Trends

Digging Up Welfare's Roots

Are people on welfare the victims of bad luck—or bad planning? Policy analyst Charles Murray, who revolutionized the welfare debate in 1984 with his book Losing Ground, has once again taken a close look at the evidence and challenged the prevailing answer.

Murray takes issue with one of the most influential books on the subject, Years of Poverty, Years of Plenty, which portrays a scenario in which incomes rise and fall in a random fashion; people go on welfare only temporarily, in response to unavoidable problems; and poverty is not the fate of a permanent underclass but rather a short-term situation that people move in and out of. In such a world, income supports are seen as an appropriate response to a tumultuous economy.

Years of Poverty is based on data from the Panel Study of Income Dynamics (PSID), a database begun in 1968 to track people over time. In a report published by the American Enterprise Institute, Murray examines PSID himself and concludes that "the notion of turbulence and randomness in income mobility has been oversold. The generalizations that have become part of the intellectual conventional wisdom since Years of Poverty cannot be sustained if the data are broken down by age."

Murray first looks at "economic mobility," a term he insists must be differentiated from "change in real family income." The former implies an unusual change in socioeconomic status, but it's often used misleadingly to describe very normal changes in income that occur over the life cycle: Young people make more money as their careers progress, while older people decrease their income as they spend less time working. "The apparently chaotic income shifts that are yielded by an aggregate of the entire population settle into well-ordered patterns once we consider age," writes Murray.

Overly broad definitions of economic mobility can also distort the public-policy debate. For example, if downwardly mobile means falling from a comfortable income—say, at least twice the poverty index—into poverty, then only 2 percent of the PSID women aged 55–64 were downwardly mobile. But if downwardly mobile means experiencing any loss in real family income, then 75 percent were downwardly mobile. "So what number," asks Murray, "is chosen for the newspaper editorial or for the snappy statistic to be given in Congressional testimony?"

Next Murray looks at welfare mothers. Here again, he argues, the analysis is affected greatly by demographics. In contrast to women who enter at later points in their lives—presumably because of short-lived crises—most "unmarried, uneducated new AFDC mothers…remain on AFDC for long periods of time. Of the unmarried women who had less than a high school degree, 64 percent were on AFDC for the entire ten-year followup."

This flies in the face of received wisdom that "AFDC is predominantly a matter of short-term assistance and that long-term dependency is rare." Murray believes that "for the younger and the never-married, [AFDC] tends to deform the marriage and labor market behaviors that would otherwise enable them to achieve a productive adulthood."

Finally, Murray looks at the overall group of people who were poor in 1970. In contrast to the portrait of people thrown into poverty by a shake of the dice, Murray finds that "poverty strikes selectively. Poor people of 1970 were very poorly educated.…Once education and age are both taken into account, there is very little left to explain." Indeed, he concludes, "the PSID reveals with striking clarity that the requirements for getting out of poverty in this country"—completing high school, getting a job, and either staying in the labor force or marrying someone who'll stay there—"are so minimal that it takes a mutually reinforcing cluster of behaviors to remain in poverty, even if you are black and even if you are female."

These may be pretty harsh words, but they shouldn't be misread: Murray isn't blaming the victims so much as blaming the architects of our welfare system. He suggests that we ask: "How do policies affecting poor young people encourage them not to do the very ordinary things that need to be done to avoid poverty?" Perhaps this question will put us on the track to genuine welfare reform.

Do Profits Collide With Safety? The Plane Truth

It seems odd to have to argue against the notion that airline executives find it in their interest to let 747s full of passengers crash to the ground. Yet within days of any air disaster or near-miss, the op-ed pages of America's newspapers ring with cries for reregulation on the presumption that profits and safety are incompatible.

Such widely published critics as pilot and lawyer John Nance argue that the fierce competition brought on by deregulation has forced the airlines to skimp on safety in the drive to cut costs and fares. The market provides incentives only to be profitable, not safe.

Several analysts have countered that air travelers want safe travel as well as low fares, so competition should increase efforts to ensure safety in the air. And in fact, flying is actually safer now, measured by fatalities per passenger mile, than when the industry was deregulated in 1978.

Now, two researchers at Clemson University have found additional evidence that the market provides an incentive to airlines to spend money on safety: crashes often cause an airline's stock value to fall, especially when the airline is at fault.

Michael Maloney and Mark Mitchell studied the impact of 56 fatal airline crashes. They found that in 31 of them attributed to pilot error, the airlines' stock on average suffered a drop of over 2 percent in rate of return. Eight accidents linked to the manufacturer had a less significant impact on stock returns, and the remaining accidents (without passengers or attributed to unknown or multiple causes) had no effect.

