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Asia Research n.d. [OA 7566] [1]
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Asia Research n.d. [OA 7566] [1]
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Records of the White House Office of Speechwriting (George H. W. Bush Administration)
Speech Backup Chronological Files
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Speechwriting, White House Office of
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Asia Research n.d. [OA 7566] [1]
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L
Nov. 27 / Administration of George Bush, 1991
Statement by Press Secretary Fitzwater
Many people wonder how a President un-
on the Adjournment of Congress
derstands what goes on outside Washington,
November 27, 1991
especially to people struggling to make
ends meet. Of course, statistics paint a so-
Congress has adjourned for the Thanks-
bering picture: Unemployment, tight credit,
giving holiday after making progress in sev-
lower home values, sluggish job growth. But
eral important areas, but much remains to
real life speaks far more eloquently than
be done. We still must be sensitive to the
bare numbers. I have traveled to 48 States
need for economic improvement in this
since becoming President: Talking, meeting
country.
people, listening, learning. I will continue
When the Congress returns next year, we
traveling around our great country because
will engage these issues. The American
that's one way a President stays in touch
people deserve a Government that re-
with people.
sponds to the need for jobs and economic
Recently, many Americans have written
opportunities.
me, saying they want me to know and un-
derstand that hard times have hurt them.
They don't pull any punches. One man,
who lost his job in September, described
Text of the Thanksgiving Address to
how he and his wife struggle to support two
the Nation
children at home, pay the bills, and keep up
November 27, 1991
their property while he seeks work. "Mr.
President," he wrote, "now is the time to
From Camp David, Barbara and I would
come to the aid of the American people.
like to wish all Americans a joyous Thanks-
The American people need to know that
giving. This holiday has always had a special
you mean what you say." A woman, who
meaning for the Bush family, as it does for
typed beneath her signature the words,
most Americans. Thanksgiving captures our
"Average Middle American," was just as
spirit as a people: Our determination, our
blunt. Her husband recently lost his job,
generosity, our industry, and our faith.
and she wrote that "it's pretty thorny out
Thanksgiving brings to mind the joys of
there."
plenty and the anguish of want. As Ameri-
Well, I do understand. I am concerned.
cans celebrated Thanksgiving in 1777,
And I want to help. I know that for a
George Washington and his troops huddled
person out of a job, the unemployment rate
along the banks of the Delaware River. Buf-
is 100 percent.
feted by the brutal cold, haunted by British
As a Nation, we need to address today's
troops massed over the horizon, they
problems and tomorrow's promise in a new
stopped to offer humble words of thanks
world united in economic competition, not
and praise, and to dedicate themselves to
frozen in nuclear conflict.
the cause of building a land of prosperous
Over the years we have built a strong
liberty. That simple moment helped estab-
foundation for progress in this new, revital-
lish the American character. Our founders'
ized world. Inflation is down. Interest rates
faith and determination transformed this
have fallen to the lowest level in years. This
land from a patchwork of colonies into a
year we will export billions of dollars more
republic of ideals.
in goods and services than ever before, and
This Thanksgiving, many of us join
that means good jobs for American men
friends and family around the table; others
and women.
share time by phoning loved ones far away;
This doesn't mean that we ought to sit
and all of us will think of others. In places
back and hope for the best. We must take
of worship across the land, people contrib-
strong steps to move ahead. I have asked
ute canned goods or turkeys or clothing.
Congress to pass an important series of ini-
They share their blessings with people suf-
tiatives to boost our economy. These in-
fering through tough times. And that's as it
clude tax incentives to unleash investment,
should be. Americans always have expressed
reforms to help our banks do their job, pro-
their thanks by serving others.
posals to set loose a revolution in American
1736
Administration of George Bush, 1991 / Nov. 27
dent un-
education, initiatives to keep health care
hington,
united by bonds of brotherhood and serv-
costs down. Taken together, these proposals
ice.
o make
would let Americans do more, produce
int a so-
Every day, as I confront the tasks ahead
more, dream more, dare more. They would
it credit,
of us, I think of the people we serve: The
create more jobs, good jobs, for American
wth. But
family struggling to make ends meet; police
workers.
tly than
risking everything to keep peace on the
Unfortunately, Congress did not send me
18 States
streets. I thank God for our teachers, who
a comprehensive package of economic
meeting
growth measures. But we can't take "no"
must serve as psychologists, doctors, social
continue
for an answer.
workers, and peacekeepers before getting a
because
chance to teach the three R's. And I do
Now, I know we're about to enter an
in touch
election year. And I know that both parties
care about the people who write me letters,
will spend a lot of time taking tough shots
especially people in trouble, people out of
work.
written
at one another. In our system of govern-
and un-
ment, the opposition will attack the Presi-
Finally, I also remember the American
t them.
dent aggressively. There is nothing new
people I have seen in every State and on
e man,
about this. But when people are hurting, a
virtually every continent: People who will
escribed
President cannot accept politics as usual.
not take no for an answer, people with a
bort two
Congress left town after a particularly
zest for life, people who love their country.
keep up
bitter session. We now have a few weeks in
Americans don't ignore tough realities;
k. "Mr.
which elected officials can cool off and hear
we tackle them. We don't wallow in self-
time to
from the people they serve. In this time we
pity or despair. We shove obstacles aside
people.
can build a foundation for greater prosperi-
and make life better. Optimism, opportuni-
low that
ty. I will continue taking what independent
ty, realism, determination: These are
an, who
steps I can to help the economy like fight-
oxygen to us; they let our society live and
words,
ing to create opportunities in foreign mar-
breathe. America grew strong with the help
just as
kets for American workers. I'll make sure
of the greatest resource on Earth, the
his job,
that administration agencies do everything
American people. As we look ahead, we
orny out
they can to help the people, from getting
should be as realistic about our strengths as
unemployment checks out to easing the
we are about our problems. Every time I
icerned.
credit crunch. And I will insist that we get
talk with Americans, I see our strength, and
the money in our transportation bill out
I feel all the more determined to do what
it for a
nent rate
right away to build roads, fix bridges, and
you elected me to do: Foster growth, keep
create jobs.
the peace, and maintain our stature as the
When I give the State of the Union
world's greatest Nation, the standard by
today's
speech in January, I will ask Congress to lay
which all other countries measure them-
n a new
aside election-year politics at least long
selves.
tion, not
enough to enact a commonsense series of
Two years ago, I talked to the Nation on
economic growth measures. I will ask politi-
the eve of Thanksgiving about the chal-
strong
cians to restrain their personal ambitions at
lenges posed by the collapse of communism.
revital-
least long enough to get the job done.
We met those challenges.
st rates
:rs. This
Afterward, the normal election-year bat-
One year ago today, Barbara and I stood
tling can resume.
in the sands of Saudi Arabia, looking into
rs more
Politicians should remember that hot
the eyes of the finest men and women this
re, and
rhetoric won't fill an empty stomach. It
country has ever known. I wondered
n men
won't create a job. It won't get the people's
whether I would have to send those young
business done. Americans don't care about
people into battle. We were a Nation on
it to sit
finger pointing in Washington, and they
edge, anxious about what lay ahead in the
ust take
certainly have no tolerance for politicians
Persian Gulf. No one knew how it would
e asked
who use tough times for political advantage.
work out.
of ini-
So, I will continue to place top priority on
ese in-
But look at what they did, what we did.
the issues you care about: Building a grow-
stment,
We pulled together. We fought for princi-
ing economy, world-class schools, and what
b, pro-
ple. We stood up to aggression. And when
our founders called "public tranquility," a
nerican
our men and women returned home, re-
kinder, gentler Nation rid of crime and
member how we felt: Proud, excited, confi-
1737
Nov. 27 / Administration of George Bush, 1991
dent, even relieved, all because we knew
November 28
that we did the right thing.
Connecticut Institute for the Blind Adult Day-
Today, democracy is on the march
care Program, of Windsor, CT
around the globe. Nations long enslaved
have begun experimenting with liberty, ex-
November 29
ploring their own promise as free people.
Danny Davey, of Santa Ana, CA
America led the way to this new world. We
met the test of world leadership.
Just as we've met every challenge in the
past, we will meet those that confront us
today. As we do, let us remember who we
Digest of Other
are and what we've done. Let's give thanks
White House Announcements
for our blessings, for our families, and our
faith. Let's dedicate ourselves to the hard
work this moment demands. Let's pledge to
The following list includes the President's
join hands in common purpose.
public schedule and other items of general
That's the Thanksgiving spirit, and it has
interest announced by the Office of the
lifted us since the Pilgrims first celebrated
Press Secretary and not included elsewhere
it more than three centuries ago. Now let's
in this issue.
call upon that spirit today to help those in
need. Let's call upon that spirit as we move
November 24
toward a new year and look forward to a
In the afternoon, the President and Mrs.
new century.
Bush returned to the White House from a
Thank you. May God bless all of you and
our great land, the United States of Amer-
weekend stay at Camp David, MD.
ica.
November 25
The President met at the White House
Note: The text of the address was issued by
the Office of the Press Secretary on Novem-
with:
ber 27, for release on November 28.
-the Vice President; John H. Sununu,
Chief of Staff to the President; Brent
Scowcroft, Assistant to the President for
National Security Affairs; and members
of the CIA briefing staff;
Points of Light Recognition Program
-Kirk Fordice, Governor-elect of Missis-
sippi;
The President named the following individ-
-Secretary of Defense Dick Cheney.
uals and institutions as exemplars of his
Later in the morning, the President trav-
commitment to making community service
eled to Columbus, OH, where he visited the
central to the life and work of every Ameri-
Ft. Hayes Metropolitan Education Center.
can.
He then went to the Veterans Memorial
Auditorium where he attended a reception
November 23
with Ohio education leaders.
South King County Multi-Service Center Liter-
In the afternoon, the President returned
acy Program, of Federal Way, WA
to the White House.
In a ceremony on the State Floor of the
November 25
Residence, the President received diplomat-
Operation SHARE, of Phoenix, AZ
ic credentials from Ambassadors Luvsandorj
November 26
Dawagiv (Mongolia), Abul Ahsan (Bangla-
desh), Pal Tar (Hungary), Alphonse Berns
Williamsport Students Engaged in Real Volun-
teer Efforts (WillSERVE), of Williamsport, PA
(Luxembourg), Ernst Jaackson (Estonia),
Rudi Valentine Webster (Barbados), Yog
November 27
Prasad Upadhyay (Nepal), and Abdul
Linda McKeehan, of Golden Valley, MN
Rahman bin Fares Al-Khalifa (Bahrain).
1738
NATIONAL SECURITY COUNCIL
12/17
To: Tony Snow
Dan mcGroarty
From: Jim Kath (x5672)
Attached are comments on the Australia
speeches, remains, etc. Please feel free to
call if there IS anything I cando.
DP:
III
The outline for the Melbourne speech in sections II- ought to
be in the Parliament speech. The political/military/strategio
aspects of Australia's international role and our commitment to
the region belong in this speech.
Sections 1-4 of the attached ought to be only about a fourth of
the speech; the global, regional, and bilateral sections should
take up the remainder, with a light touch on past/present and a
heavy dose of the things we need to do in the future.
Keeping the message palatable to those at home is good, and
should call for State of the Union messages to be intertwined
with the themes descibed in no. 5 on the attached.
Trade issues should include our determination to promote
American interests by active involvement abroad and stress
that time spent abroad is relevant to America's current
concerns; NAFTA should include reference to interdependence
of our economies; GATT should include commitment to an open
world trade and financial system.
Security issues should include explicit reference to the
joint defense facilities' role in the Gulf war and the
Australia Group efforts to control CBW could be linked to
the global perspective that our businesses must take to
succeed in the Asia Pacific region.
Cultural issues should include reference to getting our own
house in order and economic success based on hard work.
Reference should be made to shared values of free people and
free markets as well as our broad, active agenda to restore
American competitiveness.
In short, our global, regional, and bilateral issues should be
the context for straight talk about the link between foreign and
domestic policy.
JK
from 2. Dussh
Outline for Speech to Australian Parliament
1. Introductory formalities
2. We share ancient traditions, common ancestors and language,
respect for the rule of law. We have a dynamic friendship today.
We share a commitment to work together for peace, prosperity and
security in the future.
This building in Canberra is home to one of the few
extant original copies of the Magna Carta.
Washington's National Archives has one of the other
copies.
Anecdote about 18th century Australian-American
exchange if appropriate.
3. We each developed frontier territories and became great
trading and seafaring nations in the 19th century.
Anecdote from 19th century if appropriate -- perhaps a
story about Mark Twain's visit to Australia.
4. During the 20th century Australians and Americans fought side
by side for freedom and democracy WWI, WWII, Korea, Vietnam,
Persian Gulf.
culture. 5. Today we remain stronge partners in trade, security and
Trade issues: bilateral, APEC, GATT -- including
assurance that NAFTA is consistent with GATT and would
be beneficial to the Pacific Rim.
Security issues: Attaboys for our allies. Attaboy for
Australia's good works on Cambodia, in chemical and
missile tech arms control, etc. Promise to keep US
engaged in Pacific security.
Cultural issues: End on a high note of our common
concerns for carrying on as healthy societies in the
next century. There is some affinity with America
2000; for example, Australia has had educational
choice for years. I'm getting Lamar ("Crocodile")
Alexander's book Six Months Off and will look for a
good closing, upbeat, forward-looking anecdote about
his six months in Australia.
Throughout the speech I'll look for ways to keep the message
palatable to the American audience at home. I.e. not get too
deep into globaloney.
DP:
The Melbourne speech, as noted earlier, should lose the
military/strategic aspects of II and III. This speech needs to
address sections IV and v, but also needs as its reason for being
a section that would take about fifty percent on business themes.
It should elaborate on some of the themes that were touched on in
the Parliament speech as important components of our political
and security agenda. This would also serve to preview the same
themes that will appear in the main business-oriented speeches in
Singapore, Seoul, and Tokyo.
I think IV A/B and V are the speech.
(1) IV A can be fleshed out to encompass successful
completion of the Round in all of its aspects, with a chance
there to tie in EEP and bilateral economic relations in the
context of our shared multilateral objectives. This should
include some specific points on our commercial presence in
Australia directed at the audience of American and
Australian executives.
(2) We could follow with V's look to the future, with an
emphasis on all of the non-security relationships we have
and can develop with Australia (environment, energy,
education, etc.), including announcement of the APEC
Education ministerial to be hosted by Secretary Alexander.
The emphasis should be on the clear commercial link to these
themes--American expertise in environmental engineering and
the like.
(3) This would lead to competitiveness themes and steps we
are taking to tie our domestic commercial goals to our
foreign policy agenda, stressing again a forward-looking
approach that underlines our appreciation that we can learn
from each other in the region covered by APEC.
Again, the explicit link should be made between our activities in
Australia and direct payoff to the American economy. The
conclusion should address job creation and technology development
that draws on the best of both countries.
JK
Outline for the Melbourne Business Luncheon Speech
(Smith/Aarhus)
I. Introductory Remarks:
A. Acknowledgements, humor, etc.
B. Brief trip update.
II. Recognize Australia's Growing International Role:
A. Express appreciation for the leadership role Australia
has assumed in the world.
1. Australian-American military alliance.
2. Active role in working towards settlement in
Cambodia.
3. Australia's contribution to the multi-national Gulf
Coalition.
4. Strong efforts on proliferation issues,
particularly regarding nuclear and chemical
weapons.
B. Our partnership has become increasingly important,
especially in the wake of the tremendous changes that
have occurred in the world over the last two years.
III. U.S. Regional Role to Remain Strong:
A. The regional partnership which the U.S. has enjoyed with
Australia, and other Pacific countries, has been the
region. foundation for economic and political stability in the
B. Despite the changes elsewhere in the world, the U.S.
will remain engaged, concerned and active in Asia and
the Pacific, both in strategic and economic terms.
- continued -
IV. Stress Cooperation on Multilateral Trade Issues:
A. Both our countries have been at the forefront, pushing
hard for free and open markets in the world. We must
continue our joint efforts to shape an international
trading system which will foster free trade,
particularly through successful conclusion of the GATT
Uruguay Round.
1. Stress need for greater openness in trade relations,
as both our countries face economic difficulties
on the homefront.
2. American export growth figures.
3. American-Australian export figures.
4. Acknowledge Australia's leadership in establishing
APEC and in shaping its development as an
important international economic entity.
B. Export Enhancement Program: Our use of EEP to counter
agricultural subsidies of the European Community is one
point of contention between our two countries.
1. EEP problem.
2. Keep pressure on the European Community.
3. POTUS commitment to further dialogue on EEP and
other economic issues.
- continued -
V. Facing Challenges Ahead:
A. Environment/Energy
1. The Australian and United States governments have
agreed on pursuing energy policies that will
promote our energy exports while addressing
environmental issues.
2. The U.S. Energy Department is working with its
Australian counterpart in cooperation to develop
cleaner energy techniques.
B. Australian Center for American Studies: Will expand
bilateral links through programs to benefit business,
education, and the universities. This new Center will
provide mutual benefit for both nations.
,C. General Round-up of future challenges
1. The proliferation of chemical, nuclear, and
biological weapons of mass destruction remains a
problem. Australia's role in achieving
international safeguards to reverse the
proliferation trend has been critical to this
effort.
2. We share a common view that the formation of
protective trading alliances must be avoided, and
support for cooperative frameworks such as APEC
must be vigorously continued.
3. We should do all we can to open markets and foster
free trade in order to strengthen international
economic cooperation, confidence and recovery.
VI. Conclusion:
A. These are real indications of the cooperative spirit
that exists between our two nations as we seek to
strengthen our economic, cultural, and educational
ties. They are positive signs of the shape which our
bilateral relationship will take over the next five
decades.
B. We need to continue to work together to ensure that the
future of our relationship will be as productive a
partnership as it has been for the last fifty years.
#
#
#
UNCLASSIFIED
ED
SUGGEST. POINTS FOR AFTER DINNER REMARKS
AT PARLIAMENTARY DINNER
Hosted by Prime Minister and Mrs. Hawke
January 2, 1991 - Canberra
First of all, I would personally like to thank Prime
Minister Hawke, and members of the House of Representatives
and Senate for the warm hospitality you have shown Barbara
and me during our stay here.
There is a strong bond of friendship between our two
countries, which I am confident will continue to strengthen
and to grow in the years ahead.
As the world situation is evolving, so is our relationship;
and it is as valuable today as it was during the darkest
days of the Cold War.
Our relationship goes far beyond our shared political and
cultural values; Australia is an important trading partner
for the U.S. as the U.S. is for Australia. Australia is
also an important ally in international economic fora. Our
relations in the defense and security areas are solid; our
joint facilities contribute importantly to our efforts to
ensure a more peaceful world.
We can other
in the field of
Our cooperation in conservation and environmental
protection is expanding. There is much we can learn from
each other. and exchanges in the fields ef/education are
important as we both seek to prepare our students better to
live in a rapidly and vastly changing high-tech world.
We need productive citizens to make our saieties compe fiyive. We must
I have come to appreciate the regional and cultural
expand economic our.
diversity of Australia, both from my visit here in 1982 and engage-
in my few days here Being someone who calls Texas home, I ment
feel very much at home here.
abroad
Let me close with a special
to ensur
-- I especially want to express my appreciation to Prime
stability
Minister Hawke and the Australian Government for all the
and
arrangements that went into my visit here. I also want to
progrest
thank PM Hawke for hosting this tonight's wonderful dinner. A Thank you,
for
my friends.
ove
peoples.
Like another Texam who came here in 1966,
I feel like I never left Lome at all, 4 CBS
felt athome he same you plains, your hells, your
UNCLASSIFIED
- - Like that Presidents I have come to ventize the real
bush country, and yourson cattle.
similarities are four more meaning F1. The rent equation
cont.
IS human we have the same openness, HE
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same self confidence, and the supped: same generosity
199
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- There IS a new hope / today that gnouse was 6 only
Tate THO 917 5:16
state
glimpsed in 1966 We can focus our energnes DRG
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our people and share gldsuiry a vision 28 of al and If Ers 3A
freedom Freedom from foreign 10 areas
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domination, freedom from tyranny 18103100 SGT TUO
free people and free markets are bift 401
the increase all as over THE the world or J16 16191 oals
on contrive to work together here dalot uses
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build the United states, in Szegoop ISO
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1-4
015
UNCLASSIFIED
POINTS TO BE MADE WITH THE AUSTRALIA-UNITED STATES
CORAL SEA COMMEMORATIVE COUNCIL
I am pleased to have the opportunity this morning to thank
all of you personally for your participation in the
Australia - U.S. Coral Sea Commemorative Council.
-- The programs and activities you coordinate or sponsor will
ensure that events which shaped the beginnings of our
bilateral alliance -- especially the 50th anniversary of
the Battle of the Coral Sea --- receive the attention they
deserve in 1992.
I also want to convey to this Council and to all
Australians who are developing commemorative programs this
year the appreciation of the over one million American men
and women who served in Australia during World War II.
The participation of so many prominent Australians on this
Council is evidence that the defense of freedom here and in
the South Pacific during World War II by Australians and
Americans has not been forgotten by succeeding generations.
I share your hope that many of our veterans will return to
Australia with their families in 1992 to take part in the
activities that are being planned. I know they will
receive the same open, warmhearted Aussie welcome that I
have received.
I am sure that the actions of this Council will strengthen
and sustain an alliance that has matured and is as relevant
today as it ever was.
My best wishes to you throughout this commemorative year.
Dramate changes are takeng place thoughout the world.
It will be up to our daughters adsons to not only
remember the instructions who participated in important
histeriead events such is the Butlle ofte Corne seals
rotonly remember the events that shaped our lives,
but also carry with UNCLASSIFIED teem as Ky face the charlenges
of a new ea in the devels askend Ke spirit
of freedom and democracy that energized our patriots
of fifty verys ago.
UNCLASSIFIED
SUGGESTED POINTS FOR TOAST AT THE STATE DINNER
Hosted by the Governor General and Mrs. Hayden
January 1, 1992 - Canberra
Before proposing a toast to the Queen, I would like to make
a few brief remarks.
First and foremost, I can't express strongly enough how
pleased Barbara and I are to be here with you, Mr. Governor
General, your gracious wife, Dallas, and the other
distinguished guests.
Barbara and I recall fondly the warmth we felt during our
1982 visit during Coral Sea Week. We are feeling that warmth
again on this visit. Other than Kennebunkport I can't think
of another place we would rather be to see in this new year.
