HK:

The International House Agenda arrived yesterday.
At Tab A is a simple outline of the proposed
program (based on last year's meeting).

At Tab B is Tom Olson's agenda with more details
and including the minutes from last May's meeting.

At Tab C is a letter from Howard Cook. He outlines
his turning over the CEO duties to Tom Olson.
He mentions your previous offer to take part in
a fundraising meeting for the House and suggests
a date in the spring. He also asks for advice
on getting money from Iran and a letter of
introduction to ANSARY in that connection. He
encloses an itinerary of his upcoming trip on
behalf of the Half Century Fund.

The program is in line with what you agreed to
earlier in the summer and follows last year's
procedure with:

4-6 Board Meeting

6-6:30 Reception for Board Members

6:30- Meet with Students; informal

7:30 remarks and Q&A

INTERNATIONAL HOUSE

4:00 You open the Board Meeting with a moment of silence for past Board member John D. Rockefeller.

At this time there are no other actions to be introduced.

1. -- You then entertain a motion to approve the Certificat of Service of Notice of Meeting.

2. -- You entertain motions to approve the minutes of the May 18 meeting and Executive Committee meetings (July 6, August 1 and Sept. 20).

-- Herman Rottenberg reads statement re Howard Cook's turning over CEO responsibilities to Thomas Olson. Mr. Jack Howell will then ask to have the statement accepted for the record. Tom Olson will then present a gift to Howard Cook.

3. -- You then introduce Mr. Olson to present the documents and call for discussion. This discussion should lead to 2 resolutions:

A. Authorizing Olson to undertake a pilot version of the "McCloy Fellows" program.

B. Approve additional renovation projects, totallying $459,000

4. -- Reporton on Operations. Olson will present the report

5. -- Report of the Program Committee. Gerald Barsdorf should be called upon to present the report of the Committee.

6. -- Report on the Annual Fund and Capital Campaign.
Call on Howard Cook to present report on capital fund drive and Robert Purcell to present the report on the Capital Campaign.

7. -- Discussion of next date for the meeting--to take place during second week of December (11th-15th)

ADJOURN: 6:00 You entertain motion to adjourn for drinks which will be available in the Board Room

MORE

-2-

6:00 You have a half hour reception with the Board members and a couple of members of the staff

6:30 Meet residents, non-resident members, Board members and a few guests (about 750 people) in the auditorium.

The proposal for you to speak from the stage of the auditorium --as you did last year. Olson will introduce you to the students (many are newly arrived).

After your informal remarks they propose to have microphones set up from which students can ask you questions.

This is slated to take one hour.

Memorandum for Dr. Kissinger
for the meeting of the Board of Trustees
of International House

at 4:00 p.m., Thursday, September 28
with an informal talk to residents and questions from residents following

GENERAL INTRODUCTION

This Board meeting will concentrate on long-range planning for the House,
including a document on development strategy, long-range budget projections and a
discussion of the renovation program.

The meeting will be in the Home Room, a somewhat less formal setting than
the Mural Room, where previous meetings were held. The Home Room is used for
seminars, concerts (it has a Steinway A piano in good condition) and social and
cultural gatherings of students. The room has portraits of the founder of Interna-
tional House, Mr. Harry Edmonds, and his wife; a portrait by Khalil Gibran of the
head of Jesus, a portrait of Abby Aldrich Rockefeller, and a few other works of art.

Following the Board meeting, there will be a half-hour reception for those
who attended the meeting only -- Board members and one or two members of the staff.

At 6:30, you will meet residents, non-resident members, Board members and a
few guests (about 750 persons) in the auditorium for a talk and questions. This
is scheduled to last one hour.

There will be a photographer present for a few minutes at the Board meeting
and at the informal talk. The press have not been invited.

BOARD MEETING

You should open the Board meeting with a moment of silence for one of our
past Board members, Mr. John D. Rockefeller 3rd. Mr. Rockefeller served for 19 years
as a member of the Board, and part of that time as Chairman of the Executive Committee.
I attach a statement Howard Cook issued at the time of his death. I will consult
with Abby O'Neill and inform you if there will be any resolutions or other actions
introduced at this time. The remainder of this memo is keyed to the items on the
agenda.

Item 1.

The Chairman shall entertain a motion to approve the Certificate of Service
of Notice of Meeting.

Item 2.

The Chairman should entertain motions to approve the minutes of the May 18
Board meeting and the Executive Committee meetings held on July 6, August 1 and
September 20. The minutes of these meetings are in the Board meeting blue book.

After the motion of approval is made, Herman Rottenberg will seek the Chair's
recognition to read a statement concerning Howard Cook's giving over the responsibilities
of Chief Executive Officer to me. After he has read this statement, Mr. Jack
Howell will seek recognition of the Chair to have this statement accepted by the
Board for the record.

IN MEMORIAM

JOHN D. ROCKEFELLER 3RD SERVED AS A MEMBER OF THE BOARD OF TRUSTEES OF INTERNATIONAL HOUSE FOR 19 YEARS, FROM APRIL 1930 TO MAY 1949. IN THIS CAPACITY AND AS CHAIRMAN OF THE EXECUTIVE COMMITTEE HE GAVE GENEROUSLY OF HIMSELF DESPITE THE PRESSURES OF HIS MANY OTHER COMMITMENTS.

HE BELIEVED DEEPLY IN THE IDEALS OF THE HOUSE AND TOOK A KEEN INTEREST IN THE WELFARE OF OUR MEMBERS.

THE INTERNATIONAL HOUSE COMMUNITY MOURNS HIS PASSING AND FEELS A DEEP SENSE OF LOSS.

A MEMORIAL SERVICE WILL BE HELD AT THE RIVERSIDE CHURCH at 11 a.m. on Thursday, July 13, 1978.

Memorandum for Dr. Kissinger

-2-

September 22, 1978

Following this, Tom Olson will seek recognition of the Chair to present
Howard Cook with a small personal gift.

Item 3.

Long-range planning. The Chairman should introduce me to present the documents and call for discussion of them. I expect this report to produce most of the discussion at the meeting. The discussion should lead to two resolutions:

The first would authorize me to undertake a pilot version of the "McCloy Fellows" program. (See annex to the lavender memo, entitled "The Development of International House.")

The second resolution would be to approve the additional renovation projects, totalling $459,000, and the principle that these renovation projects be undertaken as Howard Cook succeeds in raising additional funds.

Item 4.

Report on Operations. The Chairman should call on me to present a report on operations, which will be brief.

Item 5.

Report of the Program Committee. The Chairman should call on Gerald Barsdorf to present the report of the Program Committee.

Item 6.

Report on the Annual Fund and Capital Campaign. The Chairman should call on Howard Cook to present the report on the capital fund drive and on Robert Purcell to present the report on the Capital Campaign.

Item 7.

The Chairman should suggest a date for the next meeting which will take place in midtown Manhattan, during the second week of December.

The Chairman should entertain a motion to adjourn for drinks which will be available in the Board room.

The meeting should adjourn as near as possible to 6 p.m., in order to give the Board members a half hour for informal conversation with each other before your informal talk in the auditorium.

INFORMAL TALK

The informal talk will take place in the auditorium which is on the same level as the Home Room. You will speak from the stage of the auditorium, as you did last year. I will introduce you to the students, most of whom are new residents to International House this month, and many of whom are newly arrived from overseas. Unless you choose to do it otherwise, we will set up two or three microphones from which students may ask questions once you have concluded your remarks. The students have been asked to make their questions as brief as possible.

Memorandum for Dr. Kissinger

-3-

September 22, 1978

The student microphones will be monitored by a member of the Program office staff, to insure that the question-and-answer period moves as smoothly and efficiently as possible.

Following your talk, several of your fellow Trustees will dine with a selected group of students in a private room of the cafeteria.

TFO/mjn

International
House

500 Riverside Drive
New York, N.Y. 10027
(212) 678-5000
Cable: ALLNATIONSNYK

FOUNDED 1924

September 22, 1978

OFFICERS AND TRUSTEES

Honorary Chairman of the Board
John J. McCloy

Chairman of the Board
Henry A. Kissinger

Chairman, Executive Committee
John J. Howell
J. Henry Schrøder Banking Corp

President
Howard A. Cook

Executive Vice President
Thomas F. Olson

Secretary
John French
Curtis Maitet-Prevost, Colt & Mosle

Treasurer
John R. H. Blum
Richards & O'Neil

Gerald E. Barsdell
Dubars International, Inc

Paul D. Carter
Columbia University

Walther Casper
Metallgesellschaft

Hays Clark
Donald L. Cuneo
Shearman & Sterling

Shelby Cullum Davis
Shelby Cullum Davis & Co

Mrs. Daniel P. Davison

Christopher F. Edley
United Negro College Fund

John Elliott Jr.
O'malley & Mathews, Inc.

James D. Farley
Cibank, N.A.

Mrs. Haebler Frantz
Sourour Helgason
Icelandic Airlines, Inc

Mrs. Amory Houghton, Jr.

Gilbert E. Jones

Paul H. Kjaer-Hansen

Leonard Linton
Central Resources Corp

Mrs. Donald B. Marion

Jonathan Mason
The Japan Fund

Lawrence C. McQuade
W.R. Grace & Co

Edmond J. Nout
New England Mutual Life Insurance Co

Mrs. George D. O'Neill

Robert W. Purcell
Rockefeller Family and Associates

Kent Rhodes
Readers Digest Association, Inc

Mrs. Reuben Richards

'Mark Robinson

Herman Rottenberg
Performing Arts Foundation

James S. Smith
Peal, Marwick, Mitchell & Co

Stephen Siamas
Exxon Corp

Norton Stevens
Norin Corp

Robert G. Stone, Jr.
West India Shipping Co., Inc

'Anat Trivedi

William M. Weaver, Jr.
Alexander Brown & Sons

Frank Wyman
Private Investor

'Student Trustees

Dr. Henry A. Kissinger
Suite 520
1800 K Street, N. W.
Washington, D. C. 20006

Dear Dr. Kissinger:

Christine Vick suggested that since it might be impossible to schedule a meeting with you before the Board meets on September 28th, that I should write you about the matters I had hoped to cover with you.

First, I want to call your attention to the memorandum which John Howell and I sent to all Trustees on August 2nd, in which Tom Olson, our Executive Vice President, was designated Chief Executive Officer, with complete responsibility for the program and operation of International House. This action was taken by the Executive Committee on August 1st, at my suggestion, so that I could devote my full time to fund-raising. I will retain my title as President until the annual meeting in December 1979, when I will resign, just four months before my retirement at 65, in April 1980.

I will continue to be responsible for the Annual Fund, for the Half Century Fund Campaign and for the World Members' (alumni) program. In this connection, I recall your offer, at the Board meeting in May, to take part in a fund-raising meeting for the House and I would like to suggest that we set a date for such an event some time in late March or April 1979. Perhaps we can do this when I see you on September 28th.

In line with our changed responsibilities, Tom Olson will be responsible for the Trustee meetings and will be sending you a detailed memorandum today, for your guidance at the meeting on Thursday, September 28th.

When I was in Iran on June 7th, I handed a letter to your advance man, Mr. Ronald Dollin, indicating that I had seen Sheikh Yamani on June 4th, and that he had presented

Dr. Henry A. Kissinger

-2-

September 22, 1978

International House with $100,000 from the Kingdom of Saudi Arabia. I would like to have your advice on how we might secure a like amount from Iran and in this connection, it would be very helpful if I could have a letter of introduction to Mr. Ansari. (So far, I have raised $40,000 from Iran; $20,000 from the Pahlevi Foundation, $10,000 from the Chamber of Commerce, all through my contacts with Senator Ziai, and $10,000 from the Pak Dairy Company). I will be going back to Iran in January and would hope to raise at least $50,000 from the National Iranian Oil Company.

At our last meeting you suggested that I inform you of the countries I intend to visit and so I am enclosing a copy of the itinerary of my forthcoming trip around the world on behalf of the Half Century Fund. Perhaps you might have some suggestions of people I should see, in some of the countries I will visit.

We are all looking forward to having you with us on Thursday. We have a wonderful group of students this year and they are excited about their meeting with you from 6:30 to 7:00 p.m.

With kindest regards,

HAC:gg

enc.

Itinerary
Howard A. Cook Trip
Oct. 15 - Nov. 22, 1978
Half Century Fund Campaign

<table><thead><tr><th>Day</th><th>Date</th><th>leave</th><th>Airlines/flight #</th><th>Departure Time</th><th>Destination</th><th>Arrival Time</th></tr></thead><tbody><tr><td>Sun</td><td>Oct 15</td><td>NY</td><td>United 5</td><td>12 noon</td><td>Los Angeles c/o A. Cook</td><td>2:25 p.m.</td></tr><tr><td>Tues</td><td>Oct 17</td><td>Los Angeles</td><td>Japan Air 063</td><td>3:00 p.m.</td><td>Honolulu Sheraton</td><td>5:25 p.m.</td></tr><tr><td>Wed</td><td>Oct 18</td><td>Honolulu</td><td>Japan Air 003</td><td>3:35 p.m.</td><td>Tokyo Palace</td><td>6:30 p.m. (Oct.19)</td></tr><tr><td>Tues</td><td>Oct 24</td><td>Tokyo</td><td>Cathay Pacific 450</td><td>3:45 p.m.</td><td>Seoul Plaza Hotel</td><td>6:05 p.m.</td></tr><tr><td>Fri</td><td>Oct 27</td><td>Seoul</td><td>Korean 605</td><td>2:30 p.m.</td><td>Taipei Hilton</td><td>3:50 p.m.</td></tr><tr><td>Mon</td><td>Oct 30</td><td>Taipei</td><td>Thai 623</td><td>12:15 p.m.</td><td>Manila Hilton</td><td>2:00 p.m.</td></tr><tr><td>Wed</td><td>Nov 1</td><td>Manila</td><td>Quantas 27</td><td>5:15 p.m.</td><td>Hong Kong</td><td>7:05 p.m.</td></tr><tr><td>Sun</td><td>Nov 5</td><td>Hong Kong</td><td>Cathay Pac. 703</td><td>9:00 a.m.</td><td>Singapore Mandarin</td><td>2:20 p.m.</td></tr><tr><td>Wed</td><td>Nov 8</td><td>Singapore</td><td>Singapore 642</td><td>1:45 p.m.</td><td>Bangkok Siam Inter Cont.</td><td>3:20 p.m.</td></tr><tr><td>Fri</td><td>Nov 10</td><td>Bangkok</td><td>SAS 972</td><td>10:25 p.m.</td><td>Copenhagen</td><td>6:00 a.m. (Nov 11)</td></tr><tr><td>Sat</td><td>Nov 11</td><td>Copenhagen</td><td>SAS 602</td><td>3:10 p.m.</td><td>O s 1 o</td><td>4:10 p.m.</td></tr><tr><td>Mon</td><td>Nov 13</td><td>O s 1 o</td><td>SAS 490</td><td>8:50 p.m.</td><td>Stockholm</td><td>9:45 p.m.</td></tr><tr><td>Thu</td><td>Nov 16</td><td>Stockholm</td><td>Swissair 413</td><td>8:45 a.m.</td><td>Zurich</td><td>11:10 a.m.</td></tr><tr><td>Sat</td><td>Nov 18</td><td>Zurich</td><td>Air France 681</td><td>9:20 a.m.</td><td>Paris c/o Olson</td><td>10:30 a.m. Ch de Gaulle</td></tr><tr><td>Mon</td><td>Nov 20</td><td>Paris Ch de Gaulle</td><td>Air France 642</td><td>9:40 a.m.</td><td>Brussels Sheraton</td><td>10:30 a.m.</td></tr><tr><td>Tue</td><td>Nov 21</td><td>Brussels</td><td>B. A. 373</td><td>8:25 a.m.</td><td>London Cavalry Club</td><td>8:25 a.m.</td></tr><tr><td>Wed</td><td>Nov 22</td><td>London</td><td>B. A. 175</td><td>11:00 a.m.</td><td>NY</td><td>1:35 p.m.</td></tr></tbody></table>

JAN 30 1978

Dear Marcus:

It was good to hear from you, and Nancy and I appreciated your expression of good wishes for the New Year.

I certainly would be interested in speaking in November to the Board of Governors of the Weizmann Institute if it is possible. Unfortunately, it will be difficult for me to give you a firm commitment this far in advance, but I will put it on my calendar and do my best.

One important factor -- it is unclear to me whether the meeting will take place in Rehovoth or London. Do let me know as soon as you can, as it will help in my planning.

Nancy joins me in sending our best wishes and hoping we see you soon.

Sir Marcus Sieff
Michael House
Baker Street
London, W1
England

Telegrams
Marspenza London Telex.
Telephone: 01-935 4422

LCT

Michael House,
Baker Street,
London, W.1

From The Hon. Sir Marcus Sieff

12th January 1978

I wish Nancy and you a happy and healthy
1978.

As Chairman of the Board of Governors of
the Weizmann Institute of Science in Rehovoth,
my co-Governors and I, and the President,
Michael Sela, would consider it a privilege if
you could talk to the Board of Governors at
their annual meeting which takes place this
year on 6th and 7th November.

We have recently started the practice of
having someone connected with the Institute
talking about a subject of his choice, not
only to the Governors and leading members of
the Institute, but in addition to leading
Israelis, including the President, members
of the Government and industrialists who
also attend.

The speaker chooses his own theme and
whatever subject you might decide to speak
on would be of great interest to such an
audience.

.../...........

[LC]

CF

Michael House, Sieff
Baker Street,
London, W.1

Telegrams
Marshall London Telex.
Telephone: 01-935 4422

21st April 1978

Dear Henry,

Thank you for your letter of April 13th.
I am delighted there is a high probability
that you will be able to come to Rehovoth
on 6th and 7th November when the Annual
General Meeting of the Board of Governors
of the Weizmann Institute is held.

We have started the custom that during this
meeting one talk should be given which has
no direct relationship to the Weizmann
Institute but will be of general interest,
not only to the Governors, but to the invited
guests who are leaders in their particular
fields in Israel.

Last year I spoke on human relations in
industry - a hobby horse of mine. In addition
to the Governors who attended there was the
President of Israel and a number of Ministers
and leading industrialists. The talk, with
questions, lasted a little over an hour and
was given at Noon on the opening day of the
Governors' meeting prior to a lunch which a
number of leading citizens attended.

.../...........

May 31, 1978

Dear Sir Marcus:

Dr. Kissinger has asked me to get in touch with
you about his proposed November 6-7 trip to
Rehovoth for the meeting of the Governors of
the Weizmann Institute. I know the invitation
is in the forefront of his mind, and he is
trying very diligently to make arrangements
to be there.

Mrs. Kissinger will undoubtedly accompany him,
as will two or three security personnel, the
exact number, unfortunately to depend on
conditions at the time. Dr. Kissinger wanted
me to inquire whether the invitation included
the travel and other expenses of the party.
It goes without saying that he would not want
to accept any form of honorarium, but if the
expenses could be taken care of I know Dr.
Kissinger would appreciate it.

With Dr. Kissinger's warmest personal regards,

The Honorable
Sir Marcus Sieff
Michael House
Baker Street
London, W. 1
England

HAK:

Unless you prefer otherwise, we
will respond to the attached as
follows:

Dear Mr. Siegel:

Dr. Kissinger appreciates the service
Home Life has provided over the years,
but does not think it would be appro-
priate to include his name in a list
of your clients for distribution
outside your office.

Thank you so much for writing.

Signed . . .

TC

Agree ✓

Prefer __________

-3/29/78

HK:

Dr. Philip Sigler called to tell you
he is in the process of arranging a
soccer game between the national teams
of Egypt and Israel this summer. Both
sides are interested, he says (he has
already talked to the Israeli
Minister for Culture, and is now
"pushing for a meeting with his
Egyptian counterpart.) Sigler was
clear and concise, and made it clear
he was not asking for anything from
you. He just wanted you to have in
the back of your mind that such an
effort was quietly underway.

Princeton
Weekly Bulletin

Sigmund: Analyzing Chile's politics

Professor Paul E. Sigmund's
peregrinations in the field of political
science have taken him from 15th-century
political thought to contemporary politics in
Latin America. His most recent book
concerns *The Overthrow of Allende and
the Politics of Chile, 1964-76*.

Published late last fall by the University
of Pittsburgh Press and available in
paperback this month, the study draws on
Sigmund's 15 years of Chile-watching,
including 10 trips to the South American
country and an extended stay as a visiting
professor in Santiago during 1967.

The book offers a detailed analysis of Chilean politics from the government of centrist Eduardo Frei to the present right-wing junta, concentrating on the rise and fall of the Marxist regime of Salvador Allende. Sigmund's main thesis: the overthrow of Allende in 1973 resulted chiefly from internal policies rather than from the external pressures brought to bear by the U.S. government, including covert activities by the CIA.

Sigmund's interest in Chile is more than
dispassionately academic. In his
conversations about Chile a real affection
comes through for the country and its
people, who have been called "the English
of South America" for their traditions of
free speech, political tolerance, and
nonviolence in public affairs.

His Chilean connection evolved out of a
long-standing interest in the history of
political theory. At Harvard he wrote his
doctoral dissertation on 15th-century
political thought — he continues to teach
political theory at Princeton — and later
investigated how the political philosophies
of the West affected developing nations.
When Sigmund joined the Princeton
politics department in 1963 he made a
tour of Latin American countries to study
the role of ideologies in shaping political
life. On arrival in Chile he found its citizens
immersed in debate over the upcoming
election between Allende and Frei. The
atmosphere, he recalls, was "heady."

In part because of its strong middle
class, says Sigmund, Chile has long
enjoyed a parliamentary tradition. Political
change has usually come through ballots
rather than bullets, while the rights of free
speech and assembly have generally been
held sacrosanct. (The 1973 coup and the

political repression that followed are
among the few exceptions to this.)

"Of all the countries I visited in 1963, I
found political ideas to be most vital in
Chile," says Sigmund. "The whole panoply
of ideologies was represented, each with
its own view of the world and each with a
coherent philosophy of life."

During Sigmund's teaching sabbatical in
Santiago in 1967 he lived in an intellectual
climate that was equally exciting. Chilean
universities were in the throes of student
unrest and political upheaval (a worldwide
phenomenon at the time). Sigmund taught
three courses, and the political leanings of
his students differed radically in each — at
the University of Chile his students were
Marxists, while at the Catholic University
he taught Christian Democrats in one
branch of the school and conservatives in
another.

"I had a three-way split in my classes
every week. The same remark would elicit
a very different response depending on

what class I made it in.

Much of Chile's political ferment, says
Sigmund, resulted from the traditionally
strong Marxist influence in the country's
Communist and Socialist parties. The
Marxist leader for 25 years was Allende.

Allende was narrowly defeated for
president in 1964 by Frei, a Christian
Democrat. In the 1970 election he
outpolled the right-wing and the Christian
Democratic candidates. (The constitution
forbade Frei to run again.) Because he
lacked a majority, however, the election
was ultimately decided by the Chilean
congress, which chose Allende after he
promised to support a "statute of
democratic guarantees," assuring the
maintenance of constitutional liberties.

Sigmund attributes Allende's fall three
years later to "fundamentally erroneous"
economic and political policies, which
polarized the country and destroyed his
tenuous support among the middle class.
The Marxist president, he feels, was also a
victim of the intractable politics of his own
leftist coalition.

Allende's decision to increase wages
and extravagantly subsidize
state-controlled industries and agriculture
led to rampant inflation and several
nationwide strikes by the relatively well-off
copper miners, the truckers, and the
organized interest groups representing
skilled workers and professionals.

"The middle class was doubtful about Allende in the beginning and fanatically opposed to him at the end," says Sigmund. "He was also saddled with the whole history of the left in Chile," which like its counterparts in France and Spain had formed an alliance of left-wing parties in the 1930s known as the Popular Front.

Because the extreme left in Chile felt
that the Popular Front had sold out by
cooperating with the center, Allende
agreed before the election to allow the
more radical Marxists to have a veto on
presidential policy decisions. Allende was
ready to compromise with the Christian
Democrats several times during 1972 and
1973, according to Sigmund, but his
moves in that direction were vetoed by the
extreme elements of his coalition.

"If he had been successful in these
efforts, we know now, from documentary

(Continued on page 4)

Prof. Paul Sigmund says impact of U.S.
intervention in 1973 Chilean coup was
overrated.

Tim Corica 78

Lessons drawn from Chile experience

(Continued from page 1)

evidence, it would have dissuaded the
military from intervening."

Sigmund believes that the effect of U.S.
involvement in the 1973 coup has been
overrated by the press and Allende
sympathizers. Between 1970 and 1973 the
CIA covertly furnished $6 million in aid to
the opposition, and the U.S. government
influenced international financial
institutions to cut off most new loans to
Chile. But Sigmund asserts that Allende's
downfall would probably have occurred
even without such intervention.

"You can show it wasn't crucial by comparing the period during and after the 1970 election, in which the CIA tried to prevent Allende from coming to power, with the events preceding the coup of 1973. U.S. intervention was unsuccessful in 1970 because Chile had strong internal forces committed to constitutionalism. The basic decisions were being made internally, and the decision-makers weren't ready to abandon the constitution as they were in 1973, when the annual inflation rate had reached 323 percent and the society had become completely polarized. U.S. intervention may have accelerated the process, but it's something that would have gone on anyway."

The element that used its CIA funds
most effectively, Sigmund added, was the
major conservative newspaper, whose
persistent criticism of the Allende regime
appears to have helped maintain the
morale of the opposition.

(Because of the Senate Intelligence
Committee report on the CIA in Chile,
written by three of Sigmund's former
students, we know a fair amount about the
U.S. role in Chile, but, says Sigmund,
scholars can only speculate concerning
the character and degree of the
intervention by Communist powers.)

As in a classical tragedy, the seeds of
Allende's downfall can also be found in his
own character, Sigmund is intrigued by the
"split personality" of Allende (whom he
heard speak several times but never met)
and the circumstances surrounding his
probable suicide.

Allende owed his political success to
parliamentary skills developed over
several decades as a member of the
Chilean congress. His lifestyle was
comfortably upper middle class and he
enjoyed the "good life" of the urban
bourgeoisie. Yet he was also a sort of
revolutionary *manque* who would have
liked, like Castro or Che Guevara, to have
come out of the mountains and seized
power at the end of a gun.

This ambivalence between bourgeois
democracy and romantic revolution is
captured, says Sigmund, in the dramatic
last photograph of Allende on the day of
the coup as he left his presidential offices
under armed guard. Dressed in a cardigan
sweater and tweed coat, Allende also
wears a combat helmet and carries a
submachine gun — a gift from Castro — as

machine gun while the military was closing
in. Results of an autopsy ordered by the
junta concluded that death was by suicide,
although this has been challenged by
Allende supporters.

Perhaps the best evidence for suicide
lies in Allende's comments about what he
would do if a coup ever took place.
According to Sigmund, he often talked
about suicide and had even been known to
point to a statue of a former president, who
had shot himself, and to assert, "That's the
way I'll go if I do not finish my term."
(President José Manuel Balmaceda, a
hero of the left, was deposed in 1891 after
trying to nationalize the British-controlled
nitrate industry. In a striking parallel,
Allende himself had nationalized the
U.S.-controlled copper industry.)

Sigmund believes there are several
lessons that can be drawn from Chile.
Perhaps the central one is that democracy
is fragile and cannot easily withstand the
stress of prolonged polarization. In Chile a
series of political and economic crises —
brought on by government policy and
effectively exploited by the extreme right
wing of the opposition — divided the
country into left- and right-wing camps.
This eroded "the center that holds
democracy together," says Sigmund, who
points out that the fate of Communism in
Chile has not been lost on European
Marxists, particularly in Italy.

Sigmund has been back to Chile twice
since the 1973 coup. He views it, sadly, as
"an open society that has become closed."

"When you got off the plane, instead of
seeing 20 newspapers and magazines on
a newsstand you saw three—all with
exactly the same point of view. When I
returned in January 1974 an 11:00 p.m.
curfew was in effect. I remember standing
on a hotel roof overlooking Santiago one
night. Except for the noise of helicopters,
military trucks, and some occasional shots,
the city was absolutely dead. All I could
recall was how active it had been six
months before. Now there wasn't a single
soul on the streets."

Recently there has been "some —
although not much — liberalization" in
Chile, primarily in response to President
Carter's human rights policy, but probably
not enough to help Sigmund in his current
research efforts. He is now studying the
internal politics of the Allende regime and
would like — but does not expect to be
allowed — to see the state papers for that
period. Instead, his primary sources will
probably be the many Chilean exiles in
Mexico and Venezuela.

Like an aficionado at the bullring.
Sigmund has been witness to the turmoil of
Chile's politics while safely removed from
the arena. It has been an enviable position.
A former colleague of his in Santiago, an
economist who is a native Chilean, once
noted:

"You Americans are always saying what
a great laboratory Chile is for studying
politics. That may be true, but it is no fun
being a rat in the laboratory."

THE
WASHINGTON
REVIEW

OF STRATEGIC AND INTERNATIONAL STUDIES

**Editors:**

David M. Abshire

Walter Laqueur

**Executive Editor:**

Michael A. Ledeen

**Associate Editor:**

Susan Sojourner

To: HAK
From: Michael Ledeen

Claudio Signorile, the number 2 man in the Italian Socialist Party, will be in Washington the first week in October for a conference at Airlie House.

The Italian Socialist Party has been resurrected by Signorile and Craxi on the basis of a very critical anti-Communist line, and the Embassy in Rome asked if it will be possible for you to see Signorile. He does not speak English, so an interpreter would have to be present.

I said I would transmit the message, but told them that you are unlikely to be in town, and that you have not seen anyone for the past several weeks, as you are working full-time on your book.

CSIS / 1800 K Street, N.W. / Washington, D.C. 20006 / Phone: 202/833-8595 / Cable: CENSTRAT

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COUNCIL OF ACADEMIC ADVISERS

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ADVISORY COUNCIL, CENTER FOR THE STUDY OF
GOVERNMENT REGULATION

Irving Kristol (chairman), Robert H. Bork, Bill Brock, Ronald H. Coase, Kenneth Dam, John N. Erlenborn, Bryce N. Harlow, Robert H. Hatfield, Ernest F. Hollings, Max M. Kampelman, Lewis Lehrman, Richard Posner, Richardson Preyer, R. Randolph Richardson, William Ruckelshaus, George P. Shultz, Paul Weaver, Murray Weidenbaum, Aaron Wildavsky, and James Q. Wilson. Marvin H. Kosters (director) and James C. Miller III (co-director).

Regulation
AEI Journal on Government and Society

"... because the extension of regulation is piecemeal, the sources and targets diverse, the language complex and often opaque, and the volume overwhelming, much of this activity escapes public notice and therefore public debate."

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Regulation
March/Apr 1978 AEI Journal on Government and Society

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Publisher, William J. Baroody, Jr.
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REGULATION, March/April 1978, Vol. 2,
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## LETTERS 2

## PERSPECTIVES on Current Developments 5

Hair Dyes, Cancer, and the FDA

Millions of CBs That Can't Be Sold

New Federal Budget Calls for More Regulators

CPSC Redesigns Its Injury Information System

Tighter Standards for Drinking Water

Funding Public Participation in Regulatory Proceedings

## VIEWPOINT: The Welfare State and the Decline of Electoral Politics 11

Ralph K. Winter, Jr.

