Trends
Have Spaceship, Will Travel
Talk about far-out vacations. If you really want to see the world, reserve your seat aboard the Phoenix E and take a cruise into orbit for an unforgettable view of the planet, at an unforgettable price—$50,000 a person.
In a first-of-its-kind agreement, Pacific American Launch Systems, Inc., recently signed a contract to supply two Phoenix E space-passenger vehicles to Society Expeditions, a 10-year-old exotic-adventures company based in Seattle. Pacific American, a fledgling private space-transportation company in Redwood City, California, has promised to deliver the vehicles by 1991. Society Expeditions also has an option to purchase 10 additional Phoenixes from Pacific American at a substantial discount.
The Seattle firm had originally thought of NASA's Space Shuttle as its way of offering a space trip, but last year the agency decided not to get into the space-tourism business. Its decision is a potential boon to entrepreneurs wanting to establish a private space-transportation business, who have found a tough battle in trying to convince investors that NASA's Shuttle isn't the be-all of space transportation (see "Space Entrepreneurs," REASON, Jan. 1985). Says Gary Hudson, Pacific American founder and designer of the Phoenix: "Tourism in space is the only market left to justify development of new launch systems."
Hudson says that over time the price of a space jaunt will come down, perhaps below $10,000 by the year 2000. But even at $50,000 a ticket, Society Expeditions thinks it can get enough well-heeled travelers to make its initial $280-million contract with Hudson worthwhile.
For now, the big challenge is for Hudson to get the financing he needs to produce the Phoenix. Society Expeditions is not putting any money into Pacific American until the Phoenixes are delivered. It'll take several million to fine-tune the design and several hundred million to actually construct the vehicles. But things are starting to look up for Hudson and his lifelong desire to build spaceships. He told REASON that several major corporations—including one from Japan—have now approached him about joint ventures in producing the Phoenix. Not long ago, he was the one doing all the knocking on the doors—and not with great success.
If all goes according to schedule, Society Expeditions will launch its first space excursion in 1992, the 500th anniversary of Columbus's discovery of the New World. Beyond that, who knows? The company's "possible space tour development schedule" lists a 10-day "Lunar Orbit Tour" targeted for the year 2015 and a 14-day "Lunar Excursion Tour" as a possibility for the year 2030. Bon voyage.
A Private Future for Regulation?
Notorious for its fast action, the futures-trading business also has a reputation for unethical dealings. Stories about less-than-scrupulous brokers are common, an unfortunate circumstance that led to the even more unfortunate creation of the federal Commodity Futures Trading Commission in 1974. But three years ago futures brokers established the private National Futures Association, and the regulatory scene has changed dramatically.
The Wall Street Journal recently reported that the association "has quietly grown into one of the most powerful private-sector regulatory bodies." Indeed, the NFA "is taking over some of the biggest regulatory issues in the futures markets from the federal Commodity Futures Trading Commission," the Journal noted—and is showing more muscle. In September the private association charged Murlas Commodities, Inc., a major broker, with fraud and with "churning"—excessive trading of customers' accounts—and has launched a major investigation of the firm. "Churning allegations are common in civil lawsuits by futures investors," the newspaper reported, "but federal regulators have never managed to bring one against an entire firm while it is still operating." Federal "regulators in the past have seldom conducted the painstaking examination of records needed to document the charge while a firm is still operating."
Funded entirely from fees paid by futures traders, plus membership dues and assessment fees, the NFA has an annual budget of $19 million. In just a few years, both the association's budget and staff will exceed the commission's. "And the NFA's workload is growing," the Journal reported. "It expects to initiate about 240 arbitration cases in the fiscal year ending June 30, 1986, a 27% increase from the 189 cases handled a year earlier."
Can regulation be privatized? The NFA suggests a fertile new area for letting the marketplace do better what governments have claimed to do best.