Our shared values, history, culture, and struggles through
war and peace together have created a bond between our two
peoples that is close and lasting.
we
We shared the burdens of the Cold War together. Now let S
look together to the next fifty years. Let's seek ways to
expand the bonds of friendship for the next generation of young
Let's
Americans and Australians, to help them face the challenges of
their time, building on the peace, conserving the environment,
educating their children, and sharing the benefit of God's
bounty with all.
Ladies and gentlemen, a toast to Her Majesty the Queen.
On this New Year day it is appropriate that we look back at what eve have
accounghted together not look found UNCLASSIFIED to the challenges ahead.
(Duggan/Aarhus)
December 12, 1991
Draft One
Maritime
PRESIDENTIAL REMARKS:
NATIONAL MARITIME MUSEUM
SYDNEY, AUSTRALIA
[date]
[time]
[Acknowledgments]
I am delighted to take part in dedicating this gift from the
people of the United States to the people of Australia -- the USA
Gallery of the Australian National Maritime Museum. President
Reagan announced the gift in 1988, to celebrate the bicentennial
of Australia's settlement by Captain James Cook. This year, it
happens, marks the two hundredth anniversary of the arrival of
the first foreign trading ship in Sydney -- an American vessel
called the Philadelphia.
Never was a ship more aptly named. Brothers we are, and
brotherly love has linked the Australian and American people now
for two centuries. Our common ancestors endowed us with
language and culture, the rule of law, a spirit of enterprise and
a passion for freedom that we still share today.
Australians and Americans have been together for many a
maritime adventure -- in peace and in war, in commerce and in
sporting competition. Visitors to this gallery may see
historical displays on the three Americans who were among the
crew of Captain Cook's Endeavour Grew] on its voyage to Australia
in 1770. Interactive audio-visual displays allow visitors a
unique glimpse into life aboard a 19th century trading ship.
2
Other displays commemorate the common courage Australian and
American naval forces showed half a century ago in the fateful
battles of Midway and the Coral Sea.
Let us/build dedicate oviselves economic on there opportunity today ties, to to sgrowth, exymond and
Fraternal ties of culture and commerce between our nations m
stability
the
have never been stronger than now. In this spirit, and in this
Asia
Pacific
anniversary year, I am honored to take part in opening the USA
legion.
Gallery of Australia's National Maritime Museum.
WAS
#
#
#
Aarhus
December 11, 1991
A:AUSCONGR
Draft One
PRESIDENTIAL TALKING POINTS: CONSULATE STAFF GREETINGS
JANUARY 1, 1992
2:10 PM
Thank you. [Consul General Phil Lincoln, and other
acknowledgements]. Happy new year to all!
Barbara and I are pleased to be here, "fair dinkum", and
we'd like to thank you for the hard work you've done to make
this visit a success. We feel very much at home here
(and)
it may have something to do with the fact that Australia is
the same beauty raw
vitality
known as "bush country" Seriously, we truly appreciate
and
vigorous
your dedication, especially when our visit was rescheduled
for the holiday season.
Commerce home my
as
state
The ties that bind Australians and Americans stem from our
Texus.
shared values, forged by shared experiences in war and
peace. During this visit, we will focus on our goals for
the future. You and your work will help us define and build
that future.
The United States is fortunate to have representatives like
you in our embassies, consulates, and defense facilities all
over the world. Both the American staff and National staff
exhibit a professionalism and devotion that is unrivaled.
Thank you very much and keep up the good work.
#
#
#
Policy Analysis
No. 163
October 28, 1991
Routing
REPLACING THE RUBLE IN LITHUANIA:
REAL CHANGE VERSUS PSEUDOREFORM
by Kurt Schuler, George Selgin, and Joseph Sinkey, Jr.
In early August 1991 we visited Lithuania at the invita-
tion of Prime Minister Gediminas Vagnorius. George Selgin
and Kurt Schuler had previously visited Lithuania in October
1990 at the invitation of the Lithuanian Bank of Industry and
Construction. They met with the president and prime minister
and suggested ideas for monetary reform in a memorandum to
the Lithuanian government that has since been translated into
Lithuanian.¹
This paper extends those ideas in light of what we ob-
served on our recent visit and what has happened since the
failed Soviet coup. Lithuania has achieved independence but
remains linked to the Soviet economy and to the Soviet ruble.
The ruble is becoming less and less acceptable in trade, and
as a result, parts of the Soviet economy have reverted to
barter. The need for a stable, convertible currency in Lith-
uania is more urgent than ever. However, the actions the
Bank of Lithuania and the Lithuanian government have taken so
far will not produce such a currency. This paper explains
how Lithuania can successfully establish a sound currency to
replace the ruble.
Hyperinflation: A Desperate Situation
The Soviet ruble is at the heart of Lithuania's present
monetary problems. The Soviet government is printing more
rubles every month than it had originally planned to print
Kurt Schuler is a graduate student in economics at George Mason
University in Fairfax, Virginia. George Selgin is an assistant
professor of economics at the University of Georgia and an adjunct
scholar of the Cato Institute. Joseph Sinkey, Jr., is Georgia
CATO
Bankers' Association Professor of Finance at the University of
INSTITUTE
Georgia.
224 Second Street, S.E.
Washington, D.C. 20003
Page 2
during the entire year. In consequence, and despite
extensive price controls, inflation is in triple digits.
Soviet officials apparently do not understand that they are
causing hyperinflation. In the simplest terms, the present
hyperinflation is due to a rapidly increasing supply of
rubles chasing a shrinking supply of goods. The only way to
stop hyperinflation is to stop printing so many rubles.
Because Soviet officials do not acknowledge that fact, no
effective upper limit to the supply of rubles exists. Since
the failed coup, inflation has accelerated, and the ruble is
heading for total collapse.
A price system can be only as good as the currency in
which prices are expressed. Other countries that have expe-
rienced hyperinflation, such as Argentina and Brazil, have
found that it so distorts price relations as to make price
calculations in domestic currency of little use for guiding
economic activity. If the hyperinflating ruble remains the
sole legal currency, price reform will continue to be unpop-
ular in both Lithuania and the Soviet Union, for it will
only replace one inefficient price system with another. But
price reform is crucial for establishing a market economy.
As unsound as the ruble is, it has the advantage of
being a common currency. Until recently it was acceptable
throughout the Soviet Union and linked the Soviet republics
into a common trade area in which goods could move somewhat
freely. That enabled the Soviet Union to achieve economies
of scale in production that present policies are endanger-
ing. Just when Western Europe is developing an integrated
market to promote economic growth, the Soviet republics and
the Baltic nations are moving in the opposite direction.
The tariffs and quotas that they are imposing will destroy
important economies of scale that now exist in production.
If in addition the Soviet republics and Baltic nations re-
place the ruble with separate inconvertible currencies, they
will destroy the existing division of labor and make trade
among themselves collapse, as it has among the members of
the former Council for Mutual Economic Assistance. The
results will be massive unemployment and a further fall in
output.
The solution to those problems is free trade and con-
vertible currencies. Since our focus is on currency, we
shall say no more about free trade here, except to note that
large-scale trade can revive only if the Soviet republics
and the Baltic states do not erect barriers to it. Price
reform will be more popular if it is linked to a currency
reform that introduces a stable currency, which can be the
basis of a reliable price system. In addition to promoting
economic development within the former Soviet Union, con-
Page 3
vertible currencies will also integrate the newly autonomous
republics into world markets. If the new currencies that
emerge are not convertible, outsiders will not accept them,
and trade with the rest of the world will be limited to
barter, just as it is now under the ruble.
It would be best for Lithuania if the Soviet republics
would quickly establish convertible currencies, or better
yet a common convertible currency. At the moment that seems
unlikely. Lithuania will have to establish a convertible
currency by itself or perhaps at the same time as Estonia
and Latvia. Lithuania's extensive economic links with the
Soviet Union mean that if the Soviet republics follow unwise
policies, Lithuania's economy will inevitably suffer. Only
a convertible currency can offset the dislocations that will
follow. Only with a convertible currency can Lithuania
reorient its trade toward the West and encourage large-scale
foreign investment. A convertible currency will also be
vital for keeping Lithuania supplied with oil, coal, and
natural gas, which it receives from the Soviet Union. Lith-
uania now has a trade surplus with the Soviet Union because
it buys energy at prices far below world market prices.
When the Soviet Union starts charging world market prices,
Lithuania's balance of trade with the Soviet Union will
shift to a deficit. If Lithuania's currency is convertible,
Lithuania can attract foreign investment to offset its trade
deficit, just as Hong Kong--a currency board economy with no
natural resources--did for many decades. If its currency is
not convertible, Lithuania will be reduced to trying to make
inefficient barter deals for energy, as other East European
nations do.
Coupon Money: Symbol without Substance
In early August 1991 the Lithuanian government intro-
duced ration coupons as a way of laying the groundwork for a
separate Lithuanian currency and avoiding price hikes on
goods sold in state stores. Prime Minister Vagnorius
hatched the coupon scheme quite suddenly in response to
public discontent with inflation. He apparently did not
consult with specialists, many of whom severely criticized
the scheme in conversation with us. The scheme even took
other members of the cabinet by surprise. But such are
Vagnorius's energy and force of personality that he per-
suaded the Lithuanian parliament to approve the scheme.
Under the scheme, each Lithuanian receives coupons
equal to 20 percent of his ruble salary, up to a maximum of
200 rubles in coupons. People with incomes of 80 rubles a
month or less may receive coupons for more than 20 percent
Page 4
of their incomes. To buy consumer goods other than food in
state shops, people need to pay one ruble in coupons for
each ruble in currency. So if a coat costs 300 rubles, the
purchaser pays 300 rubles in currency plus 300 rubles in
coupons. The Bank of Lithuania also has a limited stock of
coupons. At first the bank announced that it would make
even exchanges of coupons for rubles or rubles for coupons
while supplies lasted. Before the coupon scheme took ef-
fect, though, the bank announced that the rate would be two
rubles in currency to one ruble in coupons.
The coupon scheme is a way of rationing goods without
raising ruble prices in state shops. Initially, coupons
also served as a symbol of defiance of the Soviet govern-
ment, a purpose that has become superfluous since Lithuania
achieved independence. The coupon scheme may have been
politically expedient, but it did nothing to correct the
underlying causes of the shortage of goods at official
prices. In addition, it has other defects, which Elena
Leontjeva, an economics professor at the University of Vil-
nius, has explained in a series of articles in a Lithuanian
newspaper. One defect is that people who wish to buy re-
frigerators and other expensive consumer goods will now need
to save a considerable amount in coupons as well as rubles.
There may be temporary surpluses of such goods in state
shops--an unusual phenomenon under socialism--because people
lack enough coupons to buy the goods, even though they have
enough rubles. That will have effects all along the chain
of production and distribution, requiring the Lithuanian
government to counteract the coupon scheme's effects by
issuing additional instructions to state-owned enterprises.
The coupon scheme thus requires more government involvement
in the economy at precisely the time when Lithuania is try-
ing to move away from socialism.
Another defect of the coupon scheme is that it cannot
prevent hyperinflation of the ruble, because the coupons are
not really an independent currency. Rather, coupons are a
supplementary currency with a fixed exchange rate for ru-
bles. Coupons are a way of trying to prevent Lithuanians
from spending 80 percent of their ruble incomes. Like water
behind a dam, the unspent rubles will continue to accumu-
late, leading to inflation in the prices of goods that are
not purchased with coupons (for instance, goods on the black
market) and to a black market for coupons.
The Ukraine tried a coupon scheme similar to
Lithuania's last year and was unsuccessful. (It has since
reintroduced coupons.) Last summer the Estonian parliament
considered a coupon scheme but rejected it on the grounds
that it might complicate introducing an independent cur-
Page 5
rency. The coupon scheme will not solve the problems it
addresses.
The Bank of Lithuania: A Lithuanian Gosbank?
The Lithuanian government has also established the Bank
of Lithuania, whose ultimate goal is to issue an independent
currency. The bank combines central banking and commercial
banking functions. Originally, it was nothing more than the
Lithuanian branch of the USSR State Bank (Gosbank), charged
with supervising other state-owned banks. Its origins as an
independent bank date from the autumn of 1989. Under pere-
stroika the Baltic republics were entertaining ideas of
greater economic independence. Zilevicius, the local head
of the Gosbank, a member of the Lithuanian parliament, and,
naturally, a Communist, drafted a bill elevating the Gosbank
branch into the quasi-independent Bank of Lithuania. He
expected to become its first president. The bill passed,
but Zilevicius was disappointed because in February 1990,
before the bill took effect, Lithuanians elected a new non-
communist parliament in their first free elections in half a
century.
The new parliament faced the problem of whether to
revoke or confirm the old parliament's last acts. Vilius
Baldisis, a professor of economics at the University of
Vilnius and a member of the new parliament, cleverly pushed
a near-copy of the old Bank of Lithuania bill through par-
liament when the most prominent opponents of the bill were
out of town. Baldisis subsequently was appointed the bank's
president. Stasys Uosis, also a professor of economics at
the University of Vilnius, is commonly regarded as Bal-
disis's idea man. He has written many newspaper articles
supporting the bank's policies and is one of its directors.
At the time of our first visit, the Bank of Lithuania
had no real power. It was vainly trying to assert its au-
thority over the state-owned banks. It was embroiled in a
contest with the Gosbank's Lithuanian branch, which remained
open because Moscow did not recognize the new Lithuanian
parliament's actions as legitimate. As the Lithuanian inde-
pendence movement gained strength, so did the Bank of Lithu-
ania. To give the bank some real power, the parliament, at
Baldisis's urging, allowed it to take over the Lithuanian
Bank of Industry and Construction and the Bank for Social
Development, which had recently become independent from
their Moscow parent banks. The Bank of Industry's top man-
agers fought the takeover; after losing, most left in Janu-
ary 1991 to form a private commercial bank, Litimpex Bank.
Page 6
The Bank of Lithuania now also controls the local as-
sets of the Savings Bank, which under the Soviet system was
the only bank that accepted consumer deposits. The Bank of
Lithuania does not let the Savings Bank lend to other banks.
Some 7 billion rubles of the Savings Bank's deposits are
immobilized at its former Moscow parent bank, but there is
some prospect that the Lithuanian Savings Bank will get the
money back. (By the time it does, the money may not be
worth much.) Another state-owned bank, the Agricultural
Bank, is trying to convert itself into something like a
private commercial bank, with some independence from the
Bank of Lithuania.
The remaining bank left over from the Soviet system,
the USSR Bank for Foreign Economic Relations, successfully
evaded the Bank of Lithuania's control since almost all of
its assets were in Moscow. The Bank of Lithuania was able
to monopolize the foreign currency transactions of enter-
prises owned by the Lithuanian government, but not those
owned by Moscow, and of other parties within Lithuania.
During our visit, the Lithuanian government was considering
making Lithuanian government-owned enterprises and private
firms pay up to 30 percent of their hard currency earnings
into a fund managed by the Bank of Lithuania.
The Bank of Lithuania is by far the dominant commercial
bank in the country. As the central bank, it also has ex-
tensive regulatory powers, though it does not yet issue
currency. Indeed, its regulatory powers far exceed those of
any Western central bank. The Bank of Lithuania has powers
similar to those of the Gosbank, which is surely not a good
model to emulate. At the time of our visit, the bank was
regulating the banking system by simply translating into
Lithuanian the decrees the Gosbank had issued in Russian.
Among the Bank of Lithuania's regulatory powers, as set
forth in the law establishing it, are the powers to deny
licenses to other commercial banks, to set minimum capital
requirements for them, to set maximum and minimum interest
rates, and to control foreign exchange transactions. The
bank has been active on all those fronts. It has dragged
its feet about granting licenses to commercial banks that
meet the requirements for going into business--it took three
months to grant Litimpex Bank's license. The Bank of Lithu-
ania can also prohibit other commercial banks from opening
branches that would compete with its own branches. Because
the bank has imposed a maximum rate of 25 percent on commer-
cial bank loans, banks cannot afford to pay more than 25
percent minus a margin to cover their costs. (Deposits in
the Savings Bank, however, are somewhat indexed against
inflation.) Inflation is 300 percent, according to the
Page 7
Lithuanian Free Market Institute's estimate. Consequently,
loans greatly subsidize the enterprises that receive them,
and private commercial bank depositors have no hope of keep-
ing even with inflation. Originally, the Bank of Lithuania
set the minimum capital requirement for commercial banks at
30 million rubles, which would have prevented any privately
owned banks from forming. It later reduced the requirement
to 10 million rubles. Unlike the Bank of Estonia, which was
trying to introduce a free-market element into foreign ex-
change dealings by holding auctions of hard currency for
rubles, the Bank of Lithuania during our visit was enforcing
the regulations of the Gosbank.
In its current form, the Bank of Lithuania has grave
defects. The most important is that it has announced no
definite plan for establishing and maintaining the value of
the proposed Lithuanian currency, the litas. The Bank of
Lithuania has all the important powers that the Gosbank has.
Among them is the power to inflate the litas just as the
Gosbank is now inflating the ruble. The law establishing
the Bank of Lithuania authorizes the bank to purchase Lith-
uanian government debt "not exceeding the parliament's set
limits, " but the parliament can change those limits at any
time. There are no limits to the bank's power to lend to
commercial banks, including its own commercial banking oper-
ations. Therefore, the law imposes no effective limits on
the bank's powers to create money. Bank officials have not
announced how they plan to keep the litas's value stable.
Other aspects of their behavior also inspire little confi-
dence. Lithuania has been cut off from the outside world
for so long that the knowledge of how to read a balance
sheet, let alone manage a central bank, is almost nonexis-
tent. We were unable to get bank officials to meet with us
during our recent visit, though we had met with Baldisis in
October 1990.
A previous Bank of Lithuania, which existed during
Lithuania's period of independence between the world wars,
issued a litas convertible into gold at a fixed rate. The
present litas will not be convertible into anything. The
experience of other newly independent nations indicates that
pressures for financing government deficits will probably be
too great for the bank to be able to adhere to any rule that
purports to limit the quantity of money (such as a rule
limiting the growth of currency plus deposits to 8 percent
per year). Lithuania runs the danger of replacing the in-
convertible ruble with the inconvertible litas.
Another defect of the Bank of Lithuania is the conflict
of interest between its roles as a commercial bank and as
the regulator of other commercial banks. Western central
Page 8
banks that once had commercial banking functions, such as
the Bank of England and the Bank of France, gradually aban-
doned them because it came to be recognized that the possi-
bility for abuse of power was great. 2 Policymakers in the
West came to realize that when a central bank competes di-
rectly with commercial banks, it may use its regulatory
powers to suppress them. During our visit many businessmen
expressed opposition to the bank's inordinate powers but
said that they were afraid to speak out against it for fear
that it would deny them loans and access to foreign ex-
change. (Politicians have also been reluctant to criticize
the Bank of Lithuania, for fear of being accused of lacking
patriotism. Last year a prominent bank official publicly
declared that to be opposed to the bank was to be opposed to
Lithuania itself.)
The Bank of Lithuania's control extends far beyond
banking to all spheres of economic activity. As monopolist
of the foreign exchanges, it has the final say on all for-
eign trade. As the dominant commercial bank, it has the
power to dictate which enterprises shall prosper and which
shall not, independent of what competitive market conditions
may determine. As the regulator of interest rates, it can
rob depositors of their savings and create shortages of
funds for lending at below-market rates, which will perpetu-
ate the system of political favoritism that the Soviet bank-
ing system now uses to allocate credit. The bank is poten-
tially more powerful than the Lithuanian government.
The Bank of Lithuania is nominally answerable to the
Lithuanian parliament, but given the long terms of office of
the bank's president (seven years) and directors and the
relative lack of economic knowledge of persons in the gov-
ernment who might monitor the bank, the parliament is un-
likely to impose effective checks on the bank's behavior.
The bank is neither politically accountable nor subject to
the market test of competition; nor does Lithuania have a
reassuring recent tradition of fairly competent central
banking. All those things make it extremely unlikely that
the Bank of Lithuania will be capable of issuing a stable,
convertible currency.
Private Commercial Banks: Cause for Hope?
Recently, a number of "private" commercial banks have
sprung up in Vilnius and Kaunas. At the time of our visit,
eight such banks were operating. The largest has capital of
18 million rubles. Some have separate foreign currency
accounts abroad, which they keep distinct from their Lithua-
nian business because of foreign exchange regulations.
Page 9
Those banks are not privately owned in the Western sense;
their major stockholders are state-owned enterprises, and in
one case also the Ministry of Finance. However, they are
independent of the Bank of Lithuania and of the Lithuanian
government. The bank managers own shares, and their voting
power is important because some banks do not allow all
shares equal voting rights.
Despite their independence, the private commercial
banks are under the Bank of Lithuania's thumb because their
legal status is uncertain. At present, they operate under
the law on joint stock companies, although a provision of
that law states that it does not apply to banks. The Bank
of Lithuania has broad powers over them; in addition to
setting reserve and other requirements, it can prevent them
from opening branches and can revoke their licenses at will.
The parliament is scheduled to debate a law on private com-
mercial banks this autumn. The Bank of Lithuania has pro-
posed one draft version of the law, and the Lithuanian Free
Market Institute has proposed another. The Free Market
Institute's version is less restrictive and would more ef-
fectively promote competition in banking. We recommend that
the parliament enact it rather than the Bank of Lithuania's
version of the law.
As is the case with the managers of the Bank of Lithua-
nia, lack of contact with the outside world has left a void
in the education of private commercial bankers. They and
other Lithuanian businessmen need to become familiar with
Western bookkeeping and accounting practices and with the
principles of financial management of banks. American and
Canadian bankers and accountants of Lithuanian descent could
do a great service by sharing their expertise with their
Lithuanian counterparts, as some already are doing.
Reforming the Banking System
Lithuania's present banking system is largely a contin-
uation of the Soviet system. Unless Lithuania changes the
powers of the Bank of Lithuania and gives commercial banks a
more independent legal basis than they now have, its banking
system will never be any better than the Soviet system.
