Trends

Airline Regulations Land in Court

A free-market policy group is challenging new Department of Transportation regulations on First Amendment grounds. The Competitive Enterprise Institute objects to DOT's restrictions on information about on-time performance that airlines provide to travel agents through computerized reservation systems.

DOT issued new regulations because of pressure from Congress to do something about flight delays. Airlines must now keep track of how often their flights arrive on time and include this data in flight information displayed on airline-operated reservation systems. But the systems are forbidden to rank comparable flights by their on-time records. They are also not allowed to include any other information about schedule reliability without the approval of DOT and unless the information is provided for all airlines. So an airline cannot let travel agents know if its reliability has improved markedly in recent months, for example.

"They're saying the information is vital, but don't make it too useful," said Sam Kazman, an attorney at CEI. "They don't allow you to put that information in the form that's the most easily usable to a travel agent who's rushed for time," Kazman told REASON. "They claim the reason for that is so the on-time performance won't be so important that airlines will start cutting back on safety to get into the gate under the wire. I think the real reason is that the airlines that are doing very badly were just screaming at them [DOT], saying, 'If you allow ranking, we'll end up at the bottom of the list.'"

Fred Smith, CEI's president and a plaintiff in the case, believes the issue has broad implications. Computerized reservation systems, he says, "are the prototypes for the electronic newspapers of the future, and what DOT is doing here is the prototype for government censorship of the future. This communications medium may be brand new, but it's protected by the oldest of constitutional amendments."

Out of the Mouths of…

Social researcher Carlos Falconi to Wall Street Journal reporter Mary Williams Walsh, as opposition to Perus bank nationalization mounted:
"The bankers are a tiny minority, but in this country of 20 million people, they have managed to get 10 million people on their side."

Journal reporter Walsh, on Peru's largest bank selling a majority of its shares to employees after Perus congress voted for the nationalization:
"With that single stroke, management turned thousands of apolitical employees into running dogs for private property."

Augusto Garcia Duque, of the employees' union, which has been calling for a bank takeover since 1962, after employees refused to work:
"How can it be that bankers can overnight convert workers who can barely read or write into little capitalists?"

Alicia Rojas, a secretary, about employees ripping out phones, stalling elevators, and jamming computers when government troops tried to seize several banks:
"We 're embarrassed to be doing this. But the customers say they support us. They say if this could happen in a bank, which is a very powerful institution, then it could happen to them, too. "

A Recipe for Success That We Can Tell with Relish

Next time you pour yourself a glass of Ocean Spray or savor a little cranberry relish, think about this: you're consuming a truly amazing fruit.

Cranberries have no federal price supports and their growers no federal crop subsidies. Anyone is allowed to grow them, and the share of the market enjoyed by various growers is dictated by the market, not by government-backed marketing orders.

So how's business in the cranberry industry? "While their grain-growing counterparts elsewhere have reeled from one economic punch after another over the last five years," reports the Washington Post, "the obscure cranberry farmers have been doing just fine.…Cranberry growing may be the quintessential example of an agricultural free market at work."

There are no warehouses full of rotting surplus cranberries. The supply in the United States, half of which comes from bogs around Cape Cod, just keeps pace with the demand. And Ocean Spray Cranberries Inc., a very successful cooperative of cranberry and grapefruit growers that has attained Fortune 500 status, keeps profits up by developing new juices and relishes. Per-acre yields and prices have risen steadily over the past 15 years, and many farmers can gross $10,000 an acre in a good season. "It's a very stable industry: Every berry that is grown is used," said Jere D. Downing, Ocean Spray's horticultural director in Plymouth, Massachusetts.

And while urban development seeps south from Boston, many cranberry farmers have turned down lucrative offers from real estate developers. "We may have a large coop working for us, but we're still small farmers and we've learned to be independent," says Doug Beaton, president of the Cape Cod Cranberry Growers Association and a fourth-generation grower. "It gives us pleasure to know we're working with a crop that has a historical image that goes back to the Pilgrims."

Next month in REASON: cranberry recipes.

Do U.S. Trade Laws Need Trading In?