## WILL LAWYERING STRANGLE DEMOCRATIC CAPITALISM? 15

Laurence H. Silberman

## GUADALAJARA! A Case Study in Regulation by Munificence 23

Antonin Scalia

## DEREGULATING TELECOMMUNICATIONS—Sorting Out Mixed Signals 30

Stanley M. Besen

## DEREGULATING TRANSPORTATION—Tracking the Progress 37

Thomas Gale Moore

## READINGS of Particular Interest 45

ISSN 0147-0590

Letters

We welcome letters from readers, particularly commentaries that reflect upon or take issue with material we have published. The writer's name, affiliation, address, and telephone number should be included. Because of space limitations, letters are subject to abridgment.

The Trucking Paradox

TO THE EDITOR:

Milton Kafoglis's excellent article on the value of motor carrier operating rights (September/October issue) presents key evidence on the adverse effects of some central features of ICC regulation. As Kafoglis notes, some groups within the ICC have come to see the escalating value of operating rights as a problem—even (perhaps) an embarrassment. But thus far the commission has balked at the most obvious solution—easing entry restraints so as to remove certificates' scarcity value; instead, as Kafoglis observes, it looks toward controlling certificate transfers—which would further decrease efficiency in trucking.

For the ICC to renounce detailed entry controls and compel competitive pricing would amount to a revolution—one for which the commissioners would have to be given public acclaim for exceptional cour-

age and altruism. But such a revolution is extremely unlikely as long as most of the ICC's support comes from the transportation providers. What is needed is a great leap forward in the commissioners' thinking—so that they reach to the general public and the commercial transport users for support, offering in exchange an economically rational set of policies designed to improve the efficiency of all transport services (even if this means less for the ICC to do). To make this feasible, education is of paramount importance, and the enlightenment afforded by Kafoglis's article is a significant contribution.

Jack Pearce,

Committee Urging Regulatory Reform for Efficient National Trucking

TO THE EDITOR:

I must take exception to the conclusion by Milton Kafoglis that “the evidence we have examined suggests that the cost of shipping goods by regulated motor carriers is excessive.”

He presents one substantial piece of new information—that forty-three trades of ICC motor carrier operating rights in the period 1967–1971 represented an average compounded annual rate of increase in value of 17 percent. However, his jump from this information to the conclusion that trucking prices are excessive is based upon a series of unsupported hypotheses and opinions and a peculiar application of economic analysis.

The basic theme of Professor Kafoglis's paper is that values of operating rights represent capitalized expectations of future profits and that the cost of those rights is reflected in the prices consumers pay for trucking services. I do not argue with the basic premise that operating certificates have value only because the government controls entry to the industry. It seems perfectly reasonable that a scarce “product” (one for which demand exceeds supply) will carry a relatively high price. And it is true that the ICC blocks aspiring entrants from many trucking markets. Thus

the “demand” for operating certificates in such markets exceeds the “supply” and said certificates therefore carry a relatively high price. As an employee of a firm which would like to expand into more trucking markets, I selfishly wish the prices of purchased operating certificates in certain markets were not so high.

However, as a student of transportation, I note that Professor Kafoglis has simply found an obtuse way of asking the same old question: Is there economic justification for regulating the trucking industry? The question has been asked thousands of times since 1935, and the arguments have been consistently the same. As John C. Spychalski points out (“Do Economists’ Perceptions of Trucking Deregulation Conform with Reality?” 1975), short-run marginal costs are substantially below long-run average costs in many sectors of the trucking business. Therefore, open competition tends to result in extremely unstable conditions relative to price and availability of service, at least in the short run while excess capacity exists in the industry. Modern experience with independent truckers in the unregulated agricultural trucking markets is a classic example of the unstable price and capacity availability problems which plague trucking markets with unrestricted entry. Modern experience with independent truckers is also a classic example of a chronic tendency to excess capacity in many segments of the trucking industry. The Supreme Court has repeatedly ruled that such “excessive” competition can be just as compelling a reason for regulation in the public interest as natural monopoly.

The argument can be made that lower average prices to transport users in an unregulated environment more than justify the associated unstable conditions described above. Indeed, surveys of shipper attitudes on deregulation show a significant minority of shippers favoring deregulation of trucking. However, there is substantial disagreement concerning whether prices would in fact be lower, on average, in an unregulated environment. A strong case can be made that although prices might be lower for large shippers making truckload-sized shipments, prices would in the long run be substantially higher for those shippers (predominantly small) forced to rely on the small-shipment-oriented general freight motor common carrier sys-

2 AEI JOURNAL ON GOVERNMENT AND SOCIETY

LETTERS

tem. (See my testimony, ICC Hear-
ings on Motor Carrier Regulatory
Reform, September 29, 1977.) How-
ever, for the sake of this discussion,
I will accept Professor Kafoglis's
contention that trucking freight
rates would drop under deregula-
tion to the extent that current
prices reflect a cost of ICC oper-
ating certificates.

The question, then, is whether
stability lent to the transport mar-
kets through ICC control of entry
into the motor carrier industry is
worth the cost.

It has been shown repeatedly that
shippers, on balance, value consist-
ency of service as highly as speed
of service, and that they generally
are willing to pay a substantial
premium for quality of service and
reduced uncertainty. For example,
Alexander Morton's study ("Truck-
Rail Competition for Traffic in Man-
ufactures," 1971) estimated that
shippers, on average, will pay 15
to 20 percent more for truck serv-
ice than they will pay for rail serv-
ice on the same shipment.

When Professor Kafoglis says
that trucking prices are "excessive,"
one would presume he means "rel-
ative to the premium shippers are
willing to pay for quality and sta-
bility." Unfortunately, he does not
offer an estimate of the percentage
of trucking prices that represents
the excess profits which purported-
ly are reflected in market values of
operating rights.

I have used two different methods
to provide such an estimate. The
first is based on the economic the-
ory that any future "excess" prof-
its that investors in general expect
a firm to earn will be reflected in
the excess of market value of the
firm over tangible book value. This
method generates an estimate,
based on 1977 median average mar-
ket value/tangible book value ra-
tios, of before-tax excess profits
equal to .6 of 1 percent of 1977 es-
timated trucking revenues. Some
theorists would argue that the cur-
rent prices of trucking stocks have
been discounted to reflect the risk
of deregulation and that historical
market value/tangible book value
ratios would thus be more appro-
priate. I disagree. In any event, use
of a five-year average for 1973-77, a
period which includes the glamour
years for trucking stocks, puts "ex-
cess" profits at 2 percent of truck-
ing revenues.

A second method of estimating
"excess" profits was suggested by
Professor Kafoglis in the original
version of his paper released by the
Council on Wage and Price Stabil-

ity. His method was based on a
misinterpretation of data released
by the American Trucking Associa-
tions (ATA) and produces estimates
which the ATA says are outlandish-
ly high. This method puts "excess"
profits at 4 percent of trucking
revenues. (The math of the two
methods is available on request.)

My estimates are not intended to
imply a high degree of scientific
precision, but rather to put Profes-
sor Kafoglis's charge—that truck-
ing rates are excessive—in perspec-
tive. Even if trucking rates would
be reduced through elimination of
entry controls in an amount equal
to the implied cost of operating
certificates (which is disputed by
trucking experts), the reduction
would lie in a range from .6 of 1
percent on the low side to 4 percent
on the high side. Considering that
shippers have been shown to be
generally willing to pay premiums
of 15 to 20 percent for high-quality
service and reduced uncertainty,
the Kafoglis conclusion seems very
much not supported by the evi-
dence.

Professor Kafoglis would have
made a more useful contribution
to resolving the regulatory reform
controversy if he had developed a
method for eliminating entry con-
trols without destroying the stabil-
ity inherent in the existing system.

Michael L. Lawrence,
Philadelphia, Pennsylvania

MILTON KAOFOGLIS responds:

I share Jack Pearce's concern about
the need for changed incentives so
that regulators are encouraged to
behave in the public interest.
Though the outlook for such change
seems bleak, we can take some com-
fort in the knowledge that there
have been (and are) regulators who
single-mindedly pursue the public
interest, irrespective of the conse-
quences to the bureaucracy, the in-
dustry, or their personal fortunes.

Notwithstanding the availability
of such persons, comprehensive re-
form of trucking regulation is ur-
gently needed. The reason is that,
as things stand, the motivation to
regulate in the public interest is
severely blunted by statutory law
and court precedents. Some mem-
bers of Congress recognize the
need for legislation, and we can
hope that this number will grow
as the facts become known and the
public becomes more deeply in-
volved. I appreciate Mr. Pearce's
judgment that my analysis has
contributed to this effort.

Michael Lawrence, on the other

hand, finds my effort a peculiar and
obtuse application of economic an-
alysis. He does not question "the
basic premise that operating cer-
tificates have value only because
the government controls entry"
and he affirms the empirical conse-
quence of my analysis by asserting
that "there are more truckers want-
ing to get into many trucking mar-
kets than the law . . . will allow."
He also agrees, albeit grudgingly,
that truck rates are higher with
entry restrictions than they would
be without them. We are agreed,
then, that there is a waiting line of
truckers ready to provide service
at lower rates than now exist, if
only the law would permit.

Though this state of affairs dis-
plesifies me, it is a source of com-
fort to Mr. Lawrence. He claims
that control of entry prevents "in-
stability" and encourages "im-
proved service," benefits which he
alleges are well worth the higher
price. The basis for his argument
is that, in trucking, "short-run
marginal costs are substantially be-
low long-run average costs." Under
such conditions, competing firms
could reduce price in the short run
to a point where none could sur-
vive in the long run. Thus, relaxed
regulation would lead to "instabil-
ity" and "chaos."

Economists would agree that, in
certain unusual circumstances, the
cost conditions described by Mr.
Lawrence could lead to the results
he fears. However, it is unneces-
sary to detail these circumstances
because the requisite cost condi-
tions do not in fact exist in the
trucking industry where 80 to 90
percent of the costs are variable
over a very short period of time.
The high ratio of variable to total
costs in trucking means that price
cannot fall far enough below total
cost for long enough to create per-
sistent excess capacity and so-
called "destructive competition."

I do not question that relaxed
entry might "be destructive" to
firms unable to withstand the
competition of more efficient or in-
novative firms. But I do argue that
service to consumers would not be
destroyed or seriously threatened
since such firms would be quickly
replaced from the waiting line of
truckers eager to serve. (The exist-
ence of the waiting line is not in
dispute.) Truckers, like restaurants,
can come and go, but consumers
will continue to be serviced. What-
ever instability open competition
would create would be of the sort
we see every day: the inefficient are
driven out of business while the

REGULATION, MARCH/APRIL 1978 3

LETTERS

customer finds a superior supplier, possibly at a lower price.

Mr. Lawrence seems to believe that competition will deny shippers the "premium" services which he alleges are provided by the regulated carriers. However, current ICC regulation (along with the motor-carrier rate bureaus) effectively prevents carriers from offering a less (or even more) deluxe service at a lower (or higher) price. In a competitive trucking market, shippers who want premium service at a higher price or less deluxe service at a lower price would find suppliers ready to meet their specific needs. ICC regulation prevents the rich variety of price-service options that the competitive market can provide. So much for theory; what are the facts?

Mr. Lawrence calculates that the premium now paid to truckers, to the extent it contributes to excess profits, is between .6 and 4 percent of total trucking revenues. He further guesses that shippers are "willing to pay premiums of 15 to 20 percent for high quality service and reduced uncertainty." These calculations and guesses leave the inference that regulation is a bargain for the shipper. However, they do not consider the actual cost of the alleged premium service that is also reflected in trucking rates. The trucker's excess profits (which Mr. Lawrence believes are the only matter in question) are simply payments over and above what is necessary to pay for the actual services received by shippers. Beyond the excess profits and payment for so-called premium services (which they may not want), shippers must also pay the costs of route inflexibility, route circuitry, and other inefficiencies generated by regulation, while taxpayers must support a regulatory bureaucracy at all levels of government. The "bargain" inferred by Mr. Lawrence's calculations is a fiction.

Mr. Lawrence cites (but does not describe) the "conditions which plague" the unregulated agricultural trucking markets. To my knowledge, the shippers of agricultural commodities do not have greater complaints than other shippers, and they pay much lower rates. When the list of exempt agricultural commodities was expanded in the 1950s, competitive pressures led to rate reductions of about 20 percent, and most shippers perceived an improvement in service.

This historical experience is now being repeated in the recently expanded commercial zones (areas

around cities that are exempt from regulation). According to the *Journal of Commerce* (January 6), preliminary studies reveal that this limited deregulation has led to rate reductions ranging from 2 to 50 percent, with the average being about 20 percent. It is also reported that some truckers are in "distress." This gives credence to some of Mr. Lawrence's fears, as well as to my own view, that inefficiencies on the part of the regulated will be exposed and eliminated by open competition. The same newspaper account states that a survey of 2,000 shippers revealed that "half felt the recent commercial zone expansion improved their LTL service, while a third said it lowered shipping costs." Said regulated truckers (like all those who compete) are having a hard time, service to the public has not been disrupted and prices are lower.

Indeed, what factual information we have tends to suggest that the predictions of those who favor relaxed entry and price competition may have been too modest. It is beginning to look as if rates will fall and service will improve with regulatory reform. Put another way, regulation may have encouraged shoddy service at a premium price, a result the opposite of that claimed by Mr. Lawrence.

## Kirkpatrick and Critics

**TO THE EDITOR:**

In her recent essay ("Regulation, Liberty, and Equality," November/December issue), Jeane Kirkpatrick attacks the belief that equality is the enemy of liberty in a democratic welfare state. In fact, she goes even further than that by ar-

guing that actions taken by government to make people more equal often create more liberty as well. Whether that proposition is valid depends on the meaning to be given to liberty and equality.

Professor Kirkpatrick starts off on the right foot when she speaks of liberty in the classical sense as absence of coercion or, more specifically, as freedom from government. But she quickly slides into a "positive" concept of liberty that also encompasses the capacity to realize desired goals. In effect, she takes liberty to mean freedom from want, and freedom from coercion to be merely one aspect of freedom from want.

In doing so, she creates confusion, because freedom from coercion is something quite different from freedom from want, and failure to distinguish the two is bound to beg issues that have been of fundamental concern over the ages. In brief, a slave may be well fed and otherwise free from want, but he is still a slave. In a more relevant context, when a democratic government takes property from Peter and gives it to Paul, the transfer of wealth must be justified on the ground that the resulting improvement in Paul's well-being is worth more than the combined loss of well-being and liberty suffered by Peter. There is no increase in Paul's liberty to enter in the balance. It follows immediately that governmental policies designed to bring about greater equality of circumstance necessarily diminish liberty properly defined.

Having said this, I hasten to grant that there are other categories of social equality that need not clash with liberty. Contrary to what Professor Kirkpatrick states at one point, liberty should not be construed as a boundless concept, extending even to the "freedom to kill." According to the precepts of classical liberalism, no person should be free to coerce others or to infringe on their freedom in other ways. Nor should anyone be free to sell himself into slavery or to lie, cheat, or steal. There must, then, be some political order—some legitimate coercive agency—embodied in any free society. Hence governmental policies designed to promote equality before the law or equality of opportunity or equality of treatment in other relevant respects need not be incompatible with liberty.

G. Warren Nutter,
University of Virginia
(Continues on page 52)

4 AEI JOURNAL ON GOVERNMENT AND SOCIETY

(19)

Perspectives
on current developments

The catalyst for the current controversy over regulating permanent hair dyes is a finding by the National Cancer Institute that a principal ingredient of these dyes causes cancer in animals. Subsequent to the release of this finding, the Food and Drug Administration announced (Federal Register, January 6, 1978) that it would require certain coal-tar hair dyes to bear a label warning consumers that the ingredients had caused cancer in laboratory animals. The resulting debate is a microcosm of the problems of legislation, laboratory testing, and conflicting views about appropriate government action that often complicate the regulation of substances posing chronic health hazards.

As for the legislation, the Food, Drug, and Cosmetic Act of 1938 authorizes the FDA to regulate cosmetics (including hair dyes) and, in most cases, to remove demonstrably dangerous cosmetics from the market. But in the case of coal-tar hair dyes, Congress limited the FDA's authority to requiring that package labels carry warning information. The merits of the limitation have been argued intermittently for forty years, but all attempts to modify it so far have failed.

As for the second problem, regulation of health hazards often depends on results from laboratory testing involving animals. In the case of coal-tar hair dyes, NCI researchers fed test groups of male and female rodents either high or low doses of a principal chemical (2,4-diaminoanisole sulfate) of these dyes, and post-mortem examinations of the test and control groups indicated higher incidences of some forms of cancers among all test groups. The matter at issue is the relevance of this finding for humans.

The Cosmetic, Toiletry and Fragrance Association, Inc., in recent testimony before the Congress, argued strongly that NCI's finding does not justify regulatory action since humans

apply the substance to their hair; they do not eat it. The CTFA cited five industry-sponsored studies which concluded that rats whose skins were painted with hair dyes showed no increase in cancer. Stressing the significance of this result, the association said that even though the skin application method reduces drastically the amount of the chemical absorbed into the bloodstream, the test animals still absorbed far greater amounts, allowing for their size, than would humans using hair dye.

Laboratory testing on animals, of course, does not provide direct evidence that a suspect agent causes cancer in humans. But sometimes it is all the regulator has to go on. Ethical and legal restrictions prevent long-term testing on humans, and epidemiological studies on humans are extremely difficult to conduct, with years passing before very definitive findings are available. Thus, the extent, if any, to which a chemical in coal-tar hair dyes increases the incidence of cancer in humans is not really known.

As for the problem of conflicting views about the appropriate regulatory response, it is complicated in this case by the nature of the scientific data. The FDA's position is that any chemical yielding positive results in animal tests must be considered a potential hazard to humans and therefore be banned from the market. The CTFA's view is that informed consumers should weigh the risks and benefits of products they consider purchasing but that, in the case of hair dyes, the scientific evidence is so inconclusive that there is nothing about which consumers need to be informed.

Both approaches have their drawbacks. The FDA's alternative, pushed to its extreme, would deprive consumers of goods they may value highly and for which they would assume some risks. The saccharine controversy clearly demonstrated the willingness of some consumers to incur potential health risks for products they like. Yet, the association's alternative,

REGULATION, MARCH/APRIL 1978 5

PERSPECTIVES ON CURRENT DEVELOPMENTS

pushed to its extreme, might result in some
consumers' using potentially dangerous prod-
ucts while assuming that the FDA is protecting
them from excessive risks.

Not too long ago, citizens' band radio was un-
known to most of us. During the 1950s the
Federal Communications Commission estab-
lished a Class D Citizens' Radio Service having
twenty-three channels and a range of from five
to twenty-five miles. The service was open to
almost everyone—that is, no specialized tech-
nical knowledge was required to obtain a li-
cense. Citizens' band activity grew slowly dur-
ing the sixties but took off in the seventies:
sales almost tripled each year between 1970
and 1974. If that growth rate had been sus-
tained, the United States would have been cov-
ered by a layer of CB radios within fifty years.

Several factors combined to produce the
explosive growth in CB radio sales. Advances
in electronic technology reduced the cost of
CB radios while improving their quality. In-
creased sales made them more valuable, since
each additional CB user on the road meant an-
other pair of eyes and ears reporting road haz-
ards. Further, CBs attracted publicity during
the 1974 truckers' strike, gaining glamor and
becoming something of a consumer fad.

But growth also led to congestion on CB
channels and interference with home television
reception. In July 1976, the FCC took a major
step to resolve these two problems: it expand-
ed the number of CB channels from twenty-
three to forty and tightened the restrictions on
"extraneous radiations" for CB sets so as to re-
duce interference with television reception. To
ease the effect on the industry, it ordered that
the new forty-channel sets not be put on the
market before January 1, 1977, that the manu-
facture of sets not meeting the new, tighter rad-
iation limits cease by August 1, 1977, and that
retail sales of such equipment cease five months
later (January 1, 1978).

Despite the advance notice and general
industry support for the FCC's initiative, con-
fusion overwhelmed the CB market. Whether
because the market was already saturated or
because consumers were confused by the

change from twenty-three to forty channels, the
demand for sets weakened. Consequently, late
in 1977, retail inventories included millions of
units that could be legally sold for only a few
more months. Retailers who had inaccurately
estimated demand for the old sets—or who had
become aware of the ban too late—were faced
with the prospect of owning merchandise they
could not sell. Prices tumbled, but sales still
were not sufficient to deplete the inventory.

In August 1977, manufacturers and retail-
ers petitioned the FCC to extend the sales dead-
line on old sets from January 1 to August 1
(1978). Consider the FCC's dilemma when
asked for this extension. If the FCC granted the
petition, manufacturers, distributors, and re-
tailers who had dumped their inventories in
anticipation of the January deadline would suf-
fer significant losses because of a seemingly
capricious regulatory action. If the FCC held
fast, millions of dollars of perfectly good hard-
ware would probably be scrapped. The chief
engineer of the commission supported the re-
quest for an extension, but the commission
itself, seeing no easy way out, chose consist-
ency and voted it down, four to two. Retail in-
terests appealed in court, but the court denied
a stay, and the sale of the old twenty-three
channel units became illegal at midnight New
Year's Eve. According to some accounts, re-
tailers who have millions of these units are en-
gaged in enormous haggling with manufactur-
ers over who is going to bear the loss.

If the 1979 budget is any guide, the increase in
regulation undertaken by the federal govern-
ment will continue. Of course, larger budgets
for regulatory agencies do not necessarily mean
more regulation, since the additional resources
could be consumed by efforts to reduce regula-
tion or by reduced agency productivity. None-
theless, the amount of activity an agency under-
takes would appear, in most cases, to be posi-
tively related to its available resources. More
specifically, the number of regulators and sup-
porting staff is one measure of an agency's ca-
pacity to increase the detail and breadth of its
regulation.

6 AEI JOURNAL ON GOVERNMENT AND SOCIETY

GROWTH IN EMPLOYMENT FOR THIRTY REGULATORY AGENCIES

<table><thead><tr><th rowspan="2">Agency</th><th colspan="3">Number of Employees a</th><th rowspan="2">Percentage<br/>Increases<br/>(Decreases),<br/>1977-79</th></tr><tr><th>1977</th><th>1978</th><th>1979</th></tr></thead><tbody><tr><td colspan="5"><strong>GROUP I</strong></td></tr><tr><td>Equal Employment Opportunity<br/>Commission</td><td>2,298</td><td>2,312</td><td>3,114</td><td>35.5</td></tr><tr><td>National Labor Relations Board</td><td>2,751</td><td>2,886</td><td>2,984</td><td>8.5</td></tr><tr><td>Occupational Safety and<br/>Health Administration</td><td>2,591</td><td>2,655</td><td>2,650</td><td>2.3</td></tr><tr><td>Employment Standards<br/>Administration</td><td>3,114</td><td>3,209</td><td>3,509</td><td>12.7</td></tr><tr><td>Federal Trade Commission</td><td>1,648</td><td>1,650</td><td>1,716</td><td>4.1</td></tr><tr><td>Antitrust Division</td><td>907</td><td>920</td><td>977</td><td>7.7</td></tr><tr><td>Securities and Exchange<br/>Commission</td><td>1,930</td><td>2,025</td><td>2,065</td><td>7.0</td></tr><tr><td>Patent Office</td><td>2,673</td><td>2,640</td><td>2,597</td><td>(2.8)</td></tr><tr><td>Consumer Product<br/>Safety Commission</td><td>914</td><td>900</td><td>899</td><td>(1.6)</td></tr><tr><td>Food and Drug Administration</td><td>7,340</td><td>7,490</td><td>7,583</td><td>3.3</td></tr><tr><td>Environmental Protection<br/>Agency</td><td>9,779</td><td>10,216</td><td>10,840</td><td>10.8</td></tr><tr><td>International Trade Commission</td><td>348</td><td>386</td><td>386</td><td>10.9</td></tr><tr><td><strong>TOTAL, GROUP I</strong></td><td><strong>36,293</strong></td><td><strong>37,289</strong></td><td><strong>39,320</strong></td><td><strong>8.3</strong></td></tr><tr><td>Internal Revenue Service</td><td>70,609</td><td>71,467</td><td>73,607</td><td>4.2</td></tr><tr><td colspan="5"><strong>GROUP II</strong></td></tr><tr><td>Civil Aeronautics Board</td><td>779</td><td>790</td><td>820</td><td>5.3</td></tr><tr><td>Interstate Commerce<br/>Commission</td><td>2,161</td><td>2,133</td><td>2,128</td><td>(1.5)</td></tr><tr><td>Federal Maritime Commission</td><td>304</td><td>345</td><td>351</td><td>15.5</td></tr><tr><td><strong>TOTAL, GROUP II</strong></td><td><strong>3,244</strong></td><td><strong>3,268</strong></td><td><strong>3,299</strong></td><td><strong>1.7</strong></td></tr><tr><td colspan="5"><strong>GROUP III</strong></td></tr><tr><td>Federal Aviation Administration</td><td>55,760</td><td>56,495</td><td>56,640</td><td>1.6</td></tr><tr><td>Coast Guard</td><td>6,333</td><td>6,421</td><td>6,421</td><td>1.4</td></tr><tr><td>Customs Service</td><td>13,519</td><td>14,581</td><td>14,903</td><td>10.2</td></tr><tr><td>National Highway Traffic<br/>Safety Administration</td><td>818</td><td>878</td><td>878</td><td>7.3</td></tr><tr><td>Federal Railroad Administration</td><td>1,447</td><td>1,604</td><td>1,642</td><td>13.5</td></tr><tr><td><strong>TOTAL, GROUP III</strong></td><td><strong>77,877</strong></td><td><strong>79,979</strong></td><td><strong>80,484</strong></td><td><strong>3.3</strong></td></tr><tr><td colspan="5"><strong>GROUP IV</strong></td></tr><tr><td>Federal Reserve Board</td><td>1,516</td><td>1,516</td><td>1,520</td><td>.3</td></tr><tr><td>Federal Deposit Insurance<br/>Corporation</td><td>4,162</td><td>4,362</td><td>4,500</td><td>8.1</td></tr><tr><td>Federal Home Loan Bank Board</td><td>1,363</td><td>1,475</td><td>1,503</td><td>10.3</td></tr><tr><td>Comptroller of the Currency</td><td>2,907</td><td>3,002</td><td>3,186</td><td>9.6</td></tr><tr><td>National Credit Union<br/>Administration</td><td>576</td><td>639</td><td>639</td><td>10.9</td></tr><tr><td><strong>TOTAL, GROUP IV</strong></td><td><strong>10,524</strong></td><td><strong>10,994</strong></td><td><strong>11,348</strong></td><td><strong>7.8</strong></td></tr><tr><td colspan="5"><strong>GROUP V</strong></td></tr><tr><td>Energy Regulatory<br/>Administration b</td><td></td><td>1,999</td><td>1,999</td><td></td></tr><tr><td>Federal Energy<br/>Regulatory Commission b</td><td>2,893</td><td>1,403</td><td>1,403</td><td>17.6</td></tr><tr><td>Energy Information Agency b</td><td>631</td><td>776</td><td>776</td><td>23.0</td></tr><tr><td>Nuclear Regulatory Commission</td><td>2,499</td><td>2,723</td><td>2,788</td><td>11.6</td></tr><tr><td><strong>TOTAL, GROUP V</strong></td><td><strong>6,023</strong></td><td><strong>6,901</strong></td><td><strong>6,966</strong></td><td><strong>15.7</strong></td></tr><tr><td><strong>TOTAL, ALL GROUPS</strong></td><td><strong>204,570</strong></td><td><strong>209,898</strong></td><td><strong>215,024</strong></td><td><strong>5.1</strong></td></tr><tr><td><strong>TOTAL, FEDERAL<br/>EMPLOYMENT</strong></td><td><strong>1,908,988</strong></td><td><strong>1,930,100</strong></td><td><strong>1,931,600</strong></td><td><strong>1.2</strong></td></tr></tbody></table>

a Full-time permanent employment as of September 30.

b Department of Energy.

Source: Based on the Budget of the United States, 1979, and the Department of Energy.

Turning to the President's budget to get the numbers on regulators and supporting staff, we find there no conveniently assembled list of planned appropriations for all regulatory activity. So the data in the accompanying table reflect our selection of regulatory agencies, based on normal usage of that term.

Agencies are grouped according to their jurisdiction. Group I agencies have broad jurisdiction under specific regulatory statutes; Group II agencies engage in economic regulation of transportation services; Group III agencies regulate transportation goods and services for safety and other objectives; Group IV agencies regulate financial institutions, and Group V agencies engage in economic regulation of energy. The table gives proposed end-of-year employment estimates of thirty agencies for September 30, 1978 and 1979, as well as actual employment levels on September 30, 1977. (Budget estimates for 1978 are, to a large extent, influenced by already completed congressional action on the 1978 budget.)

As shown in the table, total federal employment is projected to increase by 1.2 percent during this two-year period, compared with 5.1 percent for our thirty regulatory agencies. For the same period, employment increases are expected to average 8.4 percent for the agencies in Group I, 4.2 percent for the Internal Revenue Service, 1.7 percent for the agencies in Group II, 2.2 percent for Group III, 7.8 percent for Group IV, and 15.7 percent for Group V.

While the future level and direction of regulation cannot be derived from budgetary estimates alone, the President's 1979 budget clearly calls for continued growth in regulatory capacity.

REGULATION, MARCH/APRIL 1978 7

## CPSC Redesigns Its Injury Information System

Whether explicit or implicit, all federal regulatory agencies have some basis for deciding which issues to address. The Consumer Product Safety Commission not only does this explicitly, but gives the appearance of an unusual degree of sophistication by setting its priorities on the basis of a computer printout.

The CPSC is required by law to assure consumers that products are not unnecessarily hazardous. In order to obtain information on a systematic basis about which products cause the most injuries, the commission established a National Electronic Injury Surveillance System (NEISS) in 1972. This system is based on a sample of 119 hospitals, each of which supplies emergency room data on product-related injuries. Information on the patient's age and sex, the type and severity of injury, and the product involved is coded and transmitted daily to the CPSC computer. (NEISS notes only whether the product was involved in the accident, not whether it *caused* the accident.) The data are compiled monthly to determine the frequency and average severity of injuries associated with specific products. Products ranking highest on a combined frequency-of-injury/severity-of-injury scale are given priority attention for possible regulatory action.

Injuries of particular interest to the CPSC (those resulting in death or associated with flammable fabrics) may be subjected to follow-up investigations designed to obtain, when possible, the victim's account of the accident and to determine the extent to which the product caused the injury in question. To make the most of the person's memory and to reduce the likelihood that the product involved would have been discarded, investigations are conducted within seventy-two hours of the report.

The CPSC views NEISS as the best single source of statistics on product-related injuries. This is because the data are collected at a reasonable cost and are estimated to cover some 40 percent of the country's product-related injuries. But the difficulties involved in relying on such a system are apparent. First, there is the problem of how much confidence can be placed in projections based on the sample. Since data generated from the sample must be

"inflated" to estimate total injuries treated in all emergency room hospitals, and then be further inflated to represent the entire injury picture (emergency room and non-emergency room), the statistical accuracy of the sampling base is very important. But the current sample is derived from dated hospital and population figures, represents just the forty-eight contiguous states, and includes only 119 of the 4,906 hospitals that had emergency treatment units in 1968. In addition, its statistical accuracy has been diminished by the fact that some hospitals originally included on the basis of random selection have left the program and have had to be replaced.