"The role of market forces in assuring air-travel safety is to punish the party or parties responsible for the crash," Maloney and Mitchell explain in their report. Their findings, they note, "support the theory…that airlines will suffer larger losses from crashes for which they are more responsible, since they have more direct control over their pilots than over the manufacturers, air traffic control system, unavoidable weather, pilots of other planes, etc."

If the market pushes airlines toward safety, it stands to reason that the same would be true of aircraft manufacturers. This hypothesis has been tested by Andrew Chalk, finance professor at Southern Methodist University.

Chalk analyzed 72 fatal crashes from 1966 to 1979 that involved aircraft made by the three major manufacturers, Boeing, McDonnell Douglas, and Lockheed. "When press reports indicated that the design of a plane may have been a cause, the manufacturer's share price decreased and did not recover," he notes in a recent Cato Institute report. The prices dropped by 3.8 percent on average, adding up to a $21-million loss to shareholders.

This finding, argues Chalk, indicates that the manufacturer's reputation "furnishes a direct link between safety and revenues." If the design of an aircraft is perceived to be at fault, consumers are reluctant to fly on it. The airline that acquired it suffers from reduced traffic and revenue. It is less likely to purchase from that manufacturer. Owners and potential owners of the manufacturer's stock respond accordingly.

The Trade Winds Are Blowing

A new study by the World Bank confirms that free trade is one of the keys to economic success in the Third World. Surveying the trade policies and economic growth rates of 41 developing countries during the periods 1963–73 and 1973–85, the study found that the three with the freest ("outward-oriented") trade also had the highest growth.

The governments of most developing countries have for decades pursued what the report calls an "inward-oriented" trade strategy—using central planning and state intervention in an attempt to encourage domestic production and industrialization rather than international trade. The goal is to eliminate the economy's dependence on exporting primary products, such as food and raw materials, that are likely to decline in real value over time. Import barriers—tariffs, licenses, quotas, and so forth—are designed to boost domestic production and discourage trade.

Three developing countries, however—Singapore, South Korea, and Hong Kong—had strongly "outward-oriented" trade policies that do not discriminate between production for domestic consumption and export. And in the 1963–73 period, their real per capita GNP rose 9 percent, 7.1 percent, and 6 percent, respectively. By comparison, per capita GNP grew 3.5 percent in Turkey, the best performer among strongly inward-oriented economies. During the 1973–85 period, when oil price shocks pushed down growth rates all over the world, the three "outward" stars maintained rates in the 5–6 percent range, while most of the strongly inward-oriented countries had negative growth rates.

The most obvious reason for the relative failure of inward-oriented trade policies is the burden they impose on the economy, both by raising prices for consumer goods and by requiring domestic producers to make goods that would be cheaper to import. But the study notes other drawbacks as well, including the costs of maintaining and dealing with the bureaucracies necessary to sustain state control over an economy and the inefficiency encouraged by the lack of competition from overseas.

The road to growth would seem to be direct: developing countries should drop their trade barriers. But, as an editorial in The Economist notes, "The rise of mindless protectionism in America warns the poor countries that they may not be allowed to succeed."

Cable Monopolists Lose a Round

A federal jury in a Sacramento, California, case has determined that the city's awarding of a monopoly cable-TV franchise was permeated with "influence peddling." Embarrassed by the jury's findings, Sacramento officials threw open the city's cable market even before a final court ruling could be issued in August, and one upstart firm immediately began surveying unwired neighborhoods and initiating hook-ups.

Cable monopolies may be the most outrageous of currently known scams by local pols to fatten their purses. The city council awards one company exclusive rights to wire a city or neighborhood, in exchange for a bundle of goodies—"public-access" channels and a tax bite of revenues being the ones ostensibly related to the public interest; campaign contributions, a cut of the action for the pols' friends, and outright payoffs being the less public handouts. All is done on the rationale that cable TV is a "natural monopoly" because of the need to use rights-of-way controlled by local government.

The Sacramento case was typical. The monopoly franchise was awarded to an applicant that had marshaled the support of 73 local big-shots, including then–Reagan aide Michael K. Deaver. As the Wall Street Journal reported, "Most invested $2,000; some put up nothing. Cable experts estimated each investor would net a $200,000 return by the mid-1990s." But Pacific West Cable Co., which lost in the bidding war, took the city to court.

The jury in the case found that the government's natural monopoly arguments were "a sham…to obtain increased campaign contributions for local officials." Jurors also concluded that the process of granting the franchise was soiled by the politicians' "desire to favor local officials' political supporters."

