Low Taxes Boost Economic Growth Nearly Sevenfold

Countries with lower taxes experienced greater economic growth and more rapidly rising standards of living during the 1970s than did countries with higher taxes. That's the upshot of research done by the World Bank. In a recent Wall Street Journal article, World Bank operations adviser Keith Marsden reported some findings from this research, concluding "that lower taxes are compatible with a pattern of development that raises output and reduces poverty significantly."

Marsden and his World Bank colleagues reviewed data from the 1970s for 20 countries. Half had central-government tax revenues that, as a percentage of gross domestic product, were lower than the average for their income groups; the other half had higher-than-average tax-GDP ratios. After sorting the countries into 10 pairs with similar per capita incomes and contrasting tax ratios, Marsden and company compared the countries' economic and social indicators.

"In all cases," Marsden reported, "the countries that imposed a lower effective average tax burden on their populations grew faster over the decade than did their more highly taxed counterparts. The average annual rate of GDP growth was 7.3% in the low-tax group and 1.1% in the high-tax group."

Moreover, Marsden noted, the low-tax countries enjoyed substantial increases in real living standards, "shown by their higher levels of private consumption." And increases in life expectancy were also greatest in the low-tax countries.

"The data also seem to refute the argument that income distribution is less equitable in low-tax countries," Marsden reported. In fact, "the share of the poorest 40% of households in total income reached 19.1% in Thailand, 16.9% in South Korea and 21% in Japan, for example, comparing favorably with their high-tax counterparts."

Marsden and his associates found many telling statistical correlations between tax levels and economic performance: For example, they associated a decline of 0.66 percent in investment growth with a percentage-point increase in the total tax ratio, and a 0.28 percent decline in the rate of productivity growth with a one-percent increase in the tax ratio. If the private sector's share of credit dropped by 10 percent, it meant a 0.41 percent drop in the GDP growth rate, Marsden reported, and, with the exception of Japan, "government deficits were smaller in low-tax countries than in their high-tax counterparts.

"The findings do not imply that tax cuts can serve as a quick fix for a sick economy," Marsden wrote, but the conclusion is clear: "Income left in private hands and savings channeled to the private sector through financial intermediaries tend to be used more productively than taxes and credit transferred to governments." Developed, as well as developing, countries could learn from this lesson.

Mart for Art's Sake

New York and London are two of the world's great cultural centers. Their museums and opera houses operate in "roughly comparable environments," according to the British magazine the Economist, with similar attendance figures and government subsidies. Yet while the major art museums and operas in New York are prospering, their London counterparts are barely treading water financially. Why?

There's a good reason, according to a recent Economist survey—their different modes and sources of funding. In America, donors to the arts enjoy substantial tax benefits when they give. Should they need a reminder, the Economist notes that the Metropolitan Museum in New York posts a sign over its admissions desk: "Your contribution is deductible for tax purposes."

Can art survive by depending on the kindness of strangers? Not only can it survive—it's prospering here. The Metropolitan Museum of Art in New York is an example. In 1983 alone, it put on a dazzling exhibit of the Vatican treasures—and generated $2.2 million in admission fees and a $3-million grant from Philip Morris in the process. It has added spacious new galleries overlooking Central Park.

Its artistic, popular, and financial successes have been won in tandem. As of a couple years ago, it boasted 100,000 memberships ranging from $45 annually for individual members up to $2,500 a year and beyond from patrons—all of which brought in $5.3 million. It's even branched out into entrepreneurial activities. It earned another $3 million worth of profits in 1983 from its vast retail and catering activities (including a shop in Macy's).

With individual variations, this is the same story with the Museum of Modern Art, which just completed a new extension, and New York's two opera companies. Americans take this for granted, but the Economist noted the result. "A visitor to the great arts institutions of America is struck by two things: their apparent wealth and their flair for public communication."

The situation in Britain is very different. The tax system there has no comparable tax relief for donors to the arts, except for some carefully limited forms of corporate sponsorship. The Economist says that the British government frowns on large-scale tax relief. It "would mean a substantial fall in the sums within the government's direct control," as the treasury put it—yet arts institutions there are already a drain on the treasury, since the British government (and local governments) continue to fund the arts. The Economist suggests that the British government actually abhors the idea of private funding for the arts because it would "detract from one of the few pleasures in the treasury's life: playing Medici to the British arts lobby."

