Trends

How Do You Spell Relief for Ailing Rural Hospitals? P-R-O-F-I-T-S

A transfusion of the profit motive into the health-care market seems to work wonders for ailing rural hospitals—despite prophecies to the contrary by critics of for-profit health care. Profit-motivated health-care providers, critics have long warned, would "skim the cream" of the market, setting up shop only in wealthy suburban areas, where the cases are easy and the money abounds. Yet for-profit health-care companies are moving into rural areas—home to one fourth of the population—where they are reviving municipally run, money-losing hospitals, Venture magazine recently reported.

For instance, when Westworld Community Healthcare, Inc., of Lake Forest, California, took over a 38-bed hospital in Tooele County, Utah, the place was in critical, red-ink condition. In less than a year's time, Westworld had it back on its feet. The county agreed to give Westworld a 40-year lease on the hospital at $1 a year. In return, Westworld promised to retire some of the hospital's debt and to invest $6 million in the facility over a three-year period (the company has already put $1 million into it). Because so many rural hospitals are in terrible financial shape, Westworld is able to lease most of its 36 hospitals from county governments under similar favorable terms.

Four-year-old National Healthcare, Inc., of Dothan, Alabama, has also focused on rural markets, with 23 operations in towns of up to 20,000 residents. Other names in the field include Basic American Medical (Indianapolis) and Hospital Management Associates (Naples, Florida). Private-sector interest in rural health-care facilities may well grow even more—Westworld itself has a list of 2,465 rural markets with populations under 25,000. Of those, some 800 look attractive.

Critics of for-profit health care haven't yet appreciated that so long as the law allows open competition, providers will identify and seek to serve markets wherever they exist—even in rural America. And the 60 million people who live there are no doubt quite thankful that companies see such opportunities in their midst.

Rip Van Cable Wakes Up to Competition

A lot of regulators and their academic supporters must be frustrated. For years they've been pointing to cable television as a prime example of a "natural monopoly," where one and only one firm can efficiently serve consumers. In this situation, goes the argument, competition would lead to overbuilding and eventual bankruptcies. Knowing this, no company would be interested in making the capital investment necessary to build up a cable system. So, continues the argument, government must forbid competition and guarantee a monopoly franchise to one company—the quid pro quo for this lucrative opportunity being government control of rates and other matters.

But several private firms that don't enjoy monopoly franchises have nevertheless constructed cable systems, throwing a wrench in the theory that a free-entry policy won't work. And an increasing number of companies that want to get in on the action of the cable market are building their own cable systems alongside existing ones, further undermining the natural-monopoly argument. Mobile, Alabama, has recently joined the growing list of 30-40 cities where such competition between cable companies has resulted in lower rates for customers.

Before competition reared its head in Mobile, Group W Cable offered consumers a 12-channel service for about $11 a month. Then along came Mobile Cablevision, laying a system next to Group W's and offering customers a 40-channel service for the same price.

How can they do it? Mobile Cablevision's manager, Tony Thompson, explains that they can "undercut" because "Group W was overcharging." Group W has responded as the classic theory of competition predicts—it began offering 30 channels for the same 12-channel price. The company has also begun to upgrade its services, starting, not surprisingly, in the neighborhoods where it competes directly with Mobile Cablevision.

Thompson is getting good at battling entrenched cable companies. He's led similar efforts in Baton Rouge and Hammond, Louisiana, and says he did "extremely well" in both cities. "I don't know of any city in love with its cable monopoly," Thompson told REASON. "For 20 years the cable companies knew nothing but monopoly. And you don't have to work very hard when you're the only boy on the block."

The two companies who share the block in Mobile are certainly working hard now. But Westinghouse Electric, which owns Group W Cable, may be finding the work too hard. It's decided to sell all its cable operations (except in Chicago).

Regulators who are paying attention should be scratching their heads over their battered natural-monopoly theories. Meanwhile, consumers can sit back and enjoy cheaper cable TV.

Immigration Reform? What's to Reform, Ask Social Scientists

For as long as the public has been polled, a majority of Americans has looked askance at immigration. Of course, it's still a bit early to assess the impact of a recent REASON Trends report (April) countering common immigration misinformation…But a recent study by two Heritage Foundation researchers reveals that leading academics in the fields most likely to know the effects of immigration generally think it is good for America.

Researchers Stephen Moore and Rita Simon surveyed experts in anthropology, economics, history, political science, psychology, and sociology. They came up with two interesting findings: social scientists as a group are more favorable toward immigration than the general public; and among social scientists, economists are the most favorable.

