Trends

Ch-ch-ch-chChanges: Secret of Success

In 1948, the people of Nashua, New Hampshire, hanged Royal Little in effigy. His company, Textron, had closed its money-losing textile mill there, throwing 3,500 people out of work. Little, who detested inefficiency, told the townspeople they'd eventually bless him.

Thirty-five years later, they did—at a banquet in his honor. The old textile mills of Nashua and other New England towns didn't stand empty forever. They provided the inexpensive space in which high-technology businesses, including such giants as Digital Equipment and Raytheon, prospered. The low-paid textile workers have been replaced by their children—well-paid engineers and technicians. Today, says Little, "In the 3 million square feet of space we gave up in Nashua, there are now 20 different companies employing 5,500 people where we employed 3,500."

Little's story, recounted in a remarkable 70th-anniversary issue of Forbes, exemplifies what economist Joseph Schumpeter called the "creative destruction" of capitalism, the process on which progress depends. The Forbes issue, which explores that theme for almost 300 pages, illustrates the growing recognition of that process.

Some highlights:

• Nobel laureate economist George J. Stigler, of the University of Chicago, argues that the "new populists" are hissing the wrong bad guys when they attack corporate takeovers and support management. And, while attacking recent insider trading as "naked sin," he blames the Williams Act—which requires anyone who buys 5 percent of a company's stock to disclose that fact within 10 days—for creating an incentive for leaks.

To muster support for a hostile takeover, would-be takeover firms slow down their open-market stock purchases so they don't have to make Williams Act disclosures, then leak their plans to arbitrageurs who can buy lots of stock and later sell it to the "raider" at a profit.

Want to end insider trading? Repeal the Williams Act, which was, after all, the brainchild of Abscam bribe-taker Harrison Williams. Remarks Stigler, "I think it would be a good rule to repeal all laws named after legislators who have gone to jail."

• American business is losing its edge in new technology, to the detriment of U.S. consumers, because of courts and regulatory agencies that stifle innovation for fear of new risks—even when the new technology promises to be less risky than the old, says Peter Huber in "Who Will Protect Us from Our Protectors?"

• Forbes looks at four of its lists of the top 100 U.S. companies from 1917 to the present; only a few of the companies on the list 70 years ago survived to make it on to the lists in 1945, 1967, and 1987.

• "The Last Iceman" celebrates nine companies that are making it in "dead" industries, from vacuum tubes to ice to buggy whips.

The Forbes issue paints a rich and detailed picture of the changes—creative and destructive—inherent in American capitalism and of the people behind those changes. But Forbes isn't alone in recognizing the economic value of embracing change.

A recent National Academy of Sciences study, financed by federal agencies, the AFL-CIO, and private industry, has found "no convincing evidence" that automation and other new technologies are polarizing American workers into well-paid technicians and poorly paid floor sweepers. If anything, says the study, it is "the slow, rather than rapid, adoption of new technologies by U.S. manufacturers that has left U.S. products more vulnerable to international competition."

Indeed, argues another recent analysis, innovation is the key to U.S. economic success. In an article in Inc. magazine, MIT lecturer and small-business maven David Birch notes that fewer U.S. workers are making basic goods that can be produced elsewhere, while more are involved in high-technology products.

"We have, in essence, gone to our strength: innovation," writes Birch. "We are making more and more of the kinds of things that require high levels of innovation, such as instrumentation and fabricated metal products, and have relinquished to others the production of items that have not changed a great deal in the past 20 years: automobiles, television sets, shoes, clothes, and paper."

To quote Schumpeter, "Capitalism is by nature a form of change and never is, never can be, stationary." Which is why it works.

How They Rate for '88

The National Taxpayers Union has analyzed every 1986 vote affecting federal spending and released its latest congressional study just as the '88 race switches into high gear. As usual, Wisconsin Democrat William Proxmire led the Senate with a score of 83. Colorado Republican Hank Brown was tops in the House at 79. Scores for the announced 1988 presidential candidates follow. (A useful benchmark: Teddy Kennedy notched a 45.)