To correct these deficiencies, the CPSC is now redesigning NEISS. The sample for the new system will be larger (130 hospitals instead of 119), will be selected on the basis of current data, and will include hospitals in all fifty states. An attempt will be made to use only the initial—randomly selected—hospitals. Hospitals from which the sample will be drawn are grouped into five categories based on facilities and numbers of emergency room visits, and each category's weight in the sample depends on how many hospitals fall in that category. Finally, since accurate and uniform information collection and coding are crucial, full-time CPSC employees will be placed in the new hospitals to perform these functions. (Most of the data are currently supplied to the CPSC by trained hospital personnel.)

The second problem relates to the utilization of NEISS data. Many have argued that the frequency/severity ratings would be more useful to the commission if the system included additional information about the products involved—such as their age and frequency of use. Information on product age might be used to analyze the effectiveness of “voluntary” safety standards self-imposed by industry and the relative safety of products of differing ages (product-age information is now collected only during follow-up investigations). Frequency-of-use information might be used to distinguish low-accident-rate products that are frequently used from high-accident-rate products that are infrequently used, thus giving the CPSC more information on the innate riskiness of different products.

One thing to bear in mind about NEISS is that it can, at best, suggest only the benefits of

8 AEI JOURNAL ON GOVERNMENT AND SOCIETY

eliminating product risks. As the commission itself has noted, other factors, such as the cost and likely effectiveness of regulating a product, are considered before action is taken. But some have suggested—the Council on Wage and Price Stability, for instance—that since NEISS directs attention to products solely on the basis of benefits, a misallocation of commission resources might result. The alternative is a priority ranking scheme based on net benefits—that is, the difference between the benefits of removing (or reducing) a product risk and the cost of doing so. This would enable the CPSC to allocate its own internal resources so that, on balance, society would gain the most from the commission's actions.

## Tighter Standards for Drinking Water

The Environmental Protection Agency is proposing new regulations for sharply reducing cancer-causing agents in municipal water supplies. This action, announced in the *Federal Register* on February 9, would amend EPA's 1975 interim drinking water regulations, which controlled harmful organic compounds only to a very limited extent.

EPA's proposal has two parts. (1) For trihalomethanes (THMs, that is, carcinogenic chemicals such as chloroform that are created when chlorine is added to drinking water), EPA would set a containment level of 100 parts per billion. (2) For water supplies susceptible to contamination by synthetic organic chemicals other than those resulting from chlorination, EPA would mandate a specific water-treatment technique.

Both parts of the regulation would initially apply only to communities of more than 75,000 people. One reason for the limitation is that the danger from exposure to THMs is less for small communities than for large—since the latter usually rely on surface water supplies that tend to have high bacteria counts and thus require more chlorine for purification. Another reason for limiting the standard to large communities is to minimize administrative problems and capital costs while still covering nearly 50 percent of the population.

The proposal outlines three ways of satisfy-

ing the THM requirement, their cost increasing with the seriousness of the problem. First, a community whose water slightly exceeds the allowable THM level could improve its filtration process through better coagulation and sedimentation practices (assuming it has a conventional filtration plant). Second, in more serious cases, a community could resort to disinfectants that do not produce THMs (such as chloramines, ozone, or chlorine dioxide). Third, in the most serious cases, a community could use a granular activated charcoal (GAC) filtering system. This last option appears to be the most practicable way for municipalities of over 75,000 to meet the allowable THM level since many large water supplies greatly exceed that level, and since other disinfectants are either relatively weak or potentially toxic.

As for the second part of the proposal, EPA decided to prescribe the GAC filtering system in this case because it would be difficult to monitor each synthetic organic chemical that might have an adverse health effect, and because synthetic organic chemicals other than THMs are best controlled by using the GAC filtering system. The proposal would affect water supplies that are near industrial discharges, pesticide run-offs, or other sources of possible contamination.

The cost of implementing both parts of the proposal would depend on how many municipalities have to adopt the GAC filtering system to meet the THM containment level. According to information supplied by EPA, total capital expenditures required by the combined proposal would appear to range from $291 million under low-cost assumptions to $685 million under high-cost assumptions. Operations and maintenance expenses would be between $34 million and $92 million per year under the same assumptions. The cost would also depend upon how long the water had to be purified (contact time) and how often the carbon in the GAC system had to be replaced (regeneration). Actual increases in residential water bills would depend on what portion of the costs was borne by nonresidential water users.

EPA's analysis of the proposed regulation makes no attempt to estimate benefits in terms of either dollar savings or reduced risk of cancer. Without such information, the agency has no way of determining whether, given alternative demands for public and private re-

REGULATION, MARCH/APRIL 1978 9

sources to eliminate health hazards, the proposed regulation is the most cost-effective means of achieving this goal.

## Funding Public Participation in Regulatory Proceedings

In 1975, Congress authorized the Federal Trade Commission to compensate "interested persons" for their expenses in participating in agency rulemaking proceedings, if three conditions are met. The FTC must find (1) that the applicant represents an interest "which would not otherwise be adequately represented," (2) that the representation of that interest is "necessary for a fair determination of the rulemaking proceeding," and (3) that the applicant is financially unable to participate effectively without compensation.

In 1976, the General Accounting Office ruled that other regulatory agencies had general authority to pay the expenses of persons who would contribute substantially to a full and fair determination of a proceeding. Fortified by the GAO's position, additional federal agencies have proposed or adopted regulations to provide compensation funds. For instance, the National Highway Traffic Safety Administration budgeted a total of $250,000 for this purpose in 1977. But the recent case of Greene County Planning Bd. v. FPC (2d Circuit 1977, certiorari denied 1978), in which the court held that the FPC did not have authority to make public participation grants, raises doubts about the correctness of the GAO rulings.

A bill sponsored by Senator Edward Kennedy (S. 270) would create a government-wide program of compensating interested persons who participated in all types of regulatory proceedings (rulemaking, ratemaking, licensing, adjudication, and judicial review of agency decisions). Two conditions are specified. First, the applicant would have to be expected to contribute substantially to a fair determination of the proceeding. In deciding this question, the agency would have to take into account the possibility that other participants (except the agency itself) would adequately represent the interest, the number and complexity of the issues, the importance of encouraging public participation, and the need to

hear from a balance of diverse interests. Second, the agency would have to consider the applicant's financial position. Compensation would be paid if the applicant could not participate without it or if the applicant's financial stake in the outcome were small compared with the costs of effective participation. A similar bill, H.R. 8798, is pending in the House.

Proponents of compensation for public participation point out that their proposals would not expand the existing legal rights of "interested persons" to participate in agency proceedings but are designed, instead, to overcome the high costs of exercising these rights. They argue that for some groups who stand to gain or lose from agency action, effective participation costs more than the members are willing to contribute.

Opponents of the idea maintain that additional participation would make agency proceedings more costly and time consuming, without demonstrably improving the quality of agency decisions. They also assert that a better way to guarantee representation of all interests would be to charge agency staffs with that responsibility. Furthermore, some critics worry that, in disbursing compensation funds, agencies would display favoritism or would reward and ultimately "capture" the representatives of interested persons or groups. They point out that the Kennedy bill would vest more discretion in the disburser than the FTC now has and that there is some controversy about how well the FTC program has worked.

Proponents respond that the problems of additional cost and delay could be offset by improved management of both the compensation program and the particular proceeding. They reject, on the basis of their experience, the argument that agency personnel can adequately represent disparate interests. And some of them contend that the risks of an agency's showing favoritism or "capturing" subsidized representatives can be reduced by having an outside agency make the compensation awards. Others, however, resist the notion of a central compensating organization.

Many other issues of organization, funding, and eligibility are also in dispute. Undoubtedly, the issue will receive much attention in view of the recent defeat of the proposed Consumer Protection Agency.

10 AEI JOURNAL ON GOVERNMENT AND SOCIETY

Viewpoint

Ralph K. Winter, Jr.

# The Welfare State and the Decline of Electoral Politics

CONCERN OVER burgeoning government increases even among staunch supporters of the welfare state. Calls for reducing the size of government and for deregulating many industries are heard on the Left as well as on the Right. There seems, moreover, to be a widening consensus that many social welfare expenditures cannot be justified as measures that help the less well off. Nevertheless, the growth of government proceeds unchecked.

There is also a concern that voters are increasingly indifferent to electoral politics, perceiving them to be increasingly irrelevant. In 1976, although the presidential contest became a virtual toss-up in its last weeks, the percentage of the voting-age population that actually voted was smaller than in the no-contest campaign of 1972. Congressional candidates of all persuasions also seemed unable to turn on the voters, who appeared interested in the campaign more as spectators than as participants.

These perceptions—that government continues to grow while an anti-government philosophy prevails among voters and that voters increasingly regard electoral politics as irrelevant—are related phenomena, for, as I suggest below, once the welfare state reaches a certain size, a partial paralysis of the political process is likely to occur. The result of this paralysis will be that the size of government cannot be easily controlled by normal democratic processes and confidence in electoral politics will decline.

The prevailing political rhetoric indicates that philosophically most voters want less gov-

ernment, less taxes, less inflation, along with the maintenance of a decent level of support for the genuinely poor. These do not appear to be impossible or inconsistent tasks. To the contrary, the increase in social welfare expenditures by federal, state, and local governments between 1960 and 1971 alone, if given directly to the poorest 25 million people, would provide a family of four with an annual income of about $19,000. Since that far surpasses the median income—not to mention the poverty line—we can in fact eliminate poverty, reduce taxes and inflation, and limit the size of government by the simple act of giving only some of the money already devoted to social welfare directly to the poor and leaving the rest with the taxpayer. Further reductions in the size of government and in the price of consumer goods would be achieved by eliminating a number of regulatory programs that economists almost universally agree are a source of economic inefficiency and harm to consumers.

Although these options may seem irresistible, few enterprising candidates would dream of running on such a program in most states or congressional districts. The vast bulk of welfare state programs do not aid just the poor but spread their benefits widely and without regard to need—because, as Irving Kristol has written, “Congressional compassion is always tempered by political realism, and the congressional impulse is always to spread its compassion over the largest possible share of the electorate.”

No one seriously believes existing farm programs are designed to aid only the poorest 10 percent, or even 20 percent, of our farmers. Veterans' programs involve enormous funds but no one claims they are designed only to

Ralph K. Winter, Jr., is professor of law at the Yale Law School and adjunct scholar of the American Enterprise Institute.

REGULATION, MARCH/APRIL 1978 11

WELFARE STATE AND ELECTORAL POLITICS

help poor veterans. Aid to education has its
most direct impact on middle-class teachers,
while the school lunch program is fighting pov-
erty at the fanciest private schools. Even ex-
penditures for the truly poor fall to a disturb-
ing degree into the hands of middle-class pro-
fessionals and administrators.

The idea of the welfare state as a means
for protecting individuals or families against
catastrophic illness or genuine deprivation—
and, in the words of Jeane Kirkpatrick, as a
means for "providing a minimum of income
and security for all" (Regulation, November/
December)—has in practice been abandoned.
In its stead is the notion that no material desire
is necessarily outside government's responsi-
bility.

So too we have come to act as though no
economic hardship—no matter how minor or
how related to changes in consumer tastes—
needs to be tolerated, even at the price of a
government-supported monopoly. We have thus
witnessed the steady growth of a regulatory
apparatus designed to protect particular groups
from market competition. Almost all interstate
commercial transportation is a federally pro-
tected cartel. Other industries benefit from im-
port quotas or analogous restrictions on for-
eign competition. Many businesses receive di-
rect or indirect subsidies from government, and
work on government contracts is usually done
at inflated wage scales. Although none of these
programs directly helps the genuinely poor,
and all penalize consumers or taxpayers, they
are generally accepted as a routine exercise of
government's legitimate responsibility.

IT IS EASY enough to understand how
spreading political compassion over as many
voters as possible got us into our present re-
grettable posture. It is harder to understand
why, with many signs indicating that voters
want a change, we do not extricate ourselves.

One problem is that we are conditioned
to view the welfare state as an instrument of
compassion and generosity rather than as the
benefactor of special interests. Even relatively
conservative candidates, for example, when
confronted with an opponent who declares,
"America can do more in the fields of housing,
education and aid to our cities," tend to react
defensively and object only on grounds of cost.
Rarely do they challenge the sincerity of that

candidate's compassion for the poor. Yet the
specific voters appealed to are for the most
part not the poor—who are a relatively small
fraction of the total population and a much
smaller fraction of those who actually vote—
but the construction industry and those who
serve it (insurance brokers, for example),
teachers at all levels of education, students
(who are generally not poor), municipal em-
ployees, and the middle-class recipients of mu-
nicipal services.

A second problem is that some groups
(government employees, for example) receive
such a high proportion of their total income
from government that an across-the-board re-
duction in its size or function would cause
them a net loss. Most citizens, of course, would
experience a net gain, any loss in benefits being
offset by a reduction in taxes and monopolistic
prices. Unfortunately no significant portion of
the taxes an individual pays is allocable to one
particular program, just as no significant por-
tion of a product's price is visibly caused by the
Interstate Commerce Commission. As a result,
few individuals perceive that the particular
programs which benefit them are a significant
cause of high tax rates, inflation, or govern-
ment size, or, conversely, that elimination of
those programs would significantly reduce their
taxes.

What voters *may* instinctively understand
is that the elimination of programs which spe-
cifically benefit them will reduce taxes and
government *only* when combined with the elim-
ination of a number of others which do not.
But the political system does not offer such
voters a way to ensure in advance that enough
other programs will in fact be terminated so
as to leave them with a net gain. Enactment of
such a reform depends upon the acts of several
hundred legislators and a President—as well as
upon public opinion on other issues that are
competing for attention—so that no candidate
for any office can guarantee the outcome.
Voters thus understandably fear that acts of
self-abnegation will not be reciprocated and
that they will lose their benefits while continu-
ing to suffer under the burden of heavy taxes.
When it comes to reducing government, there-
fore, the voters' quite reasonable response is,
"After you."

Electoral campaigns and legislative behav-
ior are profoundly affected by this phenome-

12 AEI JOURNAL ON GOVERNMENT AND SOCIETY

non. Many candidates adopt the general rhetoric of diminished government (but only for programs that do not benefit strategically located constituents), promise greater specific benefits than ever to these constituents, and deliver on this promise by acquiescing in legislative log-rolling—which continues to increase government expenditures. Both Mr. Carter and Mr. Ford vied with each other to be “anti-Washington” but both made it clear to key groups in the electorate that they could count on federal help.

The lesson taught our citizenry by welfare state politics is not compassion but selfishness, the view that if one group, no matter what its ideological orientation, does not grab its “share” from government, another will. This competition may lead to an array of claims for government support that is impossible to satisfy fiscally, yet impossible to deny politically. In such circumstances, political campaigns become surrealistic rituals. Thus, the recent Democratic mayoral primary in New York City found the candidates obsessed (and gratefully so) with the death penalty issue, over which the mayor has neither power nor responsibility.

Voter behavior is also affected. Policy issues have declined in importance as the skill of a congressman in facilitating the delivery of government benefits has increased. This phenomenon, along with others, has resulted in an extremely high rate of electoral success for incumbents. On policy issues, therefore, American voters are in the midst of an identity crisis. Philosophically they apparently want less government, but they cannot find a realistic way of bringing that result about. Why should they not feel that elections are increasingly irrelevant?

There is a tipping point at which the breadth of welfare state benefits is sufficient to impair the capacity of government to reverse the trend toward more taxes, rising inflation, and greater size, even though a large majority of the citizenry may actually desire such a reversal. At this point, governmental paralysis may result.

Persistent inflation is evidence of a paralysis over the choice between the conflicting pressures to lower taxes and to raise expenditures. Inflation is chronic in the omnipresent welfare state, partly because printing money is politically less visible than a direct reduction in government expenditures or a direct increase in taxes. Inflation of course is a compromise, since it reduces the value of expenditures and increases the taxes paid, particularly if taxpayers are moved into higher tax brackets. But chronic inflation is a painful compromise and it is not surprising that it may cause a loss of confidence in the political process.

Another feature of our welfare state contributes to the feeling that electoral politics are irrelevant. A welfare state that extends its bounty beyond the genuinely poor and dispenses services as well as money requires a large and complex bureaucracy to administer it. This bureaucracy in turn reduces the relative power of the elected branches of government. Many of our social and economic programs entail a delegation of power to non-elected officials who are able thereafter to make law on their own. This essentially legislative power in many ways exceeds that of the Congress, although rarely are the actions of the bureaucracy subject to the kind of prolonged and searching debate that precedes—or should precede—major legislative acts.

© Washington Star Syndicate, Inc.; permission granted by King Features Syndicate, Inc., 1976.

REGULATION, MARCH/APRIL 1978 13

Although the welfare state bureaucracy is not democratically responsive, each component of that bureaucracy tends to view itself as a representative of a particular interest group. Thus, the Department of Agriculture acts as a representative of farmers, those who administer the Davis-Bacon Act regard their constituents to be the construction unions, and the Equal Employment Opportunity Commission views minority groups as its principal constituency. All concerned, whether they benefit or suffer from acts of the bureaucracy, tend to regard it—rather than the Congress and the electoral process—as the focus of the political struggle over a number of critical issues. This must account in part for the paradox that the more the government is involved in our lives, the less relevant elections seem, a mood which is clearly anti-democratic.

For example, the quota issue is a fundamental question, going to the very heart of the kind of society we want to be. We have, however, without legislative act or significant public debate, begun to impose racial and sexual quotas on employers and educational institutions through the acts of the welfare state bureaucracy. Those who favor such measures view it as standard operating procedure to seek them through administrative decision. Those who oppose such measures believe their remedy is in the courts, which are also outside the electoral process. The elected branches are regarded by all as so irrelevant that the issue of quotas was hardly mentioned in the recent campaign. Indeed, the first considered formal statement by President Carter on the matter appears to be the Department of Justice's amicus brief in the *Bakke* case. That few regard this situation even as odd underlines how accustomed we are growing to anti-democratic government.

MY ARGUMENT, of course, is subject to an important qualification. At bottom it rests on the proposition that voters, acting rationally in their economic self-interest, will cause government size and expenditures to grow. But voters may react to a variety of interests, some of which may countervail the economic war, for example, popular or unpopular, may transcend all other issues, just as appeals to nationalism can generate major economic sacrifices. So too voters may become sickened at the sight of

their government's abusing its taxing power to serve as a grab bag for those who are politically able to carry away the most. A consensus might develop that called upon government to protect only against genuine deprivation and catastrophic loss and rejected the idea that the present size of government is necessary in the name of compassion.

If so, the immediate step must be to limit all new programs—and, where possible, to divert the old—to alleviating genuine deprivation. In fulfilling that responsibility, we should, where possible, make cash grants to individuals rather than undertake to deliver services. Not only would that be cheaper but it would avoid much of the threat to democratic rule arising from the delegation of legislative power to a bureaucracy. Government grants, moreover, should not be conditioned on the recipient's adhering to any regulation not specifically authorized by legislation. Progressive income-tax brackets should be indexed according to cost-of-living changes so that government's profit from inflation is reduced.

Finally, there is a method, unique to a nation with a written constitution, by which the "after you" response to calls for reducing the size of government can be muted. Constitutional amendments can provide assurances that a reduction in one voter's benefits will be reciprocated by others, so that all benefit. Unlike the election of representatives, the amending process permits binding commitments by all to particular policies, an "all together, now" instead of "after you" approach. There is not the space here to discuss the details or appraise the kinds of amendments that might be appropriate. Among the species, however, is the proposal to set a limit on government expenditures as a percentage of gross national product. These matters are complex but worthy of far more attention than they have received in light of the impact of welfare state politics on the responsiveness of democratic political processes.

SUCH MEASURES seem drastic. In truth, they would merely stabilize the present situation and end the spiral of taxes, inflation, and government expenditures. Those who dismiss them out of hand have an obligation to offer something other than more of the same and a further obligation to tell us how else we can reverse the present drift away from democracy. ■

14 AEI JOURNAL ON GOVERNMENT AND SOCIETY

Laurence H. Silberman

THE LEGAL PROCESS is essentially the adversary procedure by which we interpret, apply, and sometimes create law. And what we call the "rule of law" is indispensable to the very existence of both capitalism and democracy. For capitalism cannot develop unless private property is, at least to some degree, protected against private assault and arbitrary governmental confiscation. Indeed, as Paul Johnson emphasizes (*Enemies of Society*), the development of the "rule of law" in England gave that country an advantage over its European competitors and therefore explains why the Industrial Revolution developed first in the British Isles. Similarly, democracy, the only form of government that legitimates and even institutionalizes dissent, requires legal support for peaceful political activity—free speech, free assembly, a free press, and the rest—without which dissent cannot flourish. That said, it is also true that the legal process, because of its unbridled growth, has become a cancer which threatens the vitality of our forms of capitalism and democracy.¹

Capitalism, of course, is based on private, market-oriented decision-making, whereas the legal process, although it normally takes the form of an adversary proceeding in which private interests play their part, is in reality a way in which the government asserts power. Today,

Laurence H. Silberman, former deputy attorney general of the United States and U.S. ambassador to Yugoslavia, is senior fellow at the American Enterprise Institute and counsel to the law firm of Dewey, Ballantine, Bushby, Palmer & Wood.

© 1977 by Laurence H. Silberman.

there is an increasing awareness in the industrial democracies that a certain degree—a tipping point if you will—of governmental intervention into the workings of the economy begins to erode the natural vigor of capitalism. Reliance on the legal process contributes to the sum total of governmental intervention and thereby endangers our economy.

Democracy is also threatened because it obviously depends on a government that responds, at least over time, to popular majority will. The legal process is a form of governmental decision-making in which those who decide (adjudicate) are, to a greater or lesser extent, removed from politics—which is another way of saying they are not responsive to popular will. As already noted, certain protections against the democratic political process are needed in order to ensure the very functioning of democracy, but the growing use of the legal process eventually erodes the vigor of other governmental institutions directly responsive to the populace, and thereby the health of democracy itself.

By legal process I mean to include not only court proceedings but also the activities of the entire panoply of tribunals that have proliferated in the United States in recent

¹ It is fashionable today to describe the American economy as "mixed," a not very descriptive term employed to avoid giving positive value to the private sector. Since I, unabashedly, assert that value, I prefer "modified capitalism"—a term which raises the issue how much modification capitalism can take without losing its acknowledged virtues. It is, however, with acceptance of its modified character that I use the word capitalism throughout.

REGULATION, MARCH/APRIL 1978 15

years. Some commentators focus concern on the growth of litigation in the United States; others decry the regulatory explosion. But actually those two trends are interrelated and complementary. Certain regulatory agencies adjudicate in what has come to be called a quasi-judicial fashion, others litigate before courts, and most do both. But even when adjudicatory authority is given to a regulatory agency, the courts are always granted authority to review agency decisions (under a greater or lesser scope of review). In other situations jurisdiction to rule on particular issues is given to, or asserted by, the courts directly. In either event, the common link is the displacement of private and political decision-making by adjudicators, whatever their titles, to whom claims are presented in an adversary manner. This work, both the adjudication and the presentation, is normally done by lawyers.²

That an adversary procedure is used is fundamental to the expansion of the legal process. If our jurisprudence grew out of an inquisitional tradition—in which judges openly supervised inquiry—it would be much more apparent, and perhaps less tolerable, that the legal process was gaining such power. In a sense the adversary procedure disguises that trend because it deceptively suggests a neutral umpire-like role on the part of adjudicators and merely an advocates' role for the lawyers.

Although the legal process is distinctly adversary, it is by no means uniquely so; all societies devise forms to respond to and channel the adversary or competitive nature of man. Our government, our Constitution, was devised in accordance with the notion that an adversary political clash of various conflicting economic, social, and sectional interests was the best protection against the dominance of any group or class. That concept implicitly assumed that no one economic or social interest was morally superior to the rest—although, as Madison put it, "a coalition of a majority of the whole society could seldom take place on any other principles than those of justice and the general good." The successful coalition of interests—these coalitions inevitably become political parties—would be the one that could attract the greatest number of votes. The legal process, however, is a quite different sort of adversary proceeding because the winner or prevailing interest is the one deemed to have

the "better" position in accordance with a legal-moral standard.

Capitalism and democracy, in common, stand for competition for the allegiance of the public as either consumers or voters. The legal process, on the other hand, is fundamentally antithetical to both because the competition is for the ear of a government official who will determine the superior claim among litigants, usually, as discussed later, in terms of priority of rights.

I

This century has seen enormous governmental growth in all the industrial democracies, ostensibly in pursuit of greater equality of condition. But direct government control of the economy (public ownership of production), although common in Western Europe, has never been attractive to Americans, perhaps because of a residual distrust of governmental tyranny. Moreover, our constitutional system makes the direct accretion of governmental power more difficult here than in any other democracy. The Constitution, of course, grants certain authority directly to the President and the judiciary, but the primary method contemplated whereby the government gains new authority is legislation (the secondary one being constitutional amendment). And legislation requires not only a majority vote of the two separate houses of the Congress but also either the assent of an independent executive or a two-thirds vote of both houses to override the executive's veto. Naturally, the more difficult

² Not all American lawyers are directly engaged in litigation, although with the growth of administrative regulatory agencies and the enormous increase in federal and state court proceedings, litigation work is growing much more rapidly than counseling. In any event, legal counseling as opposed to business counseling, which some lawyers do, is always shaped and directed by the prospect of litigation. Moreover, that many, even most, legal controversies are settled after or before suit is actually filed does not detract from the growing reliance on the legal process. Since these negotiated settlements are reached in accordance with lawyers' views on the probable results of litigation, they actually extend the adjudicators' impact. Thus, the relevant question is: what is the rate of transference of controversies into legal disputes? My own guess—the rate would be virtually impossible to measure—is that it follows closely the rate of increase in actual litigated cases or, for that matter, in the number of lawyers.

16 AEI JOURNAL ON GOVERNMENT AND SOCIETY

the legislative process, the easier it is for a de-
termined minority to block passage. Therefore,
in the United States, as opposed to the parlia-
mentary democracies, legislation has usually
required a fairly broad national consensus.

Not surprisingly then, those in this coun-
try who wish to increase governmental power
are led to seek it indirectly, and less obvious-
ly, through the legal process. So long as induc-
ing judges to rule on complicated social and
economic issues is easier than getting bills
through Congress, judge-made law is prefer-
able to legislation.

That Americans rely so heavily on the legal
process is not totally a new phenomenon;
Tocqueville noted this peculiarity of American
democracy over 130 years ago. Still, until rela-
tively recently the prevailing view among law-
yers, law professors, and judges—mindful as
they were of the undemocratic nature of the
legal process—was the need for judicial self-
restraint. Judges were not to make policy;
their authority derived only from the necessity
to settle, in accordance with law, disputes be-
tween private parties that could not be settled
elsewhere.

In the 1930s the acceptance of this judicial
limitation led to the creation of a score of in-
dependent regulatory agencies. Those who
wished to extend governmental power through
the legal process but were reluctant to openly
grant policy-making authority to judges turned
to the concept of an independent agency which,
because of its quasi-legislative character and
supposed expertise, was thought more appro-
priate for this role. These tribunals—which
Charles L. Schultze, chairman of the Council
of Economic Advisers, calls command-and-con-
trol modules—engage in lawmaking, but it us-
ually is a peculiar kind of lawmaking in which
the extent of policy discretion is often dis-
guised by the use of a form of legal adversary
procedure to present alternative arguments
and supporting information to those who de-
cide. This procedure suggests mere statutory
interpretation rather than creation of policy.
Some of these agencies, like the National La-
bor Relations Board, are still reluctant to issue
rules rather than enunciate policy at the end
point of litigation because adjudication is even
less obviously policy-making than rulemaking.

Paradoxically, after the creation of so
many of these regulatory agencies, judges, es-

chewing concepts of judicial self-restraint, be-
gan more assertively to set policy themselves.
Appellate review of agency decisions, initially
quite restrictive, expanded as judges became
more assured of their own policy judgments.
Even more striking was the expansion of orig-
inal jurisdiction to cover disputes not tradi-
tionally thought appropriate for judicial scru-
tiny, and the new ease with which litigants
gained access to judges.

One hundred years ago litigation was a
very chancy business. Rules of court were en-
crusted with arcane tradition, and a technical
mistake in pleading could destroy a cause of
action. Trial itself carried almost unforesee-
able risks. In those days one did not lightly
go to court. But reform came—the reformers
asserting the need to bring courts into the
twentieth century; litigation was simplified
and much of the gamesmanship eliminated.
Thus, in the 1930s discovery procedures de-
signed to minimize surprise at trial were intro-
duced into the federal courts.³ Significantly,
these procedures greatly expanded the infor-
mation available to judges inclined to broaden
the reach of judicial decisions.

More recently we have seen the erosion of
doctrines by which judges once limited their
own jurisdiction. The avoidance of political
questions, the requirement that a dispute be
justiciable and ripe, the insistence that a party
to a cause have standing (a sufficiently direct
interest in the dispute)—these doctrines and
many others have washed away before the
flood of petitions for judicial intervention and,
by disappearing, have encouraged more peti-
tions.

Indeed, with the rise of public interest law
firms of both Left and Right, devoted to the
advancement of scores of political causes,
lawyers today increasingly represent these
causes rather than parties before the courts.
The expansion of class actions has reached the
point where the plaintiff is more fictional than
real (Nathan Glazer speaks of the phantom
plaintiff) and, with the liberal award of at-
torney's fees, it may soon be possible to do
without litigants altogether (so long as the

³ Discovery procedures include both oral (deposi-
tions) and written (interrogatories) pre-trial ques-
tioning as well as demands for production of docu-
ments. The scope of permissible pre-trial inquiry is
much broader than that which governs trial itself.

REGULATION, MARCH/APRIL 1978 17

court finds a target for judgment).

As the courts became more and more accessible and as judges unashamedly reached for policy, the judiciary constituted an even more attractive force for political and social change than the administrative agencies. Ironically, it was once thought that judicial review would hold agency activism to congressionally designed parameters. Today, it is difficult for many agencies to catch up with the pace of judicial activism. Even ambitious civil rights enforcement agencies have been continually challenged by the speed with which courts discovered new meanings in the Constitution and in recent (as well as nineteenth-century) statutes, thereby tending to convert anti-discrimination law into a grand racial or ethnic proportional representation scheme.

## II

The growth of the legal process is not occurring without the wholehearted support of a good portion of the American intelligentsia. Those who fundamentally distrust choices made by the population as a whole, in both economic and political spheres, wish to divert as many issues as possible to the legal process. The first step in this transference is to describe an interest as a right. Once that is accepted, it is only a matter of time before courts assert authority to define and protect the right. (As Nathan Glazer points out, in protecting rights courts feel impelled to go to the "root of the problem"—which inevitably results in courts' issuing detailed administrative decisions.) A right is, after all, a priority that the holder can assert against adversary interests—even when those adversary interests are in the majority—because a right is perceived as having a superior moral claim to other interests. Certain rights constitutionally granted are virtually absolute priorities against all comers; others are of a lower order of priority. But all rights are to be protected by those institutions in our society—courts and other tribunals—that are empowered to stand against democratic will. A right, then, is a grant of jurisdiction to the legal process.

