Trends

Taking the Offensive Against Defense Policy

There are at least two important considerations in the US policy of extending defense to allies like West Germany and Japan: its cost and its wisdom. And both are objects of growing skepticism, as policy analysts increasingly scrutinize US subsidization and attendant control of other nations' defense.

As for the cost, it depends on whom you talk to—but a reasonable estimate is that somewhere between one-third and one-half of all US defense expenditures ($254 billion in 1985) goes to defending Germany, Japan, etc. This, while "the defense budget" is widely perceived as out of control.

Whether the policy is wise is a more complicated matter, about which noted Fordham University law professor Ernest van den Haag recently offered a sobering analysis. In a New York Times op-ed piece, "More Nuclear Proliferation, Please," van den Haag observed that all the nonproliferation treaties the US government has signed has brought "little success in stopping the spread of nuclear weapons." But we have successfully prevented our allies (with the exception of France) from acquiring independent nuclear forces.

With regard to West Germany, van den Haag noted, this is an especially grave situation. In that country—which the Soviets would presumably attack first in invading Europe—the United States has installed and controls nuclear weapons, and this puts the accountability for using those weapons squarely on US shoulders. "The chances of a local or tactical nuclear confrontation becoming a Soviet-American strategic nuclear conflagration," van den Haag noted, "are thus greatly increased by our control of the West German nuclear defense."

"It is not in our interest to control the defense of any foreign country," van den Haag concluded. And with regard to nations like West Germany especially, "control of another people's defense can only lead to a weakening of its own defense efforts."

This latter point is perhaps nowhere more true than in the case of Japan. The Japanese spend no more than 1 percent of their gross national product on defense, while the United States spends about 6 percent of its GNP on defense, a sizable portion of which goes to defending Japan and others. The Japanese post–World War II constitution includes prohibitions (imposed by the United States via Gen. Douglas MacArthur) against rearmament. And the Japanese people seem to support those prohibitions. So the Japanese effectively have their cake and eat it, too—with American taxpayers picking up the baker's bill.

Mulling over this state of affairs recently, syndicated columnist Ben Wattenberg proposed that the US government tax Japan for defense. "The Japanese GNP runs about $1 trillion per year," Wattenberg noted. "If they spent an additional 5 percent per year of that on defense—that is, the same rate we spend—it would cost them an extra $50 billion." Alternatively, Wattenberg suggested, "the same goal could be accomplished as a commercial-services contract. We could offer to protect Japan from nuclear or conventional attack—for a price of $50 billion" a year.

Whether the US government should be in the foreign-defense business at all—even as a contractor—is questionable. But the growing challenge of the status quo is a welcome, if belated, development.

Cable TV Protected by First Amendment, Court Rules

Do cable-TV operators have First Amendment rights? Yes, answered the Ninth US Circuit Court of Appeals in March. The three-member court's unanimous opinion moves the whole issue of cable-TV regulation into a new arena, one in which cable operators stand to cast off nearly all government control—including, perhaps, even the particularly insidious practice of exclusive franchising at the local level.

The court's decision, in fact, directly issued from a battle over exclusive franchising between Preferred Communications, Inc., a cable operator, and the city of Los Angeles. Preferred wanted to set up service to a certain L.A. area but refused to participate in the city's auction to award a franchise to only one operator. Preferred sued the city, arguing that its practice violated both federal antitrust law barring restraint of trade and the firm's right to free speech. When a lower court's ruling went against Preferred, the firm appealed the decision to the Circuit Court of Appeals. The higher court upheld the city's immunity from antitrust action but affirmed the legitimacy of Preferred's First Amendment rights. The case was sent back to the lower court to be reheard on that basis.

Of L.A.'s franchise system, the appeals court said: "Allowing a procedure such as the city's would be akin to allowing the government discretion to grant a permit for the operation of newspaper vending machines located on public streets only to that newspaper that the government believes 'best' serves the community."