Consequently, British arts institutions suffer in comparison with their American counterparts. Government subsidies are similar, but private giving is certainly not. In 1982, British government subsidies to the arts came to about $580 million, while private contributions were only about $25 million. This is in stark contrast to the United States, where government subsidies to the arts came to $700 million in 1983, but private contributions were estimated at $4 billion.

In a sense, British arts institutions are treated like welfare recipients: they're given a meager allowance to get by, but they learn that they should avoid visible prosperity or else their dole will be slashed. It's a debilitating system, but they fight tenaciously to keep the system intact and seem frightened by the idea of an American-like reliance on the private sector. "To those responsible for Britain's arts institutions, a skinny bird in the hand is better than two, however fat, in the bush," as the Economist put it.

It is the visitors to the museums and the audiences at the operas who witness the results of the skinny bird. For example, the Economist describes the National Museum in London as "crowded with tourists many of whom seem bemused at the visible conflict between free admission and lack of exhibition space." It pointedly added, "The contrast with the Metropolitan could hardly be greater."

The magazine suggested that the American experience provides a valuable lesson. "Individual giving is not an insecure revenue base," it said. "In America, it is proving more secure than any other." It is a lesson that British arts administrators could well take to heart the next time they file into parliamentary committee hearings begging to keep their subsidies flowing.

Surprises on the Economic Ladder

One of the old canards of socialist literature is that under capitalism, people are virtually stuck in the economic class they're born into. That was dogma for C. Wright Mills and William Domhoff in their power-elite theories, Michael Harrington in his much-vaunted investigation of American poverty 25 years ago, and scores of lesser-known leftists. But is class structure really as rigid as they say? Do the rich always stay rich and the poor stay poor?

Not according to the University of Michigan's Panel on Income Dynamics. To find out just how much people move up and down the ladder, the study has since 1968 kept tabs on the economic lives of a sample of more than 5,000 families that demographically reflects the general population. The study's findings were discussed in a recent article by Mark Lilla in the Public Interest and in a book by Greg J. Duncan, Years of Poverty, Years of Plenty.

Some of the most interesting discoveries have to do with poverty. The study found that large numbers of people sink beneath the official "poverty line" at some point—but the number of people who stay poor is surprisingly small. For example, looking at the 10-year period 1969–1978, the study learned that 6.8 percent were poor in 1978 but only 0.7 percent were poor for the entire 10-year period. And it noted also that "only a little over one-half of the individuals living in poverty in one year are found to be poor in the next, and considerably less than one-half of those who experience poverty remain persistently poor."

So much for the myth of a large underclass of permanently poor people in the United States. Rather, as Lilla put it in the Public Interest, most people who sink into poverty don't let their lives disintegrate. Their families stay together, and before long they're back at jobs with adequate wages.

And how about the rich? The study found that of the people who were in the wealthiest fifth of the population in 1971, only 48.5 percent were still there in 1978. A majority in the top bracket had slipped to a lower status within that seven-year period (it didn't even take a generation). This hardly supports the leftist imagery of capitalism fostering a "ruling class" that protects its status and keep out most would-be aspirants to wealth.

The Wall Street Journal has called the study's findings "explosive" and urged that it "ought to be required popular reading." This is true partly because leftists continue to dredge up statistics on income distribution, declaiming about how much the rich have and how little the poor have and how the gap between the richest and poorest remains fairly constant over time. In a limited sense, their statistics are accurate—but as Lilla concluded, income distribution "tells much, much less than one would think about the economic condition of the American people.…It is a real distortion that causes us to miss the truly dynamic character of open economies, and can muddle our thinking about poverty, equality, and economic justice."

Bye-Bye, Blues

There are many parts of the country where people have never even heard of "blue laws." Those people are lucky. These laws, where they exist, are supposed to protect the morals of the citizenry by forbidding them to do certain buying or selling on Sunday. Many of these silly regulations have been amazingly durable—some even date back to the 1700s and 1800s. But the Los Angeles Times reported recently that some of them are quickly eroding.