Sen. Bob Dole (R–Kans.) 53
Sen. Paul Simon (D–Ill.) 50
Sen. Paul Laxalt (R–Nev.) 49
Rep. Jack Kemp (R–N.Y.) 44
Sen. Joe Biden (D–Del.) 41
Sen. Albert Gore (D–Tenn.) 36
Rep. Richard Gephardt (D–Mo.) 26

The Post Office: A Bad Egg?

Grumbling about the Post Office is nothing new. But in the wake of the news that stamps will soon cost 25 cents, the criticism is getting louder, and a radical sentiment is now taking hold among taxpayers, policy analysts, and even some government bureaucrats: It's time to denationalize the mails.

In a blunt open letter to Postmaster General Preston Tisch, Federal Trade Commission Chairman Daniel Oliver sums up the sentiment well: "Postal service is bad, and customers are unhappy."

After an obligatory paean to Tisch's fine business skills, Oliver concludes that "real improvement will be elusive, not because of any failure on your part, but because a monopoly will behave like a monopoly no matter who is in charge of it." Oliver's solution: Abolish the monopoly.

In his letter, Oliver urges Tisch to call for repeal of the private express statutes, which prohibit private companies from delivering letters in competition with the Postal Service. Oliver points out that in the few areas of delivery service where competition is allowed, such as parcel post and overnight delivery, private companies have done better than the Post Office. "On what principle, then," he asks, "does government deny its citizens the benefits of competition in letter delivery?"

Writer James Bovard, denounced by the Postal Service as the "Pied Piper of Privatization," revealed in the Washington Times that, since 1980, "more government employees have been hired at the Postal Service than have been laid off at all other federal agencies combined." Yet the Post Office's own evaluation, he notes, shows that productivity has declined sharply since 1979 and that letter carriers' time-wasting has cost taxpayers over $600 million a year.

Douglas K. Adie, professor of economics at Ohio University, points out that the Postal Service "has operated in the red almost continually over the past 17 years." In a study for the Reason Foundation, Adie proposes repealing the private express statutes, breaking the Postal Service into regional companies, and selling these companies through a public stock offering.

Enquiring minds, meanwhile, were recently treated to a concrete demonstration of Post Office ineptitude. The National Enquirer conducted an "eye-popping" test of six commonly used shippers to see who could deliver a fragile package in the best condition. Following the Post Office's own instructions for mailing fragile items, the testers packed a dozen eggs in each of six heavy cardboard boxes and sent them from Los Angeles to Florida. The results? United Parcel Service (UPS), Delta Air Lines, and Federal Express all delivered the eggs without breaking any. The Postal Service broke three, placing dead last.

Tisch sees no egg on his face, however. In a written response to Oliver at the FTC, he refused to support private mail delivery, claiming that mail service is better than ever. But Tisch is no dummy: He had his reply delivered by a courier service. A Postal Service spokesman explained to the Wall Street Journal, "It's just that we wanted it to arrive as soon as possible."

Property Owners Take the Fifth

If the government takes your land to make room for a highway, it has to pay you. But if it passes a zoning law that makes it impossible to develop or sell the same land, it gets away scot-free. Or so it seemed until recently.

But in several recent decisions, the U.S. Supreme Court has upheld the right of property owners to be compensated for laws that diminish the value of their property. The rulings apply the "takings" clause of the Fifth Amendment, which guarantees that "private property [shall not] be taken for public use without just compensation," to regulation that doesn't actually transfer ownership to the government but does reduce owners' control over their property. In doing so, the Court follows, at least in part, the reasoning of such free-market scholars as Richard Epstein of the University of Chicago Law School, in his influential book Takings, and philosopher Ellen Frankel Paul of Bowling Green State University, in her new book Property Rights and Eminent Domain.

The first case involved a Glendale, California, church that owned a 21-acre camp on which several buildings were destroyed in a flash flood. The church was denied permission to rebuild under an interim ordinance that declared the land part of a flood control area. The state courts refused to hear the church's claim for compensation, citing a 1979 California Supreme Court ruling that the only remedy possible for an undue land-use regulation was the reversal of the regulation. The church appealed to the U.S. Supreme Court, which, in a 6-3 decision, ruled that a temporary restriction can amount to a taking, and the church is entitled to a trial.