We have come a long way since Thomas Jefferson listed as unalienable rights life, liberty, and the pursuit of happiness.⁴ The Consti-

tution, particularly its amendments, guarantees the essence of those legal rules that I have described as required by democratic capitalism. But new rights are constantly asserted and judicially recognized. Obviously, every new right so recognized reduces the scope for both private decision-making and the political process. What Peter Berger and Richard Neuhaus call mediating structures—families, churches, schools, corporations, labor unions, and political parties—because they stand between government and the individual (and which I prefer to call intermediate institutions since they should *not* be thought of as owing their legitimacy to any function performed for government) are, without question, indispensable pillars of a pluralistic democracy. Yet, their capacity to manage their own affairs is continually challenged—most often with respect to the crucial matter of internal discipline—by the creation of new individual rights antagonistic to institutional rights. In this fusion only the legal process benefits; its sway continuously expands.

Currently it is fashionable to speak of every American's right to a job. The government should be obliged, according to some, to provide employment (a "meaningful" job at a "decent" wage) to all those who cannot find such in the market. Make no mistake, advocates of this notion well understand the institutional significance of couching it in terms of

> Perhaps, now that courts administer prisons, schools, [and] hospitals, ... it is time for judges to assume the challenge of macroeconomics. Nevertheless, we should clearly understand what a raid on democracy this rights-creation business really is.

right; an early draft of the Humphrey-Hawkins bill actually provided for judicial recourse to those who would assert the right. It is hard to imagine a question more central to the political process in this or any other industrial democracy than the relationship between inflation

⁴ Jefferson notwithstanding, Ronald Dworkin in *Taking Rights Seriously* (Cambridge, Mass.: Harvard University Press, 1977) argues that there is no general right to liberty—essentially because you cannot plead it in a complaint.

18 AEI JOURNAL ON GOVERNMENT AND SOCIETY

and unemployment. To allow unemployed Americans to sue the government and assert their priority for employment would be to give judges authority over that central issue. Perhaps, now that courts administer prisons, schools, hospitals, even large portions of state governments, it is time for judges to assume the challenge of macroeconomics. Nevertheless, we should clearly understand what a raid on democracy this rights-creation business really is.

### III

Who are the beneficiaries of this trend? Most directly, American lawyers who profit by the increased business and from whose ranks the judges and agency heads are drawn. They share a community of interest with the intelligentsia who wish greater governmental growth and with the bureaucracy that staffs the government agencies. Indeed, the "new class"—the term Irving Kristol and others use to describe those academics who, along with the bureaucracy, stimulate governmental growth (in large part for the power it bestows on its sponsors)—has formed a triple alliance, private lawyers being the third ally. So long as the path of governmental expansion is in the direction of the legal process, most lawyers will support the alliance's goals. Even lawyers who philosophically oppose governmental expansion are understandably somewhat mollified when it takes familiar and profitable forms. This is not to suggest they are greedy, only human.

Perhaps it is inevitable that those who train for law school reflect attitudes consistent with self-interest. Still it was not always true, at least not to the present extent; law faculties at one time were heavily staffed, if not dominated, by professors who brooded over the anti-democratic character of the legal process and therefore impressed upon their students the need for its cautious use. Now it seems that law schools are centers of distrust for capitalism (and contempt for businessmen) as well as impatience with democratic institutions.

One reason for the antipathy to capitalism that marks so many American lawyers and law students is their tendency to think of the legal

process as outside, or unrelated to, economics. The phrase "everyone is entitled to his day in court" tacitly implies that litigation is essentially a free service. Of course, lawyers recognize the reality of legal fees, but most are unconcerned with the full costs of the legal process and therefore are normally instinctively hostile to suggestions for dealing with social problems that do not rely on the legal process.

Thus, the characteristic lawyers' response to the legal problems of the poor is not to attack those problems directly, but rather to provide lawyers at public expense. That family disputes and automobile accident claims, for instance, are disposed of through elaborate adversary legal procedures is a costly national scandal. But lawyers expiate any feelings of responsibility by supporting free legal services for needy individuals, thereby conveniently ignoring the total costs of this litigation, which inevitably, in one form or another, are passed on to society.

The economists, whose methodology calls attention to all costs and employs the concept of trade-offs, are particularly aggravating to most lawyers because they constantly threaten to prick that balloon of legal illusion (even though trade-offs, the stuff of compromise, fit neatly with the democratic political process). Recently, Charles Schultze, calling for a change in the federal occupational safety and health program, proposed that government-created incentives and disincentives would promote worker safety and health more effectively than thou-shalt-not rules. Schultze was greeted by a tumultuous outcry from lawyers in the bureaucracy, the Congress, and the public interest law firms. Why? Because his proposal, as the critics put it, would place an economic value on human life. Of course the present regulatory system, despite protests to the contrary, cannot avoid at least implicitly balancing regulatory costs with the increased health and safety benefits to be achieved. So long, however, as this process is never explicit, the illusion of a free legal process can be perpetuated. The sad truth is that Schultze's proposal engendered such hostility not because it placed an economic value on human life but because it placed an economic value on the legal process.

The sheer number of American lawyers— their ranks augmented by a staggering annual influx from our law schools—stimulates the

REGULATION, MARCH/APRIL 1978 19

prodigious growth of the legal process. There
is an ancient story, which lawyers love to tell,
of the small town lawyer who almost starved
until another lawyer moved to town—at which
point they both waxed prosperous. The story
tells us a great deal; it is really about a varia-
tion of Say's law, which preceded Lord
Keynes's emphasis on demand management:
an increase in supply (in our case, the supply
of lawyers) creates an increase in demand.⁵
This trend is helped along by the manner in
which lawyers—because of their relative mo-
bility and the obvious direct returns to their
professional interests—pursue elective office.
Since lawyers dominate the Congress (and
state legislatures), legislative recourse to the
legal process to resolve problems is virtually
inevitable.

Of equal concern, however, is the percent-
age of our very best talent that is drawn into
law rather than business. Undergraduate profes-
sors are struck by this trend and examination
of the legal registers that list academic honors
confirms it. Interestingly, a Yugoslav econo-
mist recently expressed concern to me about
the number of that country's finest graduates
who were avoiding business enterprises (be-
cause of recent ideological trends) and, in-
stead, choosing safer government bureaucratic
jobs. His nation's productivity would, he
thought, inevitably suffer. In the United States
it is not the bureaucracy that attracts a dis-
proportionate share of our talent. It is the
legal profession, and lawyers today are more

and more simply a structural continuation of
the bureaucracy. As the regulatory portion of
the legal process has grown, lawyers—particu-
larly those concentrated in urban centers—in-
creasingly function as intermediaries between
the regulatory agency/judicial complex and
the regulated targets. They mold the multiplic-
ity of legal rules through the legal process so
that they fit snugly around American corpora-
tions, unions, and other institutions. If we
drastically reduced the nation's private law-
yers, there would be an inevitable push to in-
crease the number of bureaucrats. Otherwise
the government's capacity to dominate our so-
ciety would be threatened.

Ironically, we see that the market works,
even for those who challenge it: talent is
drawn into law because that increasingly is
where the power is (as well as handsome eco-
nomic rewards). Disdain for capitalism and
capitalists, elitism couched in Naderite con-
cern for consumers and the poor, impatience
with the democratic process as an inadequate
engine for social change—all follow from the
power afforded those who join the ministers of
the legal process. They respond to the prospect
not of the rule of law, but of the rule of law-
yers.

⁵ If I am correct in this application of Say's law, at-
tacks on legal profession entry limitations and adver-
tising restrictions may be misguided. The economy as
a whole might be better off if we considerably tough-
ened bar examinations and thereby reduced the num-
ber of practicing lawyers, as well as tightened, rather
than loosened, advertising restrictions.

20 AEI JOURNAL ON GOVERNMENT AND SOCIETY

IV

Recently, a corporate executive amused an audience of lawyers by describing his corpora- tion's annual earnings as seven times legal fees. Attorneys' hourly rates have, of course, increased—but probably no faster than other costs in an inflationary age.⁶ The real direct cost increase is in the proliferation of legal services. One finds an analogy in medical care, where sky-rocketing costs are attributable not so much to increased doctors' fees as to the widespread use of sophisticated machinery and “pioneering” medical services, including surgery, with only marginal utility (stimu- lated, according to many economists, by exten- sive “free” insurance coverage—which should give pause to those who advocate the spread of employer-financed prepaid legal insurance plans). In any event, the direct costs are prob- ably dwarfed by indirect costs; every piece of litigation diverts hundreds, in some cases even thousands, of non-legal personnel from pro- ductive work. And the charge upon the creative energy of senior executives—the most valuable asset any business enterprise enjoys—is surely the most serious cost of all.

In a capitalist economy, efficiency and, therefore, productivity depend quite clearly on speed of response to changing market conditions. The legal process importantly delays both the making of decisions (the willingness to take risks), because it introduces external imponderables, and the carrying out of decisions already made. In truth, litigation of all kinds is becoming a major structural impediment to our economy. This is most dramatically apparent in the energy field where nuclear power plants, the Alaskan pipeline, and offshore oil exploration have been delayed interminably to the detriment of our national economy while judges ponder issues beyond their ken. But there is virtually no business investment contemplated today that is not to a greater or lesser extent surrounded by legal process snares. Naturally then, the willingness to risk capital is diminished and economic growth suffers. Indeed, perhaps some measure of the competitive advantage that Japan and some European nations seem to enjoy vis-à-vis the United States is attributable to their much less intrusive use of lawyers.⁷

If the impact of the legal process threatens the vitality and growth of our economy, it is no less a problem for our democratic institutions. As discussed before, our Constitution grudgingly permits accretions of government power: legislation requires a dominant consensus. And the need for consensus stimulates compromise, thereby moderating intolerance of opposing views. The legal process, on the other hand, offers the prospect of victory without compromise (which is what makes it so attractive to those who see moral imperatives in the satisfaction of proliferating rights). As the legal process becomes the favored procedure for resolving issues, the ability of legislative institutions to forge compromises that truly resolve contentious issues is lost.

I do not mean to ignore the executive branch. The President, uniquely responsive to the entire popular will, once had great policy latitude over the administration of the executive departments. Now, of course, much of the executive function has been diverted to independent quasi-legislative, quasi-judicial agencies. With respect to the part that remains, the executive branch is so plagued with law suits either forcing it to do what it does not wish to do or deterring it from doing what it does wish to do that it resembles, alternately, a giant puppet dancing to legal-process strings and a Gulliver tied with Lilliputian legal bindings.

We see a vicious circle. Judges apologetically say, We must decide because the Congress (or the executive) will not. However, the more apparent it becomes that the courts will at some point intercede, the less likely it is that the other two branches—particularly the Congress—will move on their own. The fundamental error is that of the judges. A lack of congressional action usually means a strong public consensus has not formed—which, in democratic theory, normally means that until it does government should not act, no matter how offensive the state of affairs to those who are “certain” of the need for a governmental

⁶ Ralph Nader's recent complaint about the rise in legal fees qualifies as a new definition of “chutzpah.” No one has done more to generate legal fees than this modern Torquemada who seeks to “purify” our society by using the legal process instead of the stake.

⁷ West Germany has less than a quarter the lawyers per capita the United States has, Japan less than a twentieth. Great Britain, which suffers from its own brand of excessive government intervention, has only a fifth (New York Times, May 17, 1977).

REGULATION, MARCH/APRIL 1978 21

response.⁸ It does not follow that the political process is not working merely because debate on an issue does not lead to a federal program. Discussion in news media, books, or congressional hearings could have caused people to conclude that government action was inappropriate.

Even when Congress acts today, often it is only to delegate to the judiciary—sometimes indirectly through a newly erected regulatory agency. Characteristically, the delegation is preceded by a general—often contradictory—statement of purpose that really reflects congressional abdication. It is often said that Congress's typical response to a social problem is to throw money at it in the form of a new federal grant program. That is true only half the time; the other half, Congress throws the problem to the legal process. Some argue that this trend does not threaten democratic institutions, or the Congress itself, for what the Congress creates it can abolish. It could, therefore, take back from the legal process the policy-making role which that process has acquired. Theoretically yes, but unfortunately only theoretically. The Congress is losing, or perhaps has already lost, the psychological disposition to challenge the “imperial judiciary” (to borrow Glazer's term), in part because its members see the expansion of the legal process as coming at the expense of the executive rather than themselves.

Take as an example the proposed Consumer Protection Agency. Its purpose as described by congressional adherents is to protect consumer “rights” by acting as a consumer advocate before administrative agencies and executive departments and even *against* those agencies in court. This would institution-

alize the legitimacy of judicial resolution of intra-executive branch disputes, clearly resulting in an enormous shift of executive authority to the judiciary. After all, the power to resolve disputes within an organization is central to the ability to manage that organization. Less apparent but equally true, the proposal abandons the precept of congressional responsibility for setting basic policy to guide executive and independent agencies. Surely if Congress concludes that one or more of these agencies has become insensitive to public needs (presumably because captured by the regulated constituency), it has the capacity to remedy the situation directly. The truth, of course, is that Congress is split on these questions and rather than hammer out a resolution, a consensus, it finds it easier to give various “interests” an advocate and entrust the courts with the policy resolution. But each time Congress chooses this seductive approach, grappling with the next policy dispute becomes harder.

V

The continuing shift of private and public policy formulation to the judiciary has caused discomfort as well as gratification to the nation's judges. The courts are, quite naturally, overloaded, and we hear of the need for more judges and new inferior tribunals as well as new layers of judicial review. But it is not merely the number of cases that threatens to overload judicial capacity; the size of certain cases, augmented by expanding discovery procedures, engenders talk of new reform. It is now proposed that discovery be cut back to more manageable proportions by tightening the standards of relevance.

Attorney General Griffin Bell recently horrified much of the antitrust bar by suggesting that large antitrust cases bogged down in endless discovery might be tried in Congress instead of the courts. To be sure, the suggestion cannot be taken literally—such a trial would be a circus—but the attorney general implicitly acknowledges that the appropriate forum for resolving broad economic policy questions raised by adventuresome antitrust cases is Congress, not the courts. One wishes that his antitrust division as well as the Federal Trade Com-

*(Continues on page 44)*

⁸ This is not to be critical of the Supreme Court's decision, as opposed to its sociological theorizing, in Brown v. Board of Education. All that was necessary was to overrule Plessy v. Ferguson, the earlier "separate but equal" decision that had frustrated the purpose of post-Civil War constitutional amendments. More troubling, however, is the Court's decision in Baker v. Carr, the famous reapportionment case that propelled the judiciary into the very "political thicket" Frankfurter had predicted in the earlier Colegrove v. Green opinion. Although the Court's justification for intervention (that a mal-apportioned legislature cannot adequately respond to popular will) is a powerful one, on balance the costs of judicial intervention have outweighed the benefits. As difficult as it is for the political process to ameliorate mal-apportionment, it is even more difficult to liberate our election procedures from a judicial straightjacket.

22 AEI JOURNAL ON GOVERNMENT AND SOCIETY

# GUADALAJARA!
## A Case Study in Regulation by Munificence

Antonin Scalia

THE STORY of the recent travail of U.S. medical schools over the requirement that they admit foreign-trained U.S. citizens to their third-year classes presents an interesting case study in the dynamics of regulation, and merits preservation as a *memento mori* for all beneficiaries of federal munificence.

### The Facts

One of the concerns addressed by the Health Professions Educational Assistance Act of 1976 was the large and increasing influx of foreign-trained doctors. Statistics showed that in each year since 1970 the number of foreign medical graduates entering the country had exceeded the number of U.S. medical school graduates, that the foreign graduates constituted more than 20 percent of all physicians practicing here, and that the percentage would rise to one-third by 1990 if current trends continued. Finding that "there is no longer an insufficient number of physicians and surgeons in the United States," the 1976 act included provisions amending the immigration laws to eliminate the preference that foreign medical graduates had received. (The wisdom of this action is irrelevant here, but one must note an apparent inconsistency between the assertion that these physicians were not needed and the un-

questionable fact that they readily found employment.)

Some of the foreign medical graduates, however, and even a greater proportion of the foreign medical students, are U.S. citizens. Indeed, in recent years the tide of disappointed applicants to U.S. schools has overflowed the traditional alternative schools in Western Europe (some of which no longer admit foreign students), and now reaches to more than sixty schools in more than twenty foreign countries. The Rumanian universities at Bucharest and Cluj, for example, reportedly boast almost ninety U.S. medical students; and new medical schools have sprung up in the Caribbean as an apparent market response to the Yankee student dollar. By far the largest and best-organized contingent of emigré medical students, however, is to be found at the Autonomous University of Guadalajara in Mexico.

Given the finding that there was no doctor shortage (as opposed to maldistribution) and given the criticism of foreign medical education with which the legislative history was replete, one might have expected the Health Professions Educational Assistance Act to take steps which would reduce the incentive for U.S. citizens to undertake or continue medical training abroad. In fact, however, as a result of pressure from a small but effective lobby of parents of foreign medical students, the act did just the opposite.

Each year a large number of U.S. foreign medical students (FMSs) seeks admission to the third year of American medical schools. In 1976, only 400 were successful—a relatively small proportion of the 6,000 now estimated to

Antonin Scalia, *professor of law at the University of Chicago and adjunct scholar of the American Enterprise Institute, has served in the federal government as assistant attorney general, Office of Legal Counsel, and as chairman of the Administrative Conference of the United States*.

REGULATION, MARCH/APRIL 1978 23

GUADALAJARA!

be studying abroad. The so-called "Guadalajara clause" of the act sought to compel an increase in the acceptance rate. In fact, it sought to guarantee entry into U.S. medical schools of all FMSs who had completed at least two years of study abroad and had passed Part I of the National Board of Medical Examiners' examination. This was achieved by conditioning each school's receipt of the per-student subsidies funded by the act (so-called "capitation funds," currently $1,400 per student) upon its agreement to accept a number of the qualifying FMSs to be "equitably apportion[ed]" by the secretary of health, education, and welfare (HEW). The condition was to be applicable during the academic years 1978-79, 1979-80, and 1980-81, and, the legislative history solemnly announced, would not be renewed.

The critical provision was this: a medical school whose assigned quota remained unfilled was permitted to refuse enrollment to a federally qualified FMS only if "the individual does not meet, as determined under guidelines established by the Secretary [of HEW] by regulation, the entrance requirements of the school (other than requirements related to academic qualifications or to place of residence)" [emphasis added]. In other words, no FMS meeting the federal requirements could be denied admission to an assigned slot remaining unfilled, no matter how unqualified academically the medical faculty might consider him to be. In practice, what was envisioned was a computerized "matching program," in which the schools and the qualifying FMSs would list their preferences, and each school would be assigned particular individuals from the pool, on what might be termed a "take-it-or-leave-the-money" basis.

This was of course an impingement upon —many would say a blatant affront to—the academic independence of the institutions affected, dictating, in effect, their admissions standards. Fourteen medical schools announced that they would not comply, and would prefer to forfeit the total of about $11 million in federal funds. (The schools were Baylor, five branches of the University of California [Davis, Irvine, Los Angeles, San Diego, and San Francisco], Case Western Reserve, the University of Chicago, Duke, the University of Illinois, Johns Hopkins, Northwestern, Stanford, and Yale.) Some schools cited financial

reasons; the University of Illinois, for example, noted that providing for the additional students would cost more than the capitation funds it would receive. Most of the schools, however, expressed substantial agreement with the sentiment most forcefully voiced by Johns Hopkins, which announced that it was "not prepared to abdicate to government the right to select its students, nor for that matter, its faculty, courses of study and degree requirements."

Faced with this declination of funding by institutions that together account for some 13 percent of the medical students in the country, the Congress reconsidered the issue in 1977. The House of Representatives voted to amend the objectionable provision, the Senate to repeal it entirely. From the conference committee emerged a compromise that passed both houses and was signed into law by the President on December 19. It is, as a practical matter, substantially less onerous for the medical schools. Instead of being required to accept an indeterminate number of FMSs who pass the exam, they are merely required to expand their third-year classes by 5 percent—a much more predictable, and therefore more acceptable, imposition. The requirement is to apply for only one academic year instead of three; and the body of applicants from among whom the schools must, as a practical matter, select their 5 percent quota is expanded slightly beyond the FMSs eligible under the old law.

## The Interpretation of the Facts

The Congress and the press have hailed the new provision as a vindication of academic freedom. In introducing the conference bill in the Senate, Senator Edward Kennedy (Democrat, Massachusetts) described it as "designed to restore to the Nation's medical schools the freedom to apply their own admission criteria"; and the *New York Times* concluded that the new law gives "American medical schools the right to set their own standards as to whom to admit." It may indeed work out that way, but it does nothing of the sort on its face.

To be sure, every skill known to draftsman's pen has been devoted to giving the new provision the appearance of respecting aca-

24 AEI JOURNAL ON GOVERNMENT AND SOCIETY

GUADALAJARA!

demic independence. Thus, instead of specifying that a certain number or a certain proportion of FMSs must be admitted, the law merely requires a 5 percent increase in class size; and does not even require this quota to be filled from a particular "pool," though it does exclude certain categories of persons from counting toward the quota. It is only upon analyzing these exclusions that one discovers (of course) that there is almost no one left except FMSs who could conceivably be an acceptable applicant. The net effect of this change in statutory approach is the difference between telling a small boy that he must eat his carrots and telling him that he must eat what's on his plate. The sound is less harsh, but compliance just as unpalatable. Again, the new law carefully avoids the needlessly provocative language of the earlier version, which specifically prohibited a school from applying its requirements concerning "academic qualifications." That unfortunate phrase is never mentioned. The new version limits itself to setting forth what *will* constitute valid excuses for not meeting the quota, a list that does not include a school's academic qualification requirements. Finally, dust is thrown in the eyes of the guileless by a "good faith effort" provision, which reads as follows:

> The Secretary [of HEW] may waive ... the requirement [of increasing the third-year class by 5 percent] for a school of medicine ... if the Secretary determines that such school has made a good faith effort to meet the requirement ... but has been unable to meet [it] solely because there is an insufficient number of students who are eligible to be counted in determining if the school has met such requirement.

But for the fact that it was not intended to make any sense, this provision could be criticized as not making any sense. The draftsmen evidently forgot that there is, technically, no such thing as a defined pool "eligible to be counted" towards meeting the 5 percent requirement, since, as noted above, the new law proceeded not by defining eligibility but simply by declaring ineligible almost all candidates the schools *would be likely* to admit except FMSs. Theoretically, everyone—butchers, bakers, candlestick makers—*everyone* except the

relatively small number of defined ineligibles, is "eligible to be counted." It is inconceivable that this "pool" would ever be "insufficient."

Since the literal text of the provision is so devoid of meaning, it can be argued that (making due allowance for what the courts politely call "legislative inadvertence") the "good faith effort" requirement and the reference to a non-existent standard of eligibility imply that the schools themselves are to be permitted to establish reasonable academic criteria—which may exclude not merely butchers, bakers and candlestick makers, but even some FMSs, and maybe even some FMSs who pass Part I of the exam. This interpretation is not inconsistent with the legislative history of the provision, because almost nothing is. The most pertinent portion of that history is contained in the following excerpts from the House debate on the bill, which read as though written by Lewis Carroll for Abbott and Costello:

> MR. SATTERFIELD [Democrat, Virginia]. Reading the conference report, on page 11 it says, "In the view of the managers, this enrollment increase requirement in no way impinges on the academic freedom of schools of medicine to apply their own admission criteria...."

> I wonder if the gentleman might explain what is meant by that statement.

> MR. ROGERS [Democrat, Florida, floor manager of the bill]. Well, ... we are asking that they increase their enrollment a certain percentage in the third year. Their admission policies are left up to the schools....

> MR. SATTERFIELD. I invite the gentleman's attention to ... the bottom of page 10, where it says, "The conferees do not intend the additional waiver authority to be used for schools who simply apply their normal admissions standards and find no student eligible to be counted can meet such standards."

In other words, reading those two together, it would seem to me that we are saying that if a school applies its normal admission standards and there are not enough people available to fill the quota, then the school has to lower those standards in order to meet the quota. Am I correct?

> MR. ROGERS. What we are saying there is that we do not expect them to manufacture unusual conditions to try to avoid the requirement of the law to increase 5 percent in the third year. For example, if a school attempted to apply its first year require-

REGULATION, MARCH/APRIL 1978 25

GUADALAJARA!

ments to the third year class, that would, in
my view, not constitute a basis for a waiver.

MR. SATTERFIELD. If they apply their
normal admission standards, I would not
think that would be unusual action.

MR. ROGERS. It depends. And, also, the
normal admission might not even include a
5 percent increase.

MR. SATTERFIELD. That is the point. In
other words, you make the 5 percent quota,
and if your normal admission standards are
too stringent to provide that 5 percent, you
must fulfill your quota by reducing your
standards?

MR. ROGERS. No. What we are saying is
that we expect a group of students who
qualify to be considered. They must be the
normal, fair standards of the school. But we
do not expect them to manufacture unusual
standards or make a standard so high that
they are able to say that, "We are not able
to take 5 percent."...

MR. SATTERFIELD. I invite the gentle-
man's attention to the waiver provision. Ac-
cording to the report, it says that the Sec-
retary may grant a waiver if he determines
that the school has made a good-faith effort
to meet the requirements but that there are
not enough students eligible to be counted.

I am a little puzzled by the meaning of that,
in light of the two provisions I just read.

MR. ROGERS. This is what we are trying
to say— . . . that, if they make a good-faith ef-
fort in accepting the student under the 5 per-
cent requirement, that is what is required.
If there is an insufficient number of students
eligible to be counted, then—and only then
—would this particular provision attach. . . .

MR. SATTERFIELD. Then . . . I am to
conclude that a school which applies its nor-
mal admission standards that it has applied
through the years would not be making a
good-faith effort?

MR. ROGERS. No. Normal admission
standards might be that they do not admit
students in their third year.

If they make a good-faith effort under the
law, a good-faith effort but the total group
eligible to be counted is not sufficient, and
thus a school simply cannot get enough stu-
dents, it would be entitled to get the waiver.

MR. SATTERFIELD. You emphasize the
word "normally," am I to understand then
that the word "normal" really does not
apply to academic standards.

MR. ROGERS. It could, because if they
make an artificial academic standard in
order to simply avoid the requirement they

also would be blocking what we are trying
to do, to get them to increase class size in
the third year by 5 percent.

MR. SATTERFIELD. Would a school, then,
which applies its normal academic admission
standards . . . be exercising good faith?

MR. ROGERS. If it is not blocking the
5 percent increase.

MR. SATTERFIELD. In other words, the
5 percent controls, and if you cannot reach
the 5 percent with your normal academic
standards, you have to reduce them in order
to reach the quota?

MR. ROGERS. Not necessarily. If they
make a good-faith effort but there is an in-
sufficient pool, they are entitled to a waiver.

MR. SATTERFIELD. I thank the gentle-
man.

There was of course no reason for the
gentleman from Virginia to thank the gentle-
man from Florida, since the matter under dis-
cussion had skillfully been left in the same
degree of obscurity it enjoyed when the ex-
change began. Beyond vigorously affirming the
obvious points that a school which intention-
ally increases its normal standards in order to
avoid taking the 5 percent *is* in violation, and
that a school which, in applying its normal
standards, admits the 5 percent is *not* in viola-
tion, Mr. Rogers had said nothing. Mr. Whitten
(Democrat, Mississippi) was no more success-
ful in pinning the matter down:

MR. WHITTEN. The gentleman is saying
what we do not count on [the schools'] do-
ing. Would the gentleman tell us what we do
count on their doing?

MR. ROGERS. To obey the law and admit
5 percent of the people who are qualified to
be counted.

MR. WHITTEN. What is the meaning of
"good faith"?

MR. ROGERS. . . . It is exactly that, good
faith in carrying out the law.

MR. WHITTEN. And the law is what?

MR. ROGERS. The law is that they shall
admit 5 percent of qualified students based
on the admissions criteria of that particular
school.

MR. WHITTEN. So the "good faith" mat-
ter is just a come-on for doing as they wish?

MR. ROGERS. Not at all. It is to let them
out if they have made a good faith effort, and
an insufficient number of eligible students
are available such that the school is unable
to comply.

26 AEI JOURNAL ON GOVERNMENT AND SOCIETY

GUADALAJARA!

The rest of the discussion is no more illuminating.

I have gone into the House floor discussion at such length (there was no Senate floor discussion) in order to bring home to the reader the important truth that the provision in question not only is unclear, but was meant to be unclear. Judging from the floor debate, "good faith" does not mean the mere impartial application of bona fide academic standards designed without specific intent to sabotage the law—for otherwise the use of first-year standards would not be automatically invalid. Yet, apparently, "good faith" also does not mean the establishment of qualifications low enough to ensure that the quota is met. But what else is there between these two extremes? Nothing, of course, with any precision; only a vague idea that the schools are expected to bend a bit to help the law achieve its purpose.

There is one point, however, on which the statute and the legislative history are clear:

MR. WHITTEN. . . . I asked a simple question: Who will determine whether it is good faith or not?

MR. ROGERS. The Secretary of HEW.

MR. WHITTEN. Which leaves it in the hands of the Secretary of HEW to do whatever he pleases; is that correct?

MR. ROGERS. No.

MR. WHITTEN. Is it not based on his determination?

MR. ROGERS. Not entirely.

MR. WHITTEN. All right, what is the limitation?

MR. ROGERS. The schools must show that they have made a good faith effort and that an insufficient number of eligible students are available. . . .

MR. WHITTEN. To whom do they have to show it? Who makes the determination?

MR. ROGERS. The Secretary.

MR. WHITTEN. So the Secretary, in the final analysis, can say, "Yes" in this case and "No" in that case; and we have no guidelines pursuant to which he must act; is that correct?

MR. ROGERS. Who else is to determine it? Is a school to determine whether it has made a good faith effort?

MR. WHITTEN. That is the point. . . . The gentleman says that the Secretary will determine it to suit himself?

MR. ROGERS. This has always been done, as the gentleman knows. . . .

## The Significance of the Facts

The saga of the Guadalajara clause is of imme-diate practical importance to medical school faculties and, in a somewhat lesser degree, to all of us associated with universities. For a number of reasons, it is also immensely in-structive to those who are interested in the phenomenon of expanding federal regulation —and in particular that species of federal reg-ulation which is characterized by broad dis-cretionary authority in an executive agency.

Given the vagueness (not to say impenetrability) of the statutory language and the First Amendment overtones of the issue, it is possible that the courts will require the secretary of HEW to grant a waiver to any school that fails to meet its quota because it has applied genuine academic standards (other than extension of first-year standards to the third year). Whatever the outcome of the ultimate court test, however, it is clear that the first stretch of the long legal road for the medical schools will consist of the now familiar process of negotiation, ultimatum, and compromise with a Department of HEW that applies standards and criteria uninformed by any statutory guidance. And it is further clear that—despite the lawmakers' now ritual condemnation of agency arbitrariness and power—this is precisely what the Congress intended. Simply put, the members could not reconcile their differences, and so they adopted a provision that is quite literally meaningless, enabling both sides to claim victory and leaving it to HEW (and, if they wish to intervene, the courts) to sort out the pieces.