The Texas blue law is an example. According to the Times, the 121-year-old statute has been construed so that Texans may buy paper plates, bicycles, and blank cassettes on Sunday, but not refrigerators, watches, or Cabbage Patch dolls. The Times failed to mention any empirical evidence that Texans are more virtuous as a result.

Now the Texan ordinance is under fire on both legal and economic fronts. Three lower courts have already found the law to be unconstitutional, leaving it temporarily in limbo, and there is a move afoot in the state legislature to repeal the blue law this year. Related to this, and perhaps more important, is the growing economic incentive to bypass the blue law.

"The pressure to keep stores open seven days a week is growing," the Times noted, "brought on in large part by a changing family scene in which both the husband and wife have jobs." Some large Texan department stores and car dealers are passionately resisting Sunday openings, but other businesses more sensitive to customers' needs are opting for change, blue law or no. Hundreds of Houston-area stores are violating the law by staying open all weekend, and at least one major department store chain, Joske's, publicly supports blue-law repeal.

Blue laws are under siege elsewhere, including in parts of the Deep South. In November, a subcommittee of the Mississippi legislature recommended repeal of the Sunday closing law there. It was enacted when John Quincy Adams was president. The Wilmington, North Carolina, city council did away with its Sunday-closing ordinance. And Birmingham, Alabama, merchants are refusing to abide by their closing law and are reportedly recognizing their move as an act of civil disobedience.

Many fundamentalist Christians would be quite happy to keep the blue laws intact. "Mississippi may be last in the nation in many things," the Rev. Gerald Harris of Jackson correctly observed to the New York Times. "But if we are the last in the nation to keep Sunday closing laws, I think that ought to be a matter of pride."

But it appears unlikely that the encumbrances of 18th-century moralists will prevail. As the Times concluded, "The days of the blue laws appear to be numbered."

Working on the Wage Gap

You wouldn't know it from reading most newspapers, news magazines or women's magazines, but one of the great success stories of the 1980s is a narrowing of the gap between men's and women's average wages, and why it's happening. That narrowing and its explanation are the subject of a recent report, "Women's Wages and Work in the Twentieth Century," written by James Smith and Michael Ward, two economists with the well-regarded Rand Corporation.

It is common knowledge that women's average wages are still considerably less than men's. People who find this gap offensive wear "59 cents" pins, to protest a widely cited figure: that the average female worker earns only 59 cents for every dollar that the average male worker earns. But Smith and Ward found that the 59-cents figure is no longer current, and some very interesting things have happened since it was. Women's average earnings actually jumped from 60 percent of men's in 1980 to 64 percent in 1983, the "largest and swiftest" gain in the 20th century. Moreover, the economists project conservatively that by the year 2000, the figure should rise to 74 percent.

Already, the generation just entering the job market has seen dramatic progress. In 1980, women 20–24 years old were earning 78 percent as much as their male counterparts. By 1983, that figure had risen to 86 percent.

Smith and Ward's report also sheds illuminating evidence on why the advance has occurred. Is it civil-rights laws and the agencies charged with enforcing them? That "explanation can be easily dismissed," according to the report. The researchers pointed out that both the legislation and the agencies date from the mid-1960s, and "while lags in the power of these enforcement agencies is likely, it strains credulity to suppose that these effects would be felt after 1980, especially in a period of budgetary retrenchment by the enforcement agencies."

They find plausible a very different explanation for the progress. Women's wages are increasing because their job skills—their education and job experience—have been increasing dramatically. Among women entering the job market, the percentage of college-educated women has been rising steadily, and the average length of women's labor-market experience generally has been increasing as well. The relation between these factors and earnings levels is well documented.

The Rand report also looked into what influences women to enter the job market. The biggest factor, they found, is more money—when women's wages are relatively high, more women work. "Holding family size constant," the report concluded, "a one percent increase in women's wages will increase their labor supply by one-third of one percent." Other factors such as age, race, and marital status had relatively little effect on the long-term increase of women in the work force. That women are drawn into the labor force in increasing numbers by steadily increasing wages is not surprising if you consider the normal workings of supply and demand. But it is particularly ironic in the light of persistent complaints that the market discriminates against women by paying them too little.

Although the Rand report didn't presume to outline a political agenda for feminism, it does provide useful data for feminists to ponder. There are civil-rights laws, the affirmative-action proposals, and comparable-worth rulings; but when all is said and done, what is giving women more opportunity is the subtle working of the marketplace.

