs, then tries to prove that advertising is really a "production" cost. This commits the fallacy of assuming that selling price is determined by the costs incurred by the producer. As an admirer of Hayek, Williams should know that selling prices are determined solely by supply and demand and that the producer's costs are irrelevant.

Seen in this framework, advertising costs are a deduction from the producer's profit, not an increase in the purchaser's cost. They are in fact an investment that the producer hopes will generate future profits greater than the amount invested. Eliminating advertising would not reduce the selling price. If it led to fewer sales, the price might even be driven up as marginal buyers disappear from the market.

Joseph P. Martino
University of Dayton
Dayton, OH

The MTA Rebuts

From Peter Samuel's "Next Stop, Solvency" (June), which advocates selling New York's subways to private operators, one might conclude that the system was created as a child of government. This was hardly the case; most of the lines were built by entrepreneurs and operated privately for years—before they went bankrupt. Service, nevertheless, had to be continued.

"Service" is a concept the article ignores, yet service is the primary purpose of urban public transport. The subways might indeed turn a profit if they existed only for those able to pay the price—limousine fleets do very nicely on that basis. But subways are the sole available means of getting to work and school for millions of low- and middle-income New Yorkers. It would be unconscionable—not to mention politically unfeasible—to place the burden of a profit-making system on their backs and to eliminate service to the areas of the city that need it most, even if those neighborhoods fail to meet profitability targets.…

As for the conclusions in the Charles River Associates study, the writer of the article seems to have stretched the idea of fare elasticity to "prove" his contention in an earlier article (May 1982) that the subways should be sold. The study stated that increased fares would retain sufficient ridership "to provide revenues from the farebox to support the annual bond repayment" of MTA revenue bonds. Those bonds are scheduled to provide $1.5 billion of the total $6.5 billion in the capital program, with the other $5 billion coming from other governmental sources. That is a far cry from concluding that raising fares high enough to meet all present and future capital and operating needs and make a profit as well would leave a ridership base of any consequence.

Arthur G. Perfall
Assistant Executive Director for Public Affairs,
Metropolitan Transit Authority
New York, NY

P.S. If you come across any buyers, let us know.

Mr. Samuel replies: Mr. Perfall says the New York subway system is not "a child of government," since it was "built by entrepreneurs and operated privately for years." It is a "child of government," however, in that (1) for over 40 years now it has been owned and operated by government, (2) it has been subject to the whims of politics and government in its budgeting, pricing, and management policies, and (3) the private companies were driven out of business by government price controls.

Mr. Perfall's statement that I have ignored the concept of service is ridiculous. My earlier article went into a lot of detail about what lousy service the subways provide under government ownership and control, and the most recent one went into a lot of detail about how private operators would be likely to improve service.

It is an old but quite spurious and discredited argument to say that transit—or any other specific service—needs to be subsidized for everyone so that it is affordable by low-income people. To provide a general subsidy to transit, which means having the brokers of Wall Street and the publishers of midtown ride the subways subsidized, will only ensure that the system sinks deeper in its present political morass.

Of course the Charles River Associates study was intended only to prove that the farebox revenues could cover expenses plus bond servicing. That was why the MTA commissioned the study. There is no reason at all, however, why someone with a less-myopic perspective than the MTA should not draw the conclusion that a rather small loss of ridership would result from nonsubsidized fares. Mr. Perfall's last statement that economic fares would leave no "ridership base of any consequence" is utterly groundless and entirely contrary to the indications of the Charles River Associates study.

The P.S. is a cheap debating point. Of course there are no buyers of the subway to "come across." As Mr. Perfall makes very clear, its present maladministrators don't have it up for sale.

General Aviation Wants to Pay Its Way

I have noted several times in your magazine the assertion that general aviation does not pay its way, most recently in an August Trends item (p. 20). If true user fees were implemented, then I could stop paying outrageous fuel taxes for flight plans and IFR equipment I do not use, for upkeep of heavy concrete runways that I don't need, and in most cases for unnecessary regulations preventing self-maintenance. General aviation is being well "serviced" all right—but in the biblical sense.

Dale Amon
Pittsburgh, PA

Robert Poole replies: Mr. Amon makes an excellent point. A growing number of private pilots now make a distinction between the present crude "user taxes" (primarily fuel taxes) and true user fees, which would be based on actual usage of specific air traffic control facilities. The largest general-aviation organization, the Aircraft Owners' and Pilots' Association, presented a very favorable article last summer (1982) on Gerard K. O'Neill's proposed satellite-based ATC system, which would be financed by transaction-based user fees.

Inflation Debate

I am quoted out of context in Tom Bethell's August column (Viewpoint). He appears not to have bothered reading my rejoinder to his earlier column (May) in its entirety or, if he read it, not to have understood its main point.…

Bethell quotes my sentence: "As long as the Fed keeps buying the bonds, bond prices will go higher and interest rates will go lower," while characteristically ignoring my very next sentence that puts the first one into context: "Interest rates rise only in response to the Fed's sluggishness in picking up the bonds dumped by worried bondholders anticipating another massacre in the bond market." But it is precisely this second sentence, omitted from his column, that explodes his whole edifice—to wit, the theory that inflation is a thing of the past and that a period of monetary stability is at hand.

Bethell's theory is as untenable as it is unfounded and even puerile to the point of gullibility. There can be no monetary stability while the rate of interest is higher than the marginal productivity of capital, because then the owners of capital goods have the incentive to sell out and invest the proceeds in bonds.

