Inflation's Sacred Cows

To the longtime despair of critics, the American political system often functions like a gigantic lubricating station for squeaky wheels. Responding to the skillful pressure of special-interest lobbyists, Congress and successive U.S. Administrations have put into effect myriad federal laws and regulations that stifle competition and tend to raise prices to consumers for the benefit of groups ranging from fruitgrowers in Florida to maritime unions in San Francisco and New York. Regulatory agencies, too, frequently act as guardians of the industries that they are supposed to regulate rather than as protectors of the consumer's interest.

The list of special-interest laws and regulations is still growing, despite howls from economists that they are serious contributors to double-digit inflation. Last week, for example, the Civil Aeronautics Board approved guidelines that would put a floor under fares charged by charter airlines on flights to Europe. Its action sets the stage for a possible 35% rate rise by 1975. A bill that is now in Senate-House conference and is expected to speed to the White House shortly would require that almost one-third of all oil imported into the U.S. be brought in aboard American-made ships, rather than lower-cost foreign vessels. The measure surely would cause the price of landed foreign oil to shoot still higher; whether President Ford vetoes it will provide a test of how much political flak he is willing to brave in order to keep living costs down.

Still, pressures are mounting as never before for a broad-scale attack on all the regulatory and legislative rigidities that grant unions and industries favors at consumers' expense.

In presenting his economic program to Congress, President Ford urged creation of a National Commission on Regulatory Reform to undertake a "long-overdue and total reexamination" of regulatory agencies. The commission would identify federal rules and regulations that increase costs to consumers and work to get them dropped. Even some regulators are pressing for change, violating Washington's unwritten rule that no regulatory agency speaks out against another. In a recent Detroit speech, Federal Trade Commission Chairman Lewis A. Engman lashed out at most regulatory agencies, particularly the Interstate Commerce Commission and the Civil Aeronautics Board. He said that their practices raise prices and shelter producers from the competitive consequences of "lassitude and inefficiency" (TIME Essay, Oct. 21).

The most comprehensive program for getting rid of these abuses came out of the minisummits that preceded President Ford's economic summit conference in September. At the first minisummit, Harvard Economist Hendrik S. Houthakker, a former member of President Nixon's Council of Economic Advisers, presented a list of 43 legislative "rigidities," each the sacred cow of some special interest, and proposed eliminating them all in a suggested omnibus bill for congressional consideration. He claimed that if all were abolished, costs to consumers for a wide variety of items could drop 5% to 10% in two years. Later, at another mini-summit meeting, Thomas G. Moore, a senior fellow at Stanford University's Hoover Institution, presented a list of his own similar to Houthakker's. By an overwhelming vote, economists of almost every ideological bent at the session agreed that Congress should be asked to repeal or amend as a package the items on Moore's list.

Among them, Economists Houthakker and Moore and the FTC's Engman have identified these broad areas where federal statutes have combined with regulatory overzealousness and inefficiency to keep prices high and fan inflationary fires:

TRANSPORTATION. Rigidities affecting all forms of transportation add anywhere from $8 billion to $16 billion a year to the nation's bill for moving people and goods. On the sea, the Jones Act specifies that only U.S.-flag ships can operate on runs between U.S. ports. That gesture to the shipbuilding industry and maritime unions forces out cheaper competition from foreign-flag vessels; it especially raises living costs in Hawaii and Alaska, which must import consumer and industrial goods from the West Coast. On land, a complicated array of ice regulations has fostered inflexible cartel-style rates, inflating rail and truck tariffs by as much as 20% and causing detours and excessive fuel comsumption. To get from Pittsburgh to Jacksonville, for example, trucks operated by Gateway Transportation must detour 306 miles out of their way to avoid competing with other lines. Earlier this year, at the height of the gasoline shortage, Consolidated Freightways was denied use of interstate highways to points south of Minneapolis, preventing a mileage decrease of 48%.

In the air, Engman feels that the CAB has worked to keep competition down and fares up. It costs only $20 to fly from San Francisco to Los Angeles on Pacific Southwest Airways, an unregulated intrastate carrier, yet twice as much to fly the same distance--350 miles--from Minneapolis to Chicago on a regulated interstate trunk airline.

AGRICULTURE. Farm price supports have largely disappeared, but hundreds of "marketing orders" issued by the Agriculture Department still have the effect of keeping prices high on almost everything from milk to navel oranges and tomatoes. Almost all the orders are based on New Deal agricultural legislation, and have been promulgated at the behest of producers. One order issued a few years ago had the effect of curtailing imports of Mexican tomatoes, thus lessening competition for Florida growers. The orders mainly restrict the size and grade of commodities that can be sold, supposedly to assure high quality; in reality, they rob consumers of the choice of buying a smaller-than-standard size or a lower-than-standard grade at a lower price. Houthakker also advocates repeal of laws that have been used to restrict U.S. imports of low-priced meat from Australia and New Zealand. Moore would eliminate import quotas on dairy products as a means of forcing down prices of cheese, dried milk and butter.

LABOR. The Davis-Bacon Act was passed in the 1930s to prevent wage gouging by contractors; it provides that workers on construction projects either built directly by the Federal Government or financed partly by federal money, such as the Second Avenue subway in New York City, must be paid the prevailing local wage. As administered by the Labor Department, that seemingly innocuous wording has become an engine of inflation; the "prevailing local" wage has sometimes been ruled to be the highest union scale paid anywhere within hundreds of miles of the job site. The higher wages on federally assisted projects, in turn, tend to pull up pay scales in private construction. Houthakker would repeal Davis-Bacon. Other economists would retain the law but require the Labor Department to make serious studies to determine what prevailing wages in the immediate vicinity of a construction project really are, rather than merely take union leaders' word for it. One study showed that the department had made only eight such surveys in 372 wage determinations under Davis-Bacon.

GOVERNMENT OPERATIONS. There is no larger special interest in the country than the U.S. Government and, say Houthakker and Moore, it has moved frequently to protect its interests over the public's. The prime example is the U.S. Postal Service, the nation's only legal carrier of first-class letter mail. Its monopoly has driven mail costs so high--a 25% jump last winter alone --that some electric utilities now use their own employees to hand-deliver bills to customers. A study by the Washington-based American Enterprise Institute argues that competition in letter mail would force the Postal Service to behave more like a business, adopting techniques of the numerous private postal services that have sprung up for other classes of mail. United Parcel Service, for example, now delivers more parcels weighing 1 Ib. or more than the Postal Service does.

Some economists, while not defending these legislative and regulatory inflexibilities, contend that abolishing them would have only a token effect on the rate of inflation. Harvard's John Kenneth Galbraith, for one, argues that such proposals are "conventional pieties" that bear "no relation whatever to the problem of remedying inflation." Other economists contend that the best measure of the importance of the sacred cows is the zeal with which special-interest groups have fought to enshrine them in law and regulatory practice. Killing them now would cause real pain for some groups, but the nation's interest in containing inflation should take precedence.

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