Blacks Don't Play Follow the Leader
Common sense suggests that America's 25 million blacks have a wonderfully diverse range of interests and attitudes, just like the nation's white, Hispanic, and Asian populations. Yet the media tend to treat this heterogeneous group as a monolith whose position on this or that issue is easily gleaned from a chat with one or two black "leaders."
This anti-individualist myth takes a pounding in a new study by the Washington, D.C.–based Center for Media and Public Affairs. The study, which appeared in Public Opinion magazine, "revealed a surprising divergence between black leaders and the average black American on a broad spectrum of concerns, including some at the very heart of race relations," according to center codirector Linda Lichter.
The organization surveyed a nationwide sample of 600 black Americans as well as 105 leaders of the NAACP, the National Urban League, the Southern Christian Leadership Conference, Operation PUSH, the National Conference of Black Mayors, and the Congressional Black Caucus. The specific findings of the survey are interesting:
• 77 percent of the leaders believe that minorities should receive preferential treatment in jobs and colleges to make up for past discrimination; 77 percent of the black rank-and-file think they shouldn't.
• 68 percent of the black leaders favor forced busing of schoolchildren; 53 percent of the black public oppose busing.
• 59 percent of black leaders want US corporations to disinvest in South Africa; 74 percent of the black rank-and-file want US companies to stay in that troubled land and use their influence for change.
• 74 percent of the leaders say they have personally experienced discrimination in applying for jobs; 60 percent of the black public say they have not.
• 61 percent of the black leaders believe blacks are going backwards; 66 percent of the rank-and-file believe they are making progress.
• 68 percent of the leaders call themselves liberal; only 27 percent of the public accept that label.
• 52 percent of the rank-and-file believe that the black leaders seen on television speak for the majority of blacks; 48 percent disagree.
In a display of breathtaking arrogance, NAACP Executive Director Benjamin L. Hooks explained away the results. He told Human Events that he "distrusts" such public opinion polls because "the average man-on-the-street, white or black, wants to appear to be fair. He responds to what the question says. Black leaders are more likely to respond to what the question means." Hooks doubtless believes that the average black man-on-the-street also misunderstood the questions put to him by a recent CBS News-New York Times poll that discovered that President Reagan's approval rating among black Americans has nearly trebled—from 10 percent to 28 percent—since 1982.
Could black voters, long the most reliable constituent of the Democratic Party, be looking for an alternative? Perhaps. Significantly, pollsters found the president's highest approval rating (33 percent) coming from those 18–29 years old—the age group where the president does best among white voters as well. Young voters of both races are most attracted by the president's jaunty self-confidence and his rhetoric of enterprise and opportunity, an indication that the future may lie with politicians who advocate a buoyant individualism.
Establishment black leaders can be expected to jealously guard their privileged positions and discourage open debate on "black issues," no matter what the polls say. But the stark differences of opinion between self-appointed leaders and their putative flock should encourage vigorous challenges to those who popular TV talk-show host Tony Brown calls "black people who represent white interests in the name of leading black people."
Rethinking "Strategic Reasons" for Supporting South Africa
What would happen if the US supply of "strategic materials" were disrupted? South Africa, for example, is a major supplier of substances used in manufacturing and the production of weapons. Suppose a Soviet-aligned government took over in South Africa and cut off the West's supply of chromium, a metal critical to the manufacture of stainless steel and other products? It has long been argued that such disruptions would be so calamitous that the US government must continue to support the present government in South Africa in spite of its policy of apartheid. South African president P.W. Botha, trying to capitalize on that fear to scare up support for his racist regime, threateningly claims that he could destroy 1 million US jobs by cutting off chromium exports to the United States.
But now a team of materials-sciences researchers at the Massachusetts Institute of Technology has raised questions about the premise of this strategic-materials argument. Led by Joel Clark and Frank Field, the group published their analysis last fall in Technology Review magazine. "In our view," they wrote, "the United States is needlessly concerned about the future availability of critical materials." Their optimism comes from looking at the market.