Writing in the National Law Journal, cable-law expert James Goodale noted that the ruling "could have a major impact on the constitutionality of the Cable Communications Policy Act of 1984 and on the franchising process used by cities to license cable companies." The core provision of the act, passed by Congress last year to set a national policy on cable regulation, allows cities to grant exclusive franchises. But the appeals-court decision clearly calls this practice unconstitutional, Goodale observed. He pointed out a number of additional regulatory practices that the ruling calls into question, including, for example, the "public access" and programming requirements that many localities routinely impose on their cable franchisees.

While cities and their attorneys are, of course, upset by the ruling, the cable industry views it as a major victory that should give cable operators welcome relief from onerous regulation. "If this decision invalidates an exclusive franchise, it also invalidates other things," National Cable Television Association president James Mooney said.

The ruling, of course, gives civil libertarians something to cheer about, but consumers, too, have reason to rejoice. With the invalidation of exclusive franchises, cable-TV competition will likely bust out all over—always good news for the customer.

Put This in Your Pipe and Smoke It

We had to read through the column twice to make sure we were understanding correctly, but there it was—conservative superstar and syndicated columnist William Buckley reversing himself and calling for the legalization of drugs, including cocaine and heroin. Granted, it was not concern for individual liberty but pragmatism that moved Buckley to his new position.

The immense profitability of dealing in, say, cocaine—precisely because of its illegality—"is a powerful engine to attempt to try to stop in a free society," wrote Buckley. "If we cannot effectively prevent its insinuating its way into the country," he asked, "what is it that we can prevent? The answer, of course, is its price. The one thing that could be done, overnight, is to legalize the stuff. Exit crime, and the profits from vice."

Buckley is certainly right about the impossibility of prohibiting highly demanded drugs in a free society. ("In other societies," he noted, "the answer is as simple as executing anybody caught smuggling or using dope.") Writing recently in the Wall Street Journal, Harvard University researcher Mark Kleiman detailed just how ineffective US drug-enforcement efforts are, particularly in trying to stem the production of drugs in foreign countries.

Kleiman, a former policy analyst in the Justice Department, pointed out, for example, that when US authorities eliminated Mexico as a marijuana producer by spraying Mexican pot fields with the herbicide Paraquat, "almost immediately Colombian production rose to fill the empty market niche, and U.S. marijuana markets were disrupted minimally, if at all." The fundamental fact is that "there are so many potential sources that the drugs are going to come from somewhere," Kleiman observed.

"What we have now," concluded conservative Buckley, "is a drug problem plus a crime problem plus a problem of a huge export of capital to the dope-producing countries." Legalization wouldn't solve the first problem—only educating individuals can help do that—but it would virtually eliminate the other two. And in Buckley's eyes, those gains are enough to justify legalization.

Getting the Antimonopoly Message Through

It's not news when the Postal Service monopoly delivers a letter four weeks late or when it concocts an electronic-mail scheme that loses money hand over fist while its private competitors are doing quite nicely. But it is news when bigwigs in the federal establishment—which is, after all, in charge of the Postal Service—are so exasperated with the mails that they seriously consider an end to its monopoly status.

What keeps the monopoly extant is an annoying 19th-century relic called the private-express statutes. But in a recent op-ed piece in the Los Angeles Times, Federal Trade Commission chairman James Miller III suggested doing away with the legislation altogether and letting private companies deliver first-class mail.

Of course, there's the familiar (if dubious) argument that if postal service were left to private companies, only residents of high-density urban areas would be served while rural dwellers would be neglected. Miller points out that the same argument was once deployed against proposals for airline and trucking deregulation, but he notes that since deregulation, "commuter airlines have used smaller planes to serve small communities at far lower costs"; and with many new trucking companies on the roads, "trucking service to rural areas has improved." But to mollify monopoly's powerful defenders, Miller would support a "safety net" as part of a private-express repeal package. This would provide "targeted subsidies to ensure rural [mail] delivery on an as-needed basis," similar to temporary federal air-service subsidies in the wake of airline deregulation. Miller figures that such an analagous postal subsidy would cost only about $26 million a year—a small price for doing away with one of the most impervious government monopolies around.

