House Hunting? Look in the Shadows

"The Shadow Market for Housing: It consists of the processes that provide housing by means other than new construction. If state and local laws gave this activity more scope, many affordable dwelling units would be available."

Just when you thought it was safe to cancel your Scientific American subscription, the venerable journal discovers the free market. In a recent article, author William C. Baer argues that one of the most important sources of low-cost housing in America has been not only ignored by planners but also discouraged by government regulations. Housing statistics generated by counting building permits and other signs of red tape, he says, ignore housing units created by expanding or subdividing existing dwellings or by converting nonresidential buildings. This "shadow market" includes partitioned houses and apartments, but also former school buildings, industrial lofts, and churches now transformed into apartments or condos.

The shadow market, the article reports, accounted for 21 percent of the housing units added between 1973 and 1980, compared to about 10 percent in the 1950s and '60s. More importantly, argues Baer, it encompassed half of new low-cost rental units and a third of low-cost units occupied by owners—all without subsidies and often without government approval.

Instead of calling for more federal subsidies to deal with the perceived shortage of affordable housing, Baer says local governments should loosen supposed land-use regulations, which actually dramatically influence the supply of housing. "All too often the local regulations thwart or impede [shadow market] modifications. In so doing they unnecessarily bar a fraction of the population from a ready-made source of low-cost housing."

He particularly criticizes zoning codes that haven't kept up with demographic changes and try to force people into single-family homes. For example, such codes prohibit elderly homeowners with extra room and no extra money from converting their single-family homes to two-family houses or from simply renting out part of the house. Fewer regulations, says Baer, "could also encourage the use of older and currently vacant or underutilized commercial and industrial space."

Now if they'd just go after rent control…

Come on Baby, Fight My Fire

"The people have spoken," political prankster Dick Tuck once observed after a campaign of his went down to defeat. "The bastards!" Those who pump for the privatization of local-government functions are more sanguine about the vox populi these days, thanks to a victory for privatization at the polls in Fort Walton Beach, Florida.

The referendum was placed on last November's ballot by the town's firefighters, who became worried when city officials visited the Scottsdale, Arizona, headquarters of the maverick private fire-fighting company, Rural/Metro. The subject of a May 1976 REASON feature and later a CBS "60 Minutes" segment, the company currently provides firefighting services equivalent to "about 25 fire departments," primarily in the Golden Agers State, according to Rural/Metro spokesman John Turner.

The Fort Walton Beach referendum, in the form of an amendment to the city charter, required that police and fire departments be "manned by city employees," thus precluding privatization. A heated, often rancorous campaign was carried on through most of 1986. Rural/Metro, which hopes to bid on a Fort Walton Beach contract, turned to radio, TV, and newspaper advertising, as well as interviews and speaking appearances, "to raise public awareness of the differences between public and private fire departments." Pointing out the private sector's cost effectiveness and higher productivity, the company claimed it could provide service comparable to the city firefighters' for $300,000 less per year. Opponents of private-enterprise service issued ominous warnings of corruption and unaccountability should blaze busters no longer be government workers.

When the votes were counted, the wise and good citizens of Fort Walton Beach affirmed the city's right to privatize by defeating the referendum, 3,634 to 2,537. "To our knowledge," says Rural/Metro's Turner, this popular vote on privatization "is the first ever."

City officials have not yet announced if and when they'll privatize. If experience is any indicator, they'll be in for another fight from the firefighters' union if they move in that direction (see "Blazing Battles," REASON, Nov. 1983). But the voice of the people has at least cleared the way.

Deregulation? You Can Bank On More

The naysayers are saying nay and even invoking the ever-so-irrelevant name of Ivan Boesky. But the Reagan administration still says it plans to take on the biggest remaining restriction on banks' economic freedom—the depression-era Glass-Steagall Act, which prohibits banks from engaging in commerce.

Glass-Steagall means that U.S. commercial banks, whose federal charters allow them to take deposits and make commercial loans, can't diversify into such financial services as insurance and underwriting. They also can't invest directly in companies, as Japanese banks have done with great success.

Banks are feeling the hot breath of competition from such financial giants as American Express and Sears, Roebuck, which aren't hampered by Glass-Steagall. Their one-stop shops are taking more and more business away from banks. Sears, for example, owns a brokerage house (Dean Witter), sells insurance (Allstate), offers a national credit card (Discover), and sells real estate (Coldwell Banker). It even takes deposits through so-called nonbank banks that don't make commercial loans.

And as if domestic competition weren't enough, banks have the Japanese to worry about. In 1970, seven U.S. banks were among the world's 25 largest; now only three make the list, compared to 13 Japanese banks. The Japan-based Sumitomo Bank, for example, has agreed to buy a large stake in the investment banking house Goldman Sachs; such a purchase would be illegal for U.S. banks, which aren't allowed to buy securities firms.

"We can't do business today with yesterday's regulations and expect to be in business tomorrow," Joseph Pinola, chairman of California's First Interstate Bancorp recently told the Miami Herald. "Unless we somehow get our act together legislatively, we are going to continue to suffer."

Help may come from the Reagan administration's Task Force on Regulatory Relief, chaired by Vice-President George Bush. But if that doesn't work, there's always a do-it-yourself option.

Thomas Labrecque, president of Chase Manhattan, flabbergasted his fellow bankers at their 1986 convention when he suggested that banks might just have to drop out of the bank system, becoming nonbank banks themselves. At a posh reception hosted by Chase, the Miami Herald reported, Labrecque told the crowd, "We either get change or people are going to have to look at giving up their bank charter."

Next thing you know, they'll be wondering why they need a charter in the first place.

Conservative Organ Pipes Up Against the Drug War

Amidst the huffing and puffing of the war on drugs, liberty seems to have gained some friends in unusual places. Most encouraging to opponents of the government's futile prohibition was a December cover story in National Review, the largest circulation conservative journal in the land (and reportedly one of President Reagan's favorites). Although NR founder William F. Buckley has lately called for legalizing heretofore illegal substances, free-lancer Richard C. Cowan's "A War Against Ourselves: How the Narcs Created Crack," accompanied by Richard Vigilante's "Reaganites at Risk," nevertheless came as a pleasant surprise.

Cowan used elemental economic analysis of the sort one would presume the Adam Smith tie-wearers of the Reagan administration are familiar with to show why "the government itself…has been one of the most potent causes" of the drug problem. Not only does prohibition enable organized crime to control the drug business, noted Cowan, but it actually encourages the substitution of harder, more dangerous drugs for less potent ones like marijuana.

Because marijuana is bulky to transport, thus increasing the chance of arrest, drug traffickers are turning to contraband that is more easily concealed. And, wrote Cowan, by concentrating their efforts on relatively harmless marijuana—more than half of all drug busts are for marijuana possession—the narcotics bureaucrats may actually be pushing people toward harder drugs.

Often lost in the hysteria surrounding the war on drugs is the extent to which the government is violating the fundamental American rights that our forefathers took for granted. Declared Cowan: "The existing and proposed laws constitute the basic elements of a socialist police state. There are already controls on cash and capital transfers, calls for the canceling of hundred dollar bills, violations of the longstanding principle of lawyer-client confidentiality, and the authority to seize the accused's property before a trial or even after acquittal."

Few conservatives are yet willing to echo Cowan's argument in public. As Richard Vigilante noted in the same issue of National Review, "Most conservative politicians have behaved irresponsibly on the drug issue, panicking in the face of a media-created crisis, attempting to expand government powers to do for the reckless what they might refuse to do for the poor: protect them from themselves." An exception, he noted, is Republican Phil Crane (Ill.), who joined 15 liberal Democrats in voting against the House's profligate and statist antidrug bill last Congress.

The drug war, Vigilante warned NR's conservative readers, "violates not merely the abstract symbols of civil liberties beloved of left-wing intellectuals; it violates genuinely important rights in ways Americans have not in the past been disposed to tolerate." Baby boomers in particular are not likely "to tolerate in their thirties and forties harassment they rejected in their teens and twenties," yet such harassment and punishment of casual users is inevitable if the war on drugs is to succeed.

If the government persists in the costly and pernicious war on drugs, Cowan predicted, "we are not going to be drug-free, just unfree. " National Review's willingness to provide a forum for the conservative case against prohibition may someday be seen as a landmark on a different path.


• Changing a double nickel. The federally mandated 55 mph speed limit (all who obey, raise your hands) has encountered yet more opposition. The American Drivers Association, a new grass-roots group based in Palm Desert, California, charges that "the value of 55 is a myth and promises to fight the good fight for its repeal.