"A representative 1980 survey," note the researchers, "found 66 percent of the public favored halting immigration altogether until the unemployment rate fell below five percent." In contrast, they found that over 80 percent of the social scientists surveyed (excluding economists) think immigration has had a positive effect on the nation's economic growth, and 86 percent think immigration has benefited American culture as well. A majority also reject the popular notion that recent immigrants, who come mostly from Mexico, the Caribbean, and the Far East, are somehow worse than the primarily European immigrants of earlier decades.

Compared to other social scientists, economists, who Moore and Simon contend "are perhaps best qualified to assess the impact of immigration levels on 'standard of living,'" are the most favorable toward allowing more legal immigrants into the country. Not one of the economists surveyed, including past presidents of the American Economic Association and past members of the President's Council of Economic Advisers, advocates lowering the level of legal immigration. This group of notables unanimously agrees that immigration has boosted US economic growth, and three out of four figure that even illegal immigrants benefit the economy.

"The purpose of this survey was certainly not to suggest that economic matters should be the sole policy concern," wrote Stephen Moore in a recent op-ed piece in the Los Angeles Times. "But when…anti-immigration groups contend, for instance, that employer sanctions will stimulate the economy by freeing up jobs for American workers, it should be recognized that the economics community almost universally rejects this notion. On an issue as important as immigration, it would be a shame to base policy on false contentions."

Some Trucking Relief in the Lone Star State

The nation's number-one private package-delivery service, United Parcel Service (UPS), finally broke into the Texas market earlier this year—after a 20-year battle with the infamous Texas Railroad Commission (TRC) to gain approval of its application to do business in the state.

In 1980, Congress pretty much deregulated interstate trucking (between states, that is), but regulation of intrastate trucking is still up to the individual states, which in most cases limit new carriers' entry into the market and put a clamp on rate competition among existing carriers. Thus far, only seven—Alaska, Arizona, Delaware, Florida, Maine, New Jersey, and Wisconsin—have deregulated trucking within their borders.

There are moves afoot, however, for greater intrastate deregulation. Transportation Secretary Elizabeth Dole, in her proposal to expand federal deregulation of interstate shipping, has included provisions to also block any further regulation of intrastate trucking by state authorities. And in Congress, several bills have been introduced to curtail states' ability to control trucking.

Consumers, of course, stand to benefit most from deregulation: unlike firms protected from competition by regulation, competing firms in an unregulated market face pressure to increase the availability of their services and to lower their rates in order to attract and keep customers. And that's not just theory. For instance, to ship a truckload of its corn chips from Lubbock to Irving, Texas (a regulated, intrastate route), Frito-Lay pays $2.57 per mile, whereas it costs the company only $1.48 a mile to ship the chips from Topeka, Kansas, to Irving, an unregulated interstate route. Similarly, in 1984 Procter & Gamble paid $430 to ship a load of detergent the 238 miles between Alexandria, Louisiana, and Houston, while it cost the company $612 to send the soap from Dallas to Houston, 243 miles.

UPS's long-sought entry into the Texas market doesn't mean that deregulation has come to the Lone Star State. But it's likely that a wedge has been driven into the stranglehold that the TRC exerts over the Texas market.

Bypass on the Surge, Puts Electric Monopolies in the Hot Seat

The Holiday Inn at New York's LaGuardia Airport uses its own power plant to produce half of its electricity and more than three-quarters of its heat and hot water, saving some $90,000 a year in utility payments. At Sun Industries' Enderling, North Dakota, sunflower-seed-processing plant, generators burn seed hulls and chaff to produce all of the factory's electricity—plus enough surplus power to sell to the local electric utility for profits of up to $3,000 a day. In Modesto, California, the S&W Cannery incinerates peach pits and other debris to generate all the heat and electricity the cannery requires.

The phenomenon of commercial and industrial facilities producing their own steam and electricity, called "cogeneration," is sweeping the nation, with cogenerators now producing about 6 percent of the country's electricity. It's one way in which power users are escaping the grip of electric utility monopolies—and it's a key factor in the growing trend toward bypassing utilities, a development that may be the beginning of the end for these monopolies.

The trend is even spreading beyond businesses. An Arizona developer has created Solar 1, a solar-powered residential community in Phoenix. All 24 homes in the development are connected to an adjacent generating plant consisting of 132,000 photovoltaic cells arranged in 3,600 panels over a space of less than 10,000 square feet. The plant can produce enough electricity to meet the demands of the homes—and then some. Solar 1 residents avoid the $300-plus monthly for air-conditioning bills that plague most households in an area where summer temperatures routinely exceed 100 degrees, and they also receive about $25 a month per household for surplus electricity they sell to the local electric company.