In our previous memorandum we argued that licensing
requirements, if any, should be liberal; that foreign banks
should have the same freedoms as Lithuanian banks; that
banks should be allowed to establish branches wherever they
wish; that banks should be allowed to undertake any other
lines of business they wish, such as insurance and stock
underwriting; and that there should be no reserve, interest
Page 10
rate, or foreign exchange controls. We argued against de-
posit insurance, which shifts responsibility for bank man-
agers' mistakes onto taxpayers at large. We also recom-
mended that banks in Lithuania publish accurate financial
statements frequently. The financial disclosure require-
ments should be modeled after American and British practice,
not after German and Swiss practice that allows banks to
keep "hidden" reserves off balance sheets. Stringent dis-
closure requirements plus the ordinary penalties on fraud
should keep embezzlement at an acceptably low level. We
reiterate those recommendations here.
We recommend that private commercial banks be licensed
by the Ministry of Finance, not the Bank of Lithuania.
Licenses should be granted automatically to all banks that
meet the disclosure requirements. Private commercial banks
should not need the Bank of Lithuania's permission to estab-
lish branches. The statutory reserve requirements that the
bank imposes are an unnecessary and inefficient tax on
banks. Interest rates should be decontrolled to end the
present artificial shortage of credit at below-market rates.
Foreign exchange should also be decontrolled; now that Lith-
uania is no longer part of the Soviet Union there is no
reason for it to prop up the Soviet ruble. Finally, the
Bank of Lithuania's commercial banking functions should
eventually be privatized. It may be possible to make many
of those changes by inserting clauses in the law on private
commercial banks that the parliament is considering this
autumn. If not, the government should amend the law that
established the Bank of Lithuania appropriately.
Right now, state-owned enterprises are the major depos-
itors and borrowers as well as the major shareholders of
private commercial banks. They deal with private commercial
banks because they do not want to depend entirely on the
Bank of Lithuania. The private commercial banks would like
to lend to private businesses and to individuals but have
difficulty doing so because property rights are poorly de-
fined and no real bankruptcy law exists. There is as yet
very little private property in Lithuania, though the gov-
ernment has begun privatization. The parliament is sched-
uled to debate a bankruptcy law this autumn.
Clear property rights and private property ownership
are vital to a well-functioning free-market banking system.
To enable individuals to borrow at reasonable rates, it is
particularly important that, as part of Lithuania's privat-
ization scheme, they receive unrestricted title to their
apartments or agricultural land. Their apartment or the
land they till will be the most valuable thing most people
own. We recommend that people have complete freedom to
Page 11
rent, sell, or mortgage the property they receive through
privatization schemes. That will enable persons who want to
start small businesses, for instance, to pledge their apart-
ments as collateral against bank loans and will thus encour-
age economic growth. It makes no sense to prohibit people
from selling their property until several years after re-
ceiving it, as one privatization scheme proposes doing.
The Currency Board Alternative
Long-term credit, unlike short-term credit, can only be
encouraged by the introduction of a sound currency. At
present, the private commercial banks limit themselves to
short-term loans because of the hyperinflation of the ruble
and uncertainty about the future shape of the Lithuanian
monetary system.
The ruble is a bad currency that is getting worse every
day. However, the litas is not likely to be any better if
it is issued by the bank of Lithuania. The bank has no plan
for achieving a stable, convertible currency and no compe-
tence in central banking. Lithuania does not need a central
bank to issue or regulate a new currency. Instead, we pro-
pose that it establish a "currency board" to accomplish
those goals while avoiding the dangers inherent in central
banking. In our previous memorandum we explained how to
establish a currency board, and a forthcoming monograph
discusses at length how a currency board works and how to
establish and operate one.³ Rather than repeat ourselves,
we shall just sketch our ideas to make the basic points
clear to readers who are unfamiliar with currency boards.
A currency board is not a bank at all, nor does it
regulate commercial banks. Its only purpose is to issue
notes (paper currency) and coins convertible on demand into
a foreign asset at a fixed rate of exchange. The foreign
asset can be a foreign currency, gold or some other commodi-
ty, or a currency or commodity basket. A currency board
does not grant loans (except perhaps in serving as a clear-
inghouse for bank checks) or accept deposits. As reserves
it holds high-quality, interest-bearing securities denomi-
nated in the foreign asset. Its reserves must be a fixed
proportion (at least 100 percent) of its notes and coins in
circulation. A currency board makes profits from the dif-
ference between the interest on the securities that it holds
and the expense of maintaining its notes and coins in circu-
lation. It remits to the government all profits beyond what
it needs to pay its expenses and to maintain its reserves at
the level set by law.
Page 12
More than 60 countries have had currency boards during
this century. Most have been British colonies or former
colonies. In 1918 and 1919, during the civil war, a Russian
currency board existed in the northern region occupied by
the British and other Allies. It issued a ruble currency
with a fixed exchange rate to the British pound. All cur-
rency boards maintained convertibility except when their
countries were actually overrun by enemy armies. Even then
the boards' assets were safe from seizure, because they were
held abroad. Despite the success of currency boards, they
exist today in only a few places, most notably Hong Kong.
Other countries that once had currency boards replaced them
with central banks, chiefly because central banking enabled
governments to manipulate the money supply for political and
fiscal purposes.
The currency board system works like the gold standard
or the gold exchange standard. Market forces determine the
amount of notes and coins that a currency board supplies as
well as the amount of deposits and other forms of credit.
The supply of reserves is determined by the actions of the
supplier of the reserve asset--the foreign central bank to
which the currency board currency is linked, or commodity
producers if the reserve asset is a commodity. Competition
among commercial banks determines the distribution of (de-
mand for) the reserves, including how much becomes the for-
eign currency reserve of the currency board country. The
currency board has no role in determining the supply of
reserves, because its 100 percent reserves make it merely a
sort of warehouse for reserves. The only way to acquire new
reserves, obviously, is to obtain assets from the reserve
currency country, which in its simplest form requires run-
ning a trade surplus. Changes in the balance of trade tend
to change the domestic money supply in the same direction.
The need to acquire reserves from abroad limits credit ex-
pansion in the banking system, since commercial banks must
have reserves to make interbank payments and to meet cus-
tomers' occasional demands for cash. The need to acquire
reserves from abroad also keeps inflation roughly in line
with inflation in the reserve currency country.
Some economists have criticized the currency board
system for its allegedly restrictive monetary policy, which
they have claimed hinders economic growth. That view rests
on a misunderstanding of how the currency board system
works. In an economy in which capital flows can occur
(which is to say, any economy with a convertible currency
that has few barriers to foreign investment), the balance of
trade does not impose any strict limits on a currency board
system's ability to expand the money supply. Instead, a
more complex but still completely market-based form of limi-
Page 13
tation, based on people's estimates of profitability, ap-
plies. (Even under floating rates a somewhat similar pro-
cess is at work. A central bank operating a floating-rate
currency has little or no power to stimulate the economy in
an economically beneficial manner, though it can cause a
temporary boom, to be paid for later with a depression.)
Hong Kong and Singapore experienced trade deficits for dec-
ades under their currency board systems, yet their money
supplies expanded all the while.
The currency board system is particularly well suited
to overcome the problems of establishing confidence that a
new currency faces. The currency board system guarantees
that government's ability to manipulate the supply of cur-
rency will be extremely limited. A central bank, even one
that is allegedly independent of the government, carries no
such guarantee. Experience shows that all central banks bow
to political pressure. Even the German Bundesbank has done
so several times in the last few years. Also, central banks
have a direct incentive to create high inflation so as to
maximize their own profit from money creation, even if they
do not finance the government debt. The people proposing a
Lithuanian currency issued by a central bank seem to be
unaware of those problems. We doubt that a new currency
issued by a Lithuanian central bank would gain confidence at
home or abroad.
Establishing the Currency Board
As the experience of more than a dozen past currency
boards indicates, it is simple to replace a central bank
with a currency board. The way to do so is to separate the
Bank of Lithuania's currency issue, bank regulation, and
commercial banking functions. The currency board would take
over the currency issue functions; the Finance Ministry
would take over the regulatory functions; and the commercial
banking functions would become a commercial bank like any
other, eventually to be privatized.
Lithuania is regaining gold that the old Bank of Lithu-
ania owned abroad before the Soviet invasion of 1940. De-
pending on the arrangements that the foreign central banks
holding the gold make with Lithuania, the value of the gold
or compensation paid in its place will be $50 million to
$100 million. The gold can provide Lithuania with the re-
serves necessary to establish a convertible currency. If
used to establish a currency board, it will be the basis of
a lastingly stable currency. If given to the Bank of Lithu-
ania, it is likely to be frittered away, leaving Lithuania
without hard currency reserves or a convertible currency.
Page 14
In our memorandum we suggested that the most satisfac-
tory reserve asset for a Lithuanian currency board is proba-
bly the German mark. The European Currency Unit (ecu) is
also worth considering, because it offers the advantages of
a somewhat diversified currency basket. If the ruble con-
tinues to be inconvertible, Western Europe will be Lithua-
nia's main source of hard currency export earnings and in-
vestment, so it is desirable that its reserves be linked to
the West European currency system. If Lithuania adopts the
mark or ecu as its reserve asset, it should sell its gold
and invest the proceeds in high-quality mark-denominated or
ecu-denominated bonds, as the case may be. Although there
is no actual ecu currency, there is a large and active mar-
ket in ecu bonds. Until Lithuania sells its gold, it can
earn interest on the gold by lending it in the London gold
loan market, whose interest rates are published daily in the
Financial Times.
The Lithuanian currency board will exchange its notes
and coins on demand at a fixed rate into or from marks or
ecus. It need not actually accept or pay hard foreign cur-
rency notes and coins; it could instead accept and pay out
hard foreign currency-denominated bonds. It could establish
a minimum amount for transactions, such as DM20, 000 or
10,000 ecus, to cut its handling costs and restrict dealings
to large blocks of foreign exchange. People who wish to
transact smaller amounts will still be able to do so through
banks, of course.
Judging from the experience of past currency boards,
the annual cost of running the Lithuanian currency board
should be less than 1 percent of the board's total assets.
The board will make profits from the difference between its
interest earnings and its expenses. All profits should go
to building up unborrowed reserves until unborrowed reserves
are at least 100 percent of the board's notes and coins in
circulation. The board might accumulate an "equity reserve"
equal to another 5 percent of notes and coins in circula-
tion, as the Hong Kong currency board has, to provide it
with extra funds in case its reserve assets should decline
in value. Profits beyond that will go to the government.
We suggest that the currency board have its legal seat
in Switzerland. That will prevent a Soviet takeover from
jeopardizing the board's assets, as happened to the old Bank
of Lithuania. The board will have its headquarters and its
actual operations in Lithuania. To insulate the currency
board as much as possible from politics, its directors
should serve staggered terms, so not all can be replaced at
the same time. A majority of directors could be required to
be foreign nationals, chosen by institutions in their home
Page 15
countries. Furthermore, the law establishing the currency
board should make clear that the board's assets belong not
to the Lithuanian government but to the board itself. The
board should be required to publish regular, detailed finan-
cial statements. In our previous memorandum we included a
model authorizing statute for a Lithuanian currency board.
Issuing the Litas
In our previous memorandum we also suggested a method
by which Lithuania could convert rubles into litas. Here we
shall suggest an alternative method for introducing the
litas: circulating it as a parallel currency. A possible
advantage of introducing the litas as a parallel currency is
that doing so may be administratively simpler than convert-
ing rubles into litas. The Lithuanian government could also
use some combination of methods, as the German government
did during monetary unification. The Lithuanian government
could convert some rubles into litas and distribute other
litas by the method we suggest here. Indeed, any political-
ly acceptable method of introducing a currency board-issued
litas would work.
If the currency board has DM165 million ($100 million
at current exchange rates), it can issue up to that amount
in notes and coins. It should declare that one litas equals
one mark (or one ecu, if the ecu is the reserve asset).
That will be a sign that the government intends to make the
litas as good as the mark rather than as bad as the ruble.
It will also take fullest advantage of the savings in inter-
national transactions costs that can be realized by having a
linked currency.
The currency board can distribute the litas to the
public according to some simple plan; for instance, it can
give every citizen of Lithuania approximately 40 litas
(DM40). The public will spend some of the litas its re-
ceives, hold some, and deposit some at banks in new litas
accounts. Banks will begin to make loans in litas. The
litas and the ruble will at first exist side by side as
parallel currencies, with a freely fluctuating exchange rate
determined by market conditions. Ruble bank deposits can be
converted into litas deposits at the market rate of ex-
change, if both bank and depositor wish. Ruble interest
rates will have been freed to reach market levels. After
adjusting for inflation, they should be no lower than litas
rates, so that not everyone may want to convert ruble depos-
its into litas deposits. Prices may be expressed in litas
or rubles depending on the wishes of sellers. Wages should
be converted into litas at workers' request. People who do
Page 16
not have litas can acquire them by exchanging their rubles
for litas at the freely fluctuating market rate at banks or
other dealers in foreign exchange.
Taxes should be payable only in litas. Ruble income
should be taxed at its current equivalent in litas at market
exchange rates. Ruble subsidies to consumers and enter-
prises could be continued. As the ruble continues to depre-
ciate, ruble subsidies will eventually be self-eliminating
if they are not increased. Litas prices should not be con-
trolled. If the government follows that advice, there will
be a growing litas sector with unregulated prices and a
shrinking ruble sector with controlled prices. The end of
the controlled sector will be gentler and perhaps less po-
litically unpopular than if all prices were decontrolled at
once.
The currency board litas will be a better currency than
the ruble and should quickly drive the ruble out of circu-
lation in many uses. That will be a spontaneous market
process; there will be no need to force people to use the
litas. The litas should be, so to speak, democratically
chosen by the Lithuanian people. Furthermore, allowing the
ruble to circulate as a parallel currency will facilitate
trade with the Soviet Union.
Distributing free litas to the public would be extreme-
ly simple. Litas notes have already been printed. Under
this proposal, they could be distributed to the public, and
Lithuania could have its own stable, fully convertible cur-
rency within a few days of establishing a currency board.
It is not necessary to wait years or possibly forever for a
convertible currency, as plans for a central bank-issued
litas envision.
With a stable currency in existence, the Lithuanian
government could undertake price reform by freeing prices to
rise to market levels. As part of the price reform, the
government should abolish ruble coupon money.
The Ultimate Goal:
Free Markets in Currency and Banking
Both theory and evidence strongly indicate that finan-
cial institutions and markets work best and contribute most
to economic growth where they are freest.⁷ Western nations
are gradually relearning the advantages of freedom for fi-
nancial markets. Lithuania would do well to avoid slavishly
imitating Western financial regulations, which have often
hindered growth without producing any general benefits.
Page 17
Instead, it should proceed directly to the goal that Western
nations have not yet fully achieved: complete freedom for
financial institutions to compete with each other as Western
companies in other types of business do.
As well as the particular freedoms for banks that we
advocate above, we wish to stress again that Lithuania
should not erect barriers to foreign financial institutions
that wish to do business in Lithuania, even to own Lithuani-
an banks. It is common for public opinion in newly indepen-
dent nations to oppose so-called foreign economic domina-
tion. For Lithuania to succumb to such ideas would be un-
wise and costly. Much of the property in Lithuania that
before independence was owned by the government in Moscow
was forcibly seized. In contrast, since sales of property
by Lithuanian citizens to foreigners will be voluntary, with
no element of coercion, there is no reason for the Lithuani-
an government to interfere with those transactions.
If foreigners wish to invest in Lithuania, Lithuanians
should be glad, because it means that foreigners think Lith-
uania has good economic prospects. For more than a century
after independence, British investment in the United States
was so large that some Americans feared British economic
domination. Nothing of the sort happened; in fact, British
investment sped America's rise as the world's greatest in-
dustrial nation. Lithuania preserved its culture during
half a century of occupation by a foreign army. Surely it
has nothing to fear from the peaceful activities of a few
business people whose intent is to make deals that both they
and their Lithuanians counterparts find beneficial.
We also wish to stress that Lithuania needs no law to
prevent people from using the ruble or other foreign curren-
cies if they prefer once the litas is introduced. (Fratian-
ni, Davidson, and von Hagen, on the other hand, wish to
prevent people from using other currencies.) 8 If the ruble
continues to be a bad currency, it will die a natural death
in competition with the superior currency board-issued
litas. As it is in other aspects of economic life, competi-
tion in currency is the best guarantee of consumers' inter-
ests. Competition in currency should extend even so far as
allowing commercial banks to issue their own bank notes,
convertible into the currency board litas or directly into
the mark or some other foreign currency. That could result
in lower and smoother interest rates by keeping as much base
money as possible in bank reserves. Such competitive cur-
rency issue systems have worked well in dozens of cases in
the past. 9
Page 18
Conclusion
The ruble is rapidly losing value. The Bank of Lithua-
nia has no definite plan for producing a stable, convertible
currency. The experience of many newly independent coun-
tries indicates that probably no form of central bank can
produce a stable, convertible currency.
As an alternative monetary institution, we propose that
Lithuania establish a currency board. The currency board
system, as used in Hong Kong and elsewhere, is a simple and
proven vehicle for promoting economic growth.
To summarize, we recommend that Lithuania take the
following steps.
* Establish clear property rights, which will allow
individual people and enterprises to offer their prop-
erty as collateral for bank loans. Allow people to
sell, rent, and mortgage privatized state property
immediately.
Pass a bankruptcy law, as the parliament is scheduled
to do.
Pass the version of the private commercial banking
law proposed by the Lithuanian Free Market Institute
rather than the version proposed by the Bank of Lithua-
nia.
* Remove restrictions on interest rates for loans and
deposits.
Allow free trading in all foreign currencies.
Abolish most of the Bank of Lithuania's regulatory
powers over private commercial banks. Transfer the
remainder, if any, to the Ministry of Finance.
* Separate the Bank of Lithuania's commercial banking
functions from its other functions, and privatize its
commercial banking functions.
Establish a Lithuanian currency board to issue the
litas. The litas should equal one German mark or one
ecu.
Sell Lithuania's prewar gold reserves for mark- or
ecu-denominated assets.
Page 19
* Distribute litas notes and coins to the public.
* Abolish the coupon scheme.
Notes
1. Kurt Schuler and George Selgin, "A Proposal for Reforming
Lithuania's Monetary System" (Unpublished paper, November
1990).
2. Charles Goodhart, The Evolution of Central Banks (Cam-
bridge, Mass.: MIT Press, 1988), pp. 45-46.
3. Steve H. Hanke and Kurt Schuler, Currency Boards for
Eastern Europe (Washington: Heritage Foundation, forthcom-
ing).
4. Steve H. Hanke and Kurt Schuler, "Ruble Reform: A Lesson
from Keynes, " Cato Journal 10, no. 3 (Winter 1991) : 655-66.
5. Michele Fratianni, Lawrence S. Davidson, and Jurgen von
Hagen, "Currency Reform in the Baltic Republics" (Hudson
Institute, Indianapolis, Ind., September 13, 1991, Mimeo-
graphed), p. 20.
6. Hanke and Schuler, Currency Boards, appendix B.
7. See Rondo Cameron et al., Banking in the Early Stages of
Industrialization: A Study in Comparative Economic History
(New York: Oxford University Press, 1967) i Rondo Cameron,
ed., Banking and Economic Development: Some Lessons of His-
tory (New York: Oxford University Press, 1972) i Kevin Dowd,
The Experience of Free Banking (London: Routledge, forthcom-
ing) ; Maxwell Fry, Money, Interest, and Banking in Economic
Development (Baltimore: Johns Hopkins University Press,
1988) ; Ronald McKinnon, Money and Capital in Economic Devel-
opment (Washington: Brookings Institution, 1973).
8. Fratianni, Davidson, and von Hagen, p. 34.
9. Dowd.
OTHER STUDIES IN THE POLICY ANALYSIS SERIES
162. False Dreams and Broken Promises: The Wasteful Federal
Investment in Urban Mass Transit by Jean Love and Wendell
Cox (October 17, 1991)
161. Contrived Distinctions: The Doctrine of Commercial Speech
in First Amendment Jurisprudence by Jonathan W. Emord
(September 23, 1991)
160. Sweden: From Capitalist Success to Welfare-State Sclerosis
by Peter Stein (September 10, 1991)
159. "Ancient History": U.S. Conduct in the Middle East since
World War II and the Folly of Intervention by Sheldon L.
Richman (August 16, 1991)
158. The Americans with Disabilities Act: Time for Amendments by
Robert P. O'Quinn (August 9, 1991)
157. Alcohol Prohibition Was a Failure by Mark Thornton (July
17, 1991)
156. The Drug War vs. Land Reform in Peru by Melanie Tammen
(July 10, 1991)
155. Only Freedom of Education Can Solve America's Bureaucratic
Crisis of Education by Jack D. Douglas (June 17, 1991)
97. Interstate Banking: The Reform That Won't Go Away by Steven
Horwitz and G. A. Selgin (December 15, 1987)
60. The Case for Free Banking: Then and Now by G. A. Selgin
(October 21, 1985)
54. Private Deposit Insurance: Stabilizing the Banking System
by Catherine England (June 21, 1985)
17.
Gold,
Paper,
or
Is There a Better Money? by David
Friedman (September 23, 1982)
8. Inflation and the Federal Reserve: The Consequences of
Political Money Supply by Lawrence H. White (April 15,
1982)
2. Monetization Practices and the Political Structure of the
Federal Reserve System by R. H. Timberlake, Jr. (August 12,
1981)
Published by the Cato Institute, Policy Analysis is a regular
Contact the Cato Institute for reprint permission. Additional
series evaluating government policies and offering proposals
copies of Policy Analysis are $4.00 each ($2.00 each for five or
for reform. Nothing in Policy Analysis should be construed as
more). To order, or for a complete listing of available studies,
necessarily reflecting the views of the Cato Institute or as an
write the Cato Institute, 224 Second Street
attempt to aid or hinder the passage of any bill before Con-
S.E., Washington, D.C. 20003. (202) 546-
CATO
gress.
0200 FAX (202) 546-0728.
INSTITUTE
Policy
October Analysis 17, 1991
No.
162
Routing
FALSE DREAMS AND BROKEN PROMISES:
THE WASTEFUL FEDERAL INVESTMENT
IN URBAN MASS TRANSIT
by Jean Love and Wendell Cox
Over the past quarter century, U.S. taxpayers have
pumped more than $100 billion in subsidies into the nation's
urban mass transit systems. That massive taxpayer investment
has paid for urban public transportation systems that fewer
and fewer Americans are using. Incredibly, mass transit
ridership is lower today--not only as a percentage of com-
muter trips taken but also in absolute numbers of riders--
than it was in the early 1960s. Despite the low and declin-
ing use of bus and rail systems, federal grants for urban
transit now appear to be as popular as ever: bills before
both houses of Congress would provide increases of up to 20
percent in public aid for municipal bus and rail systems.
