Trends

HEALING THE RAILROADS

Much of the hand-wringing over the fate of the bankrupt Penn Central Railroad has tended to obscure the full extent to which the policies of the federal government have brought about not only that debacle, but the decline of American railroading in general. Rail transportation is an order of magnitude more cost-effective than trucking, in terms of such measures as ton-miles transported per gallon of fuel. Yet massive federal subsidies of trucking and barge transportation, the incredible government-enforced stranglehold of the rail unions, and inflexible ICC rate regulation, accounting methods, and service policy requirements have combined to produce a railroad system that carries but a fraction of what it would under free market conditions. In viewing the plans to bail out Penn Central, it is extremely important that at least as much attention be focused on preventing further disasters, by removing as much government intervention as possible.

In 1972 economist Thomas Gale Moore of Michigan State University found that the ICC's regulation of rail and truck transportation was costing consumers as much as $10 billion per year in wasted resources. Moore's data suggested that the ICC's regulation of railroad rates has been "holding many rates higher than the railroads find in their own best interests." If regulation were reduced or eliminated, he continues, "lower rates for many products would likely be posted by rail carriers." Similar findings were made in the 1970 Nader Study Group report on the ICC.

Data such as these form the basis for a new bill introduced by the Administration in January. In addition to providing $2 billion in government loan guarantees for new equipment, the bill would do the following:
• Prohibit the ICC from keeping freight rates artificially high
• Allow railroads to eliminate unprofitable branch lines almost automatically
• Require the ICC to act promptly on railroad requests for rate changes and allow it to take jurisdiction away from state public utility commissions which fail to act promptly on intrastate rate increases or decreases.
• Prohibit states and localities from enforcing "discriminatory taxation" of railroad property (estimated at $55 million per year).
The new legislation would apply to all railroads, not just those currently in or near bankruptcy.

One of the biggest political obstacles to passage of such a bill will be opposition from state and local politicians to the branch line abandonment provisions. Yet in many cases, abandonment of a branch line by a large railroad need not spell the death of rail service there. There is an increasing trend across the country for the formation of new short line railroad companies, to take over and operate—profitably—needed short-distance lines. The key factors involved are regulatory and managerial. Operating as a new, independent short line, the small railroad is free of the former railroad union rules; it can therefore hire only the people it needs and pay them reasonable wages for close-to-home work. It is also small enough to operate with close management supervision and cost control, and good labor/management relations. In addition, the reduced scale of operations usually means much lower overhead for the short line.

In the past year a new consulting firm, Trans-Action Associates of Joliet, IL has helped convert a number of former branch lines into profitable short line companies. Such railroads include the Great Plains Railway (Nebraska), the East Camden and Highland (Arkansas), the Central Iowa, the Louisiana Midland, and the Oklahoma Western. These new lines are the first of a growing wave of short lines created out of failing branch lines. They join some 400 existing, mostly profitable short lines. The short lines illustrate clearly that private enterprise can provide the solution to America's railroad ills, if the government will simply remove its crippling restrictions. Despite some flaws, the Administration's new railroad bill is a step in that direction.

SOURCES:
• "ICC Rail, Truck Rate Regulation Hit in Study," AP (Washington), December 11, 1972.
• THE INTERSTATE COMMERCE OMISSION, Robert Fellmeth, Grossman Publishers, 1970.
• "Bill to Relax Regulation of Railroads Drafted," UPI (Washington), January 4, 1974.
• "The Big Rush Into Short Line Railroads," BUSINESS WEEK, October 20, 1973, p. 104.

FREE MARKET SUGAR

One of the federal government's most "unquestionable" interventions into the marketplace has finally come up for reconsideration in this age of consumerism. For 40 years the government has operated a sugar control program, under which the Agriculture Department decides how much sugar it will allow to be sold in the U.S. each year and at what prices. It then divides this "consumption quota" into sales quotas, one for domestic producers (who get about 55 percent) and another for foreign producers in some 30 countries (who get the remainder). This gigantic cartel arrangement has generally pleased domestic producers and has been a source of political power in U.S. international relations. Those who have been hurt by the cartel are (1) American consumers who have been denied the lower prices of free market competition, and (2) efficient overseas producers, who might have obtained considerably greater market shares in open competition.