"The mentality of our so-called fair-trade judges," writes policy analyst James Bovard, "is reminiscent of southern judges a hundred years ago who reasoned that the easiest way to solve a crime was to find the nearest black person and hang him." This barb is one of many in a stinging policy paper published recently by the Cato Institute, in which Bovard blasts U.S. trade policy.

The policy is based on the Tariff Act of 1930, since amended, which contains two requirements for unfair-trade cases: first, the Commerce Department must prove that a foreign product is sold here at "less than fair value" or that the manufacturer receives a government subsidy; second, the International Trade Commission (ITC) must show that the import causes U.S. companies "harm which is not inconsequential, immaterial, or unimportant." Plenty of room there for government officials to have a field day.

Since 1983, according to Bovard, the United States has initiated more unfair-trade cases against foreign firms than any other country in the world. And since 1980, the Commerce Department has found the companies guilty of "unfair" trade practices in 94 percent of the imports investigated.

U.S. trade laws, which Bovard notes "have far broader definitions of unfair trade than do those of other countries," create several trade "crimes." One is dumping, in which a foreign good is sold in the United States for a lower price than the price in its home market or for less than what the Commerce Department considers its "constructed fair value."

But in calculating this value, Bovard explains, the Commerce Department uses "arbitrary and often senseless" methods. For example, the department assumes that every foreign company makes an 8 percent profit on its goods. If a company actually makes a 7 percent profit, it's guilty, according to U.S. law, of selling at a loss of 1 percent.

And the International Trade Commission, in looking for proof that foreign competition has injured domestic companies, gets its data from those claiming to be injured. This creates an obvious bias in favor of domestic companies that want to criminalize competition from abroad.

Furthermore, when the Commerce Department can't get accurate data from foreign manufacturers to concoct its estimate of a product's "fair" price, it uses data from other countries—even if the costs of raw materials, labor, and other inputs aren't comparable. Or it simply compares export prices of different countries—without taking into account differences in the quality of the product.

Bovard shows how the Commerce Department has applied such analysis to everything from Chinese cookware and candles to Iranian pistachios, Kenyan flowers, and West German dry-cleaning machines—and come up with some amusingly precise "proof" of trade crimes. For example, the department penalized Thai rice exporters for government-subsidized dumping after finding, among other things, that subsidized loans provided a subsidy of 0.0004 percent of the export's value.

"Some of our trade law prosecutions," concludes Bovard, "prove only that the U.S. government has no shame."

Drug Ads Come Out of the Closet

If you get sick and want to know what treatments are available, you may find the matter shrouded in mystery. For years, the prescription drug market has been kept largely invisible to most consumers: by law, drug companies advertised their products only in medical journals. If you wanted to know what's on the market, you had to ask your doctor.

Two years ago the FDA lifted its ban on advertising in general-interest publications. Drug makers first tried ads that informed consumers about a product, but without naming it. Now one drug company has run a consumer ad mentioning a prescription-only product by name—but has found itself in trouble with the FDA.

Sandoz Pharmaceuticals, the New Jersey–based unit of a Swiss drug company, took out ads in 25 newspapers in September for its Tavist-1 antihistamine. Sandoz first had the ads approved by the FDA, changing some language at the agency's prompting. Nonetheless, the FDA sent a letter to Sandoz after the ads ran, urging that they be discontinued.

The FDA objected to Sandoz's claim in the ad that the drug causes less drowsiness than similar products. In giving approval, said the agency's drug-advertising branch, it hadn't known that the FDA's medical-reviewing arm had rejected that claim.

Perhaps significantly, Merrell-Dow had been running a TV and print campaign—without naming its drug, Seldane—advising consumers that doctors can treat allergies without causing drowsiness. Seldane is so certified by the FDA. The agency says it views no-name ads such as Merrell-Dow's as "public service" promotion.

Watch in the coming months for Sandoz and other drug companies to try to overcome FDA objections. Before the agency backed away from its initial approval of the Sandoz ad, Advertising Age reported an ad campaign in the works for a prescription antiwrinkle cream made by Johnson & Johnson. And G.D. Searle was considering advertising to promote its money-back guarantee.

One conclusion is sure: FDA regs do not induce drowsiness among drug makers.

Milestones

• Junk the postal monopoly. Faced with the prospect of a 32 percent hike in third-class postage rates, Gene Del Polito, executive director the Third Class Mail Association, thinks it may be time to junk at least part of the Postal Service's monopoly. Noting that the USPS seems out to slow the growth of third-class mail, Del Polito suggests legalizing competition for delivering it.

• The right number. Government censorship has been called for, but telephone companies in California have solved the problem privately. Now, phone customers who don't want their kids (or themselves) calling dial-a-porn, chat lines, or other costly 976-numbers can have such calls blocked by the phone company at its central office for a one-time $5.00 fee. Eventually, it will be possible to block some types of service but not others, allowing people to call dial-a-prayer but not dial-a-hot-mama. Or vice versa.

Global Trends

Loosening the Chains

JERUSALEM—For a country with so much state control of the economy, Israel is showing some signs of change. There are government plans to sell 26 to 40 of its 188 corporations. Duties on imported cars have been reduced. The energy sector is being liberalized by allowing new competition in oil imports.

These steps are part of a slow and very painful process of semi-privatization. Health care, due to budget cuts, is the most popular new sphere for the private sector. Private medical services and insurance firms are filling the widening gaps in public service. The state has, in the past, provided 80 percent of the medical insurance in Israel. A gradual privatization may be in the offing.

The biggest shock to the country was the recent cancellation of the LAVI plane project, which was to have employed thousands. The U.S. government's withdrawal of support caused the cancellation, and the Israeli government is not able to subsidize LAVI.

Since any collapse of big sectors of the economy is dangerous, politicians may soon be confronted with a choice: continue to support huge spending projects that provide employment, or examine the options of privatization and liberalization. The politicians just may move in that direction—after all, most of them used to support LAVI.

—Oded Yinon

Socialist Realism?

WASHINGTON, D.C.—As REASON reported last summer ("Fowl Play," Aug.-Sept.), Hungary's reputation as a free-market oasis in the desert of Eastern European command economies is vastly overblown. Now comes confirmation from Budapest.

The government of Prime Minister Karoly Grosz, installed by the Communist Party last June, has announced a program of (what else?) economic reform. The idea is to ameliorate an economy plagued by double-digit inflation, growing foreign debt (now among the highest, per capita, in the world), and crippling state controls on the modest private sector.

In an unusually frank address to the nation last fall, Grosz acknowledged not only that the economy was in big trouble. He added: "The political atmosphere and public feeling are noticeably worse than a few years ago, even worse than is justified by the average living standards." And, Grosz admitted, "Confidence in the leadership has dwindled, and sometimes the viability of socialism is put in doubt."

For this kind of candor, unknown in the Communist world until recently, Grosz has earned a reputation as a bolder, younger version of Mikhail Gorbachev. Irreverent Hungarians, in fact, refer to the current economic reform campaign as "Grosznost" and wonder whether it is focused on show or substance. The prime minister's background, after all, lies not in economic management but in the party's propaganda apparatus.

What are his innovative economic proposals? Well, the government has finally reduced the notorious 90 percent tax on privately earned profits by half, and there is talk of permitting shares of companies to be sold on the stock market—perhaps as early as 1989. And money-losing state-run enterprises have once again been threatened with an end to their subsidies, which presently absorb 30 percent of the state budget.

The first reforms to be actually implemented, however, are the introduction of a personal income tax, which will range from 20 to 60 percent of annual earnings for Hungarians, and a value-added tax on consumer products averaging 25 percent. That the government expects these massive new taxes to finally transform Hungary's economy into a stable free market may give new meaning to "socialist realism."

—Thomas O. Melia

Global Roundup

• Flying down under. Australia's government recently approved a policy calling for deregulation of domestic airline fares, route entry, and aircraft capacity. The policy, which also will likely lead to the privatization of government-owned Australian Airlines, was designed to benefit consumers, according to the transport ministry.

• Readings for rebels. Grover G. Norquist, president of Americans for Tax Reform, figures money and moral support aren't enough to help the Angolan rebels oust Cuban troops. He's taking hundreds of copies of writings by such free-market economists as Milton Friedman and F.A. Hayek (translated into Portuguese) to the rebels for use in their schools.