Economist and REASON contributing editor Thomas Hazlett, an expert witness at the Sacramento trial, points out that busting the cable monopolies will mean lower prices and more cable choices for consumers. Nationwide, there are currently some 7,000 de facto monopoly cable franchises. But the Sacramento case is the latest of several victorious court challenges that will put increasing pressure on local officials to open up their cable market to the kind of competition already found in the suburbs of Tucson, San Diego, Washington, D.C., and other cities.

If Sacramento was a solid right uppercut to the puss of state-imposed monopoly, a pending challenge to Los Angeles cable on First Amendment grounds could be the KO punch. Using the Constitution to prevent local governments from granting monopolies to privileged, influential businessmen, commented Hazlett, "would be a good way to celebrate that document 200 years after Madison and those guys wrote it."

Milestones

? Fruitful deregulation efforts. Independent growers are fighting federally backed farming cartels that set production quotas through "marketing orders." Cherry growers in the Midwest and hops growers in California have voted to scrap their marketing orders, and an administrative law judge has overturned six years' worth of restrictions on oranges as unfair to independent growers.

? You can shun. The 9th Circuit Court of Appeals has upheld the right of the Jehovah's Witnesses to "shun" former members by prohibiting current members from contacting them. The court found that the emotional harm suffered by those who are shunned is "a price well worth paying to safeguard the right of religious difference."

Global Trends

Italians Find Taxes Revolting

ROME—Contrary to popular mythology, Italians are among the most heavily taxed people in the world. From 1974 to 1986, tax revenue increased more than tenfold in nominal terms and 102 percent in real terms. Taxation has grown from less than a third of GNP to more than one-half. Marginal tax rates are unquestionably punitive: Italians start bearing rates of 27 percent at an income level of 11 million lire (some $8,500). And the tax code is so complex, contradictory, and often unintelligible that just reading it can draw laughter from an audience.

Until recently, the big puzzle had been why Italian taxpayers were not revolting against such a mess. Statists of all parties took the relative quietness of taxpayers as evidence that taxation was not excessive. Their optimism was shaken last November when a crowd of 35,000–40,000 people assembled in Torino for a "Taxpayers March." As I wrote in the Wall Street Journal, "They came from all over the country: young, middle age and old; professionals, self-employed businessmen and fixed-income workers; white and blue-collar workers." The crowd listened to three university professors, including myself, and it stressed its approval with thunderous applause.

The Torino protest was followed in March by a similar one in Geneva, attended by 5,000–10,000 people. The fact that the Geneva march was smaller than the one in Torino was greeted with relief by the political world. The politicians knew, however, that the tax rebellion was alive and that something would have to be done about it.

One thing the government has done is revise statistics. The government statistical office, for unexplained reasons, had decided to raise by 15 percent the national income figures from 1980 on. As a result, the ratio of tax revenue to GNP declined and some people, including, alas, even the governor of Banca d'Italia, have jumped to the conclusion that taxation is not excessive and can be increased!

In the June elections, all parties included tax reform in their electoral platforms. Whether the new Parliament will do anything remains to be seen. If, instead, the politicians follow the recommendation of the governor of Banca d'Italia, who advised tax protesters to "eat cake," they will be in for some very unpleasant surprises.

—Antonio Martino

Dhaka Discovers Cure for Economic Drowsiness

DHAKA—Cheers to the free-market policies of Bangladesh! The economy is growing, as is people's confidence in the future.

The latest reform is the government's announcement that it is going to privatize all state-owned industrial companies and financial institutions by selling shares to the public. Initially, 49 percent of the equity will be sold to the people, with the government retaining the other 51 percent. The government will nominate five directors of each company, the shareholders four.

To give the workers a stake in the company, 15 percent of the shares will be reserved for them. They will be allowed to borrow from their pension funds to purchase shares. And as long as the workers hold at least 12 percent equity, they will be guaranteed one seat on the board of directors. Labor leaders are generally against this plan—but the workers are buying up the shares.

What is striking is the interest small savers have shown in the market. A majority of applicants have bid for 500 Taka ($15), the minimum amount. Like the Thatcher government in England ("Buying Out of Socialism," REASON, Jan. 1986), the Ershad government in Bangladesh seeks to create a "share-owning democracy."

The massive popular interest in the share market can only be likened to a revolution. There are share owners in every strata of society; over 40,000 people applied recently to buy into Usmaniya Glass. Now that the common man has a stake in the free-market economy, what will happen to the communist idea in Bangladesh?

—Tahsin Alam