Miller isn't alone. There have been a few mutterings in Congress lately about repealing the private-express statutes. Rep. Ed Zschau (R–Calif.) recently introduced a bill similar to one of Rep. Phil Crane's (R–Ill.) that would do away with the statutes' restrictions on private first-class mail. And Rep. Bill Green (R–N.Y.) has reintroduced a more modest bill that would suspend the statutes in areas of the country where the Postal Service hasn't met its own minimal-performance standards, but Green would let the statutes go back into force when the Postal Service was up to snuff once again.

It's rather hypocritical that at least this year, all three bills will probably be discreetly interred in the catacombs of a House subcommittee archive. An informal poll of representatives conducted by Zschau indicated that when they send overnight mail—where private competition with the Postal Service is permitted—74 percent use private carriers. And there isn't a member of Congress who hasn't received mail from the private House and Senate Delivery Service which, according to Jack Shafer in the Wall Street Journal, delivers messages to the solons for only five cents an ounce, less than a fourth of what the Postal Service charges. (Private-express violations? Perhaps—but Clayton Todd, co-owner of the service, told Shafer, "I don't think there will be 12 jurors, with all the horror stories and poor service from the post office, that will convict me.")

The prospect for reform may be a bit brighter, curiously enough, in the belly of the beast—the Postal Service's own Board of Governors. At a board meeting in March, governor John Ryan mentioned the Green proposal for temporary suspension of the private-express statutes and called it "an interesting and intriguing idea." Later, he told the Federal Times that he wanted the Postal Service to "examine a relaxation of the monopoly." His view was reportedly supported by one other of the 11 governors, Peter Voss. Moreover, Linn's Stamp News has noted that the White House will soon be filling two vacancies on the board. It's not too much to hope that Ronald Reagan's own desultory sympathy for repeal will be shared by his new appointees.

As FTC chairman Miller wrote, "Private enterprise will get the mail delivered—just as it did in the Old West" with the Pony Express. That's true enough, and there's no telling who will be the next to accept it.

Settling Third World Debts—The Market Way

Though the so-called international debt crisis appears to have subsided, problems of considerable proportions do remain. Third World nations still owe billions on loans, primarily to US creditors, and their ability to pay them back—even with all the debt rescheduling that has recently been worked out—is less than certain. So we may not yet have heard the last of the "debt bomb" and the predictable cries for government bailouts to "solve" the problem.

Fortunately, however, there are signs suggesting that market solutions may already be evolving, promising perhaps to preempt the pleas for government intervention. One hopeful sign is the growing resale market for Third World debt, in which lenders sell their Third World loans at varying discounts. Recently The Economist reported that about $100 million worth of such loans are traded monthly, mostly in $ 10-million lots, and brokers quote various discount rates on them. "This week," the magazine reported in March, "loans to the Mexican government were fetching 81–82% of their face value; those to Venezuela 78–79%; to Chile 67–68%; and to Peru 60–61%."

Debtor countries can even take advantage of the resale market. "The Venezuelan government," The Economist noted, "has used part of its substantial reserves ($12 billion) to buy up some of its own discounted public-sector debt."

One of the various forms this practice has taken is the debt-for-equity (DFE) swap: "A foreign investor buys loans to a private company in a troubled country," The Economist explained, "and then swaps it with the company for shares." In what may prove an interesting twist on this mechanism, there are indications that DFE swaps may be extending beyond private companies to government-owned enterprises, as well. The Wall Street Journal recently reported that the Mexican government has floated a proposal that "would allow foreign creditor banks to exchange some of their loans for ownership in industrial enterprises owned by the Mexican government."