The advocates of broad delegation of dis-cretionary authority to the agencies almost invariably base their case upon the sheer lack of time which the Congress has to devote its attention to the minute details of regulation. Increasingly in recent years, however, the genuine occasion for delegation has been not the absence of congressional time but, after the expenditure of congressional time, the absence of congressional agreement. The Guadalajara clause episode may not be typical, but it is far from the rare exception. Whatever one might think of broad delegation as a general matter, delegation with what might be termed acknowledged absence of congressional agreement is a deplorable distortion of democratic

REGULATION, MARCH/APRIL 1978 27

GUADALAJARA!

processes. With the ordinary broad delegation, there is at least a genuinely assumed social consensus which it is the task of the agency to translate into specific detail. Delegation in acknowledged absence of agreement, on the other hand, intentionally confers upon the agencies or the courts that function of reconciling or subordinating conflicting private interests which is preeminently the task of the political branch.

> ... delegation with what might be termed acknowledged absence of congressional agreement is a deplorable distortion of democratic processes.

Another interesting feature of the Guadalajara clause saga—perhaps the most interesting feature from a “human interest” standpoint—is its David and Goliath character. The groups whose interests were infringed by the provision were surely substantial—all of the nation’s medical schools and, more broadly, the entire medical and university establishment. Moreover, they had on their side what would normally be a most inspiring rallying call for liberals and conservatives alike—academic freedom and the First Amendment. Arrayed against them was a lobby consisting almost entirely of the families of no more than 3,000 first- and second-year FMSs, the vast majority of whom were said to be from three states (New York, New Jersey, and California)—undoubtedly an affluent and politically influential group, but hardly formidable. Their cause, moreover, not only had none of the high tone of academic freedom and the First Amendment, but could scarcely be dressed in any cloth more noble than self-interest—or at most mother-love. Nonetheless, the FMSs won the first round completely, and managed to retain much in the rematch. The latter, of course (that is, their success in fighting off outright repeal), can be explained by a combination of (1) the sense in the Congress that the FMSs who are already in their second year, virtually tasting their impending admission to U.S. medical schools under the 1976 law, have something of a vested right in the continuation of that law, at least for the 1978–79 academic year; and (2) the usual human reluctance, felt

in the Congress (and especially in the House, which is quintessentially human), to admit to having been 100 percent wrong.

Securing enactment of the original 1976 law, however, surely represented an amazing accomplishment. In part, it was attributable to legislative technique. The Guadalajara clause appeared in neither the House nor the Senate bill, nor even in the committee recommendation in either house; it emerged, newborn, from the House-Senate conference, leaving opponents little time to mobilize their forces, and placing them in the very difficult position of asking each house to repudiate the conference committee's work in order to repair a very small piece of the entire package. So easily can a few senators or representatives on the conference committee—or perhaps even a few staffers—if sufficiently committed to what seems to the rest a minor point, affect the entire outcome of legislation. Or at least, so easily can they do so when what is at issue is the addition of one more condition to a federal grant.

And this is perhaps the major lesson to be drawn from the story: that regulation through munificence is likely to be the most arbitrary and the most severe regulation of all. Both

> ... regulation through munificence is likely to be the most arbitrary and the most severe regulation of all.

legally and psychologically, a condition attached to a governmental gift or benefit is easier to support than an outright governmental prescription or prohibition. Legally, for example, the government almost surely could not require all hospitals to perform abortions; but it probably could condition their receipt of federal subsidies upon their agreement to perform abortions. (This is not to say there are no unconstitutional conditions; there assuredly are, particularly when the condition bears little or no relation to the purpose of the grant or benefit, and infringes a highly protected right such as freedom of speech. But the range of unconstitutional conditions is much more limited than that of unconstitutional prescriptions or prohibitions.) Even more important than the *legal* distinction, however, is the unquestionable psychological fact that a

28 AEI JOURNAL ON GOVERNMENT AND SOCIETY

GUADALAJARA!

legislature will not exercise as much restraint
in imposing conditions upon receipt of its
beneficence as it will in enacting positive law.
The context, after all, is vastly altered. It is the
difference between saying "Son, paint the
house this weekend" and saying "Son, if you
spend the weekend painting the house I'll pay
for a ski trip to Aspen." Requesting a quid pro
quo is quite different from laying down, with-
out any compensation, an absolute rule. Thus
it is that much of our modern social regulation
has appeared first not as generally binding
legal requirements, but as conditions attached
to federal benefits-of which I shall say more
later.

It follows, then, that the institution which
has placed itself in the position of not being
able to refuse federal funds has subjected itself
not merely to regulation, but to regulation of
a particularly intensive and relatively unre-
strained sort. Most of the nation's medical
schools, if not most of its universities, are al-
ready in this position. The significant statistic
is not that 14 medical schools rejected federal
funding under the demeaning terms of the 1976
law, but that 106 did not.

There is, moreover, another phenomenon of
legislative or social psychology worth noting
here—one that gives regulation by munificence
a vital role in the gradual extension of regula-
tion by law. When a condition has been at-
tached to a governmental beneficence that is
widespread (for example, to all federal con-
tracts) or to a governmental beneficence that
is, or becomes, indispensable for the particular
class of recipients (for example, to renewals of
broadcasting licenses), the distinction between
a condition and a positive legal prescription be-
comes increasingly theoretical, and increasing-
ly blurred in the public and legislative mind.
What first wins acceptance only as a condition
to the receipt of governmental funds or bene-
fits eventually comes to be regarded as an ap-
propriate provision of direct prescriptive reg-
ulation. Thus, social and legislative attitudes
towards the appropriate scope of governmental
prescription—and, consequently, judicial at-
titudes towards its constitutional limits—are
continually stretched. Federal minimum wage
provisions appear first as conditions to obtain-
ing federal contracts, later as requirements
binding upon the entire society; safety assur-
ances required of federal contractors evolve in-

to the Occupational Safety and Health Admin-
istration; anti-discrimination conditions upon
federal grants become anti-discrimination laws;
the federal requirement that a broadcast li-
censee permit time for reply to a "personal at-
tack" leads to state statutes which seek to ap-
ply a similar rule to newspapers. And, yes, the

... straight-out prescription ... may even
have been hastened by the impudence of
the fourteen schools....

regulation by munificence that *all* the medical
schools have been willing to endure to a sub-
stantial degree (no school balked at the capita-
tion funding condition of the 1976 law that 50
percent of each school's residency positions be
in the three so-called "primary care" specialties
by the academic year 1980-81) may mutate
into straight-out prescription.

Indeed, the latter event may even have been
hastened by the impudence of the fourteen
schools in daring to reject what the Congress
thought was an offer they could not refuse. The
legislators obviously were not amused, as the
following excerpt from the conference commit-
tee report not too delicately demonstrates:

The decision of several schools to forego
capitation support unless the conditions
for receipt were altered raises a significant
question about the utility of this funding
mechanism as a vehicle for accomplishing
public policy objectives. Capitation sup-
port is an economic necessity for many
schools. Other schools are not economical-
ly dependent on these funds. These schools
would thus always retain the option of re-
fusing capitation funds because of the at-
tendant conditions, while the poorer
schools could not afford to do so. This
places the burden for implementing capi-
tation related policies exclusively upon
those schools which cannot survive with-
out capitation support. Federal policy,
however, is intended to apply to all schools.

Thus the conferees have agreed to reex-
amine the manpower legislation early next
year, and will pay particular attention to
evaluating alternative approaches to the
funding of medical education.

I would guess there are hard times ahead for
academic freedom. ■

REGULATION, MARCH/APRIL 1978 29

Deregulating
Telecommunications

Sorting Out Mixed Signals

Stanley M. Besen

WE SEEM TO BE on the eve of major changes in the ways in which we communicate with one another. In the next few years, vastly expanded communication services—ranging from improved methods of information transfer between business firms to first-run movies in the home—are likely to become available. Offices may become information processing and transfer facilities, and where once there was only a television set there may be a home information center.

Along with these developments—partly their cause and partly their result—two fundamental sets of changes are taking place. One is in the structure of the telecommunications industry. The American Telegraph and Telephone Company (AT&T), having dominated point-to-point communications for years, now confronts a small army of terminal equipment and specialized communications firms competing in markets previously closed to them. And the dominance of television by advertiser-supported over-the-air broadcasters is being challenged by a nascent industry providing services over cable in return for direct payments from viewers. The other set of changes is in the regulatory environment. In a large number of important cases, the Federal Communications Commission (FCC) has relaxed barriers to entry into the telecommunications industry and, in its efforts, has had almost total support from

the courts. Nevertheless, much unnecessary and undesirable regulation remains.

While predicting the future course of policy is never easy, two conclusions seem clear. First, the entry of new firms into many previously "closed" industries will continue. Second, it will be a long time before the FCC finally decides the terms on which firms may "compete" with one another. Competition will continue to be "managed" rather than "free."

Regulated Competition in the
Telephone Industry

Let us first take a look at evolving FCC policy on telephone terminal equipment (telephones, switchboards, et cetera) and on specialized common-carrier services (private-line long-distance communications).

**Terminal Equipment.** The great watershed in the regulation of telecommunications terminal equipment supply is the FCC's decision, *In the Matter of Use of the Carterfone Device in Message Toll Telephone Service* (1968). Before this decision, AT&T's rules and those of other telephone companies forbade the "interconnection" to the telephone system of any equipment unless it was supplied (and, usually, manufactured) by the companies themselves. The basis for these restrictions was the argument that the "systemic integrity" of the telephone system required unitary responsibility for service from end-to-end. Unless a single entity controlled the entire system, it was argued, it would be difficult to assign responsibility for disruptions in service—which would

Stanley M. Besen, professor of economics at Rice University, has served as Brookings economic policy fellow, Office of Telecommunications Policy.

This article is based on a paper presented at the AEI Conference on Regulation and Regulatory Reform, December 19, 1977.

30 AEI JOURNAL ON GOVERNMENT AND SOCIETY

mean that incentives to prevent disruptions
would be reduced. Rules against the use of
"foreign attachments" were so stringently en-
forced that some regulatory agencies inter-
preted them to exclude customer-supplied
plastic covers for telephone directories and
even shoulder rests for telephones.

The Carterfone was a device by which
operators of private radio systems could con-
nect their users directly to the telephone net-
work. After some initial legal skirmishes in
which the Carter Electric Company sought
relief from telephone company rules by bring-
ing a private antitrust suit, the FCC found that
the rules were unreasonable as applied to the
Carterfone since they failed to distinguish be-
tween attachments that posed no threat to the
integrity of the system and those that did.
Moreover, holding that it would be improper
for this ruling to apply only to the Carterfone,
the commission struck down the rules entirely.
In doing so, it invited the telephone companies
to establish new policies to prevent technical
harm to the system without limiting the use
of harmless attachments.

In response to the Carterfone decision, AT&T began to permit interconnection of terminal equipment manufactured by independent suppliers as long as its own "interface devices" were used with them. This policy was justified as protecting the technical integrity of the system when customers chose non-AT&T equipment, inasmuch as the devices would cause a malfunctioning piece of equipment to disconnect. One of the effects, however, was to limit severely the use of customer-supplied equipment since the price charged for using the protective devices was often greater than the savings gained by purchasing equipment from independent suppliers.

Since the promotion of new sources of
equipment was a commission objective—the
FCC had argued in Carterfone that the entry of
new firms into the equipment market would
encourage technological innovation—and since
the rules requiring protective devices seemed
to interfere with that objective, the commis-
sion has sought other ways to provide for sys-
tem protection. It now permits terminal equip-
ment certified as not potentially harmful to be
employed without interface devices. While the
certification program has gone more slowly
than some had hoped—standards have not yet

been set for some important classes of equip-
ment—this policy, when fully carried out, will
eliminate an important barrier to the entry of
new firms into the industry.

In appealing the Carterfone decision and
in the running legal battle that has ensued, the
telephone companies have advanced an argu-
ment in addition to the now-rejected claim
that the integrity of the system requires uni-
tary end-to-end service and have asserted that
the profits from selling terminal equipment to
business users (where the threat from com-
petitive suppliers is greatest) are needed to
subsidize residential telephone rates. Thus, it
is argued that if new firms are permitted to
provide terminal equipment, residential rates
would have to be raised.

In Carterfone and in a number of subsequent decisions, the FCC concerned itself almost entirely with questions of potential technical harm. Economic issues, where they were treated at all, tended to be dismissed summarily. Thus the commission stated in Carterfone that economic effects might well be a public interest question to be decided on the facts, but it saw no need to answer the question at that time. More recently, the commission concluded that the matter could no longer be ignored and began an inquiry into the economic effects of competition. Since the inquiry also dealt with the matter of competition from specialized carriers, we will defer the question of competitive impact until after the discussion of specialized carrier policy.

**Specialized Carriers.** As in the case of terminal equipment, the specialized carrier controversy began with an application by a private firm—MCI Communications—to provide a service that had previously been a near-monopoly for the telephone companies. In an earlier decision (*Allocation of Microwave Frequencies Above 890 MC*, 1959), the FCC had permitted firms to construct long-distance communications networks for their own use, but MCI was seeking permission to construct such networks to provide services to others. Like Carter Electric Company, MCI had the support of a number of business users who were unable to obtain the service they desired from existing carriers.

MCI offered to provide business users in a
number of cities with private-line service
(usually telephone service connecting branches

REGULATION, MARCH/APRIL 1978 31

of the same company in different cities) of
a new and different type and at lower than
prevailing rates. The response of the existing
telephone companies was, in almost all re-
spects, identical to the tack they took with
respect to the Carterfone. Their argument was
as follows: End-to-end service by a single firm
was required to preserve the system's tech-
nical integrity. While MCI's proposed rates
were below those of the existing telephone
companies, its costs were higher. And, the only
reason that MCI's prices turned out to be
lower was that the telephone companies were
employing the excess profits derived from pro-
viding these services to subsidize rates on or-
dinary long-distance telephone services and on
private-line services for low-traffic routes.

Moreover, an additional issue was raised. The telephone companies argued that, if the commission permitted competition in this area, they should be able to respond by lowering prices on their private-line services to the level of their costs. The controversy surrounding the pricing of private-line telephone service had already arisen in the case of AT&T's Telpak service (AT&T's competitive response to the commission's decision to allow businesses to operate their own private-line systems). But the MCI decision permitting the entry of the new firms (*In Re Microwave Communications, Inc.*, 1969) gave special urgency to this issue.

As in the *Carterfone* case, the commission did not restrict this decision to the firm asking for the right to provide the new service. Instead, it launched an inquiry into the entire specialized carrier question, at the conclusion of which it decided to permit relatively free entry of private-line carriers (*Specialized Common Carrier Services*, 1971). According to the commission, the new firms would provide services not previously available through the telephone companies and would stimulate (indeed, already had stimulated) the companies to offer better service at lower cost.

In reaching this decision, the FCC found
that the new entrants would probably capture
such a small part of AT&T's market that the
lost revenues would have no effect on the rates
charged to other users. The commission said
it would allow "full and fair" competition so
that the existing telephone companies would
be permitted to respond to the new entrants

by adjusting their own prices. Since so much
of the subsequent controversy surrounding
competition in the telephone industry flowed
from the *Specialized Carrier* decision, we
should point out that the FCC, in that case,
found it unnecessary "to speculate concerning
the manner in which existing carriers may
seek to respond to competitive conditions,"
but indicated that there "should not be any
protective umbrella for the new entrants or ar-
tificial bolstering of operation that cannot suc-
ceed on their own merits."

**What Does the FCC Mean by Competition?** The question of what constitutes competition hardly arose in the case on interconnection and was avoided in the *Specialized Carrier* decision. But it could not be put off forever. The problem stems from the telephone companies' claim that, when faced with competition, they should be free to reduce their own prices in order to compete effectively. Their would-be competitors counter that if the telephone companies are totally free to set prices they will engage in predatory pricing to drive these competitors out of business.

There are two arguments here. One is that the telephone companies have an incentive to set prices below their "incremental costs" (the additional cost of providing a service) in order to thwart competition. The second is that the prices charged by the telephone companies should be sufficient to cover their "full costs" (incremental costs plus a share of overhead) on each of their services; otherwise, their behavior would represent unfair competition. For those who hold this view, even telephone company prices shown to cover incremental costs should not be permitted. Clearly, competitors who would be eliminated if incremental cost pricing were permitted might well survive if prices were set at full cost.

The FCC's views on these matters are now
clear. Following the commission's decision to
allow business firms to construct their own
private-line systems, AT&T had introduced Tel-
pak, a service offering lower prices for private-
line service to customers who contracted for
the use of multiple circuits. The objective was,
of course, to discourage firms from developing
their own systems. In the Telpak case (*In the
Matter of American Telephone and Telegraph
Company, Long Lines Department, 1976*), the

32 AEI JOURNAL ON GOVERNMENT AND SOCIETY

commission rejected AT&T's contention that it
should be permitted to respond to competitive
pressure by reducing prices to (but not below)
incremental cost. AT&T had argued that price
reductions would enable it to retain the busi-
ness it would otherwise lose to competitive sup-
pliers even when its costs were lower than
theirs, while also ensuring that other users
would not be "burdened" by higher prices as a
result of the competitive response. The FCC
held, however, that AT&T's prices could not
be set below "fully distributed cost" (another
name for full costs). In other words, AT&T's
prices for these services would have to include
a "fair" share of the system's overhead costs.

Interestingly, one reason given for deny-
ing the use of the long-run incremental cost
standard was that the commission would have
difficulty monitoring its use. That is, the FCC
believed it was not able to determine whether
the long-run incremental costs claimed ac-
tually reflected the additional costs of provid-
ing service. But that determination is precisely
what would be required to ensure that AT&T's
prices on these services not be so low that
other users would have to pay higher prices.
The commission therefore adopted a policy
that probably runs the risk of new carriers'
entering markets where their costs are higher
than AT&T's. Thus the *Wall Street Journal* was
correct when it reported (September 24, 1976)
that the decision would result in *more* compe-
tition and *higher* prices—correct, that is, if we
recognize that “more competition” is being de-
fined entirely by the number of firms.

Our second piece of evidence on the man-
ner in which the commission is deciding the
terms of engagement between existing firms
and newcomers is found in a 1976 FCC report
on the effects of competition in the terminal
equipment and specialized carrier markets.¹
There, the FCC found “no convincing evi-
dence” that AT&T’s rates on terminal equip-
ment and private lines covered full costs.

This conclusion is perfectly consistent
with the commission's decision in the Telpak
case. It does not require a belief that telephone
carriers are providing services (either local or
private-line) to business users at prices below
incremental cost-only that their prices do not
reflect incremental costs plus a share of over-
head costs.

The commission began with a laudable

goal—to open previously monopolistic mar-
kets to competition. But it failed to realize that
eventually it would have to decide what com-
petitive responses existing firms would be per-
mitted to make. When the issue was finally
faced, the commission held that telephone com-
panies' prices are too low when they fail to
cover some arbitrarily defined "full" cost. So,
in the end, the FCC may have done what it said
it would not do-establish an umbrella that
protects the entrants it has encouraged.

> ... in the end, the FCC may have done what it said it would not do—establish an umbrella that protects the entrants it has encouraged.

Without for a moment underestimating
the difficulty of regulating a monopoly faced
with competition in some of its activities, the
FCC can be criticized for not realizing that,
once it opened the industry to new firms, it
could no longer avoid this problem of deter-
mining the permitted competitive responses. It
is a bit peculiar that, in the Telpak case, the
FCC rejected incremental cost pricing partly
because "standard accounting systems (includ-
ing the ones used in the telecommunication in-
dustry) typically do not provide ... data [on
marginal costs]," when the commission could
have had the companies provide that data.

One result of the commission's actions
may be to reduce the benefits that can be ob-
tained from competition. But might there not
be an alternative that would overcome the
commission's inability to regulate effectively
and still preserve the benefits of competition?
Since the problems troubling the commission
arise because the same firm provides both
competitive and monopoly services, one might
consider separating the firm into its competi-
tive and monopoly parts.² Of course, this alter-
native is attractive only if there are no cost
advantages from combining the two services
in one firm. Of the two areas in which competi-

¹ Economic Implications and Interrelationships Arising from Policies and Practices Relating to Customer Interconnection, Jurisdictional Separations and Rate Structure, 1976.

²The FCC has adopted this approach in regulating the provision by the telephone companies of certain data transmission services.

REGULATION, MARCH/APRIL 1978 33

tion has been permitted, such advantages appear less likely with interconnection than with private-line services. In fact, one of the objectives of a current antitrust suit brought by the Department of Justice against AT&T is to force the divestiture of the company's manufacturing arm, Western Electric. If there are no cost or other advantages from combining the provision of telephone service and telephone equipment—AT&T argues to the contrary—then divestiture would permit the commission to leave the equipment market unregulated. While we cannot now judge the desirability of this approach, it is one that deserves consideration.

## Competitive Entry in Television

Here we examine FCC policy on pay-TV (where viewers pay directly for programs provided via cable or occasionally over the air), cable-TV (whose primary service is to retransmit programs from broadcast TV), and the allocation of the radio frequency spectrum to television.

**Pay Television.** American commercial television has, since its inception, been financed almost entirely through revenues obtained from advertisers. An early attempt to develop a pay-television system in California was thwarted by the passage of a referendum banning such systems in the state. The referendum, which had substantial backing from both theater owners and over-the-air broadcasters, was later declared unconstitutional.

In the late 1950s, the FCC proposed a large experiment to test the desirability of pay-television systems, but was soon forced to retreat from this ambitious undertaking. Instead, it permitted a far more modest experiment in a single city—on the basis of which it concluded that pay television, if restricted so that it did not threaten free television, would be a “beneficial supplement.” The commission then promulgated a series of rules severely restricting the kinds of programming that could be offered by over-the-air pay television. The rules, which limited the movies and sports that could be carried and banned series programming entirely, were eventually extended to pay-television systems that used cable to transmit programming.

Despite these restrictions (and others),

pay-television operations that “piggyback” on existing cable-television systems have experienced modest growth by exploiting a gap in the rules permitting new films to be shown. Recently, the FCC relaxed these rules to permit the carriage of movies up to three years old (Subscription TV Program Rules, 1975)—the previous limit had been two—and to permit series to be shown.

Not content with this outcome, one of the major firms in the industry, Home Box Office, asked the courts to overturn the entire set of programming restrictions on pay-cable TV. And, in Home Box Office v. FCC (1977), the Court of Appeals for the District of Columbia struck down all the rules—holding, in effect, that the FCC had failed to provide substantial evidence that the rules served the public interest: “Even if the Commission had jurisdiction to promulgate its . . . rules there is no evidence in the record supporting the need for regulation.” The commission had argued that unless pay television was restricted in what it carried, it would “siphon” programs from advertiser-supported television and that this would reduce the quality of what viewers could receive over the air. But the court held that those who would impose regulation needed substantial evidence to support that imposition and that they had failed to present that evidence. Rather than simply accede to the commission’s expertise in this matter, the court chose instead to examine the record for evidence of the benefits that would arise from the regulations and, having found none, sent the regulations back to the commission.

> ... there are at present no remaining regulatory barriers to pay television and ... decisions on the future shape of the industry can be left to the marketplace.

The Supreme Court has refused to accept appeal of the lower court decision. Thus there are at present no remaining regulatory barriers to pay television and—unlike the situation in the cases of terminal equipment and specialized carriers—decisions on the future shape of the industry can be left to the marketplace. Any further restrictions will have to be obtained either through legislation or through

34 AEI JOURNAL ON GOVERNMENT AND SOCIETY

an FCC policy for which the courts find "substantial evidence."

**Cable Television.** A superficial look at the regulation of cable television over the last decade or so might lead one to conclude that the barriers to the development of cable are being slowly but surely removed and regulation gradually reduced. The rules adopted in 1972 (*Cable Television Report and Order, 1972*) provide that cable systems in major markets may "import" distant signals where previously they could not, and the recent elimination of the "leapfrogging rules" (which limited importation to signals from the closest markets) has a similar effect (*Leapfrogging Rules-Cable Television, 1976*). Indeed, relying on the fact that the 1976 General Revision of the Copyright Law made cable systems liable for copyright payment when they retransmit programs originally provided by a TV broadcaster, the National Cable Television Association has asked the FCC to remove all remaining restrictions on what cable systems can carry. Combined with the elimination of restrictions on pay cable, these changes promise substantial growth for cable television. Unfortunately, however, the manner in which the copyright revision treats cable TV suggests that regulation of this industry may merely be shifting from the FCC to the newly created Copyright Royalty Tribunal.

The new law creates a compulsory licensing arrangement under which cable systems may carry all signals currently authorized by the FCC upon payment of fees into a fund to be distributed among program suppliers. Apart from the fact that the fee schedule seems low when compared with the prices that would have emerged from negotiations between cable systems and program suppliers, the provisions for changing the schedule in response to changes in FCC rules are quite troublesome. The new copyright act requires that the Copyright Royalty Tribunal revise fees whenever the FCC changes its cable rules and that the fees are to be "reasonable," but does not tell the tribunal how reasonableness is to be judged.

The imposition of full copyright liability—an alternative that could have eliminated the need for restrictions on signal importation and provided for adequate compensation to program suppliers—was rejected by the Congress. As a result, the level of the fee schedule is

likely to provide the FCC with a convenient excuse for continuing some restrictions. But, even if the restrictions should be removed, the controversy would simply shift to the Copyright Royalty Tribunal, which would then have to consider changing the fee schedule.

> ... the adoption of a system of compulsory licensing virtually guarantees continuing regulation [of cable TV].

Here, clearly, is a missed opportunity. Whereas full copyright liability could have provided a basis for ending all restrictions on cable, the adoption of a system of compulsory licensing virtually guarantees continued regulation.

**The VHF Drop-In Plan.** In 1973, the Office of Telecommunications Policy (OTP), the agency then charged with formulating regulatory policy in communications for the executive branch, recommended that additional VHF television stations be "dropped into" (created in) portions of the frequency spectrum previously thought unusable because of potential interference with other stations. OTP argued that technological improvements since 1952 (when the FCC's television frequency allocation plan was adopted) had made these so-called drop-ins feasible. Since UHF stations find it difficult to compete with VHF stations, OTP's plan would have increased television competition, whether UHF stations switched to VHF or new VHF stations entered the market. These developments might even have contributed to the prospects for a fourth network.

The response of the television industry was predictable. It argued that many of the proposed stations would provide an unacceptably high possibility of electronic interference. The FCC, agreeing in part, rejected a large number of the proposed drop-ins on technical grounds. Of greater interest, however, is the commission's treatment of those drop-ins it judged to be technically feasible.

The industry had argued that, even if stations could be added without causing interference, the new stations would threaten the economic viability of existing stations, particularly those in the UHF band. (It is especially in-

REGULATION, MARCH/APRIL 1978 35

interesting that one of the groups arguing most vociferously for the protection of UHF stations is composed almost entirely of VHF stations.) Accepting this argument, the commission held that a new VHF station should be permitted in a market only if it demonstrably would neither force an existing UHF station off the air nor threaten the viability of a UHF station that might be likely to go on the air in the next ten years (TV Broadcast Stations, Adding of New VHF Stations in the Top 100 Markets, 1977). With this stringent requirement, only four drop-ins were proposed and the FCC is currently entertaining comments on their desirability.

The commission's action is not surprising. Having created and nurtured UHF television, it reacts in a predictable fashion against any threat to that system. The restrictions on cable and pay television demonstrate the FCC's solicitude for its children. However, there is an important difference between these restrictions and the FCC's treatment of the drop-in proposal. The restrictions are defended on the grounds that expansion of pay and cable television would reduce the amount of free over-the-air TV—to the detriment of viewers too poor to afford either. Moreover, the growth of cable might jeopardize the commission's long-standing policy of supporting local stations.

> ... the commission continues to protect UHF television without having substantial evidence that this benefits viewers.

But the VHF drop-ins pose none of these threats. They would operate over the air, would be advertiser-supported, and would be local stations. At worst, their introduction would merely displace one local station with another. Nonetheless, the commission continues to protect UHF television without having substantial evidence that this benefits viewers. (The only evidence that the commission examined was on the impact the drop-ins would have on the *number* of UHF stations.)

In this case, contrary to those involving Carter Electric, MCI, and Home Box Office, no firm has come forward to protest commission policy. The Department of Justice has filed objections, however, arguing that new VHF stations found to be technically feasible should be authorized "on demand."

## Conclusion

The ideal candidate for deregulation is an industry that would otherwise have operated in a competitive manner but that, having fallen into the clutches of a regulatory agency, has fewer firms, charges higher prices, and offers a poorer array of products than could be expected under competition. The solution to the problem, in these cases, is simply for the government to "go away." This is essentially the solution proffered by advocates of deregulation of natural gas production, interstate trucking, and domestic airlines.

A more difficult case for the deregulator arises in industries where there are elements of natural monopoly and where even a neutral observer might argue that regulation of some kind could increase consumer welfare. Thus, we hear little talk about deregulating the local distribution of natural gas or electricity.

The most difficult case arises where competition seems feasible in part of an industry but where elements of monopoly seem unavoidable in other parts. One might "go away" and leave the industry and its consumers to their own devices, but if one wishes to regulate the monopolistic part of the industry, then leaving the putatively competitive part alone may not be the best alternative. A more complex deregulation strategy may be required in this case.

The communications industry contains examples of all three situations. Cable television and pay television offer opportunities for the government simply to go away. In pay TV, the opportunity is about to be seized, but in cable it is likely to be ignored. Local telephone service, a natural monopoly (because, with the technology used thus far, duplication of services is wasteful), is unlikely to be deregulated any time soon. However, there may be instances of improved regulation through basing more rates on marginal costs and tailoring prices so as to smooth out the peak and off-peak loads on the system. The most difficult cases for deregulation come in the long-distance telephone and terminal equipment markets, with their blends of monopoly and competition. Here, it may not be feasible for government regulation simply to disappear. In any event, it is unlikely that it will disappear soon.

36 AEI JOURNAL ON GOVERNMENT AND SOCIETY

Deregulating
Transportation

Tracking the Progress

Thomas Gale Moore

A T A 1971 CONFERENCE on promoting competition in regulated markets, Merton Peck of Yale University said he had attended a conference on the same theme ten years earlier and was looking forward to another one in another ten years. Apparently, what he did not expect in the interim was real progress toward deregulation.

Professor Peck was too pessimistic. Two measures to reform transportation regulation have been enacted in the last two years, a major reform for a relatively minor industry (air cargo) and a minor reform for a major industry (railroads). Moreover, the future looks good for additional deregulation. Congress, with the urging of the Carter administration is likely to relax airline regulation before too long. And, for the first time in modern history, there is now a chance to reduce regulation of trucking.