And bypass is not the only way electricity users are getting around monopolistic prices. Some are turning to shopping around. The northern Illinois city of Geneva, for example, stopped buying power last year from Chicago's Commonwealth Edison when Wisconsin Electric Power offered rates 45 percent lower than Com Ed's.

Still other large power customers simply demand discounts from utilities on the threat that they'll build their own plant, move elsewhere, or close down unless they get some relief—and utilities from coast to coast are finding that they have little choice but to give in. Chicago's Com Ed now discounts rates for its largest 100 industrial customers. In California, Pacific Gas & Electric (PG&E), the nation's largest utility, recently announced proposed rate cuts of 23 percent for its big customers.

But with commercial and industrial users able either to cut deals with the monopolies or to bypass them altogether, the utilities will be forced to make up for their losses by raising rates to those on the other side of the scale: residential consumers. It's the only way left for the monopolies to cover their costs and get the return on investment that government regulation says they're entitled to. Last November, for example, the Iowa Public Service Company of Sioux City raised residential rates by almost 15 percent while lowering some commercial rates by more than 19 percent, the Wall Street Journal recently reported.

Such moves will almost surely spark strong resistance from citizens' groups—and that's where observers figure the real push for the end of electric monopolies will come about. As more and more industrial and commercial customers bypass the monopolies, households will be hit with increasing rates, as utilities scramble to earn their allowed rate of return from a smaller customer base. When consumers rise up, the eventual target will be the very structure of utilities regulation—the grant of monopoly status that holds ratepayers captive to the utilities' fixed costs. Opening up the electric industry to competition will then be the only politically acceptable alternative.

Already, California regulators are considering a new approach to electricity rate setting. In a plan drafted last fall, the California PUC proposed shifting the risk of operating a utility from the ratepayers to the utility's investors (as would be the case under competition). Industry interests complain that investors won't be interested without a guaranteed rate of return—but that will mean even more pressure to put utilities on the same (competitive) footing as other businesses.

The booming cogeneration phenomenon is leading the way toward competition with its many, decentralized, often small, power plants that cost just a fraction of the huge, centralized power systems of the regulated utilities and take only a fraction of the time to construct. In Houston, for example, independent producers between 1983 and 1985 added more generating capacity than a large nuclear reactor. With such forces coming into play, the electric-utility industry seems headed slowly but surely toward a new era, one in which competition will replace monopolies and regulation.

Americans to Uncle Scam: We Can't Drive 55!

The 12-year-old national 55 mile-per-hour speed limit continues as the object of civil disobedience. As transportation consultant Alan Pisarski detailed last November in REASON ("Deep-Six 55"), the original rationale for the law—energy conservation—has gone the way of OPEC. But 55, propped up by the feds' threat to withhold highway monies from states setting maximum speed limits higher than the double nickel, lives on.

With Washington politicos showing no signs of junking this turkey, fed-up citizens of at least one state are bypassing the politicians and taking matters into their own hands. Arizonans are currently gathering signatures to force a statewide initiative this November on whether the state should defy the feds and restore speed limits to their 1973 levels (up to 70 mph on rural interstates).

Arizonans need to collect 72,000 signatures by July 3 to place the initiative on the ballot. Mike Kelly, chairman of the Committee for Efficient Transportation (COMET), which is spearheading the petition drive, told REASON that he is "pretty optimistic" the goal can be reached. Political columnist Pat Murphy of the Arizona Republic is emphatic: "You can bank on" the initiative getting enough signatures, he writes. (At press time, the anti-55 forces were more than halfway to gathering the requisite number.)

Popular contempt for 55 has enabled COMET to tap support from across the political spectrum. Ken Sturzenacker, an Arizonan active in the repeal movement, told REASON that the initiative is drawing "tripartisan" interest, as members of the Democratic, Libertarian, and Republican parties are working together to force a plebiscite on Washington's paternalism.

Other Western states are seeking less-direct ways around 55. The Los Angeles Times reports that North Dakota, for instance, assesses no "penalty points" against a speeder caught in the act at speeds 70 mph and lower. South Dakota, Kansas, and Minnesota are similarly kind to miscreants caught going up to 65 mph. And in freedom-loving Montana, the fine for any speed greater than 55 is just $5.

But all eyes in the speed-limit debate promise to be on Arizona in the coming months. Should the repeal effort there succeed, the Reagan administration will have to decide whether or not to make good on the feds' threat to cut off 10 percent of Arizona's federal highway funds. If the administration backs down, look for other Western states to follow Arizona's lead. Looks like an interesting case study in federalism is shaping up.

Milestones

? Tax rebels aplenty. Of the 100 million Americans who filed income-tax returns this year, some 38 percent probably "cheated," according to Peggy Hite, a business professor at Colorado State University. Hite surveyed taxpayers in several states and came up with a profile of the group most likely to doctor their returns: blue-collar male workers under 35 years old who don't like taxes. These citizens, like many others, "think it's only right that they should get as much as they can from the Internal Revenue Service," Hite noted, "because they feel like they aren't getting too many benefits back from the government." Hite also reported that 48 percent of the business entrepreneurs surveyed said they have fudged on their taxes.

? Rock and roll can never die. A Maryland Senate committee has turned thumbs down on a proposal to prohibit the sale of "obscene" records to minors. Despite the protests of teenage nerds carrying signs reading "Rock Music Almost Ruined My Life," the solons affirmed the First Amendment rights of young people by a vote of 7 to 4.

Global Trends

Ciskei Results Pouring In, Another Homeland to Follow Suit

The hardy little nation of Ciskei, spun off from South Africa as part of the controversial "homelands" policy, continues its bold experiment in free enterprise. As first reported in REASON by John Blundell in April 1985 ("Ciskei's Independent Way"), a series of deregulatory measures beginning in 1984 has made the tiny country (less than a third the size of Vermont) a free-market haven. The corporate tax has been abolished. Hundreds of business regulations (and the race laws inherited from South Africa) have been repealed. The income tax is now a flat 15 percent on incomes over $4,000—which means that 95 percent of Ciskeians are exempt.

Spurred by the unfettering of the economy, Ciskei prospers. While neighboring states, including racist South Africa, are mired in the economic doldrums, as many as 70 new factories are expected to open their doors in Ciskei this year. The South Africa Daily Mail reports that the demand for labor is so great that workers are being brought in from outside Ciskei. Even the notorious city of Dimbaza, to which 25,000 blacks were forcibly relocated by South Africa in the mid-'70s, to the outrage of the international community, is booming. Unemployment is negligible in Dimbaza—the city of 50,000 contains 75 factories, with 30 more under construction. Throughout Ciskei, the deregulated taxicab industry has seen a 300 percent increase in cab drivers over the last year. One Ciskeian recently told business writer Ken Owen: "It reminds me of the early days of Taiwan."

And it looks like Ciskei may be in for some competition. Another of the homelands, KwaNdebele, which has been self-governing since 1981 and plans to go independent in December, has just accepted the policy recommendations of a white paper laying out an even more solid free-market strategy for the country. Leon Louw and Eustace Davie of the Johannesburg-based Free Market Foundation have been appointed advisors to the KwaNdebele government. Instrumental in Ciskei's reforms, Louw and Davie hope this time to avoid some of the rough spots Ciskei has experienced (for example, with civil-liberties protections) by guiding the writing of a pro-freedom constitution rather than relying on the constitution obligingly provided by the South African government and inheriting its laws and regulations.

KwaNdebele, three times the size of Hong Kong, lies 35 miles north of Pretoria and another 30 miles from Johannesburg. Most residents who work, work in South Africa, commuting to Pretoria and beyond. If the homeland continues along the free-market path, however, it may soon be needing to "import" workers as Ciskei is doing now. The implications are interesting for the blacks who now struggle to survive in the troubled segregated townships near Pretoria and Johannesburg.

A Far East Meeting of Free-Market Minds

SEOUL, KOREA—The site of the 1988 Olympic Games was home this year to the second annual Free Market Economy Symposium. The meeting, organized by the Institute of Economics and Management at the Korean University of Foreign Studies, was designed to promote an understanding of the theories and philosophy of the Austrian school of economics that has so influenced classical liberalism in the West in the last few decades.

I was invited to speak on the methodology of Ludwig von Mises, one of the leading lights of the Austrian school. Prof. Soon Cho, president of the Korean Economic Society and professor at Seoul National University, did the same for F.A. Hayek. There followed presentations on Mises's analysis of money and business cycles (by Prof. Pyung Joo Kim, of Sogang University) and Joseph Schumpeter's theory of interest (by Prof. Sang Jing Pyeon, of Sung Kyum Kwan University).

Many questions from the 50 participants centered around the differences between Austrian and Keynesian economics. Soon after the meeting, the group got an unexpected bonus—a MiG-19 fighter plane from Red China defected to a nearby airport.

The symposium was organized in 1984 by Prof. Byong Ho Park, president of the Institute of Economics and Management at the Korean University of Foreign Studies. Park has previously translated other Mises works and is currently translating Human Action into Korean.

A free-market movement is brewing in Korea, and we expect that the 1988 Summer Olympic Games will provide an opportunity to share information and experience with champions of freedom all over the world.

—Toshio Murata