The first effect of disruptions in supplies would be price rises, signaling the new scarcity of the materials. And price rises, noted the researchers, "will automatically lead to conservation and recycling (a drop in demand), and to a much-expanded effort to develop alternative materials." In the case of chromium, for example, "there are significant opportunities for 'secondary substitution'—eliminating stainless steel entirely and using other steels of lower chromium content." The researchers estimated that "a 50 percent increase in the price of stainless steel would result in an overall decrease in chromium consumption of 25 percent after one year and 35 percent after four years."
With other critical materials (among them manganese, cobalt, and platinum), decreased availability and resulting higher prices would similarly stimulate both conservation and the use of substitutes. Already, scientists are developing an impressive array of substances that can replace critical materials in many applications, including ceramics, plastics, and composites. Moreover, if prices of critical materials stayed high because of protracted shortages, this would stimulate the search for supplies that are now too expensive to exploit. Large deposits of manganese, for instance, lie on the ocean floor but are currently uneconomical to mine—at higher prices, that may change.
The MIT researchers base their claims not only on market theory but on precedent. As a result of civil disorder in Zaire, for example, the price of cobalt increased dramatically from 1978 to 1980, and, they noted, "consumption dropped sharply." Cobalt users turned to alternative materials, while "other sources increased supplies, forcing Zaire to lower its set price from $55 per kilogram to less than $22 per kilogram." In little time the price had dropped to $11 per kilogram.
Even when countries deliberately try to cut off another country from a supply of some critical material, the MIT researchers noted, the tactic rarely works. They cited, for example, the failure of the Arab nations when they tried to choke off oil exports to developed countries in the early 1970s to protest Western support for Israel. And when Rhodesia cut off its chromium exports to the United States in the late 1960s, "we simply purchased it from South Africa, which continued to buy the ore from Rhodesia." The reality is that any commodity that makes its way into the world market is available to any nation that wants to buy it.
So at least on this count, Americans can rest easy about letting the South Africans resolve their differences without the weight of the US government on one side or the other.
Shaming the Post Office (Again)
If American Discount Stamps (ADS) succeeds, you'll soon be able to purchase a 22-cent stamp for 17 cents. And that's just one of the new varieties of de facto competition with the government's monopoly on postal service.
Houston-based ADS announced this fall that they would be affixing 22-cent regulation postage stamps to the corners of two-by-three-inch postage stickers and selling them for 17 cents, making up the difference by selling advertising on the rest of the space on the stickers. Consumers can use the stickers in place of regular stamps.
In addition to getting a bargain, purchasers of these stamps-cum-stickers will no longer have to bear the long lines, business hours, and sometimes curt personnel of the US Postal Service. Instead, they'll be able to buy stamps at such outlets as their nearest McDonald's or 7-Eleven. The company's plans call for marketing its product in convenience stores, supermarkets, fast-food eateries, and other retail chains (which will pay ADS for the right to sell them). By January, an ADS spokesman told REASON, the stamps will be on sale nationwide.
Investors in the company consulted lawyers and postal officials about the legality of their venture. Kenneth Youngchild, who has put over $1 million into the venture, told the Christian Science Monitor, "there is nothing in the postal regulations that says you can't do it. Believe me, we did a lot of research before making this investment."
Meanwhile, private mail services are also competing with the USPS through the foreign-mail back door. Venture magazine reported recently on AEROMAIL, Inc., one of "a growing number of foreign mail services." For $7–10 a pound, it will pick up customers' foreign mail, sort it by destination country, apply that country's postage, and then deliver it to the local postal system. Offering a 10–30 percent savings over the USPS, AEROMAIL did some $12 million in business in 1985.
If private entrepreneurs can sell 22-cent stamps for 17 cents and deliver mail between countries for a bargain…what next?