When Carnegie-Mellon University economist Allan Meltzer first proposed this idea several years ago, at the height of the "debt crisis," analysts effectively said: "Nah. Good idea, but politically impossible." But as Journal writer Charles Stabler noted, "With time, the idea may come to seem less outlandish and even preferable to the alternatives not only in Mexico but also in Brazil, Argentina, and other countries whose need for economic growth is greater than their credit."

If Meltzer's idea indeed catches on, the rewards may be at least twofold: It may ease the pressure for government bailouts for both Third World borrowers and their lenders, First World banks. And it could put considerable chunks of nationalized enterprises back into the private sector, where they do better anyway.

Entrepreneurs Towing the Line

Among the little goodies that the government has long handed out to the upper middle class—at least, those affluent enough to own their own boats—is free towing service by the Coast Guard in time of crisis, such as when yachters forget to put enough gas in the tank and get stranded. This drain on the taxpayer was suitably exposed in the Grace Commission Report in 1983. And since then, there's been a shift in Coast Guard policy.

Now, the Coast Guard does not routinely provide the nonemergency service it used to provide freely. Instead, boaters who require such service are told to call a commercial service and pay the tab. The gap left by the Coast Guard has quickly been filled by a number of private entrepreneurs providing towing service. There's even a new service for boaters very similar to what the American Automobile Association (AAA) provides motorists.

It's called Sea Tow Services, and it's based on Long Island. Boaters pay an annual fee of $95–$110, depending on how large their boats are. In exchange, Sea Tow guarantees them free towing and other nonemergency assistance everywhere from Maine to the Carolinas, plus the Miami–Ft. Lauderdale area. As of April, Sea Tow was considering expansion to the Great Lakes, the Virgin Islands, and the Los Angeles and San Francisco Bay areas.

Sea Tow actually operates as a franchise for existing private towing companies. Each company pays $4,000 annually for the franchise in a specific area, and the company gets to keep 90 percent of the money generated by customer memberships there.

"Our business is skyrocketing beyond what anyone expected," Bruce Sweet, who owns two Sea Tow franchises on Long Island, recently told REASON. "The competition is actually good for us. After people call a competitor and get towing bills for $300 or $400, they look into signing up with Sea Tow."

The Coast Guard hasn't withdrawn completely from the nonemergency towing business. According to Coast Guard spokesperson Werner Siems, Guard policy is to defer to private towing services in areas where they're available. Even then, if darkness or bad weather makes the situation hazardous, the Guard will go to the scene to be sure that the commercial service can handle the problem. And in such cases, users' fees are not levied by the Coast Guard, which charges only for supplies it brings to boaters, such as gasoline.

Local Coast Guard commanders have some latitude in deciding which commercial services get referrals for non-emergency service. Sweet notes that in his area of the coast, a company can get approved for referrals if its equipment meets minimal quality and safety standards and its personnel either have some experience towing or have ocean-operator licenses. Sweet adds that even towers that don't qualify for Coast Guard referrals may still provide service to boaters.

Ordinarily, whenever there are calls for doing away with some government-run and taxpayer-financed service, the relevant bureaucracy will trot out some rationale for staying in business. Yet the cutback of Coast Guard perks for weekend boaters shows how private enterprise can step in and provide innovative, efficient services—and save the suffering taxpayer.

Government Spending: Now You See It, Now You Don't

The great Harry Houdini may have performed some dazzling tricks in his day, but he couldn't have matched the splendid legerdemain of Congress and the White House. In the 1970s, when budget spending levels were too high even for them, they waved their magic wand, and presto! More than $100 billion of spending disappeared from subsequent federal budgets. Vanishing rabbits turned green with envy when they heard of this wondrous "off-budget spending" trick, as it was called. Unfortunately, though, it didn't really make the spending disintegrate—it just "disappeared" the spending. Now, David Stockman, director of the Office of Management and Budget, wants to tear down the purple silk curtain and really send off-budget spending up in smoke.

Dismantling the props won't be easy. The way the trick has worked is that a coven of federal agencies, all of which provide guaranteed or subsidized loans to one of several special interests, sell their loans to a wizard-like creature called the Federal Financing Bank (FFB). Where does the FFB get the money to buy the loans? From the federal Treasury, of course. The FFB doesn't even need congressional approval to dip into the Treasury, but that's just part of the music. After the FFB has bought loans from the loan-granting agencies, they get to loan even more to their favorite interests—and on paper, the agencies haven't exceeded their congressional appropriations by one wooden nickel. Syndicated columnist Warren Brookes recently described it as "the perfect way for Congress to pay off political constituencies with cheap credit, without having it show up in the federal budget."

Who has benefited? Farmers, thanks to the Farmers Home Administration. The Pentagon bureaucracy and its foreign friends, via short-term financing of overseas military-equipment sales. Business-administration majors (among others), because of the college-student loan program (SLMA). Utility cooperatives, with financing from the Rural Electrification Agency. Etc.

It all looked too good to be true for the off-budget shamans in the enchanted Potomac kingdom, and maybe it was. Already, they are facing hard times because of Stockman, one of Washington's idiosyncratic connoisseurs of realism. According to columnist Brookes, the budget director has "drastically slowed" the rate at which the FFB purchases debts, from $30.3 billion per year in its heyday to only $15 billion a year currently. Stockman even wants Congress to liquidate the FFB completely in fiscal 1986.

Can the doughty young spending-slasher make the Bank of Off-Budget Horrors really and truly disappear? It may take some extraordinary incantations, but he might be able to pull it off. Stranger things have happened.

Milestones

? Adultery decriminalized. US District Court judge Robert Merhige, Jr., recently struck down as unconstitutional Virginia's laws prohibiting unmarried individuals from living together and having sex. "The constitutional right of privacy," Merhige ruled, "extends to a single adult's decision whether to engage in sexual intercourse."

? Fifty-five unconstitutional? Monterey County, California, municipal-court judge William Burleigh ruled recently that the state's 55-mile-per-hour speed limit is unconstitutional. In dismissing a speeding charge against driver Pamela Williams, Burleigh said the 55-mph limit is "unconstitutional because it had been enacted under federal coercion"—that is, by threatening to withdraw federal highway funds from states that didn't pass the 55-mph limit, the judge held, Congress had coerced California into passing the law.

? Free trade upheld. The Supreme Court has overturned an Alabama "domestic-preference" law that imposed higher taxes on out-of-state insurance companies than on those based in state, in order to encourage in-state economic development. "If we [were to] accept the state's view here," Justice Lewis Powell thundered, "then any discriminatory tax would be valid if the state could show it reasonably was intended to benefit domestic business."

Global Trends

Sayonara, Telephone Monopoly

YOKOHAMA, JAPAN—Nearly a hundred years of telecommunications monopoly in Japan came to an end this spring. The Nippon Telegraph and Telephone Public Corporation was privatized as the Nippon Telegraph and Telephone Corporation on April 1. There may be little change in the corporate names, but this is an epoch-making event in the history of telecommunications in Japan.

In 1888, the Ministry of Industry (later the Ministry of Communications) was authorized to operate a telephone system after it defeated a private-operation plan promoted by the Japanese cabinet. Since then, Japanese telecommunications had been under bureaucratic management.

After World War II, reconstruction of telecommunications was slow, and the blame was placed on its governmental operation. In 1952 the three-year-old Ministry of Telecommunications was semi-privatized as the Nippon Telephone and Telephone Public Corporation (NTT), which monopolized domestic telecommunications, and the Kokusai Denshin Denwa Company (KDD), which monopolized international communications.

This was the first step toward privatization of telecommunications in Japan, but bureaucratic management was still the order of the day. The two companies set service charges higher than those in other leading nations. With ample funds from monopoly prices, they succeeded in developing one of the most efficient telecommunications systems in the world. Yet, while they were satisfied with the arrangement and protected from outside competition, they lagged behind America's technological revolution in telecommunications.

But in the last few years, change was in the air. Since 1979, the United States had demanded that Japan purchase American products for the NTT and liberalize the telecommunications business here. In order to mitigate trade frictions, the Japanese government had to consider the demand seriously. At the same time, business circles started criticizing the NTT monopoly. Finally, Prime Minister Yasuhiro Nakasone's Ad Hoc Administrative Research Council in 1982 recommended privatizing the NTT and liberalizing telecommunications.

Following the recommendation, legislation to reform the NTT was submitted to the legislature a few times. It was finally approved after modification last December and made effective April 1.

The new law stipulates that two-thirds of the company's shares be offered for public subscription within five years (the other one-third will be held by the government). The new NTT is a mammoth enterprise capitalized at one trillion yen ($4.03 billion), with 10 trillion yen ($40.3 billion) in assets and 320,000 employees.

Would-be competitors to NTT are already lining up. Five private companies—Kyocera, Ushio Electric, Secom, Sony, and Mitsubishi Trading—have established the Daini Den Den, an enterprise intended to operate as a common carrier between Tokyo and Osaka. In addition, the Keidanren, an influential federation of large companies, founded the Industrial Communications Satellite Company, which may compete with KDD in the future. The Japanese National Railways has set up Japan Telecom to study the feasibility of optical-fiber cables along its rights-of-way. And the Ministry of Construction founded Japan Highway Communications to take advantage of its highway networks. Recently, even electric companies have become interested in the common-carrier business.

Top government officials are now seeking appointment in the new NTT, hoping to secure postretirement jobs and expand the territory of the Ministry of Posts and Telecommunications (MPT). Prime Minister Nakasone has assured the opposition parties that he would limit such cases to the minimum. But even in the ostensibly private Daini Den Den, the president is a former high official of MITI, and two vice-presidents are from the MPT, although its chairman does come from the private Kyocera.

It took 100 years, but the monopoly of telecommunications in Japan has finally ended.

—Toshio Murata

Uncommon Manifesto For Europe's Common Market

KALMTHOUT, BELGIUM—"It is only on the basis of an effective free market that Europe can be free, strong, sound." So begins a remarkable policy statement recently endorsed by 11 freedom-oriented organizations in each of the member countries of the European Economic Community (EEC). Called "A Consistent Policy for a Genuine Market—The Only Way Out of the EEC Crisis," the document makes the case that "free trade means higher productivity and modernization—and so a better standard of living."

The document is sympathetic to the idea of the Common Market but urges that "to achieve an effective common market, the most important task is to restructure and modernise the European economy in accordance with the market and without subsidies to agriculture, steel, etc." It calls for a series of market-oriented reforms including flexible exchange rates; abolition of state and private monopolies; an end to international restrictions within the EEC on air traffic, banks, and professional services; a freer flow of capital across EEC borders; and making trade between EEC countries and non-EEC countries "as free as possible."

The policy statement originated in the middle of last year with Dr. Wolfgang Frickhöffer of the Aktionsgemeinschaft Social Marktwirtschaft (ASM), a free-market think tank in Heidelberg. He sent a draft to other freedom-oriented organizations throughout the EEC, asking for comments with the aim of devising a document that they could all endorse.

This took a lot of work, since almost everybody wanted something a little bit different. For example, because Frickhöffer's memorandum was not 100 percent in support of individual liberty, some libertarian organizations found it difficult to accept the whole text. They discussed their objections, and after much correspondence and many telephone calls, a version was hammered out that many organizations could accept. In the end, there were still some minor points of disagreement, but it was a strong enough document that libertarians were willing to help disseminate it.

In January, the document was presented at a press conference in Brussels and sent to governments and legislators of the EEC. Now, it is up to the politicians.

—Hubert Jongen