Freeman

ARTICLE

The Tollway to Nowhere

SEPTEMBER 01, 1975 by ROBERT C. MOORE

From an address given on May 29 at the spring convention of the Pennsylvania Petroleum Association by Robert C. Moore, Vice-President—Public Affairs for Cities Service Oil Company, Tulsa, Oklahoma.

A powerful third partner is now participating in virtually every business in America. This partner invests no money and assumes no risks, but threatens to assume more control over business affairs than the owners. I’m referring to the Federal government, along with its kissing cousins—state and local government. Taken together they have bound every sector of American life with thousands of laws and regulations.

I am deeply concerned about the continued impact of regulations that are rapidly destroying the self-adjusting mechanisms that once operated so effectively within the private enterprise system. Sometimes called the eighth wonder of the world, because of the benefits it has brought to all of us, the American economic machine still has tremendous potential —but only if we will limit our tampering with and modifications to the basic mechanism.

While it might be satisfying to place all the blame for excessive regulation on the shoulders of legislators and government bureaucrats, the fundamental fault does not lie with them, but with an American public that is naive at best — uninformed at worst —about elementary economic principles and the functioning of the marketplace. Whenever problems arise, troubled people look to government for solutions, apparently convinced that there are miraculous remedies stockpiled at the state capitol or in Washington. So-called progressives who champion such steps ignore the fact that our economic system is already based on one of the most exciting and revolutionary ideas in the history of the world. This idea maintains that a society can best function, prosper and serve the material needs of that society on the basis of free choices by free individuals in a free marketplace.

Lack of Understanding

A faulty understanding of economic principles is just one reason why people look to government when things displease them —whether it’s the price of food, utilities or gasoline. Another important reason is our refusal to learn from the lessons of history. This is really a very strange paradox. If you gave a motorist a road map which led him down a dead end road, he would certainly be skeptical of its future value. After losing his way on a second journey, he would unquestionably throw the map away. Nevertheless, many people have a nearly blind faith in the potential of government to guide them safely through complex economic and social difficulties to a proper destination — despite the many past failures of bureaucratic solutions!

Many examples come to mind, and I am sure some of you can cite several. For instance, the Interstate Commerce Commission, or ICC, was created in 1887 to regulate conditions in the railroad industry. With a stated intent to protect the public interest within a very narrow framework, the ICC soon became involved in the setting of rates. In more cases than not, its decisions kept transportation costs up rather than allowing the development of efficiencies in operation to produce benefits for consumers. Under regulation, the resulting decline of competition among the railroads made them vulnerable to the challenge of other modes of transportation —such as trucks, barges and airplanes. Along came more regulation in the form of the Railway Labor Act of 1926, which gave labor unions the power to lock-in practices that were economically crippling — further reducing their ability to compete.

You are familiar with the more recent chapters of this story. Restrictive regulation and declining profits made it difficult for railroads to modernize their operations. Service became so poor that in 1970 the Rail Passenger Service Act was approved, setting up what is now Amtrak. That government-operated system has now been exempted from some of the rules that hampered the efficient running of privately-owned railroads. Aided in that way and without the necessity of generating the earnings or providing the capital requirements that are essential to a private corporation, Amtrak has now made some progress. Yet, isn’t that meager consolation as one looks back upon the havoc that was wrought by regulation? The latest proposals of the ICC would now jeopardize the more efficient railroads by forcing them to subsidize those that are failing — a move that would hasten the complete demise of our private rail system.

Has Government Improved?

Some might suggest that the government has now learned to do a better regulatory job in recent years. And anyway, a government "of the people" must do a better job "for the people." Certainly these two conditions are implied in a rising tide of new regulations and interference in market mechanisms with the primary thrust at present against our own industry.

Are you and I really so gullible that we will allow such a transparent fraud to be perpetrated upon our industry and the nation’s economic system to serve the interests of political opportunists, the whims of the uninformed and the plans of liberal dreamers? Are we really so unaware of basic economics and the complexities of our market system that we will embrace the administrative processes of government bureaucracy to solve so critical a problem as energy — one that is basic to our standard of living and the survival of our nation? Will we believe what too many of our legislators and others are saying that they can deliver cheap energy without paying the real replacement cost? It is my fervent hope that we will not be so gullible, unaware or naive!