Moreover, to propagate such an ill-conceived theory is a great disservice to the readership of REASON. Innocent people may be lulled into a sense of false security by the siren sound from his columns. Instead, the readers should be told that the dragon has not been slain—far from it: that the 20 percent prime rate was not a sign of calm seas and prosperous voyage or firm helmsmanship, but a mayday call, allowed to fall on deaf ears; that not a single problem of the US economy and of the US monetary system has been solved; that the debt is out of control, and the banks can only balance their assets against their liabilities through legalized fraud, in putting arbitrary and fancy values on their assets. Under these circumstances, it is hypocritical to pretend that the country has brought its "cheerfully immoral but rarely irrational" politicians back to their senses and to congratulate ourselves for having clipped the inflationary wings of the Fed.

A.K. Fekete
American Institute for Economic Research
Great Barrington, MA

Mr. Bethell replies: As I see it, Professor Fekete's second sentence does little more than restate the first in a slightly different way. And I cannot agree that interest rates rise "only in response to the Fed's sluggishness in picking up bonds dumped by worried bondholders." In the very short run, the federal funds rate does react that way; but in the long run what worries bondholders is the eagerness with which the Fed buys bonds, not its reluctance.

If you are the holder of some commodity other than bonds, then the existence of a rich and eager buyer makes you happy, because you are likely to get a good price if you sell. But the government buys bonds with dollars created ex nihilo at the instant of purchase, thereby diluting the value of all preexisting dollars. So the act of purchase sustains the price in the short run but in the long run undermines it, because the injection of new money disorients the unit of account (i.e., the dollar).

How would Professor Fekete account for the following data: In 1979 the Fed bought approximately $20 billion worth of bonds, thanks to which the dollar was worth noticeably less at the end of the year than at the beginning. Interest rates rose sharply, and of course bond prices dropped concomitantly. In 1982, by contrast, the Fed bought approximately half as many bonds, interest rates dropped, and the value of the dollar remained almost constant.

Certainly, to ensure real long-term monetary stability and low interest rates, we would need some constitutional guarantee that wise policy would not be abandoned the minute a Fed chairman or a president left office. And there is no chance whatever, at present, for such a constitutional change.

To that extent I am in some sympathy with Professor Fekete. What seemed to annoy him more than anything else was my suggestion that the market itself is now imposing monetary stability. I sensed when I first wrote, in February, that this was the case, and since then we have had seven months of exceptional monetary (gold price) stability. However, I agree that the ingredients for long-term stability are very far from being in place. Right now, there is tremendous pressure on Volcker to inflate, this being the simplest way to solve the Third World debt problem, for example.

So, yes, the Fed could start buying bonds in a hurry to achieve this. I simply ask: If this happens, does Professor Fekete really believe that interest rates will go down, in anything other than the very short run?

Schools vs. Unions

Samuel Blumenfeld, in his review of James S. Coleman's study of private schools (Aug.), claims vouchers or tax credits would destroy private schools' autonomy. He overestimates the power of the NEA (National Education Association) and its bureaucratic allies to affect the regulation of private schools.

It is true that a Nebraska pastor was jailed for not hiring state-certified teachers in his church school. Less well publicized is the deregulation of private education in such states as North Carolina. There, despite NEA and news media editorial efforts, state regulations requiring state-certified teachers in private schools, etc., were eliminated.…

Moreover, it is much more difficult for teachers' unions to organize small, scattered private schools than large school systems. To the extent that vouchers or tax credits encourage any increase in private schools, NEA clout would be reduced for that reason alone.…

Of course, opponents of tax credits and vouchers will try to kill such measures by attaching onerous regulations, in which case they will have succeeded, since such legislation will not pass. It is here that vigilance is required. But the problem seems manageable and should become more so as private-school enrollment increases and as more parents and legislators become aware of recent, highly publicized studies of the very low academic qualifications of the state-licensed products of the teacher training schools.

Tom Shuford
Roslyn Heights, NY

Credit Risks

Samuel Blumenfeld is certainly correct to warn proponents of educational vouchers or tax credits of the dangers of government control over private schools that might follow should they be successful. But the mere fact that there is a substantial risk to be faced here pales when compared to the certain costs society bears daily under the current system, where over 90 percent of school children are effectively forced to attend government schools.…

Further, as the recent Minnesota case reaffirms, the US Supreme Court is unlikely to hold constitutional any financing plan that provides significant additional state "entanglement."

For those of us who favor, on principle, the absolute separation of education and the state, there are additional and more fundamental objections to a voucher plan. These objections do not apply to a properly drafted education tax credit. Not taxing someone should not be considered an expenditure of government tax money any more than not drafting someone (for any reason) should be considered state support of that person.

But because tax credits do involve risk, they should be advocated only in extreme and special cases, where the evil to be overcome is greater than the risk of increased regulation. Statist education in the 1980s is such a case.

In the D.C. initiative we ran in 1981, we tried to minimize the potential for increased regulation. Section 4, for example, reads: "No educational institution shall, on account of enrolling an eligible pupil for whom a tax credit is claimed under this title, be considered a recipient of government financial assistance for the purpose of imposing any legal rule, guideline, order, requirement, or regulation upon such institution or for any other purpose."

Jule R. Herbert, Jr.
National Taxpayers Legal Fund
Washington, DC