The Pittsburgh Cowboys? New York Dodgers? Philadelphia Bills? Not Necessarily
Ever since leather-jacketed owner Al Davis of the Oakland Raiders football team packed his bags and scooted his club off to the wealthier environs of Los Angeles, sports fans around the country have been beset by nagging fears that perhaps their team will be next to abandon ship. Several bills have even been introduced in Congress to prevent hard-hearted owners from moving their teams on a whim or caprice.
But a pathbreaking new study done by Pepperdine University assistant professor Dean Baim for the Chicago-based Heartland Institute suggests that fans have little to fear—so long as the home team plays in a privately owned stadium. Baim examined the 96 arenas and stadiums that have housed major league baseball, football, basketball, and hockey teams over the last 32 years. His conclusion—private facilities are less expensive to construct, provide better amenities such as parking, are used more frequently, and are deserted by their tenants much less often than public fields and arenas.
The hard, cold numbers: The average inflation-adjusted cost per seat in constructing a private hockey or basketball arena is $1,333—for a publicly constructed arena, $1,946. When it comes to baseball or football stadiums, the cost difference is dramatic—$422 per seat if done privately, versus $1,023 at public expense.
Private arenas do a good job of spreading the cost over many users, hiring out the facility to numerous groups. Baim found that on average, a private arena is used 254 days a year; a public arena, 197. And while just 26 percent of the public stadiums have "acceptable" parking, 62 percent of private stadiums do.
Of paramount interest to die-hard sports fans is Baim's finding that "in the last 15 years there have been 22 franchise moves in the established major leagues. Of these, only two (the Cincinnati Royals' move to Kansas City and the Seattle Pilots' move to Milwaukee) involve a team leaving a privately owned facility." He opines that the economic ties that bind teams in privately owned stadiums to their host cities are far stronger than for teams that use public facilities; thus, the incentives to keep the team put are much greater.
Baim's findings should give pause to local politicians and "civic boosters" trying to convince taxpayers to ante up for expensive new municipally built sports facilities. Better to leave the construction and operation to private enterprise—it's cheaper and more efficient, and odds are that the team will still be around if you want to take your grandkids to the ballpark.
Milestones
? Nightmare on Monopoly Street. Massachusetts regulators are allowing phone companies to compete for service within area codes, starting December 1, 1986. The Tax-Me state joins New York, Virginia, Texas, and others in permitting phone competition.
? Spirited veto. California Gov. George Deukmejian has vetoed legislation that would have outlawed the state's "gray market" in European wines. Gray marketeers buy fine wines at retail prices in Europe, ship them stateside, and sell them for less than the "official" wine importers do. The Duke's veto came in spite of severe protectionist pressure from big-business importers such as Seagrams and Schieffelin.
Global Trends
First-Rate Progress in the Third World
SANTA BARBARA, CALIF.—Are Third World countries reading REASON? They've caught on to one of our favorite trends: privatization. The Financial Times of London reported recently that dozens of state-owned enterprises in developing countries have been sold to the private sector, and many more are on the auction block. Bangladesh has denationalized almost 100 companies, and Pakistan has sold about 2,000 grain and cotton mills. Jamaica has turned most of its sugar-refining and hotel interests over to the private sector, while Brazil has earmarked 77 companies for privatization. Mexico, Peru, Argentina, Thailand, and Malaysia reportedly may follow suit.
What's behind all this? Governments' tills are empty. State-owned enterprises typically require substantial external financing, straining the resources of Third World countries. A 1983 World Bank study of 27 countries found that net budgetary payments to these enterprises averaged a hefty 3 percent of the countries' total economic activity (gross domestic product).
For years, Western governments and banks have supported this inefficiency with aid and loans. But recent financial worries have such sources of security scrutinizing the flow of money, as they ponder statistics like this: in 1983, according to the World Bank report, a mere 5 percent increase in state enterprise revenues and a 5 percent reduction in costs would have been sufficient to fund all of Tanzania's spending on health, and twice Mali's health spending.