Rediscovering Liberty?

Traditional American liberalism, now at a transitional stage following Walter Mondale's shattering presidential defeat, appears to be discovering a new style—one in which the free market and less government figure more prominently. Nowhere is there greater—and more surprising—evidence of this than in the editorial "Bad Ideas and Good" appearing in the December 3, 1984, issue of the New Republic, a major voice of liberal thought for 70 years.

Among the ideas the magazine's editors suggested expunging from the liberal litany: domestic-content legislation applying to the manufacture of cars ("the very negation of international trade," they called the idea—"a sure-fire recipe for economic decline"); comparable-worth legislation ("a superficially appealing idea that would create nightmares of regulation and litigation, and put the government in the business of deciding what every job in America is 'worth'"); the nuclear freeze ("a silly gimmick" and "false banner"); election-campaign reform ("except for the tough disclosure rules…the reforms should be scrapped"); quotas regarding minorities ("government-enforced reverse discrimination"); and bilingual education ("!Ya basta!").

Though the New Republic endorsed some ideas that are likely to be equally regretted in the years to come—such as providing "free" television time for political candidates and creating a "United Nations of the democracies"—the magazine went so far as to agree that the Japanese should pay for their own defense and that "the same policy should apply to Europe." And in proposing tax reform, the editors included "lower tax rates" among the desirable goals of reform.

In what may prove to be a significant congruence of trends, American liberals are acknowledging the failure of New Deal–style government just when the nation's mature and maturing baby-boomers are increasingly asserting their individualist inclinations. As noted in REASON's January editorial ("A Party for Baby-Boomers"), recent polls and the voting record in last November's election suggest that those 75 million Americans born between 1946 and 1964—and who now constitute one-third of the nation's population—tend to resist government interference in both economic and moral matters.

Indeed, as political scientists William Maddox and Stuart Lilie contend in their recent book Beyond Liberal and Conservative, the long-standing liberal-conservative dichotomy no longer represents an accurate categorization of Americans' political attitudes. As REASON noted in Trends back in March 1981, Maddox and Lilie have found that the conventional labels "liberal" (favoring economic intervention but moral nonintervention) and "conservative" (economic nonintervention but moral intervention) do not capture the shifting political scene. To these labels they add "populist" and "libertarian": populists favor both varieties of intervention; libertarians, neither.

In commenting on this reclassification of political groups, analyst Kevin Phillips noted recently in the Wall Street Journal that those affluent, upwardly mobile members of the baby-boomer population—commonly referred to as "Yuppies"—exhibit a "preference for relatively minimal government intervention in economics and morality." And, Phillips observed, that group appears to be growing (along, alas, with the "populist" voting stream).

How these metamorphoses of demography and philosophy will affect the nation's political scene is still a matter of speculation. But for the liberty-minded among us, there even may be cause to cheer.

Getting Off of Welfare

Imagine: In a major effort to eradicate poverty, the federal government has suspended its welfare programs, substituting social-service aid with simple vouchers for only basic necessities. The results have been miraculous, among them: Fewer single women have had babies, and fewer fathers have abandoned their families. In former "welfare neighborhoods," unemployment among teens and young adults has declined. A majority of former "welfare mothers" are now working, whereas only 25 percent did before welfare was suspended. Nongovernmental social-welfare agencies have undergone a regeneration.

The above scenario, of course, is hypothetical—it comes from an article in the October 1984 issue of the Futurist, "How Welfare Reform Finally Happened," in which sociologists Ralph Segalman and Alfred Himelson explain how government welfare, originally intended as only a temporary relief measure, had locked many poor into permanent poverty and dependence. The article is written from the vantage point of the future—a future in which government welfare programs had been eliminated. For the most part, the authors predict, individuals and families would learn to cope admirably without welfare, and private institutions would flourish anew to help the needy.

In their imagined scenario, Segalman and Himelson report, removing the incentive to depend on government aid radically altered people's behavior, encouraging them to seek self-sufficiency. Among the former chronically unemployed members of the "street corner" society, for example, "having a job, even a menial and low-paying one, once again became an important status symbol." And because low-level workers and trainees came to view their jobs as a place "to establish an employment record and to prove oneself," Segalman and Himelson write, "their attitude and commitment to learning dramatically improved." And as employers learned they could benefit from this new-found commitment, they initiated even more trainee programs and low-level entry jobs.

