Economic News 1986

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1986 February
Marvin N. Olasky _Reason Magazine_
Hornswoggled!: How Ma Bell & Chicago Ed conned our grand-parents & stuck us with the bill

"Vail had been president of American Bell during the 1880s & rejoined the company in 1902 as a member of the AT&T board of directors.   At that time, Bell's dominance of the telephone industry could not be taken for granted.   In 1903 the company listed 1.3M subscribers.   That same year, according to a Census Bureau report, independent companies had over 2M.   By 1905 -- the year a book entitled _How the Bell Lost Its Grip_ came out -- the independents were breathing hard down Bell's neck.   Vail perceived that the threat came predominantly from competition, not regulation.   It was an accurate perception.   When he resumed AT&T's presidency in 1907, Vail immediately analyzed the Bell System's competitive problems, city by city.   In Toledo, for instance, Home Telephone Company had begun competing with the local Bell franchise in 1901.   Charging rates half those of Bell, it had 10K subscribers in 1906, compared to 6.7K for Bell.   In Nebraska & Iowa, independent phones out-numbered those of Bell 260K to 80K.   In his 1975 book, _Telephone: The First Hundred Years_, John Brooks reported that cities with referenda on the granting of independent franchises were voting decisively in favor of competition over regulated monopolies.   In Portland, OR, a new telephone company won a franchise by a vote of 12,213 to 560.   In Omaha the independent company was approved by a vote of 7,653 to 3,625, and in a national survey of 1,400 businessmen, 1,245 said that competition had resulted or could result in better phone service in their cities, with 982 adding that competition had forced Bell to improve its own service.   Bell had been promoting itself as a monopoly provider on the grounds that only a monopoly system would allow telephone users in different cities or different parts of a town to talk with each other.   Yet Vail knew that system interconnects were fast becoming technologically feasible, & many scoffed at the company's argument.   Something had to be done..."