The considerable support within Congress for expanded
transit aid is not surprising. Since the federal government
created the Urban Mass Transportation Administration during
Lyndon Johnson's administration, public transit has been a
fertile field of dreams and promises. Tax-supported transit
lobbyists¹ supply Congress and state houses with visions of
magic carpets that whisk commuters around gleaming cities.
The alleged virtues of public transit are by now famil-
iar. For weary motorists, public transit systems promise
less automobile-generated traffic congestion; for environ-
mentalists, less air pollution; for city planners, a first
step toward urban revitalization; for the poor, inexpensive
access to efficient transportation; for conservationists,
less wasteful use of energy; and for the business community,
a way to lure suburbanites back to central business dis-
tricts.
Jean Love and Wendell Cox are Illinois-based consultants who
CATO
specialize in transportation, privatization, and the economics
INSTITUTE
of the public sector.
224 Second Street, S.E.
Washington, D.C. 20003
Page 2
Regrettably, more than two decades of experience with
publicly supported bus and rail systems have exposed each of
those dreams as a costly illusion. Public transit systems
have failed to deliver any of the promised benefits.
Transit subsidies are not increasing ridership.
Transit ridership is lower today than it was 30 years
ago--before the billion-dollar subsidies began. Peo-
ple, including transit executives² and elected offi-
cials, tend to ride public transit only when they have
no other reasonable choice.
*
Transit subsidies have not reduced road congestion.
The shiny new multi-billion-dollar rail systems have
not diverted meaningful numbers of drivers from their
cars; most new patronage has been of less expensive,
more flexible bus lines and energy-efficient car and
van pools. 3
Transit subsidies do not reduce air pollution. Be-
cause public transit has not increased ridership, tran-
sit has had no discernible impact on air quality in
cities. Mass transit patronage is so low that even
doubling it would have a negligible effect on air qual-
ity.
* Public transit is not energy efficient. The average
public transit vehicle in the United States operates
with more than 80 percent of its seats empty. 4 Because
of the low average number of passengers per bus, energy
consumption per passenger mile for public transit buses
now is greater than that for private automobiles and
far exceeds that for car and van pools. 5
* Transit subsidies have not helped revitalize cities.
Cities, such as Buffalo, with new multi-billion-dollar
rail systems have not reduced flight from their central
business districts. Even with ever-greater subsidies
for public transit, the exodus of businesses and resi-
dents from downtown areas is accelerating.⁶
*
Urban transit does not benefit the poor. Ridership
studies show that the poor are not heavy users of fed-
erally subsidized transit systems. Transit provides
only 7 percent of trips made by low-income people. 7
The cold, hard lesson of the last 25 years is that
instead of promoting increased efficiency in bus and rail
service, higher taxpayer subsidies have paid higher-than-
inflationary transit costs. Subsidies have financed exces-
sive compensation for transit employees, declines in transit
Page 3
productivity, and swollen bureaucracies--not increased ser-
vices. If public transit costs had risen only at the same
rate as private bus industry costs, service levels now could
be more than double the 1989 level.
Worst of all, taxpayer subsidies, particularly federal
grants, have actually impeded the development of efficient
and cost-effective urban transit programs in U.S. cities.
The experience of other industrialized nations and some
selected systems in the United States demonstrates that by
tearing down the significant regulatory barriers, which
prevent private, unsubsidized transit systems from develop-
ing, and by encouraging competitive contracting by private
providers for subsidized systems, the mobility needs of
urban residents can be met at lower cost and greater conven-
ience to customers. Conversely, if Congress approves fur-
ther large increases in transit subsidies, they will fuel
further increases in transit costs. Those funding increases
will ill-serve the interests of urban commuters, and they
will certainly ill-serve the interests of American tax-
payers.
The Destructive Federal Role in Urban Mass Transit
Before 1960 most transit systems in the United States
were privately owned and operated. That situation was re-
versed when Congress created the Urban Mass Transportation
Administration (UMTA) in 1964. 9 Indeed, during the mid and
late 1960s, public aid was used to help finance the conver-
sion of transit from private to public monopoly. From an
initial $435 million over three years, 10 UMTA's funding lev-
el grew over the next 20 years to $3 billion per year by
1989.
As a result of the poor performance and waste of many
of the transit systems receiving federal support, the Reagan
administration, under David Stockman and James C. Miller III
at the Office of Management and Budget, succeeded in cutting
transit grants by roughly 25 percent in the mid and late
1980s. In 1985 former senator William Proxmire (D-Wis.)
presented his celebrated Golden Fleece Award for wasteful
use of tax money to UMTA. Proxmire said that UMTA had
"played Santa Claus to the nation's cities, and that the
results of the program were "a spectacular flop, the Edsel
of federal programs. Taxpayers were taken for a ride. "
Ralph Stanley, at that time the administrator of UMTA, ac-
cepted the award in person stating, "I embrace Senator Prox-
mire's Golden Fleece Award and totally agree with his criti-
cism. #11
Page 4
Despite the obvious problems of mass transit, higher
levels of federal subsidies have been proposed. This year
funding for mass transit may rise by as much as 20 percent
to nearly $4 billion annually.¹²
The Myth and Reality of Public Transit Systems
The conventional wisdom in Washington is that the mani-
fold social benefits of efficient public transit systems
justify high taxpayer subsidies. A massive commitment of
taxpayers' money to public transit is purportedly essential
to solving a variety of national problems--including urban
decay, traffic congestion, U.S. dependence on foreign oil,
and the transportation problems of the poor. For those and
other reasons, strong special interest groups support in-
creasing subsidies to bus and rail systems. Î3 Yet upon
closer inspection, the evidence convincingly demonstrates
that each supposed benefit of transit is more myth than
reality.
Myth no. 1: Federal Transit Subsidies Have
Improved Transit Service
Federal dollars for urban transit have not bought im-
provements in service levels for commuters; rather, they
have generated rapid inflation of costs in the industry.
Between 1970 and 1985 public transit operating costs per
vehicle mile increased an incredible 393 percent (Figure 1)
or roughly twice the rate of general inflation during the
same time period and roughly 2.5 times the operating cost
increase for similar service in the private bus industry.14
Public transit costs have increased at a faster rate than
costs in any other sector of the economy--even health care
(Figure 2). From 1970 to 1989 public transit costs per
vehicle mile increased approximately 20 percent more than
health care costs.¹⁵
The cost inflation in the public transit industry has
corresponded almost precisely with mushrooming levels of
federal assistance. Annual subsidies rose from less than
$300 million in 1970 to more than $12 billion in 1989¹⁶--a
10-fold increase after adjusting for inflation. Those sub-
sidies represented 14 percent of transit revenues in 1970
and nearly two-thirds of transit revenues in 1989 (Figure
3). Public transit has consumed more than $100 billion in
public aid in the last two decades. Although federal fund-
ing for public transit declined in the 1980s, state and
local assistance has more than made up for the loss so that
Page 5
Figure 1
Change in Inflation-Adjusted Costs per Mile for Transit and
Private Bus Service, 1950-85
Legend
Public Transit
120
Private Bus Service
120
100
100
80
80
Transit
Percent
Subsidies
60
Begin
60
40
40
20
20
0
0
1950
1955
1960
1965
1970
1975
1980
1985
Source: APTA Annual Reports and UMTA Section 15 Annual Reports.
Figure 2
Inflation in Transit Costs versus Costs of Other Goods and Services 1970-89
General Inflation
Weekly Earnings
Fuel
Medical Care
Public Transit
(per vehicle mile)
0
100
200
300
400
Percent
Based on APTA annual reports; UMTA Section 15 annual reports; and U.S. Department of Labor,
Bureau of Labor Statistics, various annual reports.
Page 6
Figure 3
Fares as Percentage of Operating Expenses
100
100
80
80
PUBLIC AID
60
60
Percent
40
40
FARES
(Includes Advertising Revenues)
20
20
0
0
1965
1970
1975
1980
1985
1989
Based on data from the APTA annual reports and UMTA section 15 annual reports.
aid to public transit continues to grow faster than infla-
tion.
17
Regrettably, service has improved little in response to
the increased federal commitment to local transit. For each
new inflation-adjusted dollar of revenue, transit has pro-
duced less than 25 cents of new service--75 cents of each
dollar has financed cost increases that exceed the rate of
inflation. A 1986 study by UMTA found that of the $8 bil-
lion spent by the federal government on operating subsidies,
$2 billion went for higher real wages, $1.5 billion went for
lower employee productivity, and $1 billion went to reduce
real fares. Only $1 billion went to extend or improve tran-
sit service. 18 As a result, today it costs an estimated
$4.20 to generate a dollar's worth of new transit service. 19
In sum, federal subsidies to urban transit have not
purchased additional or improved levels of service. The
funds have contributed to a largely inefficient and overcom-
pensated industry that is failing consumers.
Page 7
Myth no. 2: Increasing Federal Subsidies Will Attract More
Transit Riders
Gross public transit ridership has been consistently
falling since World War II. In 1945 ridership was 23.5
billion passengers, whereas in 1989 it was 7.5 billion--or
less than one-third the 1945 level and less than half the
1950 level (Figure 4). The drop in ridership occurred de-
spite huge increases in the number of urban commuters be-
tween 1945 and 1989.
Since 1970 urban ridership has risen by roughly 5 per-
cent, which could be taken as a sign that public transit is
on the rebound. Unfortunately, even the small reported in-
crease in ridership is probably vastly exaggerated as a
result of the way trips on public transit are counted. Each
segment of a public transit journey is counted separately,
so a passenger transferring from one bus to another or from
a bus to a rail car is counted as two passenger trips.
Studies have shown that up to two-thirds of new rail rider-
ship represents transfers from buses. Hence, many bus rid-
ers are double-counted because they must use both a bus and
a rail line or two buses to make a trip that they previously
made on a single bus.
Because the population has increased 25 percent and the
labor force has increased 50 percent since 1970, the minus-
cule increase (if it exists at all) in ridership claimed by
Figure 4
Transit Ridership, 1945-89
25
23.5
20
17
Billion Passengers
15
11.5
9.5
10
8.5
7.5
7
8
8
7.5
5
0
1945
50
55
60
65
70
75
80
85
89
Cato Institute
Based on data from APTA and UMTA.
Page 8
the transit industry translates into a shrinking market
share captured by public transit. Transit's share of trips
to and from work--transit's biggest market--declined by
nearly 30 percent during the 1970s in large metropolitan
areas. Total public transit rides per capita plunged an
additional 15 percent from 1980 to 1989 in metropolitan
areas with populations of more than 1 million. 20 In 1980
public transit's urban market share²¹ (6.4 percent of work
trips) just exceeded the market share for walking to work;
car and van pools, which do not receive any direct federal
subsidies, provided nearly three times the number of trips
to work that public transit did. Nationwide, only 2.2 per-
cent of all personal trips were made by transit, and just
over 5 percent of work trips were provided by transit.²²
Even the development of expensive new rail systems did
not reverse the trend in ridership loss; per capita transit
ridership dropped in all urban areas that opened or expanded
rail systems in the 1980s: Atlanta, Baltimore, Buffalo,
Miami, Portland, Sacramento, San Diego, San Francisco, and
Washington, D.C. Consider these examples:
Portland's light rail line, which opened in 1987,
attracted only one-third of its riders from the auto-
mobile; 23 most other riders were diverted from buses.
*
Buffalo spent more than $600 million, most of which
was federal money, to construct a rail line, but com-
bined bus and rail ridership in 1989 was 20 percent
below the bus-only ridership figure for 1980. 24
*
Miami's Metrorail, which was built in the 1980s with
massive federal assistance and carried a final price
tag in excess of $1 billion, is ridden by only 1 per-
cent of Dade County residents. 25
Most cities that have constructed expensive new rail
systems during the past 15 years have dramatically overesti-
mated ridership. Figure 5 shows projected versus actual
ridership in nine cities with rail systems built with feder-
al dollars. Ridership fell below projections in every one
of the cities, and only one achieved even half the predicted
ridership levels.
Myth no. 3: Public Transit Can Meet the Transportation Needs
of Urban Commuters in the 1990s
Transit use in the United States has been declining for
at least the past five decades as a result of changing life-
styles and economic conditions, including low-density land
Page 9
Figure 5
Legend
Actual Ridership
Rail Passengers, Actual VS. Predicted Ridership
Predicted Ridership
Washington
Baltimore
Miami
Buffalo
Pittsburgh
Portland
Sacramento
Miami People Mover
Detroit
0
25
50
75
100
Percent
Source: Don Pickrell, The Causes of Rising Transit Operating Deficits (Washington: U.S. Department
of Transportation, 1983).
use patterns inside and outside of cities, suburbanization,
the increase in female employment outside the home, the 40-
hour work week, the steadily growing affluence of workers,
and most important, the emergence of the automobile. Some
argue, however, that public transit will experience a reviv-
al in the 1990s as public investment in buses and rail sys-
tems rises.
The evidence suggests that many of the changing com-
muter travel patterns that began to emerge in the 1970s and
1980s will continue in the 1990s, thus accelerating the
exodus from subways and buses to automobiles and other forms
of non-fixed-route transportation services such as minivans.
Even if increasing government transit dollars are able to
purchase increases in the level of transit service, those
programs will become increasingly incidental to America's
travel patterns.
As has been well established, the dominant commuting
pattern is no longer from the suburbs to downtown but from
low-density suburb to low-density suburb. Today the number
Page 10
of suburb-to-suburb commuter trips is roughly double the
number of commuter trips from suburb to center city. 26 Yet
public transit's conventional forms--buses and trains--can
be effective only in high-density corridors where a large
number of riders begin or end their trips in a concentrated
area such as a densely developed central business district.
While many large downtown areas have grown, their relative
importance in metropolitan areas has diminished--most com-
mercial and office development has occurred in the suburbs.
And the emerging suburban employment and retail centers do
not have densities sufficient to justify expanded transit
service--particularly rail service. The cost in subsidies,
vehicles, and transit personnel to duplicate the radial
networks that serve downtown areas would be prohibitive.
The unavoidable truth for the transit industry is that
today's metropolitan area is tailor made for cars, not for
fixed-route public transit. Conventional transit cannot
serve suburban areas with speeds and total travel times
comparable to those of private transportation. Further
investments in modes of transportation to accommodate travel
patterns that predominated more than 40 years ago will not
meet commuters' needs in the 1990s.
Myth 4: Public Transit Can Be Successful in the United
States Because It Is Successful in Other Industrialized
Countries
Advocates of higher taxes for transit constantly point
to the far higher levels of transit ridership in Western
Europe, Canada, Australia, New Zealand, and Japan to suggest
that substantial increases in U.S. transit ridership would
occur if only there were much higher levels of public sup-
port for public transit.
But there are inconsistencies in that line of reason-
ing. First, public transit subsidies already are higher in
the United States than they are in other developed nations.
The extremely high operating costs of public transit in the
United States suggest that, with the possible exception of
the former communist countries, U.S. public subsidies per
passenger may be the highest in the world. Subsidies ac-
count for approximately two-thirds of operating costs in the
United States, substantially more than they do in nations
where ridership is higher. In Europe and Canada subsidies
are less than 50 percent, and in Japan subsidies are less
than 15 percent. 27
The higher ridership in other developed nations is not
the result of more generous subsidies. The average resident
Page 11
of a Western European urban area takes nearly five times as
many public transit trips annually as a U.S. urban resident,
despite the fact that a lower level of service (vehicle
miles) per rider is provided in Europe. There are at least
two fundamental causes of Europeans' more intensive use of
public transit--density and concentration of destinations.
Western European urban areas have a far larger percentage of
their commercial development and employment in their urban
cores, and their population densities are much greater--more
than three times those of their U.S. counterparts.
Even in an urban environment that favors use of bus and
rail service, public transit's market share is stable or
declining, and automobile usage is increasing in Western
Europe, just as it is in the United States. 28 Europe did
not create higher transit ridership by attracting passengers
from the automobile, although many transit supporters insist
that can happen in the United States. Indeed, in Europe
today, as income levels rise, the automobile is diverting
passengers from transit. Moreover, even though subsidies
are generally lower than they are in the United States,
concern about rising public transit costs has induced West-
ern European governments to take various actions to limit
the growth of subsidies even further, such as competitive
contracting, reduced reliance on national government subsi-
dies, and overall limitations on subsidies.²
Myth no. 5: Increased Public Investment in Transit Will
Increase U.S. Productivity and Competitiveness
Economists agree that there is a correlation between a
nation's capital infrastructure and its productivity and
competitiveness. But productivity is improved by a new
capital project only when its benefits equal or exceed its
costs and when the rate of return at least equals that of
alternative investments. Infrastructure may be productive
or unproductive--money expended to build a bridge to nowhere
or an underutilized rail facility erodes productivity. On
the whole, public investment in new transit infrastructure
has diminished, not increased, the nation's total produc-
tivity.
30
Transportation planners routinely overstate the pro-
jected economic rate of return on new public transit invest-
ments by systematically overestimating ridership and under-
estimating construction costs. For example, a U.S. Depart-
ment of Transportation study of 10 urban rail projects
showed that only one project came in under the estimated
cost; construction costs for the remainder ranged from 33 to
106 percent over initial estimates.³¹
Page 12
Proper tallying of the total public investment in
cities' transit systems and calculation of the per passenger
subsidy makes it clear that the costs of those projects far
exceed any possible benefits to national productivity or
competitiveness. Total costs of capital and operation range
from $5.58 to $16.44 per rail passenger ride, yet most rid-
ers pay a base fare of roughly $1.00.
Many of the expensive transit projects funded in the
1980s turned out to be white elephants. Detroit, for exam-
ple, built a three-mile downtown people mover (that operates
in only one direction) largely with federal funding. Con-
struction costs were 50 percent over budget and ridership 80
percent below projection.³² To pay for the construction
deficit, funding was siphoned from needed bus improvements
in a city whose low-income population represents a substan-
tial market for bus service expansion. Detroit proposed
reduction of its police force as it increased its expendi-
tures for the higher-than-anticipated operating deficit33--
and Detroit has one of the nation's highest crime rates.
Similarly, in Miami per passenger expenses are so great that
it would have been cheaper for taxpayers to provide limou-
sine service for public transit users than to build and
operate an extravagantly expensive rail system. Such rail
systems are anything but an efficient investment in Ameri-
ca's infrastructure.
Undaunted by the evidence, cities throughout the coun-
try are now duplicating those expensive mistakes. Dallas,
Minneapolis, Salt Lake City, and Tucson are all planning
expensive rail systems that would be suitable only for the
high-density cities of Europe. Those systems are not ex-
pected to cover their operating expenses let alone recapture
the multi-billion-dollar federal, state, and local invest-
ment of taxpayers' money.
Unquestionably, the major explanation of the inability
of the public transit industry to contain costs has been the
inflated salaries and benefits of public transit workers.
Public transit employees are paid as much as twice the
amount received by the average nonsupervisory worker in the
United States and 65 percent more than the average U.S.
worker. Although the education requirement for transit
drivers is less than a high school diploma, they receive
nearly 11 percent more in total compensation than do pri-
vate-sector employees with four or more years of college
education. The average compensation for all transit employ-
ees exceeds the average salary for U.S. employees with col-
lege degrees by more than 30 percent. 34 Public transit
fringe benefits average 50 percent of employee pay--nearly
double the fringe benefits of the average private-sector
Page 13
worker.
35
Hence, when fringe benefits are added to the equa-
tion, the average transit employee receives 70 percent more
in compensation than the average U.S. employee
(Figure 6) 36
Worse yet, the pay premium enjoyed by transit workers
appears to be widening. Philadelphia's fiscally troubled
Southeastern Pennsylvania Transit Authority, for example,
has developed a 1992 budget that includes a 5.5 percent wage
increase (more than one-third more than the national average
wage increase in 1991) for employees. Yet SEPTA is planning
service cutbacks, demanding additional subsidies, and
threatening to shut down the system if a new, dedicated tax
is not provided for the deficit-plagued transit system. 37
San Francisco's Bay Area Raid Transit system reports that
unionized employees have rejected an offer of a 4 percent
wage increase for each of the next three years. The BART
offer would bring drivers' salaries to $48,000, janitors' to
$36,000, and mechanics' to $53,000 per year; benefits, which
add to the total compensation, would remain at 51 percent of
wages and salaries, so that drivers would be compensated at
more than $70,000, janitors at more than $50,000, and me-
chanics at $80,000 annually. 38
Public transit has suffered declining labor productivi-
ty over the past two decades. Productivity as measured by
hours of bus service produced per constant dollar fell an
average of 43 percent from 1964 to 1985; the productivity
Figure 6
Annual Compensation of Full-Time Employees, 1988
Legend
Fringe Benefits
U.S. Nonsupervisory
$24,849
Wages
Average U.S.
$28,790
With 4 or More
Years of College
$37,656
Transit Bus Driver
$41,662
Transit Employee
$49,009
Cato Institute
Derived from Statistical Abstract of the United States and UMTA section 15 report, 1988.
Page 14
decline for large transit agencies was 55 percent. About
one-third of the cost increases over inflation in urban
transit since 1970 can be attributed directly to the decline
in productivity.³⁹
Let us put the dismal record of transit worker produc-
tivity and performance into perspective. The unsubsidized
private taxi industry employs about the same number of work-
ers as transit but provides three times as many vehicle
miles of service. 40 Yet transit is heavily subsidized by
government and taxis receive virtually no public assistance.