Departing from the big-government and planning mentality that often characterizes the Futurist's brand of reform, Segalman and Himelson instead display a more-radical, antibureaucratic way of thinking about poverty, one that appears to be spreading. Social researcher Charles Murray, in REASON's December issue ("Saving the Poor from Welfare") and in his book Losing Ground, proposed abolishing federal welfare for the working-aged poor as a reform that would go a long way toward eliminating poverty. Murray has caught the attention of the major and lesser media. Social observers from all quarters, it seems, are beginning to take seriously Murray's indictment—shared by Segalman and Himelson—of the Great Society assumption that massive welfare programs can cure poverty.

Although major welfare reform at the federal level cannot be expected any time soon, significant change may come about in other ways. One possibility is that private welfare agencies now dependent on federal funds change their minds about taking this money and find a new dynamism in true independence from the state. In New York City, for example, Roman Catholic Archbishop John O'Connor recently announced that his archdiocese has been examining ways of operating its social programs without government money. If the church is bound to a city order preventing recipients of city funds from refusing to hire homosexuals, O'Connor said, then the church will reject both city and matching state and federal funds and will operate the programs without government money.

The archdiocese is contesting the order in court, and the church obviously would like somehow to retain the government money. But if the archdiocese loses and continues the programs without government aid, it would be a small breach in the state-dominated welfare system. So far, O'Connor's move is bringing out into the open one of the many strings inevitably attached to government assistance. And recognition of those strings could do much to spark a move toward private instead of public aid for the hapless.

Beefing Up Broadcast Freedom

Government controls over the broadcast and communications industries continue to shrink, with several significant developments worth noting.

The Federal Communications Commission (FCC)—which is at center stage in the move toward freer telecommunications—recently modified a 31-year-old rule that limited the holdings of broadcast-facility owners to seven AM radio stations, seven FM stations, and seven TV stations. Now holders are limited to 12 of each type of broadcast station (although TV owners may have up to 12 stations only if the stations together reach no more than one-quarter of the nation's viewers).

Another major FCC deregulatory move recently won the backing of a US Court of Appeals. The court affirmed an FCC ruling that prohibits state and local governments from regulating TV programming that is distributed by satellite to private dwellings. The court decision primarily benefits operators of satellite master-antenna television systems. In an SMATV system, an antenna positioned on private property—say an apartment rooftop—receives a satellite signal and relays it via cable lines to subscribers (apartment tenants, for instance).

Though SMATV users number only 800,000 or so to cable's 37 million subscribers, the cable industry is upset by the ruling. Cable operators, of course, are subject to state and local regulation, which they increasingly view as an obstacle to their ability to compete with emerging alternatives to cable, such as SMATV.

Bit by bit, however, cable operators will get some of the freedom they're asking for, largely from the Cable Communications Policy Act of 1984, which requires the FCC to set guidelines for exempting cable systems from state and local regulation. The FCC recently drafted such guidelines: in areas where there are at least four over-the-air TV signals including those of the three major networks, the agency proposed, there would be enough competition to exempt a cable operator from regulation. That condition covers much of the nation.

In another proposal, the FCC has suggested allocating unused portions of the radio spectrum reserved for mobile communications by lottery rather than by government fiat. Under the proposal, the agency would, divide up the reserved spectrum space into 35 parcels and grant licenses to the parcels via a lottery, with the licenses being freely transferable.

Commenting favorably on the proposal, a recent New York Times editorial noted that under such a system, if one venture "flunked the market test, the license could be quickly transferred to another user." Though the plan falls far short of the ideal policy of simply allowing citizens to establish rights to spectrum space by "homesteading" frequencies, it would, as the Times noted, "eliminate the need for hundreds of hours of hearings."

On another front—the setting of technical standards for broadcast technologies—the FCC is also aggressively pursuing a deregulatory course. The commission recently announced its intention to eliminate or significantly relax as many government-imposed standards as possible, leaving the job of standards-setting to the marketplace. Reporting on the development, Electronics Week magazine noted that "the FCC has been steaming ahead with technical deregulation for years," leaving communications-equipment makers "neither surprised nor alarmed to learn of the new doctrine."