If we are confused today about whether Congress can legislate a solution to market problems, let us look briefly at their recent effort in the troubled housing industry. (Incidentally, the problems in that depressed industry, while substantial, are relatively simple compared to those in the energy field.)

In the recently enacted tax law, the current Congress in its infinite wisdom sought to stimulate the housing market. This would be done by giving buyers of new houses between March 13th and December 31st, 1975, a 5 per cent credit up to $2,000 against 1975 income taxes. Congress was well-intentioned in this instance because there were 600,000 unsold new single-family homes, co-ops and condominiums on the market and 50,000 mobile homes in inventory. Congress calculated that new building would not be stimulated until this inventory cleared the market. The solution appeared simple, and Congress adopted the tax provision without any hearings. The Wall Street Journal says this legislative method, i.e., legislation without hearings, qualifies a Congressional action as "bold and imaginative." Whatever else can be said about this 94th Congress, it certainly qualifies as "bold and imaginative."

It now appears in retrospect that the "simple" solution to a "simple" market problem was not so "simple" after all. And remember, good intentions are not the criteria for success. It now appears that instead of stimulating the housing market, this tax change will likely work in a very perverse manner. Note the unanticipated "fall-out" from this Congressional effort:

·              A house on which construction starts after this past March 26th is not eligible, so builders are not hurrying to build houses that cannot compete with the subsidized units. The effect will likely be to delay new starts until late fall.

·         The tax measure rewards inefficiency since builders that handled their own problems through better planning, quality construction or more competitive pricing now find their less efficient and less self-reliant competitors rewarded by Congress.

·         Some 300,000 units were under construction and contracted, i.e., they were committed for, but not conveyed to the purchaser. The tax break is simply a transfer of funds to these lucky buyers and will not generate new housing starts.

·         Because units that have been once occupied are not eligible for the tax break, the program distorts buying away from used homes, unfairly depreciating the value of used homes until the end of the year.

·         The tax measure imposes a "confusion penalty" on the housing industry that has real economic costs. It will be months before buyers and builders have a clear picture from Internal Revenue on what is really eligible. There are triple damage penalties imposed on sellers for falsification, so they will be understandably apprehensive until the rules are clarified. Buyers who sell old homes must take into account any capital gain they realize, so they may not get the benefit anticipated. Of course, many buyers probably will make this discovery after the deal on the new home is already closed. At best, many buyers will also be confused for some time about the implications of purchase.

·          And finally, it has now been estimated by Congressman Al Ullman, Chairman of the House Ways and Means Committee, that the tax provision may result in true additional sales of only 75,000 units at an estimated cost of $600 million to the taxpayers — or $8,000 per added home sale. Even by Congressional yardsticks, that must be considered something less than a bargain for the nation and its taxpayers.

What are the lessons for you and me today from this modern day example of a legislated solution to a market problem? If my comments to this point have not excited your interest, I urge you now to take a deep breath — and give your undivided attention to these truisms I am about to suggest:

Truism #1. It is impossible for government to interfere with a balanced and integrated market system without creating unreasonable distortions, many of which are invariably counter-productive.

Truism #2. Government solutions frequently reward the inefficient and penalize the productive which the market will not allow. While there may be temporary benefits for some, experience has proved this process is always anti-consumer in the long term.

Truism #3. Government is subject to the influence of special interests, rewarding those who find political favor and penalizing those who do not. Reward and cost to the consumer do not then meet the test of impartial market discipline — again to the long term detriment of the consumer.

Truism #4. The intrusion of government into the market always creates an enormous "confusion penalty." While you and I may not always like the discipline in the market, at least we can rely on the time-tested and consistent economic laws by which it operates. What government has manipulated once, it can manipulate again. More than any other factor, government intrusion into our industry is preventing solution of our energy problem. In fact, the evidence is overwhelming that such interference caused the problem in the first place. Will we continue the present confusion or now turn the problem back to the market for solution?