A Major Reform for a Minor Industry

In November 1977 the President signed a bill (H.R. 6010) making entry into the air cargo industry virtually free and giving operators wide discretion in setting rates. As of November 1978, any U.S. citizen will be able to submit an application to operate an all-cargo service, and the Civil Aeronautics Board (CAB) must issue a certificate within 180 days, unless the

Thomas Gale Moore is senior fellow at the Hoover Institution and adjunct scholar of the American Enterprise Institute.

applicant is found not "fit, willing and able." This means that both aspiring and existing air cargo carriers (including passenger airlines that operate all-cargo services) will be able to initiate or extend their all-cargo operations anywhere within the forty-eight contiguous states and to use aircraft of any size. Furthermore, air freight operators (both all-cargo and combination freight) will be able to charge any rates, with certain exceptions, and the board loses its power to suspend challenged rates pending a hearing. Rates will still have to be filed with the CAB, however, and can be held unlawful if the CAB finds them to be unjustly discriminatory or predatory, or to represent undue preference or deceptive practices under existing regulations.

Why did this reform, certainly a larger step toward complete deregulation than is being contemplated for any other industry, sail through Congress so easily? For one reason, air cargo—which moved less than half of 1 percent of U.S. domestic freight in 1975—is only a minor (though fast-growing) industry. More important, all the firms that are principally engaged in the air freight business—Flying Tiger Line, Federal Express, Summit Airlines, Seaboard World, and Airlift International—supported the legislation, while the major air carriers, for whom air freight is a smallish item, were only mildly opposed. Furthermore, shippers as a group did not take a strong concerted stand, probably because most of them use air freight for special occasions and not as a broad-and-butter service. Thus, the American Retail Federation supported free entry but wanted the CAB to keep control over maximum rates;

REGULATION, MARCH/APRIL 1978 37

DEREGULATING TRANSPORTATION

the National Industrial Traffic League agreed about rates but favored relaxed, not free, entry. Finally, organized labor, although generally hostile to deregulation for any sector of the air transport industry, was more concerned about scheduled passenger service than cargo.

> ... the suddenness of the deregulation of air cargo ... is a hopeful sign, but not much more than that.

In short, the suddenness of the deregulation of air cargo, carried through despite some opposition by shipper groups, the Teamsters, and most of the large certificated carriers, is a hopeful sign, but not much more than that. It does show, I think, that economists have successfully demonstrated the public benefits of free markets in transportation—successfully enough to bring about change in the absence of strong countervailing power.

## A Minor Reform for a Major Industry

The major reform of a minor industry was relatively easy, but the minor reform of a major industry—the railroads—was achieved only with great difficulty. After twenty years and more, the mountain labored and brought forth the Railroad Revitalization and Regulatory Reform Act of 1976, called the 4-R Act. This establishes a narrow “no suspend” zone of reasonableness¹ and encourages the use of seasonal and regional rates, but makes abandonment of lines even more difficult than before.

The 4-R Act provides new standards for just and reasonable rates: a rate cannot be considered unjustly or unreasonably low if it at least equals variable costs (costs that vary with the level of output produced); and a rate cannot be considered too high unless the carrier has “market dominance.” In addition, carriers cannot be required to hold their rates at a particular level to protect the traffic of any other carrier (or mode of transport) unless the proposed lower rate is below variable cost. Finally, the act provided for a two-year experiment (the “Yo-Yo” provision) whereby railroads could raise or lower rates 7 percent from the level at the beginning of each year without

fear of suspension—although the reasonableness of a change could be questioned and the new rate ultimately rejected, and although a rate could still be suspended if market dominance were found to exist. Very few “Yo-Yo” rates were filed (all of them increases); partly because the provision offered so little additional rate freedom.

The Interstate Commerce Commission has established three criteria for market dominance so strict that they seriously conflict with the rate flexibility intended by Congress and the administration. First, the railroad is presumed to have market dominance if it has a market share greater than or equal to 70 percent of the relevant market. (About 45 percent of current railroad traffic is, in the commission's view, likely to meet this market dominance test.) Second, the railroad is presumed to have market dominance, no matter how small its market share, if the rate equals or exceeds 160 percent of variable cost.² (About 11 percent of current traffic moves at rates estimated by the ICC to be equal to or more than 160 percent of variable costs.) Third, market dominance exists if shippers or consignees have an investment in rail-related equipment or facilities large enough to prevent or make impractical the use of another carrier or mode of transport. (About one-quarter of rail traffic would meet this test.)

Altogether the commission estimated that some 48.5 percent of railroad traffic would meet one or more of these tests. Of the non-market-dominant traffic, some 57 percent is carried at rates calculated by the ICC to be below variable cost and therefore noncompensatory. Since railroads are free to raise these rates to variable costs, the fact that they fail to do so implies that the rates cover marginal costs and that competitive conditions are such that rates cannot profitably be increased.

¹ A “zone of reasonableness” is a range, normally a certain percentage above and below prevailing rates, within which carriers may raise or lower rates. The concept is usually coupled with the limitation that rate changes within the zone, while they may not be suspended forthwith, may be investigated and ultimately declared unlawful (and presumably any excess revenues refunded).

² If either the first or the second condition is met, there is said to be a “prebuttable presumption” that the carrier has market dominance, meaning that the carrier may contest the point but that the burden of proving that it does not have market dominance is on the carrier.

38 AEI JOURNAL ON GOVERNMENT AND SOCIETY

DEREGULATING TRANSPORTATION

Generally, the ICC's market dominance test has kept the railroads from seeking higher rates where shippers would pay them and has authorized the railroads to charge higher rates where market conditions will not permit them. Hence, it has not led to rate flexibility. In fact the only real improvement in regulation as a result of the 4-R Act has been some encouragement of seasonal rates: three such rates have been filed.

> While the 4-R Act is too new to be adequately judged, it is clear that its interpretation by the ICC... is frustrating the intent of Congress.

While the 4-R Act is too new to be adequately judged, it is clear that its interpretation by the ICC, especially the definition of market dominance, is frustrating the intent of Congress. Moreover, so far, the railroads' use of the act to go after new traffic has been meager.

There are at least two lessons to be learned from the 4-R Act. First, the railroads are clearly reluctant to cut rates to attract business from their competitors. The reasons may be that price cuts would draw too little traffic to be profitable, that lower rates would be below marginal costs, or that railroad executives are not sufficiently market-oriented to exploit the existing opportunities. Probably all factors are at work. Second, Congress is timid about permitting free pricing, and the ICC, like most other regulatory agencies, will continue to stifle competition. In other words, significant regulatory reform is difficult to achieve.

If reform of airline or trucking regulation is to be significant, it must go beyond what the Congress did for railroads and must be structured so that an unfriendly regulatory commission cannot frustrate its purposes.

## Airline Deregulation

The air cargo bill was spun off from the airline deregulation bill when it became apparent that the latter would not be passed in 1977. But air passenger service is nonetheless the next candidate for deregulation.

### Education of Policy-Makers.
During the Great Depression of the 1930s, many economists and policy-makers lost faith in the ability of the market to handle economic affairs. In the transportation area, this contributed to the passage of the 1935 Motor Carrier Act and the 1938 Civil Aeronautics Act.

Opinion changed slowly. Even through the 1950s, economists and policy-makers who were concerned with regulation were primarily interested in making it work better, not in scrapping it. Not until 1962, when Richard Caves published *Air Transport and Its Regulators*, did the tenor of academic thinking begin to change. Caves concluded that "the air-transport industry has characteristics of market structure which would bring market performance of reasonable quality without any economic regulation...." His was the first major empirical and theoretical work to come down clearly for airline deregulation.

Michael Levine, in his 1965 article on air transportation within California, first pointed out that an unregulated intrastate carrier performs better than a CAB-certificated airline. Five years later, William A. Jordan's *Airline Regulation in America: Effects and Imperfections* brought to a wider audience the evidence on the difference between a CAB-regulated airline industry and airlines operating in a largely unregulated environment. To this day the strongest evidence in favor of airline deregulation is the performance of unregulated intrastate carriers in California and Texas.

The annual reports of the Council of Economic Advisers give one indication of what economists and policy-makers were thinking about regulation in the post-war period. The first mention of transportation regulation appeared in the 1965 *Annual Report* and amounted to two paragraphs; the ICC was mentioned once and the CAB not at all. The next year's report contained a much stronger several-page section on surface transportation. The first mention of CAB regulation, one paragraph long, came in the 1970 report and the first extensive treatment in 1971.

Congress has lagged behind the executive branch in accepting the idea of deregulation. In 1975, the Senate Subcommittee on Administrative Practice and Procedure, chaired by Senator Edward Kennedy (Democrat, Massachusetts), held extensive hearings on airline

REGULATION, MARCH/APRIL 1978 39

DEREGULATING TRANSPORTATION

regulation and issued a major report indicting
the system. In spring 1977, the Senate Sub-
committee on Aviation covered the same
ground in additional hearings. Yet, in Septem-
ber 1977, Senator Daniel Inouye (Democrat,
Hawaii) told a meeting of that subcommittee
that the arguments for automatic entry were
"pure nonsense" and that there was no evi-
dence that deregulation would produce lower
fares. As for the House of Representatives, sev-
eral bills, including one proposed by the Ford
administration, were introduced in 1975-77 and
the House Subcommittee on Aviation held hear-
ings in 1976 and 1977.

For those who have become discouraged
with the pace of airline deregulation, the pre-
ceding narrative should give some perspective.
The economics profession itself was not con-
vinced of the merits of deregulation until the
1960s. A fair summary might be that econo-
mists were educating themselves on the sub-
ject throughout the 1960s and that general
agreement began to emerge only after the ap-
pearance of Jordan's book in 1970. The last
eight years have been spent convincing the
media, the Congress, and government officials.

**Current Proposals.** In late 1977—after twenty-two markup sessions that can be generally characterized as exercises in education—the Senate Committee on Commerce, Science, and Transportation approved (11-2) the Kennedy-Cannon bill. According to *Congressional Quarterly*, much of the delay was caused by committee members' unfamiliarity with the regulation issue. The airline bill being considered in the House, one sponsored by Representative Glenn Anderson (Democrat, California), is much like Kennedy-Cannon. The Committee on Public Works and Transportation plans to act on this bill in 1978.

The Kennedy-Cannon bill, as voted out of
committee, would provide reform in two es-
sential areas, rates and entry (including route
flexibility):

* Airlines would be allowed to raise fares as much as 5 percent or lower them as much as 35 percent without CAB approval.

* Any existing airline would be allowed automatically to enter one new route of not more than 3,000 miles in each of the first two years after enactment; in the third year, each airline could enter two new routes a year, not

exceeding 3,000 miles total, without CAB ap-
proval. Moreover, each airline could designate
three routes that would be protected from
automatic entry by other airlines during the
first three years, two routes in the fourth year,
and one in the fifth; after five years no route
could be protected, but the Civil Aeronautics
Board would have the option of making a
change if the program had created hardships
for some airlines or communities.

* Airlines could drop routes, but only after ninety days' notice. "Essential" services to small communities could be subsidized by the CAB.

* A new firm desiring to become a certifi-
cated carrier would need only show that its
proposed service was "consistent with," not
that it is "required by," public convenience
and necessity. Although the committee de-
cided, after a long battle, that the burden of
proving such consistency would remain on the
applicant, the language change is designed to
diminish that burden. How significant the
change would prove to be, in and of itself, can-
not be predicted. The bill would also eliminate
the principal hurdle to establishing public con-
venience and necessity—the fact that this
phrase has long been interpreted as protecting
existing carriers against competition that
would substantially injure them. The bill states
that more innovative or efficient methods of
operation or significant price reductions are
consistent with public convenience and neces-
sity and that the possibility a potential new
competitor will divert revenue from an exist-
ing carrier is not necessarily inconsistent with
the public convenience and necessity.

**Prospects.** The academic community has done the research on airline deregulation. The prospects for reform now lie in how successful various groups—including the academy—will be in influencing the Congress. The major proponents of at least partial deregulation are the Carter White House, the Council on Wage and Price Stability, the Council of Economic Advisers, the Antitrust Division of the Department of Justice, a somewhat reluctant secretary of transportation, and some voices from the Civil Aeronautics Board—in particular, its chairman and some staff. In addition, a group entitled the Ad Hoc Committee on Airline Regulatory Reform—which includes a highly

40 AEI JOURNAL ON GOVERNMENT AND SOCIETY

DEREGULATING TRANSPORTATION

unlikely assortment of organizations repre-
senting conservative Republicans, liberal Dem-
ocrats, Naderites, retailers, retired persons,
students, and business interests—is strongly
supporting the effort. United Airlines, Pan
American Airlines, Frontier Airlines, Hughes
Air West, and Pacific Southwest Airlines also
favor change.

The provisions in the Senate bill for pro-
tecting small towns appear to be adequate to
assuage the worries of most small communi-
ties that they would lose service under deregu-
lation. On this subject testimony before the
Senate last spring tended to be muted.

Opposing deregulation are the other major airlines—which claim that United is on the other side because it has the largest network and so is in a good position to gain from the proposed route flexibility. Organized labor is also strongly opposed. No doubt labor understands that deregulation would be more likely to lead to airline expansion with increased passenger traffic than to a significant reduction in airline jobs. What organized labor really fears is that the growth of non-union airlines would spread if entry into the airline business were reasonably easy, and that this would put downward pressure on the pay scales and employment opportunities for unionized flight crews and support personnel. Furthermore, the labor protective provisions added to the Kennedy-Cannon bill are designed only to ease the transition for unemployed airline workers, and not to maintain union wages well above non-union wages. Airline labor therefore will lobby hard to bottle up any bill.

Banks and insurance companies are also
resisting the bill. According to William Mc
Curdy, former vice president of Equitable Life
Assurance Society, "it is the consensus of the
financial community that a period of substan-
tial upheaval, if not chaos, will result . . . while
present company positions change."

In recent months, as support for deregula-
lation has been gathering momentum, the air-
lines have been engaging in some price compe-
tition in an attempt to convince the public that
reform is not necessary. This, along with the
liberalization of charter rules, explains the
rapid expansion of discount fares that has oc-
curred. But at the same time, CAB decisions
to deny some rate cuts in order to protect the
charter carriers point up the problem of con-

tinued regulation, even under a chairman who
favors competition.

> ... as support for deregulation has been gathering momentum, the airlines have been engaging in some price competition in an attempt to convince the public that reform is not necessary.

Nevertheless, for the first time since air-
lines were regulated in 1938, it now seems
likely that a partial deregulation bill will be
enacted. The only question would seem to be
timing. My guess is that it will occur within
three or four years, maybe even this year. Once
this happens, no further deregulation can be
expected in the airline industry for at least
another decade. Before going further, the Con-
gress and public officials will want to see how
this bill works. That will depend in part on
how the CAB interprets its provisions. Will
the board, for example, be liberal in approving
applications for operating certificates of public
convenience and necessity, or will it construe
the words "consistent with" very strictly? In
the meantime, the focus of regulatory reform
will shift to the trucking industry.

Motor Carriers

The prospects for significant deregulation of
the trucking industry are not nearly so bright
as the prospects for airline deregulation. No
bill is currently before Congress. The secretary
of transportation is opposed to any change in
the statute. And the White House, though it
generally favors the concept, has not yet indi-
cated what its position will be.³

**Education of Policy-Makers.** Virtually from
the date the Motor Carrier Act was passed,
economists have criticized the idea of regula-
ting such an inherently competitive industry. In
the ensuing four decades, the effects of regula-
tion on trucking rates, costs, efficiency, and
service quality have been subjected to consid-

³According to press reports, President Carter is con-
sidering three options: legislation mandating signifi-
cant deregulation of the airline industry variety, re-
forms undertaken by the ICC backed up by a congres-
sional resolution to encourage action, and ICC reforms
only.

REGULATION, MARCH/APRIL 1978 41

DEREGULATING TRANSPORTATION

erable analysis. It has been shown, for example, that the trucking of commodities exempt from ICC control works well, with many firms having operated in that segment of the industry for years. It has also been shown that rates in regulated trucking are considerably inflated. Various estimates have been made of the costs of regulation and of the benefits to special interest groups that regulation produces. The unregulated British and Australian trucking systems have been described. The subjects of service to small communities and of less-than-truckload shipments have been well analyzed. Yet Congress remains unimpressed.

In 1955 Secretary of Commerce Sinclair Weeks chaired a cabinet committee that drew up a mixed bag of recommendations on transportation policy. On the one hand, it proposed tighter ICC control over exempt agricultural trucking and private trucking—a proposal that would be hard to imagine today. On the other hand, it proposed a zone of reasonableness for railroad rates—with minimum rates equal to variable costs, maximum rates at least equal to full costs, and rates for traffic with no substantial competition held to a “reasonable” limit. The zone-of reasonableness concept has appeared in various regulatory reform proposals in recent years and, as noted, was timidly introduced in 1976 in the 4-R Act.

In 1962 President Kennedy proposed a bill providing for some significant deregulation of railroads, trucks, and barges. A similar bill was introduced in 1963 and further hearings were held. The next year the House Committee on Interstate and Foreign Commerce put together a bill that included complete deregulation of agricultural carriage by all modes of transport. The Johnson administration, believing it had to oppose that great a degree of deregulation, allowed the bill to die.

In the mid-1960s a presidential task force on transportation policy recommended, among other things, the removal of legal barriers to entry and route abandonment on the part of common carriers (rail, truck, and airline), the elimination of most of the ICC's authority over minimum rates, repeal of the long-haul/short-haul provisions of the Interstate Commerce Act, amendment of that act to deny carriers the right to request suspension of proposed rates, and amendment of the Federal Aviation Act to eliminate rate regulation of all unsubsidized

domestic air-passenger transport. No legislation resulted, but the task force's report was widely circulated in the government.

The next major attempt to amend the Interstate Commerce Act occurred in 1971 when the Department of Transportation proposed the Transportation Regulatory Modernization Act (which the White House had decided not to sponsor because of Teamster opposition). This proposal would have reduced control over entry into trucking, facilitated the broadening of existing certificates both as to the commodities that could be carried and the routes that were authorized, and established a zone of reasonableness for rates. (The zone specified ranged from a floor at variable cost to a ceiling at 150 percent of fully allocated cost. Any proposed rate within this zone would have been, per se, legal unless it violated the long-haul/short-haul clause or was unjust, preferential, prejudicial, or unduly discriminatory.)

Both the Senate and the House held extensive hearings on this bill in the spring of 1972, but no bill was passed. The bankruptcy of the Penn Central in 1972 and the ensuing effort to reorganize the northeast rail network both helped and hurt the deregulation effort. While these events focused attention on transportation, especially rail, and made some congressional response imperative, they also diverted attention from the costs of trucking regulation. Moreover, although regulation played a part in the sorry financial position of the railroads, there were more immediate reasons for the Penn Central's collapse. The most that could be expected by even the most optimistic deregulators was that over time some deregulation would help the railroads, while possibly making them worse off in the short run. What was needed was a “quick fix” and not a fundamental change in the rules. The eventual passage of the 4-R Act can, however, be attributed to the Penn Central debacle and to the earlier studies on the advantages of decreased regulation. Indeed, the act's deregulation provisions were made a condition of Ford administration support of the financing provisions.

**The Prospects for Motor Carrier Reform.** As mentioned before, the prospects for even partial deregulation of trucking are not great. The subject is not of paramount interest to voters; and consumer groups, though they favor de-

42 AEI JOURNAL ON GOVERNMENT AND SOCIETY

DEREGULATING TRANSPORTATION

regulation in principle, are not likely to give it
their best efforts.

Strong approval can, however, be expected
from the academic community, the Antitrust
Division of the Justice Department, the Coun-
cil on Wage and Price Stability, the Council of
Economic Advisers, and key members of the
White House staff. In addition, Senator Ken-
edy, who was so instrumental in stimulating
congressional interest in airline reform, is
planning to do the same thing for trucking. His
antitrust subcommittee held hearings in Oc-
tober 1977 on legalized rate agreements and
rate fixing by motor carriers, and the hearings
scheduled for this year will cover all aspects
of motor carrier regulation.

Some support for deregulation may, it is
true, arise within the trucking industry itself.
The editor and publisher of *Overdrive*, a maga-
zine for independent truckers, has advocated
deregulation and there are certificated carri-
ers, both large and small, that could benefit
from reducing entry restrictions. But outside
of government and the academy, it is still hard
to find much support for the idea. Among ship-

> ... outside of government and the
> academy, it is still hard to find much
> support for [trucking deregulation].

pers, some are for free entry into the industry,
while many others—concerned about low rates
for their competitors or higher rates for them-
selves—are fearful of changing the system.
Thus, while the users of airlines (the passen-
gers) favor a freer market in that industry,
users of trucking services do not unanimously
or even overwhelmingly support it in theirs.
Moreover, small communities worry that freer
exit from the market would mean that they
would lose the services they now receive. Guar-
antees may have to be included in any proposal
in order to mitigate their opposition.

But it is the owners of operating rights
(who fear for the value of their assets), along
with the labor unions and the railroads, that
are most strongly opposed. A provision for
buying out the owners' operating rights, pro-
posed recently in a *New York Times* editorial,
might help move a major deregulation bill
through Congress—even though many would

be opposed to such a use of taxpayer money,
especially since large numbers of these owners
are quite wealthy. In any case, paying off the
owners would not eliminate the vehement op-
position of organized labor. The Teamsters
fear, with justification, that free entry would
open the industry to a flood of non-union
trucking firms. Certainly, owner-operators
would be a major threat to the high wages
Teamsters currently receive. Finally, deter-
mined resistance can be expected from the rail-
road industry, because deregulation would pro-
duce lower freight rates for motor carriers, en-
abling them to capture traffic from the rail-
roads. While railroad managements could and
would respond with lower rates, they do not
believe that lower rates—let alone the loss of
business to trucks—would be in their interest.

Supporters of regulatory reform have not
yet faced this last issue. The fact is that dereg-
ulation of trucking would probably make the al-
ready sick railroad industry sicker in the short
term, even if it resulted in the elimination of
railroad regulation so that the railroads would
be able to compete. Thus trucking deregulation
could lead to significant pressures to subsidize
or nationalize our rail system. Whereas total de-
regulation of all surface transport should even-
tually produce a healthier and slimmer railroad
industry, the transition could be so painful that
Congress may not take the first step.

Unlike the CAB, the Interstate Commerce
Commission is opposed to any tampering with
its authority and is attempting to demonstrate
that the goals of deregulation can be achieved
without deregulation itself. Thus the commis-
sion has enlarged the unregulated commercial
zones around big cities—to the chagrin of
many in the trucking industry. In addition, the
commission has been holding hearings on pro-
posals to liberalize entry restrictions, finding,
of course, that there are industry spokesmen
on both sides of the issue. Moreover, the ICC
is looking into the question of rate bureaus.
The threat of congressional action has, at least,
led to ICC activity.

If Congress deregulates trucking, it will be
a testimony that academic scholarship and
academic perserverance have convinced the
public, the Congress, and government officials
(who have, individually, not very much to
gain) of the rightness of the cause. But if regu-
lation of trucking is—as some recent studies

REGULATION, MARCH/APRIL 1978 43

DEREGULATING TRANSPORTATION

seem to suggest—a process through which im-
portant groups receive benefits, there is little
hope that Congress will act. The individual
gainers would be unlikely to gain significantly,
while the losers would suffer large losses.

Perhaps there would be a chance, though,
even in this case, if consumer groups, Common
Cause, the media, and a combination of liber-
als and free market conservatives could be in-
duced to work for deregulation. At this time,
two influential senators, Edward Kennedy and
Charles Percy (Republican, Illinois) are active-
ly in favor of change. With White House sup-
port, deregulation of trucking is possible in the
next three to five years.

Conclusion

The best chance for regulatory reform now lies
in the airline industry, where the case for
change has been clearly made and its propo-
nents are in a strong political position.

If airline reform fails in Congress, there
is no hope for deregulating any other sector.
But even if airline reform does occur, achieving
trucking deregulation will be difficult. Yet, the
probability is not zero and the industry is clear-
ly worried. If motor carriers are deregulated, it
will be important to turn again to the railroad
industry and make a bold move to reduce ICC
controls there. With trucking even partially
free, railroad managements would probably
support deregulation of their operations, leav-
ing only shippers and labor opposed.

To end on an optimistic note, economists
have shown that their profession can be in-
fluential. Without the studies and testimony
of scholars, there would have been no move-
ment towards deregulation. While economists
can become discouraged with the pace at which
Congress adopts their obviously brilliant anal-
yses, given the opposition and given that econo-
mists generally "haven't met a payroll or run
a railroad," it is amazing that they have had so
much influence.
■

Lawyering and Democratic Capitalism

*(Continued from page 22)*

mission, whose new chairman promises “in-
novative” litigation, would take the hint.

Plainly, both adding judges and limiting
discovery procedures will reduce judicial bot-
tlenecks and permit even more questions to be

brought to court. Is that really desirable? Per-
haps it is only as the legal process becomes
clogged and, therefore, judicial decision-mak-
ing less available that private and political in-
stitutions will regain their own decision-mak-
ing capacity. Of course, that suggests a form
of rationing, which is always an extreme rem-
edy—and particularly so here, since we cannot
be sanguine that the courts or Congress would
adopt the proper methodology to order the
queue. It might well be those matters least ap-
propriate for judicial resolution that gain the
highest priority. (Note that the Speedy Trial
Act of 1974, one attempt to order the queue by
giving criminal cases a first priority, has had
perverse consequences because of unrealistic
time limits.) In any event, those at the bottom
of the queue will surely protest their place-
ment vigorously, claiming discrimination.
Even now, Supreme Court efforts to limit
class-action relief have been attacked as anti-
poor, anti-consumer, and so on. However, to
those who would so protest, I offer the thought
that they might be benefitted in the long run,
since they might gain greater effectiveness in
the political process and that might be infinite-
ly more valuable than reliance on adjudicators.

Still, we face a dilemma. Unless our politi-
cal institutions mount a virtual counterrevolu-
tion against the legal process, our only hope of
preserving the vigor of democratic capitalism
may be for the legal process to become so un-
wieldy that private and political decision-mak-
ing gain a comparative advantage. But then the
legal process would be less available for those
matters for which it is truly needed.

Is it too much to ask of American lawyers
that they accept major responsibility for find-
ing ways out of this dilemma? I do not think
so. After all, American democracy was founded
and set on its course by lawyers—albeit law-
yers who were simultaneously farmers, busi-
nessmen, architects, and philosophers. Chief
Justice Burger has repeatedly, but virtually
alone, warned of the dangers of an over li-
gious society but he is, of course, constrained
in what he can say; he cannot criticize specific
legislative proposals or, except in his opinions,
judicial imperialism. He deserves more sup-
port from an American bar that eschews self-
interest (as far as that is possible) and con-
cerns itself with the harmful impact of an ever
expanding legal process on our society.
■

44 AEI JOURNAL ON GOVERNMENT AND SOCIETY

Readings
of particular interest

Regulatory Agency Structure—
Cause for Optimism?

*Governance of Federal Regulatory Agencies* by David M. Welborn (Knoxville, Tenn.: University of Tennessee Press, 1977).

This study, undertaken in response to growing public concern about the performance of regulatory agencies, examines the inner workings of the Civil Aeronautics Board, the Federal Communications Commission, the Federal Maritime Commission, the Federal Power Commission, the Federal Trade Commission, the Interstate Commerce Commission, and the Securities and Exchange Commission—known as the “Big Seven.”

According to David M. Welborn, political scientist at the University of Tennessee, not enough is known about how a regulatory commission (as distinct from an agency headed by a single official) functions, and this may explain some of the recent criticism of the performance of these commissions and the attendant proposals for reform. Nonetheless, Professor Welborn emphasizes that his intention is not so much to evaluate these criticisms and proposals as “to explore the relationship between agency governance and those characteristics of performance identified as problems.” Specifically, the lines of inquiry of this study are drawn in terms of the finding of the 1971 President’s Advisory Council on Government Organization, headed by Roy Ash: that regulatory commissions are ineffective because of their independence of the President and their collegial character.

Professor Welborn's conclusion, based principally on interviews with present and former regulators, is that "systems of governance have developed [within the so-called Big Seven] so that the commission form is not a barrier to achieving performance aims, such as those put forth by the Ash council, or to

achieving the diverse objectives sought in economic regulation." This conclusion rests on the determination that the commission chairman, partly because of legislation and executive orders in the 1950s and 1960s, has become the key to an agency's operations. The chairmen "stand apart from other regulators in scope of activity, engagement in regulatory processes, and in imprint on regulatory determinations." They have wide discretionary powers over such disparate matters as staff appointments and what issues are brought before the commission for collective consideration. Furthermore, they have a much larger public role than their colleagues since it is they who speak in behalf of their agencies before Congress and other organizations. The extensive role of the chairman in agency governance is, in sum, "secure in its underpinnings, stable in at least broad outline, and typically free of substantial, overt conflict."

Thus, in contrast to the Ash council's assertion that regulatory commissions suffer from "splintered management," the author describes their structure as consisting of "a fairly high level of integration around the chairmanship." In other words, suggestions that regulatory commissions need a single dominant executive instead of a collegial executive miss the point, since this is already what they have to a large extent. Moreover, just as the term collegiality no longer describes relations among fellow commissioners, the term independence no longer accurately describes relations between the regulatory commissions and executive branch agencies and departments. Indeed, according to the author, chairmen who accept appointments today often see themselves as part of the President's administration. In effect, these developments, along with the constraints embodied in the appointment process, the congressional appropriations process, and existing statutes and precedents, make it clear that regulatory commissions are not so

REGULATION, MARCH/APRIL 1978 45

READINGS OF PARTICULAR INTEREST

independent as to be politically unaccountable.

Having suggested that the Big Seven as constituted can do what they are supposed to do—albeit, at times, with much difficulty because of the enormously complex task of trying to reconcile competing economic interests —Welborn presents suggestions for improving regulatory performance. Consistent with his theme of the expanded role of commission chairmen, he emphasizes ways to make fuller use of this position without diminishing “the working concept of collegiality.” First, the President should try to appoint as chairmen individuals who can deal with both broad substantive issues and the myriad details of day-to-day regulatory business. Second, chairmen should use the skills and abilities of their fellow commissioners more effectively. Third, “innovative ways” for handling the multiplicity of regulatory tasks must be found. Finally, means for facilitating systematic coordination between regulatory agencies and other governmental bodies and organizations are needed.

## The Burger Court and Mr. Bakke

"The High Court's Road in the Bakke Case" by A. E. Dick Howard, in *The American Oxonian*, October 1977, pp. 225-234.

In this review of *Regents of the University of California v. Bakke*, A. E. Dick Howard of the University of Virginia Law School traces the evolution of the Supreme Court's views on race since 1896, analyzes the arguments on both sides of the case, and gauges the likely responses of the Burger Court. Allan Bakke, a disappointed white applicant, is challenging the constitutionality of a special admissions program of the medical school at Davis, under which sixteen out of one-hundred places in the entering class are set aside for minority students.

According to Professor Howard, if the Court should choose to decide the case on the grounds of constitutionality, then “the central issue becomes one of deciding whether the 14th Amendment’s guarantee of ‘equal protection of the laws’ permits a person’s skin color alone to influence or determine his admission to a professional school.”

The author finds it difficult to accept arguments that the Fourteenth Amendment does apply to “benign” race-specific acts, for these acts are certainly not benign toward those who are displaced and may also have the deleterious effect of undermining the self-respect of minority students. Moreover, the notion of race preference raises perplexing questions: “How many places in an entering class may be earmarked for members of a given race?” If race is simply one factor among many, how is it to be weighted? May all minorities be given preference, including those like the Asian-Americans who are already generously represented in regular admissions? At any rate, the author argues, to provide racial preference is to “risk exacerbation of racial resentment.”

The Court's approach to racial issues has shifted, Howard notes, from the view that the Constitution is colorblind (stated in Justice Harlan's famous dissent of 1896) to support for racially based remedies to past injustices. Yet, according to Howard, the recent precedents justifying preferential treatment of minority applications as a means of remedying previous discrimination may not be applicable in the Bakke case, because there is no evidence that Davis has ever discriminated. Moreover, in cases where the Court has allowed the use of racial considerations, the situation has not been one of scarcity (a limited number of places), and the remedy has merely required shifting students or voters from one place to another, not denying some a place altogether.

The author does not expect the Court to disregard entirely its rule of “strict scrutiny” of racial considerations simply because those considerations are now being used to favor minorities instead of to discriminate against them. Nor does he expect the Court to “endorse the notion that minorities are entitled to something like a proportionate share of the country’s doctors and lawyers” simply because their numbers are so low in these professions.

Indeed, the justices may wish to reject in principle the notion of race as a criterion for admission; but if they do they will be likely, in Howard's view, to consider the social impact of their decision. He suggests three ways for the Court to resolve the dilemma. (1) It could decide to substitute the concept of “disadvantage” for the concept of race. Though this remedy might end up helping mostly poor

46 AEI JOURNAL ON GOVERNMENT AND SOCIETY

whites, this result cannot be predicted because
few, if any, law or medical schools have tried
out this approach. (2) The Court could decide
to leave admissions policy to the universities
themselves, just as it has kept its hands off
other social issues it considers better left to
local experimentation or to the political proc-
ess. Finally, (3) the Court could outlaw "quo-
tas" (Howard recognizes the difficulty of defin-
ing this word) but let the universities "use race
as one factor in admissions."

Although Professor Howard believes the
Court could easily duck the constitutional
issue, the problem would remain. Thus he con-
cludes: "As with the Brown ruling in 1954,
there is a special need for a decision that is
seen to rest on principle."

A Counterproposal for Containing
Health Care Costs

"Health Care Cost-Containment Regulation: Prospects and an Alternative" by Clark C. Havighurst, in *American Journal of Law and Medicine*, Fall 1977, pp. 309-322.

Clark C. Havighurst of the Duke University School of Law argues that regulation of health care for the purpose of containing overall costs is, in fact, a form of rationing. It is also, he says, a particularly difficult form of rationing for political institutions to undertake, because the public expects a high standard of health care and because that care has a symbolic value—health care is a “right”—as well as an economic value.

Necessarily, according to the
author, cost-containment regula-
tion would prevent patients from
receiving, and professionals from
providing, the care that both be-
lieve would be beneficial. The regu-
lators "have been asked to say 'no'"
in circumstances where everyone
immediately concerned "is inclined
—because they do not face the
costs—to say 'yes.'"

Professor Havighurst argues
that regulation sometimes seems
advantageous because it is com-

pared not with alternative policies but with
doing nothing at all. Because the providers
of health care have failed at self-regulation
in their professional standards review organi-
zations and will not perform the rationing
function, there is a movement toward arbi-
trary forms of regulation or, in the author's
words, "escalating arbitrariness." The pro-
posal to establish a cap on health care costs
and then allocate the permitted costs by politi-
cal processes would deprive some consumers
of care they wanted and give others care they
would not purchase if they could. The natural
tendency of regulation in health care is "to-
ward narrowing consumers' range of choice,
enforcing a false consensus, and obscuring the
wide variations that exist in both consumer
preferences and medical practice."

Havighurst suggests a market alternative.
He would (1) reduce "excessive subsidization"
of health insurance by changing the federal tax
treatment of health insurance premiums, (2)
encourage active competition between and
among insurers, health maintenance organiza-
tions, and "new models of health care financ-
ing and delivery," (3) enforce antitrust laws in
the health care professions to encourage ex-
periments in cutting costs to consumers, (4)
allow Medicaid and Medicare beneficiaries
some choice between more health care and
cash by giving them vouchers—or refundable
tax credits—to cover their payments under
those programs. In other words, he argues for
a competitive market in the provision of health
care, one that is free of government-instituted

'Boy, hospital costs are really getting out of hand. They charged
me $385 and I only visited a friend in Room 212!'

Reprinted courtesy of the *Chicago Tribune*.

REGULATION, MARCH/APRIL 1978 47

rigidities. In that kind of market it would be
the patients and the providers, not the govern-
ment cap, that would contain costs.

Folklore and the FDA

"Regulating Pharmaceutical Innovation: An Economist's View" by J. E. S. Parker, in *Food Drug Cosmetic Law Journal*, April 1977, pp. 160-181.

The author, an English economist now senior lecturer at Otago University in New Zealand, here compares the regulation of new drugs in the United States and the United Kingdom, taking into account the (1) folklore of a regulatory agency's operations, (2) the agency's terms of reference, administrative structure, access to scientific knowledge, methods of communication, procedures, incentive structure and attitudes toward risk, and (3) the basic underlying model of innovation.

He notes that American folklore counsels that delaying the introduction of new drugs is a benefit, while in Great Britain the folklore counsels that new drugs are good and "the regulatory agency is not considered fair game for parliamentary comment." Moreover, in the United States, drugs must be proved effective before they are used, while in Great Britain (at least by law) they need only be proved safe.

In the United States, the regulatory agency in question—the Food and Drug Administration—is a part of the executive branch (in British terms, “a full-blown department of State”), whereas its British counterpart—the Committee on Safety of Medicine—was, until 1968, quasi-independent and quite small. But now the CSM is an agency of the government and is, moreover, requiring retrospective review of drugs already introduced for effectiveness as well as safety. Nevertheless, even now, the British have not quite reached the U.S. situation where “the patient is protected from drug hazard and not from disease.”

A further contrast is the fact that the FDA relies on in-house personnel, the CSM on outside experts—the latter being more likely to be acquainted with the frontiers of medical knowledge and, therefore, more likely to understand the nature of new drugs. Tied to this is the formality of procedure: the FDA needs

all things in writing, while the CSM encourages person-to-person contact. On the question of risk, the U.S. system embodies a concern with "absolute risk," the U.K. system with "relative risk," in Parker's terms. U.S. drugs are to be "risk free," while in Great Britain the risk of using a new drug is to be measured against the risk of not using it.

Finally, the implied model of innovation in the U.S. scheme of things is one in which advances are made in predictable little steps, "where a compound is identified as having possible therapeutic value for a specific disease, and a highly directed routine is then followed from testing in animals through to evaluation in man." The British model implies a more sophisticated innovation process than the FDA's "disease specific potential drug" model —a process in which there may be more complicated and indirect paths to innovation.

With all this set out, Mr. Parker turns to the observed decline in new drug introductions in the United States, the decreasing productivity of R & D expenditures in the United States, the concentration of innovational output in the United States in larger established companies, the contrary trends in Great Britain, and the—so far, modest—export of U.S. resources to avoid FDA regulation. He suggests that, to reverse these trends, a new model of innovation is needed, a new attitude toward risk, new procedures, new use of outside experts, and—underlying all of this—a new folklore and political environment for the regulation of pharmaceutical innovation in the United States.

Weidenbaum on
Government and Business

*Business, Government, and the Public* by Murray L. Weidenbaum (Englewood Cliffs, N.J.: Prentice-Hall, 1977), 336 pp.

Murray L. Weidenbaum, director of the Center for the Study of American Business at Washington University (St. Louis), designed this book for "future generations of business executives" as well as "government officials and members of various interest groups." Though the benefits of regulation are noted, and though all seven case studies come from gov-

48 AEI JOURNAL ON GOVERNMENT AND SOCIETY

ernment sources, Professor Weidenbaum em-
phasizes the costs of regulation—to business
and, through business, to the public. The book
describes "far-ranging regulatory activities,
which impinge on almost every business execu-
tive . . . in industries that are not ostensibly
'regulated' as well as those that are."

Part I on "Regulation by Government" de-
liberately adopts "at times an unconvention-
ally critical view of federal intervention," de-
signed to provoke discussion. The author con-
siders consumer safety, automobile safety, job
safety, environmental controls, and job dis-
crimination, before turning to regulation via
government procurement and government as
financier. The chapter on procurement points
out that the question of social responsibility
has largely been settled for companies doing
business with the federal government: they do
what the government wants or they do not get
government contracts. Many of these govern-
ment-oriented corporations have taken on the
characteristics of government bureaus, and the
consequent loss of the "advantages of innova-
tion, risk-bearing, and efficiency" is a high pos-
sible cost to the society as a whole. The chap-
ter on the government as financier argues that
government-guaranteed credit reduces the
"amount of credit that can be provided to un-
protected borrowers, mainly consumers, state
and local governments, and private business
firms."

Part II on "The Adaptation by Business" discusses passive, anticipatory, and active business responses to government controls. It appears to Weidenbaum that large firms are able to respond more actively and positively than small firms, though trade associations may help small firms in their response.

Part III on "Shaping the Business Envi-
ronment" begins by examining the means by
which business adjusts to increasing govern-
ment involvement in its day-to-day activities—
lobbying, trade associations (including their
lobbying), and participation in the political
process (the data suggest that some business-
men do not fully understand that process).
Then, as a kind of capstone to the entire vol-
ume, Professor Weidenbaum examines the ris-
ing government presence in business manage-
ment. This rising presence, he suggests, repre-
sents a "second managerial revolution." Just
as the first managerial revolution transferred

the locus of business decision-making from the
firm's owners to the firm's managers, the sec-
ond is transferring it from the firm's managers
to the "vast cadre of government regulators."

As a case in point, the author focuses upon
the proposal of the Initiative Committee for
National Economic Planning to create a for-
mal system of national economic planning,
whereby the government would forecast de-
mand for goods and "induce" industries to
meet the demand forecast (the means of "in-
ducing" being laws, as specific as necessary).
Proposals for federal chartering of corpora-
tions and a requirement for public members
(including labor representatives) on boards of
directors, if enacted, would also help bring
about a basic change in the nature of corpora-
tions and in the relationship between business
and government.

The present relationship, in Professor Weidenbaum's words, appears to be "basically adversary in nature." Rather than continuing along this line or embracing a government-business partnership on the European or Japanese model (which would submerge the public interest, especially the interests of consumers), he suggests a third alternative—"peaceful coexistence" made possible by "a sensible division of labor between the public and private sectors in achieving basic national objectives."

Regulation by Litigation

*Decision to Prosecute: Organization and Public Policy in the Antitrust Division* by Suzanne Weaver (Cambridge, Mass.: MIT Press, 1977), 196 pp.

The form of economic regulation practiced by
the Antitrust Division of the Justice Depart-
ment is an instructive alternative to regulation
by commission, according to political scientist
Suzanne Weaver of Yale. *Decision to Prosecute*
examines the structure, personnel, and policies
of this division during the years 1971-74 in
order to learn about the "consequences of this
court-oriented form of policy making."

Since the beginning of the twentieth cen-
tury the Antitrust Division has been chiefly re-
sponsible for prosecuting violators of the Sher-
man and Clayton antitrust acts. The Sherman
act (1890) prohibits attempting, conspiring, or

REGULATION, MARCH/APRIL 1978 49

combining to monopolize any line of com-
merce or to restrain trade in any line of com-
merce. The Clayton act (1914) prohibits spec-
fic monopolistic practices and acquisitions
that have the effect of lessening competition
measurably or creating a monopoly in any line
of commerce.

Professor Weaver finds that the very organ-
ization of the division reflects the much-
criticized ambiguity of American antitrust pol-
icy, an ambiguity that is related to the original
legislation. For example, the Sherman act fails
to define "unlawful restraint of trade"; and
Senator Sherman's own speeches stress the po-
litical and social, as well as a modern econo-
mist's view of the consequences of monopolies
and monopolistic behavior. Further, the Anti-
trust Division is shaped by the "imperatives of
prosecution" and by the desire to bring and win
as many cases as possible. The decision whether
to prosecute is based largely on the likelihood
of success, rather than on a theory of antitrust
policy. But there are some situations in which
most staff lawyers are reluctant "to bring a case
they think they can win," for example, where
prosecuting would have an anti-competitive re-
sult, where harm would be done to a small
businessman, or where prosecution would "pre-
vent or slow" the distribution of an "important
commodity."

Staff lawyers in the division possess, and
jealously guard, their considerable independ-
ence. This is so much the case that "where ex-
ecutives have actually tried to exercise author-
ity in behalf of goals different from those of
the staff, they have found that staff resistance
and the outside opinion that supports it can
make the exercise futile in the long run." But
this same professional outlook serves as the
major protection against improper influence
by businessmen or politicians. That is, the con-
cept of legal craftsmanship (which is the ad-
mired hallmark of the Antitrust Division) and
the intimate relationship between the division
and the private antitrust bar are, in the au-
thor's opinion, fundamental to the division's
reputation of incorruptibility.

Various assistant attorneys general (AAG)
who have headed the division have attempted
organizational or public policy initiatives, but
with mixed success. In general, straightforward reorganizations, such as AAG Lee Loev-
inger's move in 1961 to place all of the divi-

sion's transportation-industry work in one sec-
tion, are successful. On the other hand, policy
innovations, like AAG Donald Turner's attempt
to improve the economic quality of the divi-
sion's work, encounter resistance and resent-
ment. In the case of Turner's initiative, the
"criteria of review" were changed by adding
standards that were "alien" to the lawyers
and "repugnant to their notions of good pros-
ecution." Also Turner drew up guidelines for
mergers that heavily emphasized economic-
structural data and that tried to make the
work of the division in this area, for the first
time, predictable. Opposition from the staff to
whatever restricts its short-run prosecutorial
"reach" (in spite of possible long-range bene-
fits) ended many of the Turner innovations as
soon as he left the post.

Professor Weaver points out that some of
the organizational arrangements now being
proposed to reform regulatory commissions—
such as "enabling courts to intervene more
energetically"—already can be found in the
Justice Department's methods of enforcing
antitrust policy. She concludes that the divi-
sion appears to be able to maintain a "faithful-
ness to legislative intentions" and that it has
"escaped massive corruption by other inter-
ested parties." At the same time, however, the
path of regulation by prosecution resists anti-
trust policy-making. One consequence in the
division has been a strong preference for one
version of competition with little recognition
of possible complexities in the idea or of com-
peting economic and social goals.

Perspectives on the 4-R Act

Railroad Revitalization and Regulatory Reform, edited by Paul W. MacAvoy and John W. Snow, Ford Administration Papers on Regulatory Reform (Washington, D.C.: American Enterprise Institute, 1977), 246 pp.

This collection of analyses and other docu-
ments was assembled by two economists, Paul
MacAvoy of Yale and John Snow of the Chessie
System (who is also a lawyer), as background
for the Railroad Revitalization and Regulatory
Reform Act of 1976 (4-R Act). One important
question addressed, according to MacAvoy, is,
can a regulatory agency "effectively implement

50 AEI JOURNAL ON GOVERNMENT AND SOCIETY

a basic reduction of its own powers?"

The volume begins with a 1973 report in which the Task Force on Railroad Productivity reviews what went wrong in the rail industry, emphasizing property taxation, passenger deficits, rail technology, regulation, the "fractured" corporate structures and labor-management problems. Then a 1973 paper by the U.S. Department of Transportation outlines the northeast rail problem and recommends that these railroads be restructured rather than nationalized, that the existence of a crisis as well as substantial northeast rail freight traffic must be recognized, that the system be streamlined (which would reduce jobs and service), and that regulation be reformed.

The United States Railway Association, in a 1975 paper making up the third chapter, discusses intermodal and intramodal competition and suggests that the former (competition between different modes of transportation) "may not be capable of producing some of the benefits associated with rail-rail competition" but that these benefits may be provided by "indirect rail-rail competition."

In Chapter 4, which is a 1975 memorandum from then Secretary of Transportation William Coleman, the railroads' problems are defined as redundant facilities and excess competition, outmoded regulation, archaic work rules, lack of capital, and preferential treatment of other modes of transportation. Secretary Coleman proposed two pieces of legislation, one of which, the Railroad Revitalization Act of 1975, became the basis of the 4-R Act. This is followed by John Snow's summary of the main elements of the Ford administration's proposal for rail regulatory reform—improvements in ratemaking, restriction of anti-competitive practices by rate bureaus, loan guarantees, and system restructuring. Mr. Snow's summary leads to a Department of Transportation staff paper in which the rail industry's benefits from regulatory reform are estimated at $985 million to $2 billion.

In Chapter 7, economic consultants Stephen Sobotka and Thomas Domenich suggest that the cost standards for rail pricing should be the standards of variable cost pricing until rail property wears out. Since "it has not been demonstrated" that there is any greater social value to railroads than to other kinds of economic activity, the authors are not convinced

that society should subsidize railroads.

In Chapters 8 and 9, first an economist and then a lawyer address the question of rail-barge competition and predatory pricing. David Qualls of the University of Maryland concludes that the proposed water-carriers' amendments to the 1974 Transportation Improvement Act would not be in the public interest, because they might prevent technological innovation and lead to higher rates and prices. Law Professor Glen Weston of George Washington University opposes the water carrier amendments as unnecessary.

In Chapter 10, the U.S. Department of Transportation examines the question of rail abandonments outside the northeastern region, noting that there might be substantial impact on agriculture, milling, mining, and logging if they should occur.

In Chapter 11, John Snow (at that time deputy undersecretary of transportation) and Mark Aron of the Department of Transportation assess the regulatory reform provisions of the 4-R Act, noting that the results "are significant but not as extensive as those recommended by the administration." Chapter 12 is made up of ICC and Department of Transportation reports on the implementation of the 4-R Act.

In Chapter 13, economic consultant Norman H. Jones, Jr., discusses the concept of market dominance as it affects the pricing flexibility (especially upward flexibility) intended by the 4-R Act. He concludes that "intermodal competition pervades the transportation markets in which railroads participate" and that "rail market dominance can be considered the exception rather than the rule in virtually every market." On the other hand, as the Department of Justice brief that concludes the book argues, the ICC has defined market dominance in such a way as to avoid this conclusion. This brief criticizes the ICC for refusing to consider evidence of geographic and product competition even in rebuttal, for using an unreliable accounting system to compute costs, and for assuming market dominance based on a standard of investment that "is so vague as to be irrational." The effect of all this has been to contradict the intent of Congress that "railroads be free to adjust their rates without extensive litigation where effective competition exists."

REGULATION, MARCH/APRIL 1978 51

LETTERS

*(Continued from page 4)*

TO THE EDITOR:

This comment on Jeane Kirkpatrick's recent essay in *Regulation* is partly a fan letter because for the past several years I have admired her clear, cogent, and stylish writing, in both articles and reviews. By now my response to seeing her name on a magazine is to turn first to the page where her work begins. . . . But, in the case of this essay, for the first time in my experience with her writing, I have an impression that a central point is either incompletely made or even flawed enough to devalue the main theme.

I refer to Professor Kirkpatrick's characterization of contemporary welfare state liberalism as incorporating "the classical liberal's emphasis on individual liberty and individual rights." She moves toward this with the very sound observation that classical liberalism (which is where, generally, I would locate my own position) weights too lightly, or even ignores, the fact that other than government forces can impose serious constraints on freedom. It does not follow, however, that a reaction to this fact and an emphasis on "freedom from certain types of economic hardships" mean that welfare state liberalism "augments the commitment to individual liberty." It seems to me very possible—indeed an accurate description of the present situation—that most of welfare state liberalism can come to be simply a power-balancing act attempting to appease prominent blocs and lacking even the inclination to think about the ultimate consequences for a free society.

My uneasiness with Professor Kirkpatrick's treatment of a welfare state mode is reinforced by a very interesting piece by Stephen Haseler in the December *Commentary*. Haseler stresses the ominous theme that the welfare state mode in Europe is collapsing into socialism in a discouraging variety of instances. Certainly this runs counter to an unhedged contention that "the tensions between liberty and equality prove salutary in practice."

Admittedly, Professor Kirkpatrick distinguishes between the welfare state and what she calls *progresiste* liberalism, a "very different ideology whose principal goal is the destruction of the capitalist system in favor of a state-owned and controlled economy." But if Haseler is correct in his assessment, we have to face the probability that the distinction she

makes is more form than substance. In his analyses, whatever distinction there was between social democracy (welfare state) and socialism (*progresiste* liberalism) became so badly eroded that "it was becoming difficult to point to the exact differences between social democrats and socialists." He says further that "this melding of social democracy and socialism is by now apparent all over Europe. The two terms are used interchangeably; and no great doctrinal . . . differences separate the social-democratic and socialist faction in any of the Left-of-Center parties."

I think that the central theme of Jeane Kirkpatrick's essay should be preserved to emphasize the links between liberty and a reasonable measure of equality, reasonably pursued. These can be complementary and mutually supportive. But not necessarily so, and not without a firm sense that the prime reason for valuing equality is its enhancement of liberty. The pernicious flaw in the now dominant welfare state attitude is that it includes no such orientation. . . .

Bert Elwert,
University of Illinois
at Chicago Circle

TO THE EDITOR:

Jeane Kirkpatrick's essay doesn't suffer for want of either scholarship or analytical imagination. And I am satisfied that I could live unafraid for my basic liberties in any political community where her personal judgment on the concrete issues of regulation, equality, and liberty was sovereign.

But, alas, I live, not in a true political community, but in a mammoth nation that has reached the point where Congress, the judiciary, and the executive annually penetrate ever more deeply into the remaining recesses of privacy and liberty. . . . What dominates the minds of most of our congressmen, a very large part of the federal judiciary, and just about every President is not liberty, but *equality*—the kind of equality that comes only from federal regulation of one kind or other. As our record of governmental action in matters of health, safety, desegregation, alleged discrimination in a whole plethora of areas, affirmative action, environmental protection, and, most recently and appallingly, in the revision of social security taxes demonstrates, we are scarcely deluged these days by governmental anxieties about our personal and family liberties.

There was a time, a long time indeed, when the author's reassurances about the "existential relations" that have always existed, and must exist, between liberty and equality would have comforted me. What she calls the "tensions" between the two values and within each of the values tended to resolve themselves, though admittedly never perfectly, within the then vast private sector. So tiny indeed was the public sector that it would never have occurred to anyone even half a century ago to refer to a private sector. There was simply American society, surmounted by an extremely limited and small federal government. Bureaucracy at any level was minuscule, and the idea of huge regulatory agencies empowered to order the details of human life was simply unknown; that is, until the present century.

I don't for a moment question Jeane Kirkpatrick's own dedication to—and, I vow, preference for—liberty, as compared with equality. And I reaffirm the second sentence of this letter. But the upshot of her article is nevertheless one more blow in behalf of an egalitarianism that is already threatening to suffocate individual liberties and to weaken the social order. To imply that there is no need to become concerned about the possible impact of equality upon liberty because there have always been tensions between the two values, and because each can be seen as reinforcing to the other, is Olympian, to say the least. I dare say there have been ages in which such extreme individual liberty existed as to give luster to the ideals of regulation and equality. But our age certainly isn't one of them. . . .

And a strange thing has happened. Measures like the progressive income tax, unemployment insurance, direct aid to the impoverished, infirm and elderly, social security, and other analogous acts of government—which, when they were enacted, were justified in the name of compassion or social justice—are now called “redistributionist” or “egalitarian.” The inference to be drawn is obvious. Let us, then, simply “continue” the work of redistribution. . . .

Professor Kirkpatrick seems to me to assign equal weight to *liberty* and *equality*—that is, when neither is pushed to an irrational extreme—and this, I believe, is a great mistake. It is not necessary to invoke, as she does, "the *progresiste liberal*" to illustrate the mentality that, in our age, carries the

52 AEI JOURNAL ON GOVERNMENT AND SOCIETY

LETTERS

value of equality to lengths destruc-
tive of the system of free private
enterprise and economic freedom.
The ordinary liberalism and the
welfare state liberalism which she
seems to accept, if not actually laud,
are making enough headway, thank
you, in the cause of egalitarianism.
She speaks of "the democratic wel-
fare state's continued emphasis on
the liberty of the individual." I wish
I saw some of that emphasis but,
in fact, I see none—only occasional
eruptions from political conserva-
tives, which thus far have had some
restraining effect upon the egalitar-
ianism that liberalism of any kind
has so largely accepted. . . .

There is only one kind of equality
that reinforces liberty and that, of
course, is citizens' equal access to
the law and its courts. But who now
cares about *that* relic of the seven-
teenth century? Today every signifi-
cant use of the word *equality* cul-
minates in what that great liberal
Lyndon Johnson called equality of
social condition or result.

Which, in our heavily regulated
epoch, suggests another point.
Whereas Professor Kirkpatrick sees
a mutually reinforcing relation be-
tween equality and liberty, I see the
same relation between equality and
power. Power, when it becomes as
centralized as it is in our govern-
ment, invariably levels, destroys, or
reduces the natural hierarchy of
any social order or economy. Con-
versely, all efforts to bring about—
to mandate—an equality of social
and economic condition must end
up with the bureaucrat, the police
officer, even the soldier. The trouble
with equality as a value is that al-
though it aims at being a relation
between individual and individual,
it actually winds up as a new rela-
tion between individual and state.

Just one more observation. *Equal-
ity* in even the best of lights strikes
me as an intrinsically mean word,
lacking the nobility of such words
as *liberty, freedom, justice,* and
*rights*. . . . Mr. Justice Holmes
wrote once that he hated equality
because it inspired envy. So, I fear,
it does. . . .

Robert Nisbet,
Columbia University

TO THE EDITOR:

Jeane Kirkpatrick quotes a verse
which tugged at my heartstrings
when I was young:

The golf course is so near the
mill

That almost every day

Little children at their work

Can watch the men at play.

This no longer tugs at my heart-

strings because I now know what
the policy consequences of such
sentimentality are. The Congress
passes legislation requiring the mill
to give each employee a member-
ship in the golf club, a bag of clubs,
and ten free lessons. This so raises
the cost of production that the mill
goes out of business and the chil-
dren are thrown out on the street to
engage in some unregulated or, pos-
sibly, illegal enterprise.

My point is not to deny the value
of Kirkpatrick's insistence that
curbing the liberty of one person
may be the necessary price of ex-
panding the liberty of someone else.
My point is that this trade-off is not
the issue in most questions of gov-
ernment regulation. Most regula-
tions do not expand the liberty of
the persons whose liberty is alleged
to deserve expansion or they do so
in an inefficient way.

(I use this circumlocution to con-
form to Kirkpatrick's vocabulary.
She demonstrates the compatibility
of liberty and equality, in part, by
defining as liberty what I would call
equality. Thus, she would describe
a policy of income equalization as a
policy of increasing the liberty of
the poor at the expense of the lib-
erty of the rich; I would call it a
policy in pursuit of equality. In my
terminology, much regulation is im-
posed in the name of equality, but
this justification is rarely valid.)

We have a large family of regula-
tions that restrict the liberty of
some people and impair efficiency
and at the same time restrict, rather
than enlarge, the liberty of the peo-
ple they are supposed to be liberat-
ing. A policy of restraining farm
production to raise farm prices is
the classic example. Such a policy
has been defended as a way to in-
crease the liberty (or income) of
poor farmers. But in fact rich farm-
ers and landlords are its main bene-
ficiaries, poor farmers are not much
affected, and poor consumers are
injured. . . .

There is another category of regu-
lations that may assist the poor—or
whomever else they are intended to
assist—but do so inefficiently in the
sense that the same results could
be obtained with less loss of total
output and liberty. Minimum wage
legislation may be an example.

Of course, government regula-
tions usually benefit someone. So
do snowstorms. And deregulation
will usually hurt someone. But
champions of regulatory reform
have years of work ahead of them
before they confront an inescap-
able conflict with interests that
could be objectively described as

deserving special consideration.

Although Kirkpatrick does not
mention any economist more recent
than J.S. Mill, she gives the impres-
sion that the classical or laissez
faire tradition of economics is in-
different to concerns for equality.
However, at least in this century
this tradition has included strong
support for the progressive income
tax and, more recently, for the nega-
tive income tax, because these pol-
icies were thought to be ways to
reduce inequality with minimum
sacrifice of liberty and efficiency.
Economists of this school have
been worried about going too far
with even such measures, not only
because of a potential conflict with
liberty but also because they be-
lieve that, beyond some point, the
pursuit of equality would harm the
poor by reducing efficiency and
growth.

Kirkpatrick criticizes the classi-
cal liberals for failing to recognize
that "government is not the only
source of constraints on human
freedoms." Without wanting to ar-
gue the relevance of other con-
straints, such as the law of gravity,
I would point out that neither is
government the only source of
equalization. It seems to me obvi-
ous that the free market has been
a powerful force for economic
equality. . . .

Herbert Stein,
University of Virginia

TO THE EDITOR:

... In her article Dr. Kirkpatrick points out that the most common constraint on one's liberty to do what one wants is lack of money, and that giving full unregulated liberty to the unseen hand to do what it wants would leave millions of people with little money at all and, therefore, without much liberty. On target also are Dr. Kirkpatrick's observations that there are problems with the cumulative effects of individually offensive government regulations and with "the progressive transfer of power from the private to the public sector."

However, it would appear from
her article that she views the cause
of much of this transfer as being
the well-meaning desires of do-
gooders like me to have government
regulate liberty so as to enhance
equality. I see a much more practi-
cal (and perhaps therefore a more
insidious) motive at work—simply
the desire to get government fund-
ing. We are asking the government
to pay for many things that were
previously if inadequately funded
privately: "private" charities turn

REGULATION, MARCH/APRIL 1978 **53**

LETTERS

out to work off government contracts, and "private" universities cannot subsist without government funds. Once the government funds a program, it must see that those funds are spent in accordance with its policies on discrimination, equality, and so on. Consequently, a myriad of new regulations appears, caused not by any original desire to regulate, but simply by the passing of many functions from private funding to state funding.

If the problem is that the nature of our present economy makes it unfeasible to finance many traditional functions without the taxing power of the state, then we must consider how to unlink the use of that taxing power from the government's responsibility to regulate. The answer may lie in allowing citizens to reduce their taxes by the amounts they give to designated organizations that were previously privately funded but which are no longer viable on that basis. As part of this change, we might need legislation making it clear that government would not be responsible for the social values embodied in the programs of these organizations.

In any event, Dr. Kirkpatrick's perceptive article should be read by every "radical" who calls for "egalitarian" dictatorships for the underdeveloped countries....

Roy Godson,
Georgetown University

JEANE KIRKPATRICK responds:

In responding to my thoughtful critics, I should like to begin with some comments of a definitional sort. I agree with Warren Nutter that in the Anglo-Saxon political and philosophical traditions, freedom means something different from power. To say that a person is free to do *x* means not that he has the power to do *x*, but that the law (written or unwritten) of the society identifies *x* as an activity in which persons may engage without incurring severe sanctions.

With Nutter, I see freedom as meaning absence of coercion. And I wholeheartedly agree that absence of coercion should not be regarded as an instance of freedom from want. In fact, I believe the precise opposite: that freedom from want is one example of freedom from coercion. Of course it is possible to be a well-fed slave, and of course even fat slaves are not free. Where Nutter and I disagree is on the relation of freedom to government. Concerning that, I desire to make two points: first, that government is by no means the only source of co-

ercion and, second, that preserving freedom sometimes requires using force against those who interfere with the freedom of others. Therefore, it does not "follow immediately" that any action of government designed to bring about greater equality "necessarily limits liberty properly defined."