According to RCA Consumer Electronics executive W. Thomas Collins, the magazine reported, "the deletion of standards will not cause broadcasters or manufacturers to change their habits, because any perceivable deterioration in quality and performance would show up in profit margins." And Michael Marcus, head of the FCC's Technical Analysis Division, made a similar point: "Consumers voting with their channel selectors," Marcus said, "is a lot more effective and efficient than anything the government could ever do."

Not all within the electronics industry are as sanguine as Collins and Marcus about the FCC's decision to get out of the standards-setting business. In an editorial on the subject, Electronics Week exhorted the industry "to behave wisely and maturely and see to it that the early predictions of disaster turn out to be wrong." Our bet is that the industry—disciplined by consumers—will sure enough come through.


• Entrepreneurial bureaucrat. Two years after the Orange County (Cal.) Office of Consumer Affairs was closed, its former chief, Augie Molina, started his own privately run consumer affairs service. He charges $45 per call, and business is reportedly booming. The moral: where there's a need, the market is sure to serve.

• Insurance is golden. Last November, the Industry Council for Tangible Assets, a coin-industry trade association, announced that it would sell insurance to protect customers of bullion against dealers' insolvency. The moral: ditto.

• Immoral laws. A New York City police official has admitted to the New York Times that the police there don't investigate "call-girl rings" unless the authorities receive a serious complaint or suspect organized-crime involvement. Also, a New York Supreme Court justice has written in an opinion that while public solicitation for prostitution may be illegal, "there may be a protection for the same type of act under private conditions."

• Flying high with contracting. The Air Force is contracting with United Airlines Aircrew Training to train the crews of the USAF/Lockheed C-5. The Air Force had been providing the training, but it said it was contracting out primarily to save money.

• Deregulatory writing on the wall. In a poll of 102 state public-utility commissioners in 48 states and the District of Columbia, all but one conceded that utilities will increasingly be deregulated. Most regulators pointed to telecommunications as the primary target of deregulation in the years to come, but they also foresaw deregulation of electric, transportation, natural-gas, and water utilities.

Economic Democracy, Brazilian Style

SAO PAULO, BRAZIL—"The enemy: government control." "The goal: freedom to work." These were a couple of headlines in a series published by Jornal da Tarde, one of Sao Paulo's main newspapers, on a weeklong national conference late last year on "The Underground Economy, the Small Firm, and the Freedom to Work." Sponsored by the newspaper, a national TV network, and several business associations, the conference had participants ranging from tax collectors to business executives to legal scholars. They all shared one major concern: it says something when a growing number of people are joining Brazil's underground economy, either because they cannot find work or business opportunities in the official economy or because they wish to evade the bureaucratic dragnet or the heavy tax burden.

Under discussion at the conference were the ideals of individual liberty and economic freedom, which were strongly defended by some small-business owners, politicians, and lawyers. Even the socialist economists present grudgingly acknowledged these ideals to be essential for democracy and greater economic equality. There was a strong consensus that the current process of political democratization in Brazil cannot be successful unless it is accompanied by freedom in the economic sphere ("economic democracy," as it was called) and some fiscal relief. Indeed, the tax collectors at the conference admitted that the raising of taxes in 1983 not only failed to increase revenue but actually reduced it and that a lowering of tax rates might spur economic development.

The participants also discussed the pro-free-market Small Business Act that passed the congress soon after. The act provides for the lowering of taxes on small businesses and, for small entrepreneurs, the lifting of market-entry requirements and regulations. It is hoped that the new law will encourage those now operating underground to establish legal enterprises and, in the words of one speaker, "assume their rights to full citizenship."

The conference has not produced any concrete results so far, but it does seem to indicate a trend: the defense of economic freedom is slowly becoming acceptable in Brazil. And even though statism continues to advance in practice, it is definitely under attack. After years of political and economic authoritarianism, Brazil may have better days ahead.


Entrepreneurs Winging It

EUROPE—Entrepreneurship is coming to Europe's airline industry, traditionally a cartel-like structure in which national governments, through bilateral agreements, deal out routes to the large, mostly state-owned, carriers. Predictably, not only has that arrangement led to high fares, but it has also choked service, especially on short-haul routes connecting smaller, nonhub cities.