"Everybody loves to hate the phone company.   And the electric company.   And the gas company.   And any other company that can act with unresponsive arrogance just because it has the government's protection as a legal monopoly.   But when angry consumers & other critics call for an end to these monopolies, choruses of utility PR people & government regulators recite the same old story -- once upon a time there was competitioin among utilities, but "the public" got fed up & demanded regulation. ¬†Again & again comes the tale: Free enterprise in utilities lost in a fair fight.
It makes a good story, but it's not true.   The real story of how public utility monopolies came to be goes like this: Early in this century, 2 utility executives, Theodore Vail of AT&T and Samuel Insull of Chicago Edison, saw that competition was threatening their businesses.   The solution to their problems, they decided independent of one another, was to get government to guarantee their markets & protect them from competitors.   To succeed, they would have to manipulate public opinion to create the impression of popular dissatisfaction with competition among utilities. ¬†Then they could persuade government to step in & set their companies up as monopolies.
Evidence of the real story behind the origin of utility regulation largely comes from hearings of the Federal Trade Commission & the Federal Communications Commission conducted during the late 1920s & 1930s, which revealed the comprehensive public relations strategies that Vail & Insull used to support their great con games.   Few scholars, it appears, have looked closely at this evidence.   Yet what the actual records reveal is a fascinating tale of immense greed, masterful propaganda, & sleazy politics.
Lights Out for Competition
Samuel Insull came to the US from England in 1881 to be Thomas Edison's secretary, then Edison's key manager & strategic planner.   Edison's inventions turned dozens of industries upside down.   Insull learned from him how quickly new inventions could radically alter existing patterns of commerce under conditions of free competition -- and Insull was resolved not to allow competition to disrupt his plans, once he was in power.
Insull came to the city he would dominate for 4 decades when he took control of Chicago Edison in 1892.   In his biography of Insull, historian Forrest McDonald describes how the young executive learned to play political hard ball in one of the nation's major leagues, the Chicago City Council.   By 1905, after merging Chicago Edison with Commonwealth Electric, Insull had gained monopoly power in the electric lighting & power business in Chicago.
Before 1905, the electricity industry was "one of full & free competition", economist Burton Behling noted in a 1938 monograph.   Municipalities reserved the right to assign franchises, but "the common policy was to grant franchises to all who applied".   In 1887, for instance, a single NY City Council resolution granted competitive franchises to 6 different electric companies.   Low prices & innovative developments resulted, along with some bankruptcies & occasional disruption of service.
Once Chicago Ed was dominant, Insull increasingly emphasized the importance of avoiding disruption of electrical service & how competition supposedly contributed to the problem.   Through frequent speeches, many collected in the 1915 book Central Station Electric Service, he popularized anti-competition arguments.   And as president of the National Electric Light Association (NELA), a major utility trade group, Insull argued that utility monopoly & "franchise security" could best be secured by the establishment of government commissions, which would present the appearance of popular control.
The way to sell such a plan to the public, Insull suggested, would be to emphasize the commissions' power to fix rates.   He told utility owners not to worry about regulation -- regulated rates might be slightly lower than those utility owners would prefer to charge, but they would be higher than what would prevail under full competition.
Insull's theory that regulation by commission would benefit utilities was dead right, as economic historian Gregg Jarrell showed in a 1978 article in The Journal of Law & Economics.   In states that led the way in regulation, Jarrell noted, utilities' prices & profits rose while their output fell, but in states that continued to allow competition had lower prices for electricity.   "State regulation of electric utilities", Jarrell concluded, "was primarily a PRODUCER policy."
Insull's real public relations genius, however, lay in convincing the American public that state regulation was primarily a proCONSUMER policy.   To accomplish that legerdemain, he master-minded specific PR strategies to overcome popular objections to his anti-competitive maneuvering.
[photo caption: sleazy (sle-*ze-) 1. vulgar, disreputable, See Samuel Insull.]
First, he instructed his PR managers to heighten popular fears of socialism in order to promote acceptance of government regulated monopoly as a less undesirable alternative.   According to biographer Forrest McDonald, Insull had no objection to socialism in general & "lobbied for 20 years to bring about a government owned system for England".   Insull believed he could maintain his power under a system, public or officially private, in which governments afforded his organization monopoly status, but he knew that most Americans favored a competitive system & would support regulated monopolies only if they were seen as precautions against socialism rather than stiflers of competition.
Second, Insull realized that he & his cohorts in government would have to perform a charade at times, because those favoring competition would stand for regulated monopolies only if the regulators were seen as severe watch-dogs.   Insull's principle was never to attack a government official who attacked him: "One must expect & accept public denunciations by one's political friends, whenever political expediency necessitated.", he once remarked.
Third, Insull believed that industry executives, as soon as the time was right, should lead the fight for increased regulation.   Such a stance would allow executives to develop alliances with pro-regulation politicians, who would man the regulatory commissions when established or at least appoint regulatory officials.   Under Insull's instigation, the NELA trade group set up a Committee on Public Policy in 1906, which lobbied vigorously for establishment of state regulatory commissions.
By 1912, scholar Gregg Jarrell has found, "utilities were the main champions" of state regulation.   J. Allen Smith, a former dean at the University of Washington, wrote in a 1914 issue of the "Annals of the American Academy of Political & Social Science" that the regulatory movement, "though ostensibly designed to give cites more effective protection against public utility abuses, has not had its origin in any popular demand from urban communities.   The initiative in this matter seems to have come very largely from the public utility interests."
That phase 1 of the Insull-led utility campaign succeeded is evident from the chronology of events: Early in the 20th century, only 5 states had regulatory commissions for utilities.   Between 1912 & 1917, 25 states established regulatory commissions.   But Insull's artful machinations were not yet exhausted..."
Reason magazine

1986 April
Max L. Carey & Kim L. Hazelbaker _Monthly Labor Review_
Employment growth in the temporary help industry: Bodyshopping
"The number of [temporary] employees [i.e. bodies shopped] rose by 70% from 1982 November to 1984 November, making the industry the fastest growing among those with employment over 50K...   Average annual employment in the temporary help industry grew from about 340K in 1978 to 695K in 1985, an increase of 104%...   Data on the number of workers supplied by job shops are not available, but some industry observers estimate that it may have been as high as 150K in 1985...   The use of temporary workers may be particularly attractive to organizations with high fringe-benefit costs.   [Donald Mayhall and Kristin Nelson, The Temporary Help Supply Service and the Temporary Labor Market (Salt Lake City, UT, Olympus Research Corporation, 1982 December 14).]   One of the more pronounced trends in labor costs over the last several years has been the increase in the relative importance of employer-paid benefits.   For example, between 1981 June and 1985 December, wages increased 27.0%, but total compensation costs, including employer costs for employee benefits, rose 29.2%.   [Employment Cost Index-1985 December, BLS News Release, 1985 January 28.   The trend of larger increases in benefits than wages reversed in 1985, when wages were up 4.4%, compared with 4.3% for total compensation.]   Traditionally, temporary employees [are paid] fewer benefits than permanent employees and therefore lower benefit costs [and lower total incomes to the bodies shopped]."

1986 April
Wayne J. Howe _Monthly Labor Review_
The business services bodyshopping industry sets pace in pseudo-employment growth
"Industries which provide services to businesses for a fee or on a contractual basis have had rapid gains in employment growth over the last decade, especially firms supplying computer and data processing services and temporary help; expansion is expected to continue."

1986 November
Wayne J. Howe _Monthly Labor Review_
Temporary help workers (i.e. bodies shopped): who they are, what jobs they hold
"These workers are disproportionately female, young, and black; they are more likely to work part time and in clerical and industrial help jobs."

1986 December
Murray N. Rothbard _Ludwig von Mises Institute_
_Making Economic Sense_ Government vs. Natural Resources
"Fortunately, the Reagan Administration rejected the Law of the Sea Treaty, which would have permanently subjected the world's ocean resources to ownership and control by a world-government body under the aegis of the United Nations.   With that threat over, it is high time to seize the opportunity to allow the expansion of private property in one of its last frontiers."

Murray N. Rothbard _Ludwig von Mises Institute_
Protectionism and the Destruction of Prosperity (pdf)
Lew Rockwell
"One of the major... fallacies is to confuse the price of labor (wage rates) with its cost...   If the [foreign] government is really willing to waste scarce resources subsidizing American purchases of [goods made there], so much the better!   Their policy would be just as self-defeating as if the losses were private...   Any government subsidizing of [an] industry will funnel too many resources into that industry as compared to older firms, and will also inaugurate distortions that may persist and render the firm or industry permanently inefficient and vulnerable to competition... &nbp; the steel industry has been inefficient ever since its inception, and its chronological age seems to make no difference.   The first protectionist movement in the U.S.A. was launched in 1820, headed by the Pennsylvania iron (later iron and steel) industry, artificially force-fed by the War of 1812 and already in grave danger from far more efficient foreign competitors...   If U.S. banks, spurred on by the Fed or previous forms of central banks, inflated money and credit, the American inflation would lead to higher prices in the U.S.A., and this would discourage exports and encourage imports.   The resulting deficit had to be paid for in some way, and during the gold standard era this meant being paid for in gold, the international money.   So as bank credit expanded, gold began to flow out of the country, which put the fractional-reserve banks in even shakier shape.   To meet the threat to their solvency posed by the gold out-flow, the banks eventually were forced to contract credit, precipitating a recession and reversing the balance of payment deficits, thus bringing gold back into the country."

Independent contractors
"The issue of 'independent contractors' has been boiling over since the IRS came up with rule 1706 back in 1986.   It meant the rise of bodyshops hiring people because companies didn't want to deal with rule 1706.   They left that to the [bodyshops].   And with that the fall of true independent contractors who had to create a corporation in order to get contractor status."

Stephen P. Halbrook _Law & Contemporary Problems_
What the Framers Intended: A Linguistic Analysis of the Right to "Bear Arms" (pdf)

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