In this country the blessings of order have been so long and so continuously enjoyed that we are always in danger of forgetting that order is a precondition to the enjoyment of *all* our rights and all our liberties. In addition to not being repressed by government, free speech also depends on *not* being driven from the soap box by neighborhood toughs, a free press also depends on the printers' *not* being able to smash the presses if they disagree with an editorial, and a free marketplace also depends on *not* having one's products destroyed or one's customers terrorized by the hired guns of a competitor.

The fact that rights do not exist simply as against government, that they are never absolute and that they are sometimes mutually incompatible remind us that questions about liberty, equality, and government turn on assumptions about how much force should be brought to bear to protect whose right to do what. I regret that the important questions in politics are almost always complex rather than simple, that they so often involve judgments among competing goods rather than between good and evil, and that they almost invariably require the exercise of prudential judgment rather than deductive reasoning.

Concerning Herbert Stein's comment about my defining as liberty what he would call equality, let me emphasize that, because poverty is *one* kind of constraint on liberty, increasing the incomes of the very poor increases *their* freedom. The problem here, I think, is that one cannot talk meaningfully about "liberty" in the abstract, but only about the freedom of particular persons in specific contexts.

I am truly baffled by Bob Nisbet's doubts about whether liberty can survive welfare state politics. The evidence (which Nisbet says he does not see) of the welfare state democrat's continuing concern for liberty is available in the practices of Western European and Anglo-Saxon welfare states. These are, in fact, the *only* nations in the world in which individuals enjoy basic political rights. We *know* that individual rights—to speak, publish, as-

semble, oppose, and enjoy due process—*can* exist in societies where the government plays a large role in the economy, because in fact they *do*. Certainly I did not desire to strike one more blow "on behalf of an egalitarianism that is already threatening to suffocate individual liberties and to weaken the social order." I do not think that our liberties are so threatened today from within. My impression is that never in history have Americans been more free—to write, speak, publish, assemble, move about, or otherwise to do as they please.

What the experience of Britain teaches, I think, is not that burgeoning bureaucracy under conditions of freedom destroys democratic liberties but that it may destroy economic efficiency, productivity, capacity for growth, and adversely affect the capacity to maintain the population's standards of living.

There is a fundamental question which, though addressed most directly by Elwert, is relevant to the other letters: that is, how much government control over an economy is compatible with the preservation of basic civil and political liberties. In fact we do not know. We know that in those societies in which government owns and controls all or most of the economy individuals lack basic civil and political rights (China, the U.S.S.R., Cuba, Yugoslavia are examples). We also know that none of these regimes came into being through erosion of liberty by a welfare state, but were born out of violence. We know too that civil and political liberties exist in societies in which government owns and manages a substantial "public sector" and regulates the "private sector" (Britain, France, Germany, Scandinavia are examples). We cannot be certain whether the progressive extension of the public sector in these countries would result in the loss of political freedom. Certainly it would if the progressive nationalization were undertaken by political leaders or parties that had no commitment to democratic liberties. This, I think, is the principal danger confronting France and Italy today. Both are threatened with the ascension to power of Communist parties who have, at best, a dubious commitment to freedom.

I may be less worried than either Elwert or Haseler (whose *Commentary* article I also found interesting) about the ambiguous relation between social democracy and socialism. It seems to me these relations have always been ambiguous. The

54 AEI JOURNAL ON GOVERNMENT AND SOCIETY

LETTERS

French and German democratic socialists or social democratic parties, for example, have at various times embraced "socialism" as a goal, only to later change their minds. So has the British Labour party. None of these parties proposes to abolish the private sector. All are committed to the preservation of democratic processes and liberties. Social democratic or democratic socialist parties have always had different goals and methods from Communist parties. The efforts of Communist parties to blur these differences do not make the social democratic parties more "like" the Eastern European "socialists."

The preservation of democratic societies and organizations has always required vigilance against anti-democratic political groups. And the major problem today seems to be a flagging passion for freedom rather than an expanding public sector.

I favor all efforts to curb administrative and judicial rulemaking. I believe that Congress should be required to stop delegating so much power and should start taking more responsibility for the policies that circumscribe our lives. I agree entirely with Herbert Stein and Roy Godson that much government regulation has little or nothing to do with equality and everything to do with bureaucrats' use of power in behalf of their own goals. Massive busing, for example, is much less relevant to achieving equality of education than to realizing a vision of the racially integrated society. Edicts requiring that girls be permitted to compete in all athletic activities have less to do with equality than with the pursuit of a vision of a sex-blind society. The drive of government officials to expand their power over the lives of the governed is an enduring aspect of human behavior under virtually all known forms of government. Vigilance is also the price of freedom from unnecessary, undesirable, unauthorized, obnoxious regulators.

Like Bob Nisbet, I worry a good deal about efforts to replace custom with government regulation. However, the preservation of customary relations is not my most cherished value, and when custom denies citizens basic freedoms (as southern customs used to deny fundamental rights to blacks and wife-beaters deny the rights of their wives), I think custom must give way to laws designed to restore freedom.

To Herbert Stein I should like to add, first, that my references to classical liberals were limited to eight-

eenth and nineteenth century figures (this usage is standard among political scientists). Second, I doubt that the children in the Victorian jingle have, on being freed by government from the sweat shops, taken to illegal activities to earn an honest quid. I suspect, rather, that they all stay home watching television, where, thanks to the restrictions of the BBC, their fare will be a bit less harmful than that of our own less regulated airwaves.

Finally, it will be clear why I especially enjoyed Roy Godson's letter.

## The Price of Safety

**TO THE EDITOR:**

Professor Oi's excellent article, "Safety at Any Price?" (November/December issue), covers the main issues in the rationale of safety regulation and sets the right tone for orderly discussion of wise policy in this area. However, I felt uncomfortable about his paragraph on "communal risks," in which he neglected to point out the harm that can come from being stampeded by publicity into accepting wasteful priorities.

He said: "Acceptable risk levels in situations involving 'communal risks' tend to be far lower than for individual risks.... Zeckhauser has argued that society will pay more for safety in a situation where there is one chance in 10,000 that ten lives will be lost than in a situation where there is one chance in 1,000 of losing one life.... When the lives of 200 passengers are at stake, the aggregate sum that these passengers are prepared to pay to reduce their risk is large—indeed, it may

be over 200 times larger than the sum the lone executive will pay." This statement correctly indicates that airline passengers will pay more per vehicle trip to reduce the risk per vehicle trip than a single car driver would pay for the same risk reduction per automobile trip —exactly 200 times as much, I would say, if there are 200 executives in the airplane and one executive, without passengers, in the car. I cannot see why an executive, or I, should pay more for a given reduction in my risk of dying in an airline crash than for the same reduction in my risk of dying in an automobile crash. Therefore, I do not understand why Oi says "it may be over 200 times," or why he appears to approve of Zeckhauser's argument.

Zeckhauser is right that society pays more for safety in connection with rare but big fatal events than it pays in connection with common small events. An airline disaster provokes news coverage for several days, letters and articles on the Op Ed page of the *New York Times*, and so on. The loss of about 200 lives every day on the highways in the United States gets nothing like the same prominent coverage. If an FAA official is found at fault in connection with an airline accident—say, because he disapproved a budget expenditure for safety equipment—his career may be ruined. If a highway official disapproves a much smaller budget expenditure on highway safety features that would save hundreds of lives, no one hears of it, and there is no scandal. As a result, the government spends too much of its funds on airline safety and too little on highway safety. As a further result, each of us faces a needlessly high risk of accidental death. Better priorities would transfer funds from one to the other, reducing our risk on the highways by substantially more than the slightly increased risk in air travel.

Although the use of wasteful priorities is commonplace in our political system, saying that we have such priorities does not make it right. Informed discussion, such as we have in Oi's article and in other articles in *Regulation*, can reduce the role of passion and increase the role of reason in setting these priorities.

Martin J. Bailey,
University of Maryland

**TO THE EDITOR:**

As long as analyses like that offered by Professor Oi continue to obscure important differences between con-

REGULATION, MARCH/APRIL 1978 55

LETTERS

sumer product safety and worker safety, we shall not proceed very far along the way to achieving "acceptable risk." Whether social or private investment in safety is "reasonable" depends not only on a comparison of costs and benefits at the margin, but also on whether we as a society believe that the resulting allocations are fair.

Professor Oi observes that "the individuals who take the riskiest jobs are likely to be the ones who attach the lowest values to life and who incur the lowest accident costs [by definition] if injured." It is also often the case that persons who sell their safety for wages in hazardous occupations come to the marketplace with the smallest bundle of goods (wealth), for example, unorganized textile workers and day laborers. Naturally, these workers do not attach high monetary values to their lives and are willing to sell their safety at a lower price than most workers would. In contrast, it can be argued that consumers of automobiles or electric hair dryers represent a mix of the members of society as purchasers and, if a risk premium could be determined by an efficient market, that premium attached to products would bring a higher price for the same risk. The truth of the matter is that wealthy parents might buy their graduating child a sports car, but not allow him/her to hold a summer job in a foundry.

Now one may argue that imposing a higher degree of safety on workers than they themselves would choose is not a very good way to transfer wealth (income). Some may suggest that, instead, we give an amount of money to the worker which represents the difference between society's concept of a fair risk premium and the worker's current risk premium. This would allow the worker to put the added income to its most valued use. Aside from the fact that this transfer payment (like most others suggested to make us feel more comfortable and just) will not occur, it seems clear that few workers would switch to safer but lower-paying jobs. Adding the transfer payment would not equate the wealth of workers in hazardous jobs with that of the average citizen, and the lower risk premiums demanded by the worker would remain essentially unchanged. Whether we care or not depends on our sense of equity. Paying the difference between risk premiums might ease our conscience, but it would not reduce injuries.

Alternatively, we as a society may impose standards to prevent an injury frequency rate above a predetermined level. If this level is higher than the workers themselves would choose, the costs would be borne partially by workers, but also by producers and consumers too! If workers are presently equating the costs of industrial injury with monetary benefits at the margin, they would certainly be willing to reduce the costs (injuries) if only a fraction of their benefits (wages) were also reduced. It would be a mistake of analysis to equate workers with consumers (as Robert Smith has done elsewhere). Yes, some jobs might be lost or wages slightly reduced if more safety were imposed on the producer, but the costs would be shared by both the consumer and producer of that dangerously manufactured product whose price might go up. Unless products bear the full costs of production in a fair way—which, I submit, means that the magnitude of the risk premium cannot be set by the worker—consumers (and producers) will benefit from the fact that workers in risky occupations value their lives less than do consumers. In addition, the research of Thaler and Rosen regarding wage differentials has not been demonstrated to be generally valid in most hazardous industries, especially where workers are uninformed about hazards and are unorganized.

Whether mandated standards are in the "public interest" depends on how one views the public interest. To be just or fair may be argued to be as much in the public interest as to "minimize the sum of expected accident costs and accident prevention costs." If Professor Oi wants to define the public interest in a narrow or traditional economic way, he should at least be explicit about the fact that he assumes that either justice is served only if economic efficiency is achieved or that the public interest has nothing to do with justice.

Nicholas A. Ashford,
Massachusetts Institute
of Technology

WALTER OI responds:

Mr. Ashford has written a remarkably empty letter. It conveys his displeasure with my essay but contains no substantive criticisms. Further, it reveals a very impressive ignorance about basic economic principles.

He objects, for example, to my emphasis on the criterion for evaluating "acceptable risk." This is

evident in his concluding paragraph when he writes, "Whether mandated standards are in the 'public interest' depends on how one views the public interest. To be just or fair may be argued to be as much in the public interest as to 'minimize the sum of expected accident costs and accident prevention costs' [emphasis added]." How does Mr. Ashford define the public interest so that this public interest is served by the kinds of standards and intent enforcement activities which OSHA exercised during its first five years of existence.

There may indeed be instances in which government intervention can result in a lower sum of expected accident costs and accident prevention costs. In order to find cases in which such intervention is warranted, we need reliable studies and estimates of accident costs and prevention costs. Little is to be gained from simply asserting that public policy has got to recognize benefits of justice and fairness.

Ashford rhetorically writes, "Some may suggest that, instead, we give an amount of money to the worker which represents the difference between society's concept of a fair risk premium and the worker's current risk premium." Look at the reasoning following this sentence. It is filled with errors of logic and wrong economics. Workers do respond to pay differentials, and offering such a societal conscience differential will attract workers to hazardous jobs and raise the number of occupational injuries and fatalities. Finally, Ashford makes unfounded assertions about the studies by R.S. Smith and by R. Thaler and S. Rosen. The individuals in Thaler's and Rosen's sample data were, for the most part, low-paid and only partly organized workers who were allegedly uninformed about the occupational hazards. Mr. Ashford does not explain why these workers in hazardous occupations were paid risk premiums of the magnitudes found by Thaler and Rosen. Equilibrium risk premiums are not set by workers but are determined by the interaction of demand and supply forces.

Health and safety are now and always have been emotional policy issues. I had hoped that my essay would prompt readers to look at these issues in terms of the trade-offs that consumers, workers, and employers make in deciding to accept varying risk levels. There is such a thing as "too much" safety just as there may be such a thing as "too little." ■

56 AEI JOURNAL ON GOVERNMENT AND SOCIETY

Testimony on
Electronic
Surveillance
for National
Security
Purposes

Laurence H. Silberman

Mr. Chairman, thank you for the opportunity to express my views on bills before this committee dealing with procedures governing electronic surveillance for national security purposes. As a former deputy attorney general and former ambassador, I have had extensive opportunity to consider the nature of the problems with which this committee is grappling.

Indeed, it was Attorney General Saxbe, under whom I served, who initiated a process which has, in truth, led to this committee's proceedings. Although it is not generally known, in the fall of 1974 Attorney General Saxbe refused to approve any further national security electronic surveillance that required the attorney general's sanction unless and until the President issued an order which delineated the attorney general's authority and articulated guidelines for the exercise of that authority. Saxbe was, thus, the first attorney general to assert the need for a written conceptual framework governing national security electronic surveillances.

Laurence H. Silberman, former undersecretary of labor, deputy attorney general of the United States, and U.S. ambassador to Yugoslavia, is senior fellow at the American Enterprise Institute and counsel to the law firm of Dewey, Ballantine, Bushby, Palmer & Wood.

1

As you might imagine, Saxbe's action precipitated a hasty effort on the part of the administration to draft such an order—an effort in which I was deeply involved. The executive order that followed was subsequently superseded by a new executive order, publicly issued in 1976, which reflected continuing experience. However, a good deal of the language in various bills before this committee has as its genesis the initial executive order issued by President Ford.

Moreover, as acting attorney general in the winter of 1975, I had the unpleasant duty to examine the official and confidential files of the FBI, the existence of which had just been disclosed by the press. These files revealed—to my never to be forgotten shock—abundant examples, stretching back through Roosevelt's administration, of misuse of the President's national security authority to engage in electronic surveillance. Most, if not all of this, has become publicly known by virtue of subsequent congressional investigations.

Finally, as acting attorney general—albeit for a short time—I did make some determinations as to whether or not to authorize electronic surveillance for national security purposes.

After having thought a good deal about the problems this committee is addressing, I firmly believe the egregious abuses of the past will almost certainly not occur whether or not the Congress legislates on this subject. I am convinced that the single most important deterrent to executive branch malfeasance is the prospect of subsequent disclosure. The extensive publicity, and accompanying criticism, which previous administrations, as well as the law enforcement and intelligence bureaucracies, have recently suffered will effectively deter serious future abuses of national security electronic surveillance. That is not to say that I believe legislation to be inappropriate; I simply wish to put the scope of the problem in perspective.

Much of the discussion about this kind of electronic surveillance has assumed that the interests at stake are only the privacy of individuals on the one hand, and the protection of national security

2

on the other. The question of the appropriate distribution of
power and authority within our government has not, in my judg-
ment, been given the explicit attention it deserves. I hasten to say
that I find the notion that the President's constitutional authority
to conduct foreign affairs and to command the armed forces pre-
cludes congressional intervention into the manner by which the
executive branch gathers intelligence—by electronic or other means
—to be unpersuasive. But to concede the propriety of a congres-
sional role in this matter is by no means—and this is the burden of
my testimony—to concede the propriety or constitutionality of
the judicial role created by the administration's bill [H.R. 7308].

Since I believe the judiciary's role in national security electronic
surveillance should be circumscribed, I strongly support the general
thrust of Congressman McClory's bill [H.R. 9745]. That bill limits
executive authority to engage in electronic surveillance generally
to those situations in which the administration's bill authorizes
electronic surveillance. But it relies on senior officials in the execu-
tive branch—reporting regularly to Congress—to comply with its
commands without providing for judicial intervention.

I have no doubt that Congressman McClory's bill would amply
protect against future executive branch abuses of power. H.R. 9745
sets forth tough substantive and procedural standards (indeed, in
some respects I think too restrictive), but most importantly that
bill would fix record responsibility on senior executive branch
officials, the President, and his political appointees, who, when
they act, would surely be aware of the likelihood of future expo-
sure if they should be tempted—as in the past—to direct surveil-
lance at the wrong people for the wrong reasons.

But would not prior judicial approval ensure greater protection?
Phillip Lacovara, in an excellent 1976 article, argued that prior
judicial approval will force articulation "of the reasons for a pro-
posed search in language that will be convincing beyond the circle
of the President's immediate advisors."¹ Perhaps. And perhaps that
is a mixed blessing. Under the administration's bill, the President
and his senior advisors are not likely to pay very close attention to
questions of electronic surveillance for national security purposes.

3

The presurveillance judicial warrant requirement will permit senior executive branch officials to avoid the degree of responsibility which Congressman McClory's bill would place upon them. The greater the authority given to the courts in this area, the less the responsibility exercised by the executive branch. When in doubt their posture will surely be: Try for the warrant.

As Mr. Lacovara's article implies, the real issue presented by the bills before this committee is: Should executive power be further reduced, and, if so, which branch of government should gain at the executive's expense? If one believes, as I do, that the so-called imperial Presidency was actually in decline almost from the time it was discovered (in some respects, the most recent executive abuses were actually precipitated by that decline), and that today the chief threat to American democracy is the *imperial judiciary*, one views any new delegation to the judiciary with apprehension.

Many of those who have opposed presurveillance warrants have argued that the judiciary is incapable of making the kinds of policy judgments necessary in gathering intelligence or conducting foreign policy. I do not make that argument. Unfortunately, judges are all too capable of these functions. As Justice Powell said in the *Keith* case, responding to a similar argument concerning internal security, "We cannot accept the government's argument that internal security matters are too subtle and complex for judicial evaluation. *Courts regularly deal with the most difficult issues of our society*" [emphasis added].² Although I have the greatest respect for Justice Powell and I reluctantly agree with the holding in *Keith* (ensuring domestic security can come too close to repressing domestic dissent), I, nevertheless, find Justice Powell's off-handed observation terribly sad. Courts do, in truth, deal regularly with many of the most difficult issues in our society-but they should not. They are, it will be recalled, not responsive to the democratic political processes, and the most difficult issues are political.

Not surprisingly, Judge Wright in the *Zweibon*³ case seized upon Justice Powell's unfortunate language to make the same argument in the national security field: that judges are perfectly capable of employing that "analytical ability or sensitivity of foreign affairs

4

necessary to evaluate-recommendations"-for electronic surveillance. Indeed, Judge Wright went further to assert that judges were even better equipped than attorneys general to make such determinations; the attorney general, according to Judge Wright, is chosen only for his "ability as a lawyer rather than as a diplomat," and attorneys general have not gained much tenure in recent years, whereas "a federal judge has lifetime tenure and could presumably develop an expertise in the field of foreign affairs if consistently resorted to for authorizations for foreign security wiretaps."⁴

Since Judge Wright places no apparent value on political accountability-attorneys general after all are responsible to elected Presidents—he might as easily suggest the judiciary take over *all* foreign affairs responsibilities to balance their increasing dominance of domestic affairs.

But it is not just greater expertise which Judge Wright offers us in behalf of the federal judiciary. In contrast to the executive branch, Judge Wright (and others) contend that judges bring to the task of balancing national security interests against individual privacy claims a "neutral and detached attitude." Detached from political accountability, yes; neutral-hardly. It is particularly ironic that probably the most activist judge, speaking on the behalf of the most activist federal appeals court in the United States, would make that claim. Few American legal scholars whether or not in sympathy with decisions of the U.S. Court of Appeals for the District of Columbia would deny that the court has over recent years ranged as far as any court from what Professor Wechsler of Columbia calls neutral principles.⁵ I don't mean to criticize this court; I do mean to make the point that the judiciary is neither theoretically nor actually more neutral than the executive, or for that matter the Congress, in reaching answers to the difficult questions which national security electronic surveillance presents. It can as easily be argued that the judiciary will overweigh the interests of individual privacy claims-it is, after all, the protection of those claims on which judicial authority is based-as it can be argued that the executive will unduly emphasize national security. And since judges are not politically responsible, there is no self-correcting mechanism to remedy *their* abuses of power.

5

The appropriate institution to oversee the President's use of electronic surveillance for national security purposes is the Congress. The crucial distinction between Congressman McClory's bill and the administration's is that the former implies—indeed, virtually guarantees—continued congressional oversight of required procedures and substantive standards, whereas the administration's bill would delegate all of that authority to the judiciary. H.R. 7308 is cut from a familiar pattern; Congress once again would act as a conveyor belt, transferring authority from both the executive and itself to the judiciary, under the illusion that it is Congress which is asserting authority. But, once the magic wand of a presurveillance judicial warrant is invoked, Congress will surely abdicate any responsibility for continuing oversight.

Although I am generally concerned about the growth of judicial power at the expense of both congressional and Presidential authority, I maintain that the administration's bill, if passed, would be a particularly unfortunate addition to this trend.

As Congressman McClory put it in his opening statement, the subject matter is so closely tied to national security policy formulation as to be inappropriately put to the judiciary. The scope of judicial review for targeted U.S. persons under the administration bill clearly propels the judiciary into policy determinations of breathtaking scope.

For instance, in reviewing whether the executive's determination is "clearly erroneous" as to whether the information sought is "foreign intelligence information," the courts will be invited, indeed obligated, to consider the following: What information is necessary to protect the United States against attack or other grave hostile acts (which implies authority to determine which foreign countries are hostile to the United States)? and, What information, with respect to a foreign power, is deemed essential to the defense of the nation or the successful conduct of foreign affairs (which implies authority to determine what is the successful conduct of foreign affairs)? Prior judicial determinations on these staggeringly broad questions would presumably be binding on the executive even where the target is a non-U.S. person. Truly, under the ad-

6

ministration's bill, Judge Wright might get what appears to be his
wish: the judiciary could gain the opportunity decisively to influ-
ence the foreign policy of the United States.

But, even if judicial review of these substantive policy issues under
the clearly erroneous test were eliminated, I would oppose any
prior judicial scrutiny of this kind of electronic surveillance even
for the purpose of determining factual probable cause. In the first
place, I doubt whether the judiciary can be held to the limitations
of the probable cause standard of the Ford administration's bill.
We have seen too many recent examples of legislation which grants
the judiciary authority only to ensure executive branch procedural
regularity. Invariably, under such legislation, the courts reach—as
they did in the environmental field—for substantive review author-
ity as well.

Moreover, despite the efforts of draftsmen to cast both the Ford
and the Carter bills in terms of criminal activity, much of the
foreign intelligence information is *not* sought for criminal law pur-
poses. Even where the activity surveyed might be criminal in
nature, the executive often chooses not to prosecute. That is why
electronic surveillance for foreign intelligence purposes is so funda-
mentally different from that employed to attack domestic crime.
And it is also why the traditional prior judicial scrutiny for domes-
tic wiretaps is so clearly inappropriate here. In fact, the criminal
law "probable cause" standard has been artificially engrafted onto
executive intelligence gathering for the sole purpose of granting
authority to the judiciary.

The administration's bill would limit jurisdiction to seven "super-
judges" appointed by the Chief Justice. This interesting device was
chosen, I assume, to counter concerns for maintaining security as
well as to develop judicial expertise in foreign affairs. But I find it
troubling. Is the Chief Justice to appoint only those judges he be-
lieves to be "sound" on national security matters? Should he ex-
clude from his select group judges like Judge Gibbons of the third
circuit who has already expressed a view in the *Butenko*⁶ case that
the Vienna Convention may limit certain activities respecting
foreign embassies? The need for this special device suggests the im-

7

propriety of the entire delegation to the judiciary; when matters
cannot be entrusted to any federal judge they should be entrusted
to no federal judge.

Even more troubling is the secrecy with which judicial delibera-
tions are to be encased. As I have emphasized, judges are not
elected; the legitimacy of their actions, therefore, depends—even
more than do actions taken by either the executive or the legisla-
tive branches—on public decision making. To be sure, aspects of
the judicial process have traditionally been kept from the public;
various hearings in camera and even the applications for warrants
in domestic criminal proceedings fall within that category. But—
and it is a big but—normally that part of a judicial proceeding
hidden from the public is ancillary to a public trial; a criminal
search warrant application will be part of an investigative proceed-
ing which, since probable cause is shown, will probably lead to a
criminal trial (the target of Title III wiretaps are subsequently noti-
fied). Here, on the other hand, virtually an entire phase of judicial
activity will go underground. Those of us not in government will
never know how the judiciary exercises the supervisory authority
over national intelligence gathering which the administration bill
grants it. This consideration, in my view, also weighs against pre-
surveillance judicial warrants.

Finally, I should like to question explicitly the constitutionality of
the administration bill. First, it denies any inherent authority on
the part of the executive to conduct warrantless electronic surveil-
lance, despite the fact that the Supreme Court has specifically re-
served that question and a number of appeals courts have held that
it exists (U.S. Court of Appeals for the District of Columbia is an
exception). Among those who have found inherent executive au-
thority is the 5th Circuit. Judge Bell writing for this court in 1973
said, "Restrictions upon the President's power which are appro-
priate in cases of domestic security become artificial in the con-
text in the international sphere"<sup>7</sup> (apparently where Judge Bell
stands depends on where he sits).

The Ford administration bill, at least, wisely recognized that if
such inherent power existed—inherent meaning beyond congres-

8

sional control—it would probably be invoked in circumstances not specifically contemplated by proposed legislation. Therefore, the Ford administration bill contained a reservation for this executive authority which is probably constitutionally compelling. To have said, as did the Senate Judiciary Committee's report, that the Carter administration bill resolves this constitutional question by simply denying the existence of any inherent executive authority is folly. If this constitutional authority exists, and I believe it does, Congress cannot legislatively repeal it.

Moreover, I have serious doubts as to the constitutionality of the judiciary's role in the administration bill. Although I have not had an opportunity to research the question exhaustively (nor for that matter as far as I can determine has the Justice Department), I question whether the courts can accept authority to make determinations required by the administration bill.

The task of the judiciary under this legislation seems much closer to rendering the traditionally prohibited advisory opinion than to the constitutionally sound adjudication of cases and controversies. Although it is true that judges have traditionally issued search warrants ex parte, they have done so as part of a criminal investigation process which, for the most part, leads to a trial, a traditional adversary proceeding. Here, however, as I have already indicated, it is more likely that the warrant will be issued to gain information for entirely different purposes, not traditionally the business of judiciary. Of course, the broader the scope of judicial inquiry into executive determinations as to the need for information sought through electronic surveillance, the more dubious the constitutionality; the court is brought further and further away from its traditional responsibilities. For that reason the "clearly erroneous" standard in the administration bill is surely the most constitutionally vulnerable aspect of that legislation.

9

NOTES TO TEXT

¹Phillip Lacovara, "Presidential Power to Gather Intelligence: The Tension Between Article II and Amendment IV," *Law and Contemporary Problems*, vol. 40 (Summer 1976), p. 106, 128.

²United States v. United States District Court, 407 U.S. 297, 320 (1972). This decision is commonly referred to as the *Keith* decision. U.S. District Judge Damon Keith was a respondent in the case.

³Zweibon v. Mitchell, 516 F. 2d 594 (D.C. Cir. 1975).

⁴Ibid., 516 F. 2d 644, note 138.

⁵Herbert Wechsler, "Toward Neutral Principles of Constitutional Law," *Harvard Law Review*, vol. 73 (1959), p. 1.

⁶United States v. Butenko, 494 F. 2d 593, 626 (3rd Cir. 1974).

⁷United States v. Brown 484 F. 2d 418, 426 (5th Cir. 1973).

11

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SILLS BECK CUMMIS RADIN & TISCHMAN

A PROFESSIONAL CORPORATION

COUNSELLORS AT LAW
33 WASHINGTON STREET
NEWARK, NEW JERSEY 07102

ARTHUR J. SILLS
CLIVE S. CUMMIS **
DAVID BECK
STEVEN S. RADIN
MICHAEL B. TISCHMAN
MORTON S. BUNIS *
STANLEY TANNENBAUM **
BARRY M. EPSTEIN
GERALD SPAN
THOMAS J. DEMSKI
JEFFREY BARTON CAHN
WARREN J. TAUB
JEFFREY H. NEWMAN *

JERALD D. BARANOFF
JEFFREY J. GREENBAUM
HARRY B. NORETSKY
HOWARD D. COHEN
IRA J. KALTMAN
LEWIS COHN
DONALD ZARIN **
KENNETH F. COUGHLIN, JR.
BOGDA M. BLEKICKI
DANIEL LOUIS GROSSMAN
LEE ALAN ADLERSTEIN *

AREA CODE 201
643-3232
NEW YORK TELEPHONE
(212) 349-7600

(N.J. AND N.Y. BARS) *
(N.J. AND WASH., D.C. BARS) **

OF COUNSEL
ARTHUR L. ABRAMS *
MORRIS BECK

April 12, 1978

The Honorable Dr. Henry A. Kissinger
1800 K Street Northwest
Suite 520
Washington, D. C. 20006

Re: The Rabbinical College of
America

Dear Dr. Kissinger:

Rabbi Moshe Herson of The Rabbinical College advised me today of your gracious return of the fee which you were to receive for your appearance and presentation at the National Founders Dinner held in New York recently, at which you accepted the Honorary Doctoral Award for Former President Ford.

Throughout the years I read avidly concerning your endeavors on behalf of these United States in foreign matters, and, of course, I had a special interest with respect to what was occurring in the Mid-East and our country's involvement therein.

For me to attempt to characterize what I believe to have been a brilliant career has, I believe, already been done by people far more expert and knowledgeable in the area in which you

SILLS, BECK, CUMMIS, RADIN & TISCHMAN

Page Two

April 12, 1978

labored so mightily on behalf of this country.

Now, I am motivated to thank you for this
generous offer to the College which is desperately
in need of funds, and this act by you indicates
that, not only are you a great man in the
international affairs of the world in a political
sense, you are also what we Jewish people call a
"Mensch" with all the connotations which emanate
from the use of that word.

Just by way of recollection, since I am
sure my name as such will not recall me to you,
we were introduced that evening and besides being
a Trustee of the College, I was introduced to you
as a former Attorney General of the State of New
Jersey.

Again thank you.

AJS/cfw