One explanation for transit's steep productivity de-
cline is that transit employees are working less. Average
annual service hours worked by each public transit employee
(for buses) fell from 1,228 in 1964 to 1,028 in 1985. The
decrease in productivity was worse for the largest transit
agencies--from 1,205 hours in 1964 to 929 hours per employee
in 1985. 41 Meanwhile, public transit driver absenteeism,
which is epidemic in the industry, averaged 34 days a year
in Miami, 32 days in Los Angeles, and 27 days in Pittsburgh,
exclusive of vacations and holidays.⁴²
Another cause of the anemic productivity levels in the
transit industry is a provision of the Urban Mass Transpor-
tation Act of 1964, section 13 (c) 43 which is administered
by the U.S. Department of Labor. That provision has secured
for transit workers a degree of bargaining power that is not
shared by employees or labor unions in other U.S. indus-
tries. 44 It sounds innocent enough, requiring that adequate
labor arrangements be made to ensure that employees are not
harmed as a result of federal funding. In practice, how-
ever, section 13 (c) has been interpreted to require negotia-
tion of generous labor agreements between transit agencies
and their unions. Failure of a transit agency to make con-
cessions to labor can result in loss of federal funding,
thus giving transit labor unions de facto veto power over
the coveted capital (and operating) grants. 45
Section 13 (c) has impeded efforts to improve productiv-
ity and efficiency in the transit industry. It requires up
to six years' pay for an employee whose job is eliminated as
a result of economies or efficiencies. Assuming the 1988
annual compensation level of $41,000 for the average public
transit bus driver, legally mandated severance pay could be
as much as $250,000 per worker, compared with mandated sev-
erance pay (unemployment insurance benefits) of less than
$5,000 for typical American workers.
Section 13 (c) also has so skewed collective bargaining
in favor of transit unions that they have negotiated not
only higher-than-market compensation in the industry but
absurd work rules that extract pay for not working. For
Page 15
example, the use of part-time labor is severely restricted
or prohibited outright, even though part-time labor is ideal
for public transit, because a large percentage of public
transit service is consumed during rush hour periods in the
morning and evening. Under current operating practices, to
cover both morning and evening rush hours, drivers are paid
for time not worked during midday. Most public transit
labor contracts also require the full-time employment of
substitute drivers. Sometimes substitute drivers operate
buses and are paid for driving; other times substitute
drivers are paid to sit and wait. Substitute public transit
drivers, who have skills that can be learned in a month or
less, are paid whether or not they work; substitute public
school teachers, who must have at least four years of col-
lege, are paid only when they work.
The net effect of those restrictive work rules is that
public transit bus drivers work as few as 36 minutes of each
hour for which they are paid on some services, and the aver-
age is less than 50 minutes of work for each hour's pay.
Practices such as those would bankrupt a company in the
competitive marketplace.
The combination of federal subsidies, excessive pay
rates, routine cost overruns, and archaic work rules in the
transit industry has prevented implementation of economical
investment and operating procedures in public bus and rail
service. That combination has been a major factor in tran-
sit's cost escalation. The annual excess of transit costs
over inflation (from 1970) is now more than four times the
total amount of federal operating subsidies. Pumping bil-
lions of additional federal tax dollars into such a system
does not contribute to the development of America's infra-
structure and ultimately makes the nation less, not more,
competitive.
Myth no. 6: The Washington Metro Has Been a Stunning Public
Transit Success That Can Be Duplicated in Many Other Cities
The most comprehensive federally supported rail system
in the nation is Washington, D.C.'s Metro. It is typically
regarded as a transit showcase that can be duplicated in
other cities.
Although the Washington Metro carries more riders than
any other new rail facility, it has fallen far short of
reaching its ridership projections. 46 Part of the reason is
that employment in the central business district has grown
at a much lower rate than projected before the system was
built, while suburban employment has grown at a greater
Page 16
rate. Not only did public transit ridership per capita
decline in the 1980s in the Washington area, but planners
projected that public transit's work trip market share would
decline another 9 percent from 1986 to 2000--despite a
planned $3 billion, or 70 percent, expansion of the rail
system. 47 Even the most recently opened Metro stations are
drawing far fewer passengers than predicted. Two new subur-
ban Maryland stations, which cost approximately $300 million
to construct and opened in 1990, are attracting only 7,300
passengers a week--slightly more than half the 13,100 ex-
pected.
The taxpayers of the Washington area could not have
afforded to build the $8 billion Metrorail system. It has
been built primarily by funding from taxpayers across the
country. Indeed, the taxpayers of the Washington area can
barely afford to pay for operating the system as local and
state budgets strain to keep up with rising costs. 49 And
the American taxpayers cannot afford the tens of billions of
dollars it would cost to replicate the Washington system in
other cities.
Myth no. 7: Public Transit Conserves Energy and Improves Air
Quality
With its continually declining work trip market share,
public transit does not and cannot reduce energy consumption
or air pollution. Some transit vehicles are overcrowded
during peak hours in high-demand corridors. Yet, most of
the time, there is excess capacity. The average public
transit vehicle in the United States operates with more than
80 percent of its seats empty. 50 Because of the low average
number of passengers per bus, the energy consumption per
passenger mile of public transit buses is now greater than
that of private automobiles, and it far exceeds that of car
and van pools. 51 And unlike automobiles, public buses are
becoming less, not more, energy efficient. In 1985 public
transit used nearly 55 percent more transit vehicles to
provide approximately the same number of rides provided in
1965. Over the same period of time the number of vehicle
miles increased by 22 percent even though ridership remained
static.
52
Rail, also because of its low ridership, has not con-
tributed to energy conservation. Rail systems require large
amounts of energy for the construction of roadbeds, tunnels,
and rolling stock. For example, one study estimated that
San Francisco's BART system, which is highly patronized,
will never save enough energy to recoup its initial energy
investment. 53 That is apparently the case for most urban
Page 17
rail systems. A 1982 Congressional Budget Office study
concluded that "under typical conditions rapid rail systems
actually waste energy rather than save it. 1154
Boosters of rail and advocates of higher transit taxes
contend that air quality will improve as transit subsidies
increase. Portland's light rail line is often cited as an
example of how transit has produced substantial improvements
in air quality since 1972. 55 Other factors are responsible
for the improvement in Portland's air quality. Since 1972
automobiles, which account for the overwhelming percentage
of travel in Portland (and virtually all other U.S. metro-
politan areas), have become 48 percent more energy efficient
on average, and the average new car has become 100 percent
more energy efficient. 56 Further, the average automobile
produces less pollution per gallon of gasoline today than it
did in 1972. In addition, the percentage of urban trips
taken by public transit in Portland was lower in 1989 than
in 1980.
Public buses have, on balance, had no favorable effect
on air pollution in U.S. cities. Because of low average
ridership, buses, on a per passenger basis, often contribute
to air pollution because bus emissions are much greater than
those of cars or taxis.
Even minute improvements in the fuel efficiency and
emission standards of automobiles, which are expected in
coming years, or an increase in the number of riders per car
would have much more effect on the environment than would
massive increases in expensive public transit service. 57
Increased energy efficiency and decreased air pollution
could be more efficiently and effectively achieved by the
use of high-occupancy-vehicle lanes, the automation of toll
collection to speed traffic, and other such reforms.
Myth no. 8: Urban Transit Reduces Traffic Congestion
Automobile users are said to benefit from public tran-
sit because it reduces congestion on roads and highways.
Indeed, that supposed external benefit to drivers is the
justification for using 1 cent of the federal gasoline tax
to pay for transit. (One proposal before the House of Rep-
resentatives would increase the gas tax to fund transit. A
portion of last year's federal gas tax is also to be appro-
priated for transit.) Yet the reduction in traffic conges-
tion resulting from increased transit subsidies is trivial,
even under a best-case scenario. For instance, if transit
ridership were doubled and the ridership gain came entirely
from drivers who left their cars to ride transit, the number
Page 18
of vehicle miles traveled by car would decline by less than
3 percent. 58
Again Portland serves as an example. The number of
automobile commuters who switched to light rail in Portland
was less than 0.5 percent of daily commuters in the metro-
politan area, 59 a percentage quickly nullified by the rate
of growth in employment. New light rail riders account for
less than two months' natural growth in total travel in the
metropolitan area. 60
Winning over even small numbers of riders from the
roads and highways to transit has proven to be prohibitively
expensive. It cost $9.22 to attract each new passenger ride
to Portland's light rail line and $28.23 per passenger ride
on the Atlanta system. Translated into cost per commuter
per year, the expense of diverting each commuter from an
automobile was $4,702 for the Portland line and $14,397 for
the Atlanta system. 61
Myth no. 9: Transit Subsidies Are Essential to the Mobility
of the Poor
Transit provides essential mobility to many of the
poor, but transit accounted for less than 7 percent of trips
made by low-income people in 1983. 62 The most pressing need
of the inner-city poor is transportation from the city to
suburban jobs for which they are qualified. Yet only 5
percent of the total "reverse commute" market is served by
public transit. From 1970 to 1980 transit's reverse commute
market share declined by 50 percent. [A federal program to
encourage entrepreneurs to provide reverse commute services
to the inner-city poor has encountered resistance and delay
as a result of transit unions' using their power under sec-
tion 13 (c). Many proposals have been abandoned; new propos-
als have been discouraged; and the poor continue to go un-
served. The increasingly dispersed nature of inner-city-
to-suburb trips renders conventional mass transit service
(large buses) unsuitable for that market in terms of both
travel time and financial feasibility.63
If public transit subsidies benefit anyone, they bene-
fit affluent suburbanites, not the poor. A Los Angeles
study determined that inner-city service, patronized largely
by the poor, received less than 22 cents in total operating
subsidy per passenger boarding, while express service, pa-
tronized largely by the affluent, received more than $1.18
per boarding. 64 A 1986 study showed that riders with in-
comes exceeding $50,000 per year received 50 percent more in
federal operating subsidies per transit trip than did low-
Page 19
income users of transit. The difference would have been
greater if capital figures had been included.
Some rail systems bypass areas with low-income resi-
dents. The Washington Metro, for example, does not go to
many high-density poor areas of the city, but it does ser-
vice the affluent surrounding suburbs. Most Metrorail rid-
ers--some 73 percent--earn $25,000 or more; 19 percent earn
$75,000 or more. 66
Improving Transit through Competition and Privatization
Clearly, inefficient, highly subsidized public transit
systems cannot deliver the socioeconomic benefits that have
been promised and hoped for. Federal subsidies have reward-
ed inefficiency and wasteful capital investment, while prop-
ping up transit monopolies that actually impede effective
alternatives to public transit. The unique patterns of
American urban and suburban development and our particular
social problems do not lend themselves to old European solu-
tions, which are being abandoned. To meet America's needs,
the following reforms are needed.
Eliminate Federal Subsidies
Federal transit subsidies have resulted in higher costs
than they have covered. Subsidies have resulted primarily
in a transfer of wealth from the taxpayers and the produc-
tive private sector to well-paid transit employees. At a
minimum, in the interest of equity and efficiency, section
13 (c) should be eliminated; transit workers should not con-
tinue to receive extraordinary compensation.
Federal subsidies increase the cost of transit. Feder-
al capital grants have generated a mad scramble among cities
to secure federal transit dollars to pay for new buses and
rail service. Often as little as 5 to 10 percent of the
investment is local money, 67 yet mayors and local transit
authorities have demonstrated repeatedly that to attract
"free" federal dollars, they will undertake massive capital
investments, even when ridership does not justify construc-
tion or purchase. The federal contribution to capital as-
sistance can be as high as 80 percent; nationally, the fed-
eral government funds 62 percent of total capital costs.6⁸
That federal contribution has had an undue influence on the
escalation of transit costs.
Many countries have recognized the cost distortion that
results from national subsidies and are reducing or elimi-
Page 20
nating them. Examples include Norway, New Zealand, the
United Kingdom, and the Soviet Union. Canada and Austra-
lia, with much higher per capita transit ridership, have
neither federal operating nor federal capital subsidies.
Costs are lower and investments are more effective when
subsidies are eliminated altogether, or at least are drawn
from a level of government closer to home. 70
Eliminate Barriers to Unsubsidized Private Service
In most cities only the transit monopoly is permitted
by law to provide public transit service. Where the private
market can operate without subsidy, it should be allowed to
do so. Turning to the private market does not require re-
turning to private monopolies and franchises, which are only
slightly better than public monopolies. It simply means
allowing the free market to provide unsubsidized service
where it can.
Private unsubsidized buses and vans currently are pro-
viding transit for people in New York and Miami. 71 A 1991
Wall Street Journal report found that private (sometimes
outlawed) vans are increasing their market share rapidly.
Transit officials estimate that more than 2,500
private transit vans now patrol New York City.
They seem to be everywhere in the boroughs of
Brooklyn and Queens, bearing names like "Knight-
Rider, " "Island Boy" and "Leo the People's
Friend. " The phenomenon seems to be spreading to
other cities with large Caribbean immigrant popu-
lations. In Miami, transit officials count 300
private vans, some even offering video tapes of
Spanish-language soap operas to entertain rid-
72
ers.
Vans and minibuses, which many people prefer to large
buses and which have been shown to expand ridership in some
areas, 73 could provide unsubsidized services in many high-
density areas, freeing subsidies to expand service in other
areas. Yet such service is outlawed in many cities, and the
public transit agencies jealously guard their monopoly stat-
us. Express service is also provided by the private sector
in some areas, but generally it too is prohibited.
Public transit spokesmen argue that private vehicles
"skim the cream" from profitable routes and increase the
deficits of transit agencies. But public transit costs are
so high that few if any routes cover their capital and oper-
ating costs. In other words, there is no cream to skim.
Moreover, the private sector pays taxes, not paid by the
Page 21
public sector, that can exceed the net revenue public tran-
sit can obtain from its best routes.
Opening the transit market to private vans and minibus-
es can provide an opportunity for the poor or near poor to
become entrepreneurs as it has done in South Africa. 74 The
cost of capital is relatively low. In time those private
operators could expand to multiple vehicles, or the experi-
ence and profits earned could lead to other profitable ven-
tures. Meanwhile, those entrepreneurs would be positive
role models for the entire community, provide employment and
a valuable service, and contribute to the tax base.
Adopt Competitive Contracting for Subsidized Transit
If political considerations mandate continued taxpayer
subsidies, public transit service should at least be pur-
chased through competitive contracting. Under that system
the public authority awards service contracts to responsive
and responsible operators who demonstrate an ability to
provide the specified quality and quantity of service for
the lowest price. The public authority retains policy con-
trol over the service, while the competitive market produces
the service under public scrutiny.
Public transit services are being converted to competi-
tive contracting in Sweden, Denmark, the United Kingdom, New
Zealand, Norway, and Finland. Competitively contracted
services in London carry as many passengers as the entire
Philadelphia rail and bus transit system. Competitive con-
tracting is used in the United States for most paratransit
(dial-a-ride) service and almost 8 percent of bus service.
Metropolitan areas such as Dallas, Los Angeles, Denver, St.
Louis, Cincinnati, San Diego, San Francisco, Seattle, Minne-
apolis, and Atlanta have achieved large cost savings through
competitive contracting of bus service. The extraordinarily
high costs of public transit in the United States have made
possible average cost savings of 30 percent. 75 There is
little reason, except vested public transit interests, not
to competitively contract for subsidized transit service.
Conclusion
The realities of public transit fall woefully short of
the myths. Transit is needed, but we can no longer afford
to imagine that conventional public transit can address the
complex problems of the changing American city. And we can
no longer support a monopoly system of public mass transit,
which has proven to be ineffective, inequitable, and unaf-
Page 22
fordable. Through incorporation of competition, America can
have efficient transit systems in every city--systems that
do improve the environment, lessen traffic congestion, re-
duce fuel consumption, and help the poor. And improved
transit can be provided at much less cost to the American
taxpayer.
Notes
1. Most larger public transit agencies pay for full-time
lobbyists in Washington as well as in the state capital, and
transit management also spends time lobbying. Most large
transit agencies have fully developed public affairs depart-
ments. In addition, the American Public Transit Association,
which is financially supported by most of the nation's transit
agencies, is involved in lobbying activity. Federal law pro-
hibits lobbying with federal moneys, so transit agencies use
state and local moneys and fares to finance lobbyists.
2. Like private-sector businesses, many public transit
agencies provide free parking for their employees. And
large transit agencies keep large fleets of cars for non-
emergency and nonsupervisory use by staff. Transit boards
and executives also use single-occupancy vehicles. Accord-
ing to the New York Daily News (June 2, 1991), New York
City's Metropolitan Transportation Authority board members
spent $200,000 in the past 12 months for chauffeured limou-
sines to travel to and from the MTA Madison Avenue offices.
The newspaper quoted the MTA first vice chairman, who gener-
ated $22,000 in overtime in the previous 16 months for his
personal driver: "public transportation can be slower and
more inconvenient than a car.' It should be noted that New
York City is the nation's most densely populated large city
and has by far the nation's most extensive transit system.
3. Alan E. Pisarski, Commuting in America: A National Re-
port on Commuting Patterns and Trends (Westport, Conn.: Eno
Foundation for Transportation, 1987).
4. National Urban Mass Transportation Statistics: Section
15 Annual Report (Washington: U.S. Department of Transporta-
tion, Urban Mass Transportation Administration, 1987).
5. Calculated from National Urban Mass Transportation Sta-
tistics: Section 15 Annual Report (Washington: U.S. Depart-
ment of Transportation, Urban Mass Transportation Adminis-
tration, 1986) ; and National Transportation Statistics,
(Washington: U.S. Department of Transportation, Transporta-
tion Systems Center, 1988).
Page 23
6. For an analysis of America's changing cities, see Joel
Garreau, Edge City: Life on the New Frontier (New York:
Doubleday, 1991).
7. Dieter Klinger and J. Richard Kuzmyak, Personal Travel
in the U.S., vol. 1, 1983-1984: Nationwide Personal Trans-
portation Study (Washington: U.S. Department of Transporta-
tion, Federal Highway Administration, 1986).
8. Data from National Urban Mass Transportation Statistics:
Section 15 Annual Report, various years; and Transit Operat-
ing and Financial Statistics (Washington: American Public
Transit Association, various years).
9. Urban Mass Transportation Act of 1964, 49 U.S.C. 1601 et
seq. A prior act, the Housing Act of 1961, authorized $75
million in aid to urban transit over three years.
10. Paul N. Tramontozzi and Kenneth Chilton, "The Federal
Free Ride: The Economics and Politics of U.S. Transit Poli-
cy," Center for the Study of American Business, Washington
University, St. Louis, October 1987.
11. Randall Fitzgerald, When Government Goes Private (New
York: Universe Books, 1988), p. 153.
12. "Transit Wins Big in House Bill," Congressional Quarter-
ly, July 13, 1991, p. 1889.
13. For a discussion of the various interest groups lining
up in favor of increased federal transit aid, see Kirk Vic-
tor, "Transit Turnaround," National Journal, August 31,
1991, pp. 17-20.
14. Calculated from Interstate Commerce Commission and Amer-
ican Bus Association data.
15. Calculated from Consumer Price Index Medical Care Compo-
nent.
16. Data from National Urban Mass Transportation Statistics:
Section 15 Annual Report, various years; and Transit Operat-
ing and Financial Statistics, various years.
17. Data from National Urban Mass Transportation Statistics:
Section 15 Annual Report, various years.
18. Ralph L. Stanley, administrator, Urban Mass Transporta-
tion Administration, Statement before the Subcommittee on
Appropriations, U.S. House of Representatives, April 9,
1986, pp. 3-4.
Page 24
19. Data from National Urban Mass Transportation Statistics:
Section 15 Annual Report, various years; and Transit Operat-
ing and Financial Statistics, various years.
20. Based on data from all public transit systems located
within the 39 metropolitan areas that reported both in 1980
and 1989 and all new systems reporting in 1989 (102 public
transit systems included in analysis).
21. Public transit figures are overstated--the figures in-
clude taxis, limousines, privately owned buses and vans, and
other unsubsidized services.
22. Klinger and Kuzmyak.
23. The Renaissance of Rail Transit in America (New York:
Regional Plan Association, 1991).
24. Data from National Urban Mass Transportation Statistics:
Section 15 Annual Report, various years.
25. Stephen Moore, "Rx for Urban Mass Transit: A Dose of
Competition," Heritage Foundation Backgrounder no. 542,
October 1986.
26. Pisarski.
27. Analysis of data from Jane's Urban Transport Systems,
ed. Chris Bushell (Coulsdon, Surrey, U.K.: Jane's Informa-
tion Group, 1991). Sample included 139 foreign systems.
28. European Conference of Ministers of Transport, Promoting
Regional Transport: Report of the Eighty-Second Round Table
on Transport Economics (Paris: ECMT, 1990).
29. See Wendell Cox and Jean Love, "International Experience
in Competitive Tendering," paper presented at Second Inter-
national Conference on Privatization and Deregulation in
Passenger Transport, Tampere, Finland, June 1991.
30. Perhaps the most successful investment in new transit
rail infrastructure has been in San Diego. Fares cover more
than 90 percent of the costs of operation for the first line
of the "San Diego Trolley." Constructed without federal
funding, that line was completed for a fraction of the costs
of comparable rail lines built with federal funding. That
performance far surpasses that of any other new rail invest-
ment.
Page 25
31. Urban Rail in America: Forecast versus Actual Ridership
and Costs (Cambridge, Mass.: U.S. Department of Transporta-
tion, Transportation Services Center, 1989).
32. Ibid.
33. "Police VS. the People Mover, Detroit News, April 15,
1988.
34. The Chicago Transit Authority provides a stark example
of the excessive compensation paid public transit workers.
The executive director of the CTA, who is not the most high-
ly paid transit administrator in the nation (the executive
directors of the Southeastern Pennsylvania Transit Authority
in Philadelphia and the Washington Metropolitan Area Transit
Authority that serves the nation's capital are paid roughly
$50,000 more per year), receives more pay than elected offi-
cials such as the governor of Illinois, the mayor of Chica-
go, and U.S. senators and representatives or appointed offi-
cials such as the Chicago police superintendent and fire
commissioner. The American Public Transit Association,
Transit Fact Book (Washington: APTA, 1988) ; Kim Nauer, "Pay
for City's Brass Matches Up with Peers, " Chicago Tribune,
October 15, 1990; Gary Washburn, "Gung-ho Chief Has CTA
Jumping," Chicago Tribune, August 5, 1990; Statistical Ab-
stract of the United States (Washington: U.S. Government
Printing Office, 1990).
35. Data from National Urban Mass Transportation Statistics,
Section 15 Annual Report (Washington: U.S. Department of
Transportation, Urban Mass Transportation Administration,
1988) and Statistical Abstract of the United States (Wash-
ington: Government Printing Office, 1990).
36. Ibid.
37. Kimberly J. McLarin, "SEPTA Approves Budget," Philadel-
phia Inquirer, June 27, 1991.
38. Benny Evangelista, "BART Ad Incenses Unions," Oakland
Tribune, July 18, 1991; and BART full-page ad: "Labor Nego-
tiations Status Report No. 1," Oakland Tribune, July 18,
1991.