Truism #5. Government solutions, when successful, are always extremely costly. Note the $2,000 tax break to stimulate one additional housing sale is now likely to cost the taxpayer $8,000 per sale. Some now would have a government oil company created to "compete" with private industry in developing additional energy supplies. Is there a one of us that really believes government can do this job better than private industry? Who can even guess what the taxpayer will pay per barrel of oil produced, if this effort comes to fruition? If $600 million to get 75,000 new housing starts is an example, the probable cost per barrel of oil found by a government oil company will make OPEC members look like pikers!

You’re likely asking yourself why the penchant for regulation remains strong despite such a poor record. Two of the reasons, a lack of understanding of economic fundamentals and the failure to learn from history, have already been mentioned.

There seems to be another reason with more dangerous implications that has been pinpointed by Senator Paul Fannin of Arizona. He maintains that many legislators believe the free enterprise system, as we know it, is an outdated 19th century institution. In this attitude, they reflect a growing segment in this country which feels that industry acting alone, with minimal government intervention, is incapable or unwilling to serve the public interest. This is not an isolated phenomenon, but seems to be part of an erosion of confidence in the validity of many of the cherished institutions that have served our nation well throughout our history. If time permitted, we might dwell on the apparent paradox of calls for increased government intervention when recent polls reflect a general lack of confidence in the ability of government to deal effectively with economic problems in our society. Could it be that we are just too impatient to allow the self-adjusting mechanisms to work? Do we lack the wisdom to define which areas are proper for government and which should be left to the market?

History also confirms that regulation, once created, tends to be subversive, feeding on itself to proliferate and self-perpetuate. It creates additional problems and distortions that need new regulation, and bureaucracy too often becomes an end unto itself.

Unfortunately, for those who are the victims there is still another force that perpetuates the cult of regulation. Regulations sap the strength and vitality of a free economy by offering transitory benefits to consumers and other special interest groups. They offer "security" in exchange for "freedom," and try to substitute "status-quo" for progress. Yes, it is possible for us to be "bought," and often the price can be tempting.

Within our industry there are those who have profited from the Emergency Petroleum Allocation Act and others who seek to make it serve their future purposes. As we have discovered before, however, many a temporary law or tax has become an institution, and there are now strong indications that this could be true in the petroleum industry.

When will we ever learn that you can’t enact only regulations that suit your particular fancy. Once you begin to take the regulatory route, you’re on an expressway that leads just one way —deeper into the bureaucratic jungles. To make it even worse, the farther you travel, the fewer the exit ramps. If you do finally leave this super highway to nowhere, the journey really can get rough — for you must find your way back to the "go" position if you hope to travel that old road again. The temptation is great to stay on the hypnotic tollway. For who knows — maybe security is better than freedom — and anyway look at how good our earnings were last year!

I have no easy solutions to the problems I have been discussing, and we cannot look for any instant revocation of the thousands of pages of useless regulations that are in effect. Perhaps our situation is not totally hopeless, for I believe there are ways to inhibit the continued growth of the statutory tumors that threaten our private enterprise system.

·          We must voluntarily work to become more responsive to those we serve than ever before. In a sense we must prove to the people that there is no need to bind us heavily in regulations.

·          There must be increased emphasis on sound economic education for people of all ages. We must supplement the schools of the nation for they can’t do this job alone. You and I spend too little time discussing the economic facts of life with our children.

·          There must be no reluctance to communicate our views to the general public and lawmakers, even though our opinions may not be immediately popular.

·           Businessmen, as private individuals, should evaluate the records of legislators and back those who uphold the principles of free enterprise.

·           By all means we must move away from the illusion that the most praise-worthy Congress is the one that passes the most laws.

·           We must solidify our own faith in the laws of supply and demand rather than prematurely calling for government intervention that is not needed — whether this is in our industry or other fields.

There is still time to get off the regulatory turnpike — but let’s not delay. It gets more expensive every mile we travel, and if we’re not careful, we could miss that last exit to freedom!

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September 1975

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