Recognizing a gap in airline service, several commuter and regional carriers have now popped up throughout Europe—quite without government planning—to serve those neglected routes. Crossair, a Swiss regional airline, operates a fleet of small turboprops on routes traveling Zurich, Geneva, Basel, Brussels, Paris, and Strasbourg (France). Fortune magazine recently reported that in Germany, NFD airline, which started as a small air taxi service, now operates scheduled flights between five European cities. And in Britain, following (the soon-to-be-denationalized) British Airways' service cuts to Birmingham, Birmingham Executive started operating various flights.

The large, national airlines failed to provide service on short-haul routes largely because of their inability to compete with cut-rate carriers on heavily traveled transatlantic routes: as Fortune noted, the national carriers tried to make up for profits lost on the transatlantic flights by raising fares on flights within Europe, but the higher fares reduced demand for air travel. The airlines started losing money on some of their less-traveled routes, so they cut back or eliminated service—and in jumped the entrepreneurial commuter and regional operators.

Part of the national carriers' problem, too, was their almost exclusive use of jet planes, which are unprofitable on many short-haul routes. A 1981 Common Market study found that of 100 routes among Common Market cities, 92 could turn a profit "if they were served by turboprops instead of jets." The commuter and regional operators discovered the economic logic that had eluded the big airlines.

The new short-run carriers are still shackled by many national and Common Market regulations that favor the large carriers (and protect the national governments' railroad businesses). But some deregulation is on the way.

Britain seems to be in the forefront of the trend. Last summer, it hammered out an agreement with the Netherlands that substantially deregulates air traffic between the two nations. By year's end, it concluded a similar agreement with West Germany and was discussing deregulation pacts with Belgium, Italy, and the Scandinavian nations. When Aviation Week reported the British-German agreement in December, it noted that new London-Munich economy fares could drop 30 percent below prevailing business-class fares.

"The signs are that our first domino to fall in Europe [the Dutch agreement] is toppling the others as well," British secretary of state for transport Nicholas Ridley told Aviation Week. "Our voice for competition is being heard elsewhere in Europe.…" Already, Common Market officials have issued several directives aimed at reducing cross-subsidization within the airline industry and at making it easier to get licenses for service on nonmajor routes.

There's still a long way to go. The dinosaur-like state airlines are still living off the fat of the taxpayer, and there are still many routes in Europe where heavy regulation makes entrepreneurial airlines untenable. But Ridley may be prescient. The dominos may be toppling, and consumers will benefit as a result.

How the Dutch Treat Drugs

AMSTERDAM—What happens when a nation ends its prohibition of marijuana? In 1978 the Dutch government declared that pot is "relatively innocuous" and decriminalized its use. The result: "Fewer young people smoke pot in the Netherlands than in several countries that impose criminal penalties for the activity," the Wall Street Journal recently reported. Though pot has been sold freely throughout the country since decriminalization in 1978, the Journal noted, "marijuana has ceased to be a big issue in the Netherlands." Furthermore, according to Dutch officials, no health or criminal problems have resulted from the new pot freedom.

Following its liberalized pot policy, the Dutch government relaxed its heroin policy as well, concentrating on caring for addicts rather than penalizing them. The new policy arose out of several assumptions about heroin use, including the recognition that no matter how vigilant the authorities in trying to prevent heroin importation into the country, some would still get in and some people would still use it. Whatever may be the cause-and-effect relationship between the liberalized policy and heroin use in the Netherlands, it is at least interesting to note that the country has one-third fewer heroin addicts relative to its population than does the United States.

Local authorities in Amsterdam, where heroin use appears to be on the rise, are pushing for even more-radical reforms in the city's heroin policy and are seeking permission from the national government to dispense heroin to addicts on an experimental basis. Addict-related crime, the authorities believe, is increasing, and they suggest that freely dispensed heroin may obviate addicts' need to support their habits by stealing.

The Dutch government remains resistant to Amsterdam's request to further liberalize its heroin policy. But if the city goes ahead with the experiment, the results should be well worth watching: they may provide some indication of what could occur if authorities lifted the heroin ban altogether and allowed individuals to freely buy and sell the substance.