• State off the wagon. New legislation in Iowa has ended the state government's 50-year-old, $125-million monopoly on liquor stores. Iowa was one of 18 states in the direct liquor-sales business. The new law calls for the stores, which have poured $50 million a year into the state's coffers, to be sold by July. Legislator Ed Parker, the law's sponsor, says there will probably be a move within a few years to get the state out of the wholesale business as well.

Global Trends

Building a New Approach

LINKOPING—Since World War II, housing and construction have been havens for Sweden's socialist planners. In the heyday of planning in the 1960s, a number of trade-union-controlled construction companies merged to form the BPA company, which became the third-largest construction firm in Sweden.

The BPA undertook an ambitious program of major construction projects abroad—and lost hundreds of millions of crowns. The late Swedish prime minister, Olaf Palme, had to bail his trade union friends out of a disastrous project in Algeria by giving extra development aid to the Algerian government—aid that soon found its way into BPA's coffers.

Trade-union leaders eventually became fed up with losing money and decided to hire a managing director instead of running the show themselves. In 1981, they hired Mr. Göran Lövgren, who took the job on the condition that he be free to run the company as a commercial enterprise, without trade-union or political interference. The desperate BPA board of directors agreed.

Six years later, BPA is a commercial success. To raise capital, Lovgren issued new shares in the company, 40 percent of which were bought by BPA employees at 50 crowns a piece, raising a total of 50 million crowns. Later these shares were traded on Stockholm's over-the-counter market and were selling at 170 crowns, for a 240 percent increase. Not surprisingly, the socialist trade-union employees of BPA have capitalist thoughts these days.

—Carl G. Holm

Lite Taxes: America's Contribution To the World's New Taste

There's nothing like a little competition—even among pickpockets. Under the new tax law, the United States now has the lowest tax rates of any major industrialized nation, and it's got the rest of the world hopping aboard. With top corporate rates down from 46 percent last year to 34 percent, and top individual rates dropping in stages from 50 percent to 28 percent (for most, but not all), the United States has become a worldwide tax haven. Other industrialized countries, in an effort to keep their productive citizens and corporate capital at home, are responding with their own tax cuts.

According to Fortune magazine, the risk of losing highly paid scientific and business talent to the United States is greatest for high-tax countries where English is the primary language, such as Canada, Britain, and Australia. Canadian tax planners, for example, now want to lower their country's top rates of 50 percent for corporations and 55 percent for individuals. Peter Daniel, assistant deputy minister of finance, confessed to Fortune, "There's no question we're concerned about companies and individuals moving to the U.S. We're going to do what we have to do to remain competitive."

In Europe, the U.S. tax-cutting example has bolstered the determination of politicians who had already made or proposed tax cuts. Britain's Prime Minister Margaret Thatcher is trying hard to take a few percentage points off the lowest (yes, lowest) rate of 29 percent. She's got plenty of incentive: 95 percent of British taxpayers fall into that bracket.

Some governments have already slashed their taxes. Singapore, for example, dropped its corporate rate from 40 percent to 33 percent last spring. And French Premier Jacques Chirac's conservative coalition has chopped the top corporate rate from 50 percent to 45 percent and the top individual rate from 65 percent to 58 percent over the last year. Finance Minister Edouard Balladur has reaffirmed the government's commitment to getting the top personal rate down to 50 percent within a few years.

And it's not just conservatives. In Austria's national elections last November, the major parties competed with tax proposals. Even the ruling Socialist Party abandoned its Marxist position on taxes and called for reducing marginal rates. "There's been a shift in all of Austria's hidebound parties," noted the Wall Street Journal.

As a result of this "festival of reform," notes Fortune, individuals in almost all of the world's major economies within a few years are likely to face marginal rates no higher than 50%." Granted, governments would still be skimming off half. But "a decade ago, when top rates typically soared between 70% and 80%, such a prospect would have seemed politically impossible, if not fiscally irresponsible."

But then the United States got on the cutting edge.

Global Roundup

• Sunrise on Soviet moonlighters. For the first time since the 1920s, the Soviet Union will allow limited private enterprise in such services as shoe repair, taxi driving, and small-scale construction and agriculture. The law, part of Soviet leader Mikhail Gorbachev's attempt to revitalize the economy, is designed to alleviate the acute shortages and delays that plague the consumer economy.

• Freedom of contract. In one of the few nations in the world where divorce is prohibited, Argentina's Supreme Court has declared unconstitutional a law that allowed couples to separate legally but not to remarry. The court ruled that divorce and remarriage are constitutional rights.