The court also came down on the side of property rights in a case involving the California Coastal Commission. Patrick and Marilyn Nollan of Ventura, California, had sought a permit to tear down their beachfront cottage and build a two-story house. The Commission, which regulates California's coastal areas, agreed to issue the permit but only if the Nollans opened a portion of their land for public access to the beach.

The court ruled 5-4 that a condition can be applied to land-use permits only if it alleviates a problem that would give the government just cause to deny the permit. Otherwise, "the building restriction is not a valid regulation of land use, but 'an out-and-out plan of extortion,'" Justice Antonin Scalia wrote for the Court.

Epstein is encouraged by the two rulings. He told REASON that although they didn't go far enough, they could pave the way for a "complete transformation" of property-rights law. In the future, Epstein hopes the Court will become still less deferential to local regulators, tightening the requirements for demonstrating a regulation is for "public use" and expanding the definition of "just compensation" to include reimbursement for such expenses as relocation costs.

In a third ruling bolstering Fifth Amendment protection of property rights, the Court unanimously struck down a federal law that required trust land owned by individual Indians to pass to the tribe rather than to the owners' heirs. The majority decision ruled that this constituted a taking, while a concurring opinion held the law violated due process guarantees. The case is significant because it recognizes inheritance as a fundamental property right, explains Robert Best of the Pacific Legal Foundation, the free-market organization that represented the Nollans and filed an amicus brief in the Glendale church case.

Best believes the three rulings have turned the tide in favor of property rights. "Last year, we were all debating the issue of how much further government is going to be allowed to go in expanding its onerous regulations.…Today we are debating how far back government is going to have to retreat from the excessive conduct of the past."

Milestones

? Behind bars in Kansas. For the first time in 107 years, Kansans can buy liquor by the drink. Voters approved a constitutional amendment allowing counties to permit saloons, and 36 of the state's 107 counties have already done so.

? Getting tricked. Arresting a prostitute costs law enforcement agencies an average of $2,000, according to a study published by the University of California's Hastings Law Journal. The study concluded that arrests for prostitution "exact a disproportionately high toll on law enforcement resources," and that agencies can no longer afford to keep prostitution illegal.

Global Trends

Ship, Ship, Hurrah!

DEURNE—Doing business via off-shore companies, situated in "fiscal paradises," is a practice known in all fiscal deserts—Belgium included.

But what is unusual is that the Belgian government now promotes it. Yes, you read that right—the government of Belgium is recommending offshore incorporation. Not (yet?) to all businessmen, but it is an official recommendation by Minister of Communications Herman de Croo to the Belgian association of professional shipowners.

Belgian shipping companies have lost money for years, largely because ships flying the Belgian flag are subject to all Belgian laws. This includes the Social Security laws, with their exorbitant taxes.

As a result, the costs to Belgian shipowners are so high they can't compete with foreign vessels. They took their problem to Minister de Croo, presenting him with four options:

(1) Change the social security system.

(2) Allow Belgian ship companies to use a special social security system.

(3) Grant the shipowners subsidies.

(4) See the shipowners go out of business.

But de Croo came up with a fifth alternative: incorporate the ships in Luxembourg, with its lower taxes and favorable laws. Perhaps the lesson is that when you want to escape government's rules, you should ask a government official.

—Fred Dekkers

Global Roundup

? Cheers! Afternoon drinking will soon be legal in British pubs. The Thatcher government is backing a bill to repeal a "temporary" wartime measure passed in 1915 that requires pubs in England and Wales to close for the afternoon. The new bill, which the Conservative Party's majority in the House of Commons is sure to pass, honors an election pledge to "increase consumer choice."

? Can we talk? Europeans will be able to buy their own telephone equipment and choose among competitors for their phone business if the European Economic Community gets its way. The EEC has released a strategy paper arguing for deregulation of all telecommunications businesses except "basic" phone service and for the breakup of government monopolies.