Trends

A Moral of the AIDS Story

AIDS hysteria has made clean blood one of the hottest goods around. The result could well be a new recognition that a marketplace in blood donations makes sense.

For over a decade, the conventional wisdom has been that blood is one of those commodities too vital to be left to the free market. But economist Ross Eckert of Claremont McKenna College argues in a recent American Enterprise Institute book, Securing a Safer Blood Supply: Two Views, that the federal government's refusal to let the free market work has needlessly endangered the blood supply by discouraging paid blood donations and thus suppressing innovative competition among blood banks.

Back in 1973, the government adopted a National Blood Policy with the avowed goal of achieving an all-volunteer system, rid completely of "commercialism." This would eliminate a supposedly huge problem: commercial blood banks setting up shop in skid-row areas and recruiting drug abusers who wanted the money but were at high risk for hepatitis (then—and still—the biggest threat to blood recipients).

But the federal government didn't have the legal muscle at the time to out-and-out prohibit the buying and selling of blood. So in 1976 the Food and Drug Administration ruled that blood from paid donors would have to carry a label identifying it as paid blood—and hepatitis risky. This achieved the government's purpose. By the late '70s, commercial blood banks had been virtually eliminated from the market.

As Eckert points out, however, the crucial factor all along had been not whether blood was paid or volunteered but the rigorousness of screening. Massachusetts General Hospital and the Mayo Clinic had an excellent experience with a combination of paid and volunteer, carefully screened, repeat donors. And when the hepatitis–blood transfusion link was discovered in the '60s, commercial blood banks, spurred by hospital demand for safer blood, had responded by relocating their collection centers to college areas and suburbs and doing more donor screening. But as Regulation magazine recently pointed out, "even the sources whose paid blood had a better safety record than volunteer blood closed down" under the government's policy in the 1970s.

The government even took steps to prevent competition among volunteer blood banks by establishing a single blood clearinghouse or consortium for each region. But this removed important incentives for quality improvements.

And then AIDS burst upon the scene. What a difference the stifling of a free market has made can be seen by looking at the parallel market for blood plasma.

In the blood plasma market, unlike the whole blood market, commercial firms were not eliminated by the National Blood Policy. And when the AIDS crisis suddenly intensified the demand for safe blood products, they responded by offering higher-quality plasma than their nonprofit counterparts. Eckert reports that for-profit plasma suppliers have been more energetic in targeting low-risk donors; for example, some commercial suppliers make products from the plasma of women only, a group at low risk for AIDS.

Ideally, suggests Eckert, a collection system would maintain a "closed registry" of donors recruited from low risk groups, highly screened by the latest detection techniques. Their donations would be traceable and donors eliminated from the registry if a transfusion resulted in disease. In contrast, to obtain a given quantity of blood, current volunteer systems rely on a large number of walk-in and once-a-year donors, who pose more risk on average than repeat donors. These systems also solicit blood from some high-risk groups such as hospital workers.

Debate over the safety of America's blood supply began long before the AIDS epidemic. Crusading public health activists, with the American National Red Cross at the fore, have championed the view that blood is a "community" rather than an "individual" responsibility. That was music to regulators' ears, and they've single-mindedly pursued a corresponding policy. It's too bad it's taking the AIDS nightmare to reveal the high price of that path, but it may at least do that.

Sorry, Tip, But the Tax Revolt Ain't Dead Yet

Remember the tax revolt? Of course you do—you're a taxpayer. And no matter how many times the politicians and pundits pronounce it dead, it keeps popping up, like, they must think, a virulent weed.

Oregon is the latest state to manifest the outbreak. A proposed 5 percent sales tax, fueled by a well-financed campaign and supported by Gov. Victor Atiyeh, recently went down to a whopping 4-to-1 defeat. Governor Atiyeh blamed the voters' attachment to "history and tradition" for their rejection of the state legislature's "hard work." By contrast, State Sen. Ed Fadeley, a prominent sales-tax opponent, rejoiced that "the average citizen, the large number of middle-class taxpayers, and small-business women and men can breathe freer again."

Just south of Oregon, a tax-reform commission appointed by California Gov. George Deukmejian recommended cutting the state's income tax by $875 million and replacing the current progressive tax structure with a modified flat tax (5 percent, with a 5 percent surcharge on incomes over $30,000 for singles and $60,000 for couples). The commission also reversed an earlier recommendation that the state begin taxing groceries, health services, and home utilities and refused to tamper with Proposition 13's limits on property taxes, admitting that this landmark to the spirit of the tax revolt is "so thoroughly ingrained in terms of public acceptance as to be unassailable."

Placing the tax revolt in its historical context was Wall Street Journal editorial board member James Ring Adams. Writing in National Review, Adams noted recently that "we are in the midst of a perennial phenomenon in American politics. Periods of rapidly rising tax burdens, such as the 1960s and 1970s, provoke reactions against government spending that tend to endure for a generation."

Adams concedes the failure of a variety of tax- and spending-reduction initiatives across the country over the last year, but he points out the extent to which voters in the 1984 elections generally favored candidates who promised to lower or hold the line on taxes. For example, in Connecticut the Democrats campaigned for a new and improved state income tax—and promptly lost 23 seats in the state legislature to the Republicans. Similarly, Independent Republicans in Minnesota won control of the state house of representatives by promising a $1-billion tax cut for 1985–86. And in Washington, Democrats won the governorship and the house of representatives after the state's Republican governor broke a pledge not to raise the state sales tax.

And it's a good thing in more ways than one that the tax revolt hasn't died. As Warren Brookes pointed out in a recent column, from 1970 to 1982, the 10 slowest growing states raised their personal income taxes by 77 percent, while the 10 fastest growing states raised theirs by just 22 percent. Though the fastest-growing states generally increased their corporate taxes more than their laggard neighbors, Brookes relays Ohio University economist Richard Vedder's caveat that "among the fast growing states both corporate and individual income taxes are much lower than in the slow-growing states."

The faces of Howard Jarvis and the other tax rebels aren't plastered all over Time and Newsweek any more. But American resistance to high taxes continues unabated, strengthened by a new economic consensus that high taxes are inimical to growth. As James Ring Adams warns the taxing politicians, the tax-revolt movement remains "a force on the American scene that cannot be ignored with impunity."

Snickers Eaters Seek Revenge

Food companies and consumer advocates, two groups that have often crossed swords in the past, are pointing their political weapons at the same target these days: the federal price-support system for peanuts, milk, and sugar.

This new alliance is focusing its collective wrath on schemes that have cost taxpayers $50 billion over the last four years. Through production limits, price floors, surplus buying programs, and import quotas, the government has raised prices for peanuts, milk, and sugar (among other commodities). Ellen Haas, executive director of the consumer group Public Voice for Food and Health, says these programs add 60 cents to the price of a five-pound bag of sugar, 15 cents to a half-gallon of ice cream, and 45 cents to a three-pound jar of peanut butter. In fact, at least 25 cents of every food dollar spent by consumers can be traced to the artificially inflated cost of foods containing these products.

Poor people, whose food bills devour a much larger percentage of their total income than do the food bills of the wealthy, are hit especially hard by agricultural price supports. Consumer lobbyists are thus taking their case to members of the Congressional Black Caucus and to liberal, urban lawmakers, according to the Wall Street Journal. An impressive coalition of food companies, supermarkets, restaurants, and budget minded groups like the National Taxpayers Union and the US Chamber of Commerce supports their efforts.

Historically, farmers' organizations like the Farm Bureau, the National Farmers Union, and the National Grange, as well as individual commodity groups, have dominated agricultural politics. But the prospect of ever-greater subsidies to bail out farmers, coupled with out-of-control federal deficits, has fueled an opposition that the entrenched farm alliance will have to reckon with.

Since the Great Depression, the government has been trying to stabilize both farmers' incomes and the country's food supply by regulating production and price levels for many agricultural commodities and subsidizing farmers' incomes directly with cash. But, knowing that the price of their products would be propped up by the government, farmers have overproduced in vast quantities. In addition, government supported prices have tended to lock American farmers out of world markets—while adding $7 billion to Americans' grocery bill every year.

In spite of falling land values and escalating farm debt, farm lobbyists still insist that price supports can somehow clean up the mess. Peanut, milk, and sugar producers even claim that their price supports benefit consumers. But consumers aren't buying that line anymore. Retorts consumer advocate Haas, "American consumers are financing the sugar and peanut commodity programs with their grocery money, and they are getting absolutely no return. On top of that, they are paying for the dairy program twice—with grocery money and again with tax money."

The new focus for consumer groups constitutes a long-overdue change. Finally, they're trying to get government not to do something.

Old Foes Shake on a New Deal, Say to Feds, "We'll Do It Our Way"

An interesting coalition of California farmers and environmentalists has found common cause in an effort to solve a problem that had the two groups glaring at each other not so long ago. The problem is polluted run-off from irrigated agricultural lands in the San Joaquin Valley in the middle of the state. The proposed solution is to bypass costly government remedies and instead build purification plants—paid for by reselling the water to California cities.

For years, the federal government has supplied subsidized irrigation water to farmers in the dry valley, transforming it into a booming agricultural area. But an unfortunate byproduct of irrigation is selenium and other salts that eventually ruin the land if the run-off is not drained away. The farmers always figured the government, having built the water projects at taxpayers' expense, would solve the polluted run-off problem in the same way.

While environmentalists worried and farmers accused them of obstructionism, the run-off was collected in a pond at the Kesterson National Wildlife Refuge. But a long-stalled drainage canal to carry the wastes 207 miles to the ocean has now nearly died of political and financial ailments. And in 1983, the environmentalists' worst fears were confirmed when it became apparent that selenium in the water stored at Kesterson was leading to deaths and deformities among waterfowl in the area. Under growing pressure from the state of California to clean up the mess it had created, and with nothing but billion-dollar solutions on the table, the federal government announced last March that it would shut off the flow of water to 42,000 acres in the valley until it figured out what to do.

In the ensuing months, a compromise was reached to allow the farmers to continue receiving the water temporarily. But it stunned the farmers, who are reaching a growing consensus that they're not going to be able to leave it to Uncle Sam to solve this one. As Jerry Butchert, manager of the water district, said to the Los Angeles Times, "it looks as though they are not going to be able to do something very rapidly, and we don't think we can wait." In August, the district and the Environmental Defense Fund announced an agreement to work together on developing their own solution—desalination and recycling of the agricultural drainage.

Even before the selenium problem, Environmental Defense Fund activists had advocated desalting plants as an alternative to the government's proposed canal. Now, desalinization appeals to both sides. Farmers like it because it offers a permanent remedy, not only to the selenium problem but also to their long-time concern about the rising salt content of the soil. Environmentalists like it because it would prevent contaminated water from being dumped into the ocean.

On top of that, recycling the farm water could sidestep the need for construction of new dams or other water projects.

Taxpayers should like the coalition's proposed solution, too, for it would keep the government's role to a minimum. The district and the EDF are asking the government for $2 million for "fast track" studies to develop a prototype desalinization plant. (Israel has some in operation now.) But they want the $2 million only as a loan. Growers would finance construction of a series of $40-million desalting plants with private loans, to be paid back by marketing the purified water. As Zach Willey of the EDF notes, the financial feasibility of the plan depends on being able to sell the water "at a rate corresponding with what it would cost to create new water in California with dams or other traditional facilities." Such market pricing of new water is an idea whose time appears to be coming in California anyway.

It sounds like a double win for us taxpayers—we wouldn't have to finance the clean-up of Kesterson, and we wouldn't have to pay to provide new water for Californians. If the farmers and environmentalists prevail in their new coalition, it would be a happy ending to the nightmarish story of Kesterson.

Milestones

• Blind squirrel finds acorn. Neo-liberal economist Lester Thurow is advocating a piece of banking deregulation. In a recent Technology Review article, Thurow argues that allowing banks to take direct ownership in industrial firms (since 1933, they've only been allowed to make loans to firms, not to buy stock) is a must if the United States is "to be competitive in world markets."

• INS stormtroopers hamstrung. A US district court judge in San Jose, California, has ruled that Immigration and Naturalization Service agents cannot raid workplaces unless they obtain a warrant or the employer's permission. The case stems from a 1982 statewide sweep of California factories during which workers who looked Hispanic were detained.

• Getting into jails. Nashville-based Corrections Corp. of America has offered the Tennessee government $250 million for a 99-year lease to operate the state's prison system. The company would charge the state a per-prisoner fee for housing and caring for inmates. Tennessee legislators and government officials were to consider the proposal in November.

Global Trends

Doing Battle with the Welfare State

LONDON—It is tempting to attack as mere cosmetics the recent proposals by the Conservative Thatcher government to reform the social security provisions of the British welfare state. That would be uncharitable. That this debate is even taking place is a sign of the success that classical liberals have had in reintroducing their ideas into the public policy arena.

One-quarter of the government budget—36 billion pounds—is spent on welfare in Britain each year. Two-thirds of British families receive at least one welfare benefit as part of their weekly income. The system employs 115,000 officials to send out 400 million forms each year in response to 16 million claims. There are 20 million beneficiaries of the British welfare state. There are only 26 million British families.

The reforms proposed by the Thatcher government are an attempt to direct welfare payments to the neediest and to simplify a system that is so riddled with loopholes that even the thousands of bureaucrats who administer it cannot understand it.

The most welcome proposal is the suggestion that the upper tier of Britain's social security system, the State Earnings Related Pension System (SERPS), be scrapped and replaced with private pension provision. Though Thatcher dares not touch the basic old-age welfare that everyone receives, nevertheless this is a brave and moral leap—but one that is meeting with so much (expected) opposition that its chances of going the full distance are questionable. SERPS, which bases additional payments on a worker's best 20 years of earnings, was begun in 1975 on what is confusingly called a "pay as you go" system. In fact, it's more like "you pay as they go"—the working taxpayer pays while the old folks go into retirement.

Thatcher proposes to phase out this enormously expensive pension system, which she has characterized as a "time bomb" because of the enormous numbers of people who will be going into retirement over the next few decades. The Conservatives' plan would honor the system's commitment to all those who are within 15 years of retirement but would require younger workers and their employers to join and contribute to an occupational pension plan or a personal pension fund.

Other elements of Britain's bloated and intrusive welfare state may be in for reform, too. Though Thatcher is refusing to touch the outrageous child allowance—under which all families receive payment of 6.8 pounds (about $9) a week for each child, regardless of income level—the Conservatives are proposing to increase the threshold for taxation from an unbelievably low $5 a week to $19 a week. This would enable the forgotten people of the welfare state, the working poor, to keep more of what they earn.

What I find brave about Thatcher's proposal is that it suggests a course for less government. Market-oriented liberals have injected their ideas back into the body politic. And as the public is exposed to these ideas, perhaps the realization will grow that not all government proposals need be for more intrusion into private citizen's lives.

—Eben Wilson

Havens of Prosperity and Peace in South Africa's Back Yard

BISHO, CISKEI—While South Africa's unrest swirls around it, the Republic of Ciskei, whose free-market reforms were reported by John Blundell in an investigative article in REASON in April 1985, continues to prosper. South African foreign correspondent Leon Louw reports that the black homeland, which gained its independence from South Africa in 1981, "is experiencing an unprecedented economic boom in the midst of a depression in southern Africa which is second only to the depression of the 1930s." David Bridgman, Ciskei's director of planning, notes that Ciskeians have been enjoying a 6 percent annual increase in per capita income, inflation-adjusted. Bridgman, who has a doctorate in economics from Cornell University and is a former employee of the World Bank attributes Ciskei's economic performance to the virtual absence of taxation, unique land-reform program, and racial harmony. (Ciskei has thrown out both the race laws and extensive economic controls that had governed it as part of South Africa.)

"A significant development is that unrest, which was most prevalent in Ciskei two years ago [when there was reportedly some police brutality], has now virtually disappeared," reports Louw. This is especially significant, he explains, because "Ciskei is surrounded by the eastern Cape, where virtually all of the present unrest in South Africa, about which you no doubt receive a great deal of information in the US, is taking place."

Developments since REASON last reported on Ciskei include the disbanding of the Swart Commission, which had studied Ciskei's situation following independence and recommended sweeping liberalization of the economic and legal arrangements inherited from South Africa. After issuing a report in December 1983, the Swart Commission had guided the implementation of specific reforms as they were adopted by the Ciskei government. In early 1985, however, its members agreed to dissolve the commission in protest against the government's awarding of contracts without recommended evaluation procedures.

Louw notes that the government "has stated emphatically" its continuing free-market policy resolve. Indeed, in June the National Assembly adopted a "Repeal of Laws Act" that swept from the books a host of South African and Ciskeian acts, rules, and ordinances. A mere listing of titles of the repealed laws, which range from the Leprosy Repression Act (1884) to the Problem Animal Control Ordinance (1984), takes up 19 pages.

Louw reports, however, that there are "predictably any number of vested interests that continually try to sabotage delegislation." Nor is this the only source of uncertainty that Ciskeians must overcome in their attempts to attract job-producing investments: other nations have refused to recognize Ciskei's independent existence; and there are fears that South Africa, threatened by a free-market enclave in its midst, will pressure Ciskei to undo its reforms.

To allay investors' uncertainty, Ciskei recently initiated unique measures. It now offers to indemnify investors against risks that the government creates. For example, if an investor starts an enterprise in Ciskei on account of the tax-haven status, the government will enter into an agreement with the investor granting indemnity against the reintroduction of profits taxes (which were 50 percent before the free market came to Ciskei).

In addition, because investors may not trust a civil-law indemnity agreement, Ciskei's government is negotiating with international insurers to obtain an insurance policy against such government-created risks as changes in tax policy and nationalization. "This too is a unique idea," notes Louw, "and it is taking some time for insurers to come to terms with it and work out appropriate premiums and the details of cover."

Meanwhile, John H. Metzler, a foreign-affairs specialist based at the United Nations who recently visited another of the independent homelands, Bophutha Tswana, reports that, with cuts in business regulation and taxes there also, gross national product has tripled in the five years since independence. The multiracial University of Bophutha Tswana now has some 1,600 students, up from 227 in 1980. And the Las Vegas–style Sun City is a continuing source of tourism income from a steady stream of whites from South Africa (while, ironically, US entertainers refuse to appear there in protest against South Africa's apartheid, maintained by laws that have been abolished across the board in Bophutha Tswana, just as in Ciskei).

Louw, head of the Free Market Foundation in Johannesburg, predicts that growing prosperity in the homelands has opened up a can of worms for "development economists," who typically have shunned the free market in favor of government-engineered development strategies for the emerging nations of Africa. He reports a flurry of discussion in academic journals on Ciskei's free-market strategy. "I think we are seeing the tip of the iceberg of a raging debate amongst so-called development economists."

Global Roundup

• Monetary miracle. Argentina President Raul Alfonsin's pledge to stop printing money to finance government spending apparently is working: in September the nation's inflation rate plummeted from a June high of 2,340 percent annually to 27 percent. Government studies surprisingly showed that Argentines understand that the printing of money to pay for the state's overspending causes inflation. Bolstering the printing ban are Alfonsin's moves to cut spending and his plans to privatize hundreds of state companies, from airlines to steel mills.

• Welcome to the 20th century. Swiss voters have approved a sweeping package of reforms granting women equal rights in marriage. Women no longer need their husbands' permission to open a bank account, nor are men responsible for their wives' financial affairs.