The financial bind is only part of the story. Ill effects at home are increasingly recognized as well. Corruption is rampant, and many public enterprises have become "employment agencies" for the better-connected, swelling the public payrolls but engaging large numbers of people in unproductive activities. "Even the socialists in the development community admit that they failed to foresee the consequences of concentrating excessive resources in the public sectors," observed the Times.
Elliot Berg, senior privatization consultant to both the World Bank and the International Monetary Fund, notes that widespread sanctions against private competitors exacerbate the economic costs of inefficient state enterprises. By preventing private entrepreneurs from participating in key sectors of the economy, these governments prevent people from building their own enterprises and thereby helping themselves.
The World Bank and the US Agency for International Development have identified marketing, agricultural services, and transportation as the sectors where individual entrepreneurs would benefit most from being allowed to compete. The Financial Times added that "the abolition of state monopolies over agricultural marketing in many African countries is a key element in almost all modern prescriptions for economic revival."
Experience supports these claims. Legalized private minibuses in Nairobi have improved both the quality and the financial condition of public transport. Private truckers in Tanzania similarly proved to be more efficient than their state competitors.
One World Bank official was prompted to challenge the "ridiculous myth that there are no entrepreneurs in Third World countries." Observing that "entrepreneurs go where the action is," he predicted that "pretty soon there'll be one hell of an entrepreneurial explosion in the private sectors of many developing countries."
Spaghetti Socialism
ROME—It would be surprising if, while governments all over the world are being forced to change their attitudes toward the welfare state, the Italian government refused to reconsider its policies. The irony is that the reconsideration of Italy's system of government intervention and welfarism has been done during the tenure of the first Socialist prime minister in Italian history. Those who remember the political platform of the Italian Socialist Party in the recent past—in 1963 they happily declared their intention to nationalize everything, with the possible exception of barbershops—will appreciate the magnitude of the change.
Here are a few examples. Prime Minister Bettino Craxi's government has gradually relaxed some of the restrictions on foreign exchange. Italians are now allowed to use their credit cards abroad without obtaining permission from the foreign exchange office. The amount of cash that Italians may use for tourism has been substantially increased, as has the ceiling on total yearly spending abroad. Though the remaining restrictions would still be considered intolerable in most Western countries, progress has been made.
In the matter of taxation, Minister of Industry Renato Altissimo has succeeded in securing tax exemption for reinvested profits in order to stimulate investments. And the minister of finance has promised to revise the tax structure, which should simplify the tax code and reduce rates across the board.
But the most significant change has been in the area of social welfare. Socialist Minister of Labor and Social Security Gianni De Michelis has proposed to trim the welfare state by introducing means tests.
This is a drastic departure from the regnant philosophy of a few years ago, when the universality of state welfare enjoyed the status of dogma and was not to be questioned. Experience has forced the Socialists to rethink their position: the national health service, which was introduced in 1980, has proved to be such a failure—"the scandal of the century," according to the leftist weekly Espresso—that everyone agrees on the need for some reform. Something must be done about a system that costs Italian taxpayers over $20 billion a year and provides service that's so poor that more than half the population ignores it and opts for private medical care.
De Michelis's solution: to replace the present arrangement with a three-tiered system that provides full benefits for families with incomes under $7,000 a year, partial benefits for those earning between $7,000 and $14,000 a year, and nothing for those earning more than $14,000.
The catch is that De Michelis's proposed reform does not include any plan for cutting down the number of state welfare bureaucrats. The result might be that we'll have a system serving a fraction of the total population but still employing a gigantic bureaucracy.
Despite these inconsistencies, the important fact is that many former advocates of statism are recognizing that we should move towards a society based on meno stato e piu mercato (less government, more market). Only time will tell whether these admirable intentions will be followed by equally admirable results.
—Antonio Martino
Global Roundup
? Reds like green. The newspaper of the Italian Communist Party, L'Unita, has broken down and begun publishing the daily report from the Milan stock exchange. Financial Editor Renzo Stefanelli says defensively: the paper is simply giving its readers, who include "many executives in private business." what they want.