Now, however, the Agriculture Department has announced a plan to end the quota system and open the market to all comers (except Cuba, which remains on the State Department's enemies list). The reaction from most domestic sugar producers has, of course, been hostile. Few companies prefer the perils of free competition to the security of a government-enforced cartel. Hopefully, American consumers will have the wisdom to speak up for the benefits of competition before the sugar lobby kills the whole plan.

SOURCE:
• "Sugar Industry Raps Plan to End Quotas," UPI (Washington), November 7, 1973.

TAX REBELLION SCORECARD

In recent months the loose assortment of people and groups struggling against the federal income tax has encountered some victories and some setbacks. First the good news. Last September a Minnesota tax rebel, William Drexler, was acquitted by a jury of charges of "willful failure to file income tax returns" for 1968, '69, and '70. Drexler had indeed filed returns, but had filled in only his name and address, arguing that to supply any further information would tend to incriminate him, and could therefore be lawfully omitted. The jury agreed (after only 15minutes of deliberation) and returned a verdict of innocent on all counts.

Now for the bad news. In California, a U.S. District Court judge ruled in November that filling out an income tax form does not violate the constitutional right against self-incrimination. A group called the Association of Concerned Taxpayers (ACT) had filed a class action suit, seeking to require the Internal Revenue Service to include the Miranda warning against self-incrimination on all income tax forms (see REASON, "Trends," January 1974). ACT reacted strongly to the judge's decision, charging that it creates a situation in which "a burglar, rapist, or murderer is afforded his rights and an honest taxpayer is not." An appeal of the decision is under way.

In further bad news, three leading tax rebels have recently suffered various forms of legal action. Jerome Daly, another Minnesotan who cites the Fifth Amendment, was recently ordered committed to the Federal Hospital in Springfield, Missouri, for "psychiatric evaluation," for an indefinite period. Marvin Cooley of Mesa, Arizona, author of THE BIG BLUFF (which advocates nonpayment of taxes) was sentenced to three years in prison and a $6000 fine in October. And James W. Scott of Fresno, California, national chairman of the Tax Rebellion Committee, was found guilty by a U.S. District Court jury on four counts of failing to file income tax returns. Following his conviction, Scott was arrested along with two associates, Claire Kelly and Vaughn Ellsworth, on "suspicion of obstructing justice and conspiracy to obstruct justice."

Clearly, the legal status of various forms of tax resistance is unclear, and the IRS is making a concerted effort to make examples of leading tax rebels. So far William Drexler seems to be the first to prevail against the might of the IRS.

SOURCES:
• "Jury Acquits Tax Rebel," DOLLARS AND SENSE, September/October 1973.
• "Judge Rules Filing Tax Form Not Rights Violation," AP (San Diego), November 13, 1973.
• News item (Jerome Daly), THE INTERESTED PARTY, November 1973.
• News Item (Marvin Cooley), SANTA BARBARA NEWS-PRESS, October 30, 1973.
• "Tax Rebellion Leader Convicted, Then Seized," LOS ANGELES TIMES, December 16, 1973.

ENDING THE HOUSING FIASCO

Last fall it was quietly announced that the federal government's one-time "showcase" public housing project—18-year old Pruitt-Igoe in St. Louis—would be completely demolished. Originally built at a cost of $36 million to house 10,000 people, the complex in recent years had become a nearly-abandoned jungle, inhabited by only 587 families, despite $13.8 million in renovation over the past five years. Now another $2.5 million will be spent to demolish the buildings.

Pruitt-Igoe and its fate illustrate the generally-acknowledged bankruptcy of phase one of the government's attempts to solve America's "housing problem." The second phase is encompassed in the 1968 Housing and Urban Development Act's two principal subsidy programs: Section 235 subsidizing the construction of owner-occupied dwellings and Section 236 rent subsidies. Several recent studies have illustrated the bankruptcy of these programs as well. The MIT Department of Urban Studies and Planning found that as much as one-half of all federal subsidy funds in the programs "never reach the residents they were supposed to benefit." Instead, the principal beneficiaries of the funds seem to be (surprise!) the intermediary bodies which dispense funds and operate housing programs: local governments, local housing authorities, housing sponsors, urban renewal agencies, and FHA offices. Further, the conditions attached to the subsidy typically reduce rather than enhance the poor family's freedom in solving its housing needs.

Another study was conducted by economist Harrison Wehner of the University of Virginia. Wehner's analysis showed that current subsidy programs are extremely wasteful, promoting the construction of expensive new housing for the poor when there is a large amount of housing available that could be rehabilitated for a fraction of the cost per dwelling unit. Current construction subsidy programs in New York, for instance, cost $3000 to $5000 annually per assisted family; the cost of equivalent renovation of existing dwellings would be only about $1500. Wehner pointed out that neither the purchaser nor the seller has any incentive to economize, because the government stands ready to make up the difference between the actual price and the purchaser's maximum payment.

Another study of Sections 235 and 236 estimates that the amount of money currently being spent could help nine times as many poor households if the programs were restructured to provide economic incentives and greater freedom of choice. Attorney Irving Welfeld notes that current programs provide public housing tenants with new units which cost about 2½ times the average cost of housing occupied by taxpayers. Section 236 pays the highest subsidies to families that can pay the most, while Section 236 penalizes developers who try to save money. Overall, the basic fallacy has been the federal attempt to construct new housing units for people who cannot afford them.

What is the solution? Ideally, remove the government from the housing field, and reduce the crushing burden of taxation (including the 25-30 percent paid by persons earning under $5000 per year) so that more people can afford used but serviceable housing. In the shorter term, such counterproductive programs as Sections 235 and 236 should be abolished. Interim federal housing assistance, if any, might provide direct grants to the poorest housing consumers, to spend as they see fit. This would remove the incentive of builders and bureaucrats to create ever-larger empires based on the promise of never-ending federal support for economically unjustified housing.

SOURCES:
• "Huge Housing Complex to be Demolished," LOS ANGELES TIMES, August 28, 1973, p. 2.
• "Housing: Where the Money Does Not Go," TECHNOLOGY REVIEW, October/November 1972, p. 64.
• SECTIONS 235 AND 236: AN ECONOMIC EVALUATION OF HUD'S PRINCIPAL HOUSING SUBSIDY PROGRAMS, Harrison G. Wehner, Jr., American Enterprise Institute Evaluative Studies 8, June 1973.
• AMERICA'S HOUSING PROBLEM: AN APPROACH TO ITS SOLUTION, Irving H. Welfeld, American Enterprise Institute Evaluative Studies 10, October 1973.

AMA TO FIGHT PSRO

The federal government's plan to subject doctors and patients to bureaucratic control via Professional Standards Review Organizations (PSRO) has long been opposed by a majority of physicians (see REASON, "Trends," December 1973, p. 34). The American Medical Association, however, after initial opposition to the plan, had adopted the position of "going along with the inevitable" once the PSRO legislation passed Congress. But delegates to the AMA Convention in December made a major switch in policy. After a long debate session, including a stinging attack on PSRO by Rep. Phillip Crane, the AMA House of Delegates voted to work for repeal of the law. The delegates declared that the public and legislators should be informed of the "potential deleterious effects of the law on the quality, confidentiality (of patient records), and cost of medical care. The best interests of the American people, our patients, would be served by repeal."

SOURCE:
• "AMA Will Seek Repeal of U.S. Measures to Check Health Care," Harry Nelson, LOS ANGELES TIMES, December 6, 1973.