39. Don Pickrell, The Causes of Rising Transit Operating
Deficits (Washington: U.S. Department of Transportation,
Urban Mass Transportation Administration, 1983).
40. The Status of the Nation's Local Mass Transportation:
Performance and Conditions, report to Congress (Washington:
Page 26
U.S. Department of Transportation, Urban Mass Transportation
Administration, 1988).
41. Calculated from data in Charles Lave, Measuring the
Decline in Transit Productivity in the U.S. (Thredbo, NSW,
Australia: International Conference on Competition and Own-
ership of Bus and Coach Services, 1989).
The transit industry dismisses declining public transit
labor productivity as a necessary consequence of increases
in rush hour service. See, for example, Elliott D. Sclar,
K. H. Schaeffer, and Robert Brandwein, The Emperor's New
Clothes: Transit Privatization and Public Policy (Washing-
ton: Economic Policy Institute, 1989). Lave, however, found
that rush hour service has not increased; it has declined by
15 percent in recent decades. Lave also reports that public
transit operating speeds have increased by 13 percent over
the same period. The drop in rush hour service and the
increase in operating speeds, of themselves, would have a
positive effect on labor productivity. Lave's findings
suggest that public transit productivity may have declined
even more than is suggested by the raw numbers.
42. Subhash R. Mundle, "Impact of Work Rules on Transit
Productivity and Costs, paper presented at the Urban Mass
Transportation Administration's Fourth Annual Symposium: The
Private Sector and Public Transit, March 1988.
43. Urban Mass Transportation Act of 1964, as amended, 49
U.S.C. 1601 et seq. Amendments include an extension of
section 13 (c) labor protection to cover federal operational
funding in addition to original provisions covering federal
capital funding.
44. Simon Rottenberg, "Protection of Employees in the Public
Acquisition and Operation of Urban Mass Transit," in Govern-
ment Protection of Employees Involved in Mergers and Acqui-
sitions, ed. Herbert R. Northrup and Philip A. Miscimarra
(Philadelphia: University of Pennsylvania, Wharton School,
1989) provides the most comprehensive examination of the
effects of section 13 (c).
45. Federal legislation created and enforces section 13 (c).
However, many transit agencies have signed a local version
of 13 (c) that is more stringent than the federal law. The
model 13 (c) agreement, developed jointly by the transit
unions and the American Public Transit Association in 1975,
specifies that disputes be settled by binding arbitration--
something not federally required. Although individual agen-
cies were not required to adopt that contract or its provi-
sions, many did to avoid lengthy contract negotiations.
Page 27
46. Urban Rail in America: Forecast versus Actual Ridership
and Costs.
47. Federal City Council, Transit in the Nation's Capital:
What Lies Ahead? (Washington: U.S. Department of Transpor-
tation, Urban Mass Transportation Administration, Technology
Sharing Program, 1986), p. 2.
48. "2 New Md. Stations Draw Fewer Riders Than Metro Expect-
ed," Washington Post, September 16, 1991, p. C1.
49. Metrobus and rail operating costs exceeded $509 million
in 1989; states and localities paid 90 percent of the total
subsidies of $240 million. The Washington system currently
is cutting service for lack of "adequate" subsidies.
50. National Urban Mass Transportation Statistics: Section
15 Annual Report, 1987.
51. Calculated from National Urban Mass Transportation Sta-
tistics: Section 15 Annual Report, 1986; and National Trans-
portation Statistics, 1988.
52. Data from the National Urban Mass Transportation Statis-
tics: Section 15 Annual Report, various years; and Transit
Operating and Financial Statistics, various years.
53. Data from National Urban Mass Transportation Statistics:
Section 15 Annual Report, various years.
54. Congressional Budget Office "Urban Transportation and
Energy: The Potential Savings from Different Modes, 1982,
p. 1.
55. The Renaissance of Rail Transit in America.
56. In 1972 the average automobile got 13.4 miles per gal-
lon; by 1988 that figure had improved to 20.0 miles per
gallon. The average new car achieved 14.4 miles per gallon
in 1972 and 28.8 miles per gallon in 1988. Data from Na-
tional Transportation Statistics Annual Report (Washington:
U.S. Department of Transportation, Research and Special
Programs Administration, Transportation Systems Center,
1990).
57. Lave.
58. Alan Altshuler, The Urban Transportation System (Cam-
bridge, Mass.: MIT Press, 1979).
59. Ibid.
Page 28
60. Calculations based on the 1980 to 1990 population growth
rate and the national average of daily trips per person in
metropolitan areas of similar size as of 1983 given by
Klinger and Kuzmyak.
61. Calculated from data in Klinger and Kuzmyak.
62. Klinger and Kuzmyak.
63. The Status of the Nation's Local Mass Transportation:
Performance and Conditions, p. 58.
64. Wendell Cox, "Distribution of Operating Subsidies in Los
Angeles County, Transportation Research Record 877 (Wash-
ington: National Research Council, Transportation Research
Board, 1983).
65. Charles River Associates, Allocation of Federal Transit
Operating Subsidies to Riders by Income Group, cited in The
Status of the Nation's Local Mass Transportation: Perfor-
mance and Conditions.
66. Martin Tolchin, "Transit Aid Called No Help for Poor, " New
York Times, March 9, 1987.
67. States also provide capital funds, although at a lower
rate than the federal government. The combined state and
federal contribution often covers nearly all of the construc-
tion--or the proposed cost of construction--of rail and other
capital projects and purchases. St. Louis provided an in-kind
match so that the federal government is expected to provide
the entire cost of planning and building a new light rail
system.
68. Federal formula capital grants provide 80 percent of the
total funding of a project up to the limit set by the formu-
la; the remainder of the funding comes from state, city, or
regional funds or from fares. Federal discretionary capital
grants provide 75 percent. Federal grants no longer cover
cost overruns; and because states and localities often pro-
vide capital assistance in excess of match requirements as
well as fund cost overruns, the level of federal assistance
for capital is sometimes less than the permissible statutory
limits.
69. "Congress Bucks Privatization Trend, " Transit Times (Wash-
ington: American Bus Association, September/October 1991).
70. William F. Shughart and Mwangi Kimenyi, Public Choice,
Public Subsidies, and Public Transit (Washington: U.S. Depart-
Page 29
ment of Transportation, Urban Mass Transportation Administra-
tion, Office of Private Sector Initiatives, February 1991).
71. E. S. Savas, Sigurd Grava, Jeffrey A. Parker, and Roy
Sparrow, The Private Sector in Public Transportation in New
York City (New York: City University of New York, Institute
for Transportation Systems, 1991), prepared for the U.S. De-
partment of Transportation, Urban Mass Transportation Admin-
istration; Daniel Machalaba, "Opportunistic Vans Are Running
Circles around City Buses, Wall Street Journal, July 24,
1991; Dan Holly, "It's Metro vs Minis in the Battle of Bus-
es," Miami Herald, May 4, 1991.
In Miami last year minibuses began to operate several
transit routes for a lower fare when a change in the law
created a loophole. The minibuses garnered 20,000 passen-
gers a month according to the transit agency. The law has
since been changed--as a result of pressure from the public
transit agency--to prohibit the entry of new private compa-
nies and expansion of routes, but companies already operat-
ing were "grandfathered in. Metro, the public transit
agency, recently has reduced its fares (incurring huge defi-
cits) on one of its routes to drive the unsubsidized company
from the market.
In New York private vans illegally divert nearly $30
million a year from the transit agency. Private vans oper-
ate their unsubsidized service for a lower fare than the
transit agency.
72. Machalaba.
73. H. D. Blundred, "Barriers to Market Entry: Practical
Experience of the UK Bus Market, " paper presented at Second
International Conference on Privatization and Deregulation
in Passenger Transport, Tampere, Finland, June 1991.
74. "Congress Bucks Privatization Trend."
75. Roger F. Teal, "Transit Service Contracting: Experiences
and Issues,' paper presented at the Annual Meeting of the
Transportation Research Broad, Washington, January 1985,
p. 3. See also Cox and Love, "International Experience";
Private Sector Briefs: Private Sector Involvement in Public
Transportation (Washington: U.S. Department of Transporta-
tion, Urban Mass Transportation Administration, Office of
Private Sector Initiatives, July 30, 1988 and 1990) i Wendell
Cox and Jean Love, Designing Competitive Tendering Systems
for the Public Good: A Review of the US Experience (Thredbo,
NSW, Australia: International Conference on Competition and
Ownership of Bus and Coach Services, May 1989).
OTHER STUDIES IN THE POLICY ANALYSIS SERIES
161. Contrived Distinctions: The Doctrine of Commercial Speech
in First Amendment Jurisprudence by Jonathan W. Emord
(September 23, 1991)
160. Sweden: From Capitalist Success to Welfare-State Sclerosis
by Peter Stein (September 10, 1991)
159. "Ancient History": U.S. Conduct in the Middle East since
World War II and the Folly of Intervention by Sheldon L.
Richman (August 16, 1991)
158. The Americans with Disabilities Act: Time for Amendments by
Robert P. O'Quinn (August 9, 1991)
157. Alcohol Prohibition Was a Failure by Mark Thornton (July
17, 1991)
156. The Drug War vs. Land Reform in Peru by Melanie Tammen
(July 10, 1991)
155. Only Freedom of Education Can Solve America's Bureaucratic
Crisis of Education by Jack D. Douglas (June 17, 1991)
154. Extricating America from Its Middle Eastern Entanglement
by Leon T. Hadar (June 12, 1991)
153. When Business "Adopts" Schools: Spare the Rod, Spoil the
Child by John Hood (June 5, 1991)
152. State Spending Splurge: The Real Story behind the Fiscal
Crisis in State Government by Stephen Moore (May 23, 1991)
151. The Poison of Professional Politics by Mark P. Petracca
(May 10, 1991)
150. Intelsat and the Separate System Policy: Toward Competitive
International Telecommunications by Milton Mueller (March
21, 1991)
149. Judging the 1991 Reform Effort: Do U.S. Banks Have a
Future? by Catherine England (March 12, 1991)
148. How Rising Tax Burdens Can Produce Recession by William C.
Dunkelberg and John Skorburg (February 21, 1991)
147. The Profligate President: A Midterm Review of Bush's Fiscal
Policy by Stephen Moore (February 4, 1991)
146. Slower Is Better: The New Postal Service by James Bovard
(February 1, 1991)
145. What Now for U.S. Energy Policy? A Free-Market Perspective
by Robert L. Bradley, Jr. (January 29, 1991)
144. Long-Term Care: Why a New Entitlement Program Would Be
Wrong by Peter J. Ferrara (December 13, 1990)
143. Why Trade Retaliation Closes Markets and Impoverishes
People by Jim Powell (November 30, 1990)
142. Arabian Nightmares: Washington's Persian Gulf Entanglement
by Christopher Layne and Ted Galen Carpenter (November 9,
1990)
141. Term Limitation: An Idea Whose Time Has Come by John H.
Fund (October 30, 1990)
140. The Collision Course on Textile Quotas by Thomas Grennes
(September 12, 1990)
139. Aiding Eastern Europe: The Leveraged Harm of "Leveraged
Aid" by Melanie S. Tammen (September 10, 1990)
138. The Perils of Managed Trade by Susan W. Liebeler and
Michael S. Knoll (August 29, 1990)
137. Subsidies to the Arts: Cultivating Mediocrity by Bill
Kauffman (August 8, 1990)
136. Uncle Sam, Rock 'n' Roll, and Higher Education by Charles
J. Sykes (July 25, 1990)
135. Farm Bill Follies of 1990 by James Bovard (July 12, 1990)
134. The Illusion of Power: Aircraft Carriers and U.S. Military
Strategy by David Isenberg (June 8, 1990)
133. Perestroika and the Soviet Military: Implications for U.S.
Policy by Edward A. Corcoran (May 29, 1990)
132. Housing Policy in New York: Myth and Reality by Cassandra
Chrones Moore (April 4, 1990)
131. JTPA: Another Federal Training Fraud by James Bovard
(March 27, 1990)
130. National Service: The Enduring Panacea by Doug Bandow
(March 22, 1990)
129. Cut the Social Security Payroll Tax by Daniel J. Mitchell
(March 8, 1990)
128. Perilous Panacea: The Military in the Drug War by Ted
Galen Carpenter and R. Channing Rouse (February 15, 1990)
127. The Source of America's Housing Problem: Look in Your Own
Back Yard by William Tucker (February 6, 1990)
126. Education: Is America Spending Too Much? by John Hood
(January 18, 1990)
125. Creating a U.S. Policy of Constructive Disengagement in
the Middle East by Leon T. Hadar (December 29, 1989)
124. Economic Sanctions: Foreign Policy Levers or Signals? by
Joseph G. Gavin III (November 7, 1989)
123. The Promise of High-Definition Television: The Hype and
the Reality by Thomas Gale Moore (August 30, 1989)
122. The Farm Credit Quagmire by James Bovard (July 27, 1989)
121. Thinking about Drug Legalization by James Ostrowski (May
25, 1989)
120. Debt, Leveraged Buyouts, and Corporate Governance by Barry
E. Adler and Larry E. Ribstein (May 2, 1989)
119. Sequestration: Gramm-Rudman's Potent Weapon for Spending
Restraint by Daniel J. Mitchell (April 24, 1989)
118. The Pitfalls of U.S. Covert Operations by David Isenberg
(April 7, 1989)
117. Gorbachev and Glasnost--A New Soviet Order? Implications
for U.S. Foreign Policy by Thomas M. Magstadt (March 20,
1989)
116. To Reduce Military Tensions in Europe, Ban Conscription by
Stanley Kober (March 10, 1989)
115. Abolish Medicare Taxes on the Elderly by Peter J. Ferrara
(January 25, 1989)
114. U.S. Military Spending in the Cold War Era: Opportunity
Costs, Foreign Crises, and Domestic Constraints by Robert
Higgs (November 30, 1988)
98. Railroad Reregulation: Is the C.U.R.E. Cure Worse Than the
Disease? by Robert B. Ekelund, Jr., and Robert E. Hébert
(January 20, 1988)
84. The Disunited States: A Country in Search of an Efficient
Transportation Policy by Robert V. Delaney (March 10, 1987)
Published by the Cato Institute, Policy Analysis is a regular
Contact the Cato Institute for reprint permission. Additional
series evaluating government policies and offering proposals
copies of Policy Analysis are $4.00 each ($2.00 each for five or
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INSTITUTE
Policy No. 164
November Analysis 1,
Routing
THE MYTH OF FAIR TRADE
by James Bovard
Americans' freedom and prosperity are being sacrificed
on the altar of fair trade. Each year protectionists discov-
er new moral pretexts for further restricting how American
citizens may spend their paychecks. Fair trade is a moral
delusion that could be leading to an economic catastrophe.
Unfortunately, the louder politicians have demanded fair
trade, the more U.S. trade policies have become a travesty of
fairness. The U.S. government has created a trade lynch law
that can convict foreign companies almost regardless of how
they operate. Between 1980 and 1989, the U.S. Commerce De-
partment found only 5 percent of the foreign companies it in-
vestigated not guilty of dumping.¹ Two thousand foreign com-
panies have been penalized since 1980 for selling their prod-
ucts to Americans at prices lower than those approved by the
U.S. government.
When politicians call for fair trade with foreigners,
they routinely use a concept of fairness that is diametri-
cally opposed to the word's normal meaning. In exchanges
between individuals--in contract law--the traditional test of
fairness is the voluntary consent of each party to the bar-
gain: "the free will which constitutes fair exchanges, " as
Sen. John Taylor wrote in 1822.² When modern politicians
speak of unfair trade, they do not mean that buyers and sell-
ers did not voluntarily agree but that federal officials
disapprove of the bargains American citizens chose to make.
Fair trade, as the term is now used, usually means government
intervention to direct, control, or restrict trade. Fair
trade means government officials decide what Americans should
be allowed to buy and what prices they should be forced to
pay. Fair trade is paternalism in international commerce.
James Bovard is a Cato Institute associate policy analyst and the
CATO
author of The Fair Trade Fraud (St. Martin's Press, October 1991).
INSTITUTE
224 Second Street. S.E.
Washington, D.C. 20003
Page 2
Fair trade often means that some politician or bureau-
crat picks a number out of thin air and imposes it on for-
eign businesses and American consumers. Fair trade means
that Jamaica is allowed to sell the United States only 970
gallons of ice cream a year, that Mexico is allowed to sell
Americans only 35,292 bras a year, that Poland is allowed to
ship us only 350 tons of alloy tool steel, that Haiti is
allowed to sell the United States only 8,030 tons of sugar. 3
Fair trade means permitting each American citizen to consume
the equivalent of only one teaspoon of foreign ice cream,
two foreign peanuts, and one pound of imported cheese per
year. Fair trade means the U.S. government imposes import
quotas on tampons, typing ribbons, tents, twine, table lin-
en, tapestries, and ties. Fair trade means that the U.S.
Congress can impose more than 8,000 different taxes on im-
ports, with tariffs as high as 458 percent. 4
In practice, fair trade means protectionism. Yet every
trade barrier undermines the productivity of capital and
labor throughout the economy. A 1979 Treasury Department
study estimated that trade barriers routinely cost American
consumers 8 to 10 times as much as they benefit American
producers. 5 A 1984 Federal Trade Commission study estimated
that tariffs cost the American economy $81 for every $1 of
adjustment cost saved. 6 Restrictions on clothing and tex-
tile imports cost consumers $1 for each 1 cent of increased
earnings of American textile and clothing workers.⁷ Accord-
ing to the Institute for International Economics, trade
barriers are costing American consumers $80 billion a year--
or more than $1,200 per family. 8
We will examine the U.S. anti-dumping law, U.S. coun-
tervailing duty law, U.S. retaliations against alleged for-
eign unfair trade barriers, and the moral essence of fair
trade.
The "Dumping" Myth
Economic xenophobia is the core of the U.S. anti-dump-
ing law. The Commerce Department acts as if every sale of a
foreign product at a low price is a Trojan Horse--an insidi-
ous attempt to undermine the American economy. While Ameri-
can politicians lecture the world on fair trade, our anti-
dumping laws are an inquisitorial nightmare for foreign
companies, a mockery of due process and justice.9
Dumping occurs when a company charges a lower price for
a product in an export market than in its home market. Dif-
ferential pricing according to demand and market conditions
is a normal business practice, yet the U.S. government con-
Page 3
siders it highly pernicious when done by foreign companies
exporting to the United States.
Dumping has long been portrayed as a serious threat to
the American economy. A 1921 House of Representatives re-
port warned against "a now common species of commercial
warfare of dumping goods on our markets at less than cost or
home value if necessary until our industries are de-
stroyed. 110 The Senate Judiciary Committee warned in 1986
that "the unlawful dumping of foreign goods
has become
a serious threat to American industries. ⑉11 In 1989 a fed-
eral judge characterized dumping as inherently "predatory"
and declared that dumping involves an element of "wrong-
doing.
U.S. anti-dumping practices routinely expel foreign
corporations from the U.S. market as punishment for normal
business practices. The anti-dumping law forces foreign
companies to run a nearly endless gauntlet of American bu-
reaucrats. A more perceptive federal judge concluded that
the anti-dumping law allowed American companies to conduct
"economic war" against their foreign competitors. 13
While many people consider dumping an arcane subject,
penalties for dumping have forced Americans to pay more for
photo albums, pears, mirrors, ethanol, cement, shock absorb-
ers, roofing shingles, codfish, televisions, paint brushes,
cookware, motorcycle batteries, bicycles, martial art uni-
forms, computers and computer disks, telephone systems,
forklifts, radios, flowers, aspirin, staplers and staples,
paving equipment, fireplace mesh panels, dry cleaning, and
many other things. Anti-dumping laws increasingly prevent
American businesses from obtaining vital foreign supplies
and machinery. Commerce Department officials now effective-
ly have direct veto power over the pricing policies of thou-
sands of foreign companies. Anti-dumping law constitutes
potential political price controls over almost $500 billion
in imports a year.
Anti-dumping law exists to prevent foreign companies
from selling goods in the United States at "less than fair
value. " What is less than fair value? The Commerce Depart-
ment's creative definitions would challenge even a medieval
scholastic. Technically, "less than fair value" means sell-
ing a good in the United States for less than its price in
the foreign home market or for less than its cost of produc-
tion plus a large profit. Commerce Department regulations
state, "Fair value
is an estimate of foreign market
value. 114
Page 4
The "crime" of dumping results solely from applying
different tests of fairness to U.S. and foreign prices.
The Treasury Department, in a 1957 report on dumping, de-
fined "fair value" for foreign prices: "the word 'fair' as
used here simply means what one ordinarily conceives of as
the 'fair market' value--what a willing buyer will pay a
willing seller. 115 But U.S. anti-dumping law rejects volun-
tary agreement as the measure of fairness of U.S. prices for
imported products. The U.S. price of an imported product is
"fair," not according to whether a foreign seller and Ameri-
can buyer voluntarily agree, but according to whether the
foreign company can pass dozens of arbitrary tests imposed
by the U.S. government.
Commerce convicted a Brazilian company for selling its
frozen concentrated orange juice for 1.96 percent less than
fair price. 16 The United States has a 40 percent tariff on
orange juice, so Commerce subtracted 40 percent from the
Brazilian company's U.S. sale price before comparing it with
the Brazilian price. The Brazilian government imposes a 3.5
percent export tax on orange juice, and shipping and insur-
ance costs probably added at least another 2 or 3 percent.
Thus, Brazil was selling orange juice for at least 45 per-
cent more in the United States than in Brazil. But the
Commerce Department still considered the U.S. price unfairly
low.
Anti-dumping laws are a relic of the days of fixed ex-
change rates. Commerce will convict a foreign company for a
price difference as small 0.5 percent between its U.S. and
foreign prices. Yet the dollar routinely fluctuates 10 or
15 percent or more in value annually. 17 Naturally, the num-
ber of dumping convictions has soared as exchange rates have
become more volatile.
Commerce officials have used the capricious rules on
exchange rates to encourage American companies to file anti-
dumping cases against foreign competitors. In early 1988
the newsletter Inside U.S. Trade reported: "The Commerce
Department is trying to cajole industries into filing dump-
ing cases against Japanese imports for products that it
feels are being sold at prices that do not sufficiently
reflect the recent appreciation of the Japanese yen, accord-
ing to many sources including Commerce officials. Commerce
has been unofficially compiling a list of products suspected
of being dumped by Japanese companies. 18 One Commerce of-
ficial declared that the agency was "trying to force Japa-
nese concessions on contentious trade issues--such as re-
strictive bidding on construction projects and agricultural
quotas--by 'creating an anti-Japanese climate. 1119
Page 5
Commerce sometimes penalizes foreign companies for
selling different products for different prices. In 1984 an
Italian company was convicted of having a less-than-fair-
value margin of 1.16 percent on its sales of pads for wood-
wind instruments. Commerce compared the price of a smaller
woodwind pad sold in the United States with that of a larger
woodwind pad sold in Italy. Since the smaller pad sold for
less than the larger pad, the Italian company was dumping. 20
In a brief defending its action to the Court of Internation-
al Trade, the U.S. government admitted that it had not com-
pared the sales price of identically sized pads--and then
claimed that Commerce has unlimited discretion to accept or
deny comparisons of that sort. 21
In a Japanese TV case, one company had its dumping mar-
gins increased because it donated unsold television sets to
charity. Commerce assessed the firm as if the television
sets had been "sold" for $0 in the U.S. market--the ultimate
act of unfair trade. 22 Companies have also received higher
dumping margins for selling TVs to employees at a large dis-
count and for selling damaged or defective televisions at a
markdown.
23
In the case of stainless steel products from the Swed-
ish company Avesta, Commerce compared sale prices of small
quantities of steel sold in Sweden with the prices of large
quantities of steel sold in the United States. As Avesta's
brief noted, "Over two-thirds of the sales in Sweden were
for quantities less than 500 kilograms, and the average
price of these sales is over 22 percent greater than the
average price for sales with total order quantities between
501 and 5,000 kilograms, and over 60 percent greater than
the average price of sales with total order quantities over
5,000 kilograms. 1124 Because Avesta sold ,000-kilogram
quantities for lower prices than 500-kilogram quantities, it
was acting unfairly. 25
U.S. anti-dumping law also imposes a cost-of-production
test on foreign companies. If a foreign company is not
making an 8 percent profit on its exports, the Commerce
Department automatically penalizes the company for selling
at a loss. The 8 percent assumption is totally arbitrary
and extremely biased against foreign companies. The Inter-
national Trade Commission reported that average "profits
before income taxes for all U.S. corporations in 1986 were 6
percent of sales. 1126 Thirteen of the 15 largest companies
in the Fortune 500 failed the 8 percent profit test in
1989. 27
Cost-of-production analyses tend to be sinkholes of
quibbles and capricious judgments. Commerce usually con-
Page 6
siders only the cost of production during the six-month
period in which it is examining the foreign company's U.S.
sales. A major issue in a case involving Canadian raspber-
ries was how to amortize the cost of a raspberry plant--
whether 10, 15, or 25 years was the proper time frame. 28 In
one cost-of-production analysis, Commerce included the ex-
penses Suzuki incurred in defending itself before the U.S.
Consumer Product Safety Commission on charges that its all-
terrain vehicles were unsafe. 29 In a 1990 sweater investi-
gation, Commerce penalized two Korean firms for making dona-
tions to local charities, claiming that the unrelated dona-
tions were part of the cost of making sweaters and should
have been reflected in higher sweater prices. 30
Commerce effectively wrecked the exports of hundreds of
Taiwanese sweater companies because a few small Taiwanese
companies could not quickly respond to Commerce's massive
information requests. Commerce sent the Taiwanese firms a
100-page single-spaced questionnaire in English; the average
Taiwanese firm was commanded to quickly provide over 200,000
bits of information. Commerce conceded in its Federal Reg-
ister notice that "none of the investigated [Taiwanese]
companies refused to provide the information requested,
refused verification, or otherwise significantly impeded the
Department's investigation. 1131 The management of one Tai-
wanese sweater company consisted of the owner and his wife.
Commerce imposed punitive duties on the company, declaring
that "lack of manpower" to answer the questionnaire was no
excuse. Commerce imposed punitive duties on another Taiwan-
ese company largely because the company's factory had burned
down and it had lost many of its records. Since the United
States also imposes a 34 percent tariff on the sweaters,
hundreds of Taiwanese sweater companies are effectively
locked out of the U.S. market.
Every dumping duty is an attempt to create an artifi-
cial scarcity, to deter foreign companies from exporting,
and to decrease the supply of goods on the American market
in order to allow American companies to charge higher
prices. Politicians measure the success of the anti-dumping
law by the number of foreign companies that are banned from
the U.S. market or are forced to sharply raise their prices
here. Sen. Arlen Specter (R-Pa.) declared at a 1986 Senate
Finance Committee hearing on the administration of the anti-
dumping laws: "I am not looking for more people to collect
damages from, frankly, I am trying to stop the [foreign]
goods from coming in. 1132
The anti-dumping law turns foreign companies into eco-
nomic lepers. Perpetual jeopardy is the natural condition
of companies under anti-dumping orders. Although a company
Page 7
may be complacent with a 1.93 percent margin established in
an initial dumping investigation, Commerce can raise the
dumping margin to 92 percent with only a short notice in the
Federal Register. 33 An anti-dumping order can easily torpe-
do a foreign company's exports to the United States.
Federal officials have bragged about the chilling ef-
fect of anti-dumping laws. Deputy Assistant Secretary of
Commerce Gilbert Kaplan told the Senate Finance Committee in
1986: "The minute a case is filed, an importer or a customer
faces an undetermined liability, an undetermined price basi-
cally, for items, for an indeterminate period of time, into
the future.
If you are a purchaser, you have to think
very long and hard before buying from an exporter given that
undetermined liability that you are going to face for quite
a number of years. 1134 Secretary of Commerce Malcolm
Baldrige declared in 1986: "The [dumping] penalty is actual-
ly applied to the U.S. importer, but it means that if he's
got to pay that penalty, he just ain't going to import any
more. That's the stick that you're looking for. 1135 The
anti-dumping law provides a way for Commerce to beat up on
American companies that import foreign products.
Commerce officials are sometimes quite candid about
their biases. In a 1991 speech, Marjorie Chorlins, deputy
assistant secretary of Commerce for import administration,
thanked the American Wire Producers Association for their
frequent use of the anti-dumping law against wire imports
and declared, "The partnership which the AWPA and Import Ad-
ministration have enjoyed over the past ten years has been
active and rewarding. 1136 In 1989 Secretary of Commerce Rob-
ert Mosbacher described himself as "the advocate for U.S.
business in the [Bush] Administration. 1137 Mosbacher is the
highest "judge" in the Commerce Department in dumping cases.
Since the judge has proudly declared his bias in favor of
U.S. businesses, it is not surprising that anti-dumping
proceedings are often a kangaroo court.
The basic premise of anti-dumping law-that it is a
crime for a company to sell the same product for two differ-
ent prices in two different markets 15,000 miles apart--is
an economic absurdity. Price differentials usually prove
nothing except that prices are different. If a businessman
sells ice cream to Eskimos and to people on a tropical is-
land--and the people on the tropical island willingly pay
more--does that mean the businessman is unfairly dumping ice
cream on the Eskimos because he is selling it to them at a
lower price? Are the Eskimos harmed by the price differen-
tial between the arctic and the tropics?
Page 8
Although fear of predatory pricing was the fount of the
U.S. anti-dumping law, the list of products that have been
hit with dumping duties makes a mockery of the predatory
argument. Did Washington bureaucrats really believe in 1972
that Canadian companies were conspiring to dump ice cream
sandwich wafers in the United States to destroy their Ameri-
can competition? And what good would it have done to cor-
ner the ice cream sandwich wafer market anyhow? If the
Canadians had obliterated their U.S. competition and tripled
the price of ice cream sandwich wafers, Americans would
simply have bought more ice cream cones and fewer ice cream
sandwiches.
The Specter of Foreign Subsidies
U.S. trade policy appears to assume that every handout
given to a foreign business is automatically a stab in the
back of a competing American corporation. Foreign subsidies
have long been a prime hobgoblin of American protectionists.
Rep. Thomas Hartnett (R-S.C.) warned in 1986 that "foreign
governments, through the introduction of subsidies, rebates,
and other economic incentives have made fair competition an
impossibility.'
The United States imposes countervailing duties on im-
ported products that allegedly received foreign government
subsidies. The CVD is supposed to insulate the United
States from the effect of a foreign subsidy, thereby pre-
venting foreigners from cornering the American market. The
U.S. government does not hesitate to penalize foreign compa-
nies even when it is providing larger subsidies to competing
American firms.
U.S. CVD policy presumes that regardless of how large a
benefit foreign subsidies provide to American consumers, the
subsidies must be penalized. CVDs have boosted prices Amer-
icans pay for wool, steel, ham, castor oil, cotton yarn, or-
ange juice, scissors, carnations, sugar, pistachios, roses,
auto glass, cement, leather apparel, cookware, lamb meat,
shop towels, agricultural tools, footwear, ball bearings,
rice, and aspirin. Disputes over foreign subsidies have
greatly antagonized our trading partners.
American CVD law effectively hangs a sign at the U.S.
border warning foreign companies: "Nonvirgins need not ap-
ply. " But the U.S. government is constantly amending its
definition of "virginity. " While governments disagree about
whether subsidies are good or evil, no other government in
the world has such an expansive definition of subsidies as
does the U.S. government. Over time, the administration of
Page 9
U.S. CVD laws has become increasingly protectionist, arbi-
trary, and divorced from economic rationality.
In April 1986 Commerce imposed a 0.82 percent surtax on
Thai rice imports. Commerce, after an exhaustive investiga-
tion, concluded that a Thai government price support program
provided a subsidy equal to 0.004 percent of the value of
Thai rice exports to the United States, a government cooper-
ative assistance program provided a 0.09 percent subsidy, a
mortgage program provided a 0.02 percent subsidy, discounts
to rice millers provided a 0.01 percent subsidy, and so
on.40 While the Thai government was providing a trickle of
aid to Thai farmers, it was also imposing export taxes on
rice. The U.S. Department of Agriculture, in an unrelated
study, concluded that, after subtracting the amounts spent
on credit, fertilizer, and marketing assistance from the
export taxes, Thai government policies imposed a net 5 per-
cent tax on rice production in 1985.41
At the same time the U.S. Department of Commerce was
nickel-and-diming Thai rice growers, the U.S. Department of
Agriculture was bankrupting them. The U.S. government spent
$2 billion in 1986 to flood international markets with Ameri-
can rice, driving down the world rice price by 50 percent.
The Thai rice program spent less than $100 for each Thai
rice grower, while the U.S. program spent the equivalent of
over $1 million for each full-time American rice grower
between 1985 and 1990. 42 Thailand's average per capita in-
come is $860, while the average American full-time.rice
grower was a millionaire even before receiving lavish subsi-
dies in the mid and late 1980s. 43
In 1983 the United States imposed a CVD on Argentine
wool.
44 Commerce justified the penalty on the grounds that
the Argentine government, through a regional development
program, paid a bonus of 6 percent for products exported
from Argentina's southern ports. (The United States has a
similar program: the Appalachian Regional Commission, which
has given billions of dollars in grants and loans to busi-
nesses in that region.) While Argentine sheep producers
were allegedly receiving a 6 percent subsidy, the Argentine
government was also imposing a 17 percent tax on wool ex-
ports. Commerce disregarded the export tax because "the
export taxes and duties and the [export subsidy] programs
were enacted under separate laws. 1145 In the same year that
Commerce began penalizing Argentine wool growers for receiv-
ing a 6 percent subsidy, the U.S. Department of Agricul-
ture's wool program gave American wool growers direct pay-
ments equal to 150 percent of the value of their wool. 46
Page 10
In 1990 Commerce imposed a 14.17 percent surtax on
Argentine leather imports because the Argentine government
had banned the export of cattle hides in 1985. 47 (The
United States imposed a similar ban on the export of hides
in 1966.) Commerce alleged that the export ban on Argentine
cattle hides was equivalent to a direct subsidy to the Ar-
gentine leather-tanning industry. Commerce created a simple
test of the fairness of Argentine prices: "the best measure
we have of what [Argentine] prices would have been in the
absence of the current embargo is a benchmark based on U.S.
hide prices. 1148 The fact that U.S. hide prices were higher
than Argentine prices in the years 1985-89 proved that the
Argentine leather producers were subsidized. But in the
late 1980s Argentina suffered from hyperinflation, massive
currency devaluations, a deterioration in the quality of
cattle hides, and government policies that severely dis-
rupted the economy and exchange rates. Commerce disregarded
all those factors in judging Argentine prices by U.S.
prices.
In some cases foreign companies and governments must
spend more defending themselves than the total amount of the
alleged subsidy. In January 1990 Commerce issued a prelimi-
nary determination alleging that a Singapore government re-
search contract provided a subsidy to a Singapore software
manufacturer. 49 Commerce claimed a subsidy existed because
Commerce's contrived estimate of the Singapore government's
future revenues from the research results was $42,891.57
less than the amount the Singapore government paid the pri-
vate firm to do the research. In the final determination,
Commerce conceded that no subsidies existed. Commerce's
investigation cost the Singapore government and the software
company over $170,000--almost four times the amount of the
alleged subsidy. 50 Commerce's lengthy investigation of a
Singapore software firm for allegedly receiving a $42,891
subsidy showed true chutzpah, as the U.S. government, a few
months before Commerce's investigation began, committed $100
million to SEMATECH, a U.S. public-private semiconductor
research consortium.
A major goal of CVDs is to force foreign governments to
end their subsidies and play fair. But even when foreign
governments reduce or abolish their subsidies, Commerce
still routinely refuses to abolish the CVDs. Commerce also
refuses to repeal CVDs levied on companies that can prove
that they do not receive government subsidies. Leonard
Shambon, the chief of the Compliance Division, which over-
sees CVD orders, observed in 1987, "In the area of counter-
vailing duties, the actual prospects for receiving a revoca-
tion because of the elimination of subsidies are dim, if not
Page 11
nonexistent. 1152 There were no revocations of CVD penalties
between April 1981 and June 1987 53
Protectionists often justify CVDs by warning that for-
eign governments must be penalized or they will monopolize
the American market. If we look at the list of nations cur-
rently hit with CVDs, we see that the vast majority are
Third World nations--countries that are unable to pay their
own bills, much less take over the world. Of the 76 current
CVD orders, 8 are against Argentina, 7 are against Brazil,
10 are against Mexico, 5 are against Peru, 2 are against
Venezuela, 1 is against Zimbabwe, 1 is against Ecuador, and
2 are against Iran. 54 Almost half of all CVD actions have
been against nations that have effectively defaulted on
their foreign debt--not exactly a sign of imminent economic
hegemony. Despite the widespread perception that Japan
heavily subsidizes its industry, there are no CVD orders
against Japanese products.
The effect of foreign subsidies on exports is usually
far less than the effect of gyrations of currency exchange
rates. Though business subsidies, as are every other type
of misguided government intervention, are pervasive in Latin
America, they are dwarfed by changes in the exchange rate.
The average CVD on Argentine exports was 5 percent, and the
Argentine exchange rate fluctuated 244 percent between 1980
and 1987. The average Brazilian CVD was 12 percent, and the
Brazilian exchange rate fluctuated 135 percent. For Chile,
the average CVD was 12 percent, and exchange values fluc-
tuated 223 percent; for Colombia, the values fluctuated 7
and 189 percent; for Costa Rica, 17 and 152 percent; for
Mexico, 10 and 204 percent; and for Peru, 25 and 131 per-
cent.
55
Countervailing duty laws are premised on the idea that
even minimal subsidies from a government are "magic beans"
that enable a company to grow into the sky and conquer the
world--that government aid is a steroid that vastly in-
creases the strength of a foreign company. But the history
of government subsidies is one of burning money almost as
fast as tax collectors can scoop it up. Export subsidies
are usually artillery shells that explode in the face of the
nation that fires them.
International disputes over subsidies resemble a couple
of drunks lying in a gutter, each accusing the other of
overimbibing. While the U.S. government calculates foreign
subsidies out to the millionth of a percentage point, it
pours tens of billions into the coffers of American busi-
ness. During the 1980s, when the Commerce Department
launched over 300 CVD investigations of foreign firms, U.S.
Page 12
government policy provided $260 billion in benefits to Amer-
ican farmers, over $5 billion to the merchant marine, over
$30 billion to small businesses, and over $30 billion in
subsidized credit to exporters. 56 Total U.S. government
subsidies and liabilities for aid to business since 1980
exceed $500 billion. That amount is probably 20 times
greater than the total foreign subsidies paid on products
exported to the United States.
The clearest proof that foreign subsidies do not pose a
grave threat to the United States is that few foreign coun-
tries have been troubled by the effect of subsidized im-
ports. Switzerland, Austria, Sweden, and Norway have never
imposed a single CVD; yet neither U.S., nor European, nor
Asian subsidies have allowed foreign companies to corner
those markets. Hong Kong imposes no CVDs, no dumping du-
ties, and almost no tariffs. With that "bare-the-throat"
policy, Hong Kong has had the highest economic growth rate
in the world since 1960; Hong Kong's per capita income in-
creased from $180 in 1948 to over $9,000 in 1989. Hong
Kong's per capita income now exceeds that of Israel, Ire-
land, and Saudi Arabia. 57
We have no national interest in obsessing over mis-
guided foreign tax and economic policies. Does the U.S.
government need to "countervail" every foolish act by every
other government in the world? Most CVDs amount to economic
shadowboxing--American bureaucrats and politicians thrashing
the air to pummel imaginary enemies. or, more accurately,
U.S. countervailing policies resemble the scene from Don
Quixote in which Quixote beats Sancho Panza and insists that
he is actually beating a horde of evil demons. CVDs have
had far more effect on American consumers than on foreign
governments.
The U.S. subsidies policy is based on a doctrine of im-
maculate competition--any foreign company with the slightest
taint must be sent to bureaucratic purgatory. Commerce
essentially tries to apply the "Caesar's wife" standard to
international commerce, demanding that foreign companies be
free of even the suspicion of receiving aid from their gov-
ernments. That is profoundly unrealistic and hypocritical.
The 301 Solution
When U.S. Trade Representative Carla Hills took office
in February 1989, President Bush presented her with a crow-
bar to symbolize her task of prying open foreign markets. 58
Section 301 of the Trade Act of 1974-the main U.S. crow-
bar--authorizes the U.S. government to investigate and re-
Page 13
taliate against foreign trade barriers that are judged to be
unfair. Under section 301, U.S. producers may petition the
Office of the U.S. Trade Representative to take action
against a foreign practice or barrier, or the USTR can ini-
tiate an investigation. Once the USTR officially decides a
foreign barrier is unfair, the United States gives the for-
eign government a deadline by which it must reform its poli-
cy or face American retaliation. As the Wall Street Journal
noted, "American [trade] retaliation is supposed to be the
nuclear deterrent that forces the rest of the world into
submission.
It is surprising how often the United States itself en-
gages in the same practices that section 301 penalizes. The
first section 301 case targeted Guatemala for requiring that
cargo being shipped to Guatemala be carried by Guatemalan
ships. The United States itself has extensive cargo prefer-
ence laws, which the General Accounting Office estimated in
1985 added over $100 million to the cost of providing food
donations to foreign countries. 60
In 1976 the United States brought suit against Taiwan
because of "confiscatory tariff levels on imports of major
home appliances. 1161 (The Taiwanese tariff on refrigerators
and air conditioners was 60 percent. ) 62 But the United
States has confiscatory tariff levels on many items, includ-
ing a 151 percent tariff on low-priced watch parts exported
from Taiwan. 63
Many section 301 complaints have involved agricultural
export subsidies, including European Community export subsi-
dies for poultry, wheat, and wheat flour and Taiwan rice
subsidies. In recent years the U.S. government has also
provided export subsidies for all of those items; it has
paid export subsidies of 111 percent for poultry, 78 percent
for wheat flour, 94 percent for wheat, and over 100 percent
for rice. 64 The United States denounces Japanese rice im-
port quotas, though unlimited U.S. export subsidies have
done far more to distort the world rice market than has
Japan's ban on rice imports. The United States brought a
case against Korea for its beef import quotas, even though
the United States also has beef import quotas. Five section
301 cases involved allegations that foreign governments
subsidized their steel industries as does the United
States. 65 The Footwear Institute of America persuaded the
USTR to launch seven section 301 cases against foreign trade
barriers on footwear--even though the United States itself
maintains tariffs of up to 67 percent on footwear.
In May 1988 the United States launched an investigation
of Japanese citrus quotas. In the press release announcing
Page 14
the case, U.S. Trade Representative Clayton Yeutter noted,
"The Florida citrus industry
believes that removal of
Japan's unfair barriers could cut the price of oranges for
Japanese consumers by one-third. 1166 By amazing coincidence,
that is roughly the amount that the price of orange juice in
the United States could fall if the 40 percent tariff on
Brazilian orange juice imports were abolished.
In August 1988 the USTR settled a second unfair agri-
cultural trade case with Japan. Under heavy U.S. pressure,
the Japanese agreed to end their quotas on ice cream,
cheese, and sugar; of course, American trade policymakers
believed that the United States had a right to continue its
own import quotas on the same items. 67
In December 1988 the European Community banned the im-
port of American beef produced with growth hormones. That
action outraged the United States, as U.S. policymakers
believed there was no scientific evidence that the beef hor-
mones had adverse effects on humans. The EC ban was unjus-
tified, but the United States has an equally unjustified ban
on imports of German ham. German ham has an international
reputation as a luxury product, yet the United States in-
sists that it is not safe enough for Americans.
The United States retaliated against the EC beef ban by
imposing 100 percent tariff surcharges on European hams and
pork shoulders, cranberry juice, instant coffee, alcoholic
beverages containing less than 7 percent alcohol, and pet
food packaged for retail sale. The U.S. retaliation devas-
tated some American businesses. As the Journal of Commerce
noted: "A Chicago food importer's mid-size business will
lose almost $3 million in revenue this year as a result of
the trade sanctions.
National Food Trading Corp. saw
10 percent of its export business evaporate when the peeled
tomatoes it imports from Spain were hit with the 100 percent
tariff. 1168 The importer of Riunite wine dodged the super
tariff by raising the alcohol content of the wine by 25
percent. (Some Americans who drink low-priced sweet wine
and were not aware of the U.S.-EC trade war may have been
awarded drunk driving tickets as a result.) Christina
McCown, a spokesperson for the USTR, justified the 100 per-
cent tariff: "The amount of retaliation equals the amount
lost in U.S. exports. We were not trying to cause any U.S.
businesses a hardship. The beef war sought to placate
American cattlemen by padding the pockets of American pet
food makers.
Other U.S. trade retaliations have also harmed U.S.
companies. As Jim Powell noted: "In 1978, American broad-
casters filed a complaint because Canada had abolished tax
Page 15
deductions for advertising on stations in the United States.
The United States retaliated by removing tax deductions for
advertising on Canadian-owned stations. The consequence, of
course, was that American advertisers had a harder time
reaching the Canadian market. Twelve years later, these
retaliatory measures are still in place--and Canada has not
changed its original policy.
Section 301 victories often skewer American consumers.
In the 1985 settlement of a dispute over Japanese leather
quotas, Yeutter declared: "The agreement is a significant
victory for the principle of free and fair trade.
This
is far preferable to protectionist measures that would re-
strict imports without increasing U.S. exports. 1171 Yet as
part of its "victory for free trade, " the United States
raised tariffs on Japanese leather imports from 12 to 40
percent--with the explicit goal of sharply reducing Japanese
exports to the United States.
In 1988 the United States decided to punish Brazil for
its denial of patent protection to American chemical and
pharmaceutical companies operating in Brazil. The USTR
imposed a retaliatory 100 percent duty on Brazilian penicil-
lin and tetracycline, among other products. Apparently,
some higher justice was served by punishing Americans with
pneumonia (forcing them to pay higher prices for their
drugs) in order to placate wealthy American multinational
corporations. 72 Six months later Brazil announced cessation
of interest payments on the $22 billion it owed U.S. banks.
American trade negotiators are often blinded by moral
arrogance. Carla Hills told the House Ways and Means Com-
mittee in 1989, "I hasten to tell other nations that we are
the freest and most open market in the world and that even
in those areas that are most restricted, we do import per
capita far more than our largest trading partners. 1173 As
Hills must know, Hong Kong has far fewer trade barriers than
the United States, as do the United Arab Emirates and Singa-
pore. Sweden and Austria also may be more open than the
United States. And, in making her claim that "even in those
areas that are most restricted, we do import per capita far
more than our largest trading partners, " Hills forgot that
Canada, the largest trading partner of the United States,
imports far more sugar, peanuts, and cotton per capita than
does the United States. The assertion that the United
States has the world's most open markets has long been a
cardinal tenet of American trade theology and is often made
as a prelude to demanding new trade barriers, somewhat like
people loudly announcing that they are good Christians be-
fore slamming the door in their neighbor's face.
Page 16
The U.S. government has done more to reduce exports
than has any other government in the world. The amount of
increased exports gained due to all the section 301 cases in
the last decade is less than the annual estimated amount of
U.S. exports lost thanks to the Export Control Administra-
tion. As George Gilder notes, "By constantly imposing spe-
cial export controls for nonsensical national security con-
cerns and changing policy from month to month in response to
utterly spurious emergencies, the U.S. government has become
the chief obstacle to U.S. competitiveness in electron-
ics. The National Academy of Sciences estimated in 1987
that unnecessary Commerce Department export controls on U.S.
technology and products that pose no threat to national
security reduced American exports by $9 billion. 75 U.S.
agricultural exports would be far higher if the government
abolished federal farm programs. A study by Andrew Felten-
stein of Kansas State University estimated that unilaterally
abolishing farm programs would have reduced the U.S. trade
deficit by $42 billion in 1986. 76 A 1988 study by Purdue
professors Thomas W. Hertel, former USDA chief economist
Robert L. Thompson, and Marinos E. Tsigas concluded that the
misallocation of resources and capital to agriculture de-
pressed the productivity of other sectors of the U.S. econo-
my and reduced American manufacturing exports by $7.5 bil-
lion and service exports by $3.4 billion.² An American
Enterprise Institute study concluded that U.S. tobacco ex-
ports would double if the government abolished its tobacco
quota and price support system.78 The USDA imposes severe
limitations or quotas, or both, on the export of lemons, al-
monds, raisins, peanuts, and peanut butter. 79
The Morality of Fair Trade
Every restriction on imports is an attempt by the U.S.
government to compel some Americans to pay higher prices to
other Americans than they otherwise would have paid. Con-
sumers do not offer to voluntarily pay higher prices; they
pay higher prices only because 17,000 U.S. Customs Service
officials leave them no choice.
Trade is not simply a matter of exchanging widgets for
gadgets; it affects the way people live their daily lives.
Since practically no one can make all the things he wears,
eats, and uses, a person's standard of living and opportuni-
ty in life depend largely on his opportunities for trading
the product of his labor with others. Pervasive trade bar-
riers effectively force people to use inferior building
blocks for their lives. Trade barriers are an attempt by
politicians to control the market. And politicians cannot
Page 17
control the market without commanding everyone who must rely
on that market.
Trade barriers raise prices, and price hikes have the
same effect as a federal decree that some Americans shall no
longer be allowed to buy the restricted product. As John
Stuart Mill noted in "On Liberty,' "Every increase of price
is a prohibition to those whose means do not come up to the
augmented price. The Joint Economic Committee observed
in 1956, "For a government official to make a moral judgment
on how we ought to spend our money is an invasion of liberty
and privacy which is acceptable only where obvious public
harm follows. 1181 Government cannot drive up prices without
knocking some people out of the market--without taking a
notch out of someone's living standard, changing the types
of clothes some people wear, the cars some people drive, the
food some people eat, the medical care some people receive.
The 1986 Softwood Lumber Agreement added $1,000 to the cost
of constructing a new house in the United States, 82 thereby
knocking as many as 300,000 people out of the home-buying
market and effectively decreeing that many families would
be forced to live in trailer homes instead of real houses.
If the federal government intervened to cause old people's
bones to automatically break when they fell, that interven-
tion would be denounced as the height of idiotic tyranny.
But apparently federal intervention in the form of a quota
that imposes the equivalent of a 170 percent tariff on dairy
imports, 84 thereby ensuring that many Americans will have
calcium deficiencies and weak bones, is okay. What is the
moral difference between putting a 50 percent surcharge on
imported clothing8 and commanding millions of poor people
to wear tattered garments?
Every trade restraint is a moral issue, forcibly sacri-
ficing some Americans for the benefit of others. Treasury
Secretary Robert Walker observed in 1845, "If the marshall
were sent by the federal government to collect a direct tax
from the whole people, to be paid over to the manufacturing
capitalists to enable them to sustain their business, or
realize a larger profit, it would be the same in effect as
the protective duty. 1186 If a businessman pulls a gun on a
customer and demands 20 percent more for a product, that is
robbery. If a politician intervenes to the same effect, it
is fair trade. As the Supreme Court said in 1875, "To lay
with one hand the power of the government on the property of
the citizen, and with the other to bestow it upon favored
individuals to aid private enterprises and build up private
fortunes, is none the less a robbery because it is done
under the forms of law and is called a taxation. 1187
Page 18
Protectionism rests on a moral glorification of an eco-
nomy's least competitive producers. Sen. Ernest F. Hollings
(D-S.C.) announced in 1988: "The market will take care of
consumers. The Government must take care of producers. No
government was ever organized to get everybody something for
a cheap price. The market does that. (Hollings made
that observation in a speech calling for further government
suppression of the market.) Protectionism is a Dred Scott
policy for consumers--the federal government promises not to
let American buyers escape from American businesses that
want to charge consumers higher prices.
Fair trade is based on the doctrine that producers have
rights and consumers have duties. Fair trade assumes that
the consumer's freedom of choice is an injustice to the
producer. The soul of protectionism is that government
should force customers to carry a company that cannot stand
on its own two feet. Protectionism is an economic no-fault
insurance policy: no matter how often an American company
crashes in the marketplace, the consumer must pay the bill.
Federal officials have long talked and acted as if they
had a droit du seigneur over American consumers. U.S. Depu-
ty Trade Representative Linn Williams declared on December
4, 1989, "I should also note that the U.S. has 'contributed'
a substantial part of its domestic market to imported
steel. 1189 It is outrageous for a high-ranking government
official to speak of the U.S. government allowing some Amer-
icans to buy imported steel as a contribution--as if gov-
ernment officials own the consumers' dollar and can decide
to "contribute" it to whom they choose. That statement
epitomizes the notion that government officials own the
market they seek to control. Rep. Joseph M. Gaydos (D-Pa.),
executive chairman of the House Steel Caucus, declared in
1988, "We're not going to allow domestic companies, if we
can help it, to buy [steel] overseas. 1190 Federal officials
talk as if they have the right to dispose of the dollars of
any American company or citizen that needs to buy steel, or
sugar, or cheese, or an auto. In 1990 Sen. Jesse Helms
(R-N.C.) denounced U.S. textile policy "that gives our mar-
ket to foreigners. Helms apparently believes that the
U.S. Congress should have the right and power to give the
market to whom it chooses. To talk of giving the market is,
in reality, to talk of giving away the dollars of anyone who
must depend on that market. For politicians to allocate
market share is to treat consumers like serfs who can be
freely traded by their lords.
Medieval theologian Duns Scotus declared that a price
was just when "the owners of things
preserve equality
of value in the things exchanged, according to right reason
Page 19
judging of the nature of the thing exchanged in relation to
its human use. 1192 U.S. trade law assumes that goods have an
objective value in themselves that can be determined in a
bureaucratic vacuum thousands of miles from the market where
the product is exchanged. The soul of American trade law is
that bureaucrats and politicians, not buyers and sellers,
are the proper judges of fair value. All the absurdities,
biases, and scholastic methods follow from that principle.
Fair trade essentially substitutes the moral and political
values of federal policymakers for the economic values of
private citizens.
Conclusion
Fair trade is an income redistribution system based on
the capture of political power. In the end, the morality of
fair trade is pure realpolitik--th deification of power as
an end in itself. Should the capture of political machinery
give some Americans a right to put their hands in other
Americans' pockets? Should politicians have the right to
reduce one man's standard of living in order to buy another
man's vote?
There is no way that restricting Americans' opportunity
to buy and sell can make America a richer land. Protection-
ism is the ultimate "less is more" policy--a policy based on
the idea that the United States will become richer if the
government forces Americans to pay higher prices for fewer
goods. Every trade barrier imposes an opportunity cost on
the American economy.
Every unnecessary burden the U.S. government places on
American industry and agriculture means lost exports and re-
duced income for American citizens. The fewer crutches the
government provides, the faster American industry will run.
Should we hold U.S. productivity hostage to the stubbornness
or stupidity of other nations' trade policymakers? Should
the United States wait until it receives a foreign bribe
before it looks to its own interests? Are dairy import
quotas--and the brittle bones of the American elderly--an
asset that we should demand to be compensated for giving up?
Are the tattered clothes of many poor Americans something
the nation should be proud of? Is a federal sugar policy
that drives American food manufacturers overseas a national
asset?
The rising phobia of imports and trade balances misses
the purpose of trade. Trade allows consumers everywhere a
chance to benefit from increases in productivity anywhere.
As Emerson observed, "If a talent is anywhere born into the
Page 20
world, the community of nations is enriched. 1193 Trade binds
humanity together in laboring for mutual benefits. The
expansion of trade between the end of World War II and the
1980s produced the greatest era of prosperity in world his-
tory.
The fundamental issue is not whether foreign govern-
ments treat American companies fairly but whether American
citizens receive fair treatment from their government. Even
if trade barriers exist abroad, U.S. politicians should not
perpetuate them here. We should cease punishing American
consumers for the alleged sins of foreign governments.
Notes
1. U.S. Congress, Senate Finance Committee, Remedies
against Dumping of Imports (Washington: Government Printing
Office, July 18, 1986), p. 37 (testimony of Gilbert Kaplan).
Also see U.S. International Trade Commission, Operations of
the Trade Agreements Program, annual reports 1987-89.
2. John Taylor, Tyranny Unmasked (Washington: Davis and
Force, 1822), p. 38.
3. For details on the trade barriers cited in this para-
graph, see James Bovard, The Fair Trade Fraud (New York: St.
Martin's, 1991).
4. Office of the U.S. Trade Representative, "U.S. Proposal
for Uruguay Round Market Access Negotiations, March 15,
1990. This document was a bit difficult to read because it
had "SECRET" stamped all over it.
5. Dave Larsons, "The Cost of Import Protection in the
United States, " U.S. Treasury Department, 1979; cited in
Michael Finger, H. Keith Hall, and Douglas Nelson, "The
Political Economy of Administrative Protectionism," American
Economic Review 72, no. 3 (June 1982) : 453.
6. David Tarr and Morris Morkre, "Aggregate Cost to the
United States of Tariffs and Quotas on Imports,' Federal
Trade Commission, 1984.
7. Martin Wolf, "Why Voluntary Export Restraints? An His-
torical Analysis,' World Economy 12, no. 3 (September 1989) :
284. Wolf was citing a 1984 study by the Trade Policy Re-
search Centre.
8. Paul Blustein, "Unfair Traders: Does the U.S. Have Room
to Talk?" Washington Post, May 24, 1989.
Page 21
9. U.S. trade laws require that the Commerce Department
judge whether a foreign product is being dumped or subsi-
dized. After Commerce finds dumping or subsidization, the
U.S. International Trade Commission judges whether dumped
imports have injured U.S. corporations. The ITC finds inju-
ry in the large majority of cases.
10. Richard Martin, Anti-Dumping Law in a Liberal Trade
Order (New York: St. Martin's, 1980), p. 72.
11. U.S. Congress, Senate Finance Committee, p. 124 (quoted
in testimony of Peter Suchman).
12. N. David Palmeter, "The Rhetoric and Reality of the
United States Anti-dumping Law, " Mimeo, November 27, 1989,
p. 1. The quote is from a decision in the case of Algoma
Steel Corp. Ltd. et al. V. United States, 865 F.2d 240, 242
(Fed. Cir. 1989).
13. Zenith Radio Corp. V. Matsushita Elec. Indus. Co.,
513 F. Supp. 1100 (1981), p. 1333.
14. Federal Register, March 28, 1989, p. 12786.
15. U.S. Department of the Treasury, "Report of the Secre-
tary of the Treasury to the Congress on the Operation and
Effectiveness of the Anti-dumping Act and on Amendments to
the Act Considered Desirable or Necessary," 1957, pp. 18-19.
16. Federal Register, March 17, 1987, p. 8326.
17. Washington lawyer David Palmeter observes: "In the U.S.,
exchange rates in anti-dumping proceedings are determined by
applying an outdated regulation, a relic of an era that
ended in the early 1970s when the fixed exchange rate system
established at Bretton Woods was abandoned.
The rate
established by the Federal Reserve is a quarterly one, set
in advance, and based on transactions at the end of the
previous quarter.
This average rate is used throughout
the quarter unless, on any particular day, it varies from
the average by more than five percent, in which case the
daily rate is used." N. David Palmeter, "Exchange Rates and
Anti-dumping Determinations," Journal of World Trade 22,
no. 2 (1988) 73.
18. Inside U.S. Trade, January 29, 1988, p. 1.
19. Ibid.
20. Luciano Pisoni Fabbrica Accessori Instrumenti Musicali
V. United States, Court of International Trade,
Page 22
no. 84-10-01435, June 12, 1986. 640 F. Supp. 255 (CIT
1986).
21. Ibid.
22. Interview with Washington trade lawyer, December 9,
1989.
23. Letter to William D. Hunter, deputy chief counsel for
import administration, U.S. Department of Commerce, from
Lawrence Walders of the law firm of Graham and James, March
20, 1989, p. 18.
24. Post-Hearing Brief in Avesta, U.S. Department of Com-
merce investigation no. A401-0-603, September 17, 1987,
p. 8.
25. Federal Register, October 9, 1987, p. 37810.
26. U.S. International Trade Commission, "Foreign Protection
of Intellectual Property Rights and the Effect on U.S. In-
dustry and Trade," ITC publication no. 2065, February 1988,
p. ix.
27. Hideotoshi Ukawa, "Uruguay Round: Japanese Priorities,"
presented at a conference jointly sponsored by the Journal
of Commerce and the National Foreign Trade Council, New York
city, June 6, 1990.
28. U.S. Department of Commerce, Administrative Hearing,
Certain Red Raspberries from Canada, investigation
no. A-122-401, March 22, 1985, p. 48.
29. Federal Register, January 31, 1989, p. 4870.
30. Federal Register, August 10, 1990, p. 32668.
31. Federal Register, August 23, 1990, pp. 34585-602.
32. U.S. Congress, Senate Finance Committee, p. 23.
33. Palmeter, "Rhetoric and Reality," p. 8.
34. U.S. Congress, Senate Finance Committee, p. 39.
35. The White House, "Press Briefing by United States Trade
Representative Clayton Yeutter and Secretary of Commerce
Malcolm Baldrige, " July 31, 1986, p. 7.
36. Marjorie A. Chorlins, speech to the American Wire Pro-
ducers Association annual meeting, Scottsdale, Arizona,
January 31, 1991.
Page 23
37. "Secretary Mosbacher Discusses Trade Issues at 'Europe
1992' Conference in Washington," Business America, March 13,
1989, p. 12.
38. Federal Register, May 14, 1972, p. 5293.
39. Congressional Record, August 6, 1986, p. 19361.
40. Federal Register, April 9, 1986, p. 12356.
41. U.S. Department of Agriculture, Estimates of Producer
and Consumer Subsidy Equivalents, Government Intervention in
Agriculture, 1982-87 (Washington: U.S. Department of Agri-
culture, 1990), p. 286.
42. A 1985 Congressional Budget Office report estimated that
there were 4,000 full-time rice producers in the United
States. (Full-time was defined as gross sales of over
$100,00 of rice per year.) Congressional Budget Office,
"Diversity in Crop Farming," 1985, p. 46. USDA spending on
rice subsidies exceeded $4 billion between 1985 and 1990.
See U.S. Department of Agriculture, "Annual Budget Summary,"
1986-91. For more details on the rice program, see James
Bovard, The Farm Fiasco (San Francisco: ICS Press, 1989),
pp. 81-82.
43. For Thailand's per capita income see World Bank, World
Development Report 1986 (New York: Oxford University Press,
1986), p. 180. For the wealth of U.S. rice growers, see
Congressional Budget Office, "Diversity in Crop Farming,"
p. 46.
44. Federal Register, April 4, 1983, p. 14423.
45. Federal Register, June 18, 1987, p. 23197.
46. U.S. Department of Agriculture, Agricultural Statistics
1987 (Washington: Government Printing Office, 1988), p. 292.
47. Federal Register, October 2, 1990, p. 40280.
48. Ibid.
49. Federal Register, January 17, 1990, p. 1597.
50. Interview with Celia Khoo, embassy of Singapore, Wash-
ington, May 17, 1990.
51. Congressional Budget Office, Using R&D Consortia for
Commercial Innovation: SEMATECH, X-ray Lithography, and
High-Resolution Systems (Washington: Government Printing
Office, 1990), p. 15.
Page 24
52. Leonard Shambon, "Revocation under the Anti-dumping and
Countervailing Duty Laws? You Should Live So Long!" in
Commerce Department Speaks 1987, ed. Wendell Willkie II (New
York: Practicing Law Institute, 1987), p. 284.
53. Ibid., p. 285.
54. U.S. International Trade Commission, Operations of the
Trade Agreements Program, ITC publication 2317, September
1990, p. 194.
55. Julio Nogues, "The Experience of Latin America with Export
Subsidies,' in Subsidies and Countervailing Measures, ed. Bela
Balassa (Washington: World Bank, 1989), p. 53.
56. For an excellent analysis and survey of current U.S.
government subsidies, see Doug Bandow, The Politics of Plun-
der (New Brunswick, N.J.: Transaction Books, 1990).
57. Alvin Rabushka, From Adam Smith to the Wealth of Nations
(New Brunswick, N.J.: Transaction Books, 1985), p. 129;
World Bank, World Development Report 1990 (New York: Oxford
University Press, 1990), p. 179.
58. Louis Uchitelle, "A Crowbar for Carla Hills," New York
Times Business World Magazine, June 10, 1990.
59. Editorial, Wall Street Journal, May 5, 1989.
60. General Accounting Office, "Transportation of Public Law
480 Commodities--Efforts Needed to Eliminate Unnecessary
Costs," June 1985, p. 3.
61. U.S. Congress, House Ways and Means Committee, Fiscal
Year 1990 Budget Authorization for the U.S. Trade Represen-
tative (Washington: Government Printing Office, March 22,
1989), p. 59.
62. Federal Register, December 1, 1977, p. 61103.
63. Office of the U.S. Trade Representative, "U.S. Proposal
for Uruguay Round Market Access Negotiations," p. 416.
64. General Accounting Office, "Activity under the Export
Enhancement Program," February 1990, p. 32.
65. Ernst & Young Consulting, "Report on Government Assis-
tance to the U.S. Steel Industry," prepared for the Canadian
Steel Producers Association, October 1989, p. 4.
Page 25
66. Office of the U.S. Trade Representative, "Yeutter Ac-
cepts Florida Citrus Industry 301 Petition," press release
no. 88/31, May 25, 1988.
67. Office of the U.S. Trade Representative, "Summary of
Settlement--U.S. & Japan GATT Agricultural Case," August
1988.
68. Paula Green, "U.S. Importers Caught in Cross Fire of
Trade War, Journal of Commerce, August 22, 1989.
69. Ibid.
70. Jim Powell, "Forget the Crowbar," Reason, March 1990,
p. 36.
71. Office of the U.S. Trade Representative, "Yeutter An-
nounces Japan Leather Agreement," press release no. 85/34,
December 21, 1985.
72. U.S. Congress, House Ways and Means Committee, 1990
Budget for U.S. Trade Representative, p. 62.
73. U.S. Congress, House Ways and Means Committee, USTR
Identification of Priority Practices and Countries under
Super 301 and Special 301 Provisions of the Omnibus Trade
and Competitiveness Act of 1988 (Washington: Government
Printing Office, June 8, 1989), p. 14.
74. George Gilder, "Chip Sense and Nonsense," Wall Street
Journal, April 2, 1987.
75. Congressional Record, April 28, 1987, p. H2586.
76. Andrew Feltenstein, "Agricultural Policy and the U.S.
Federal Budget and the Trade Deficit," paper prepared for
the Global Agricultural Trade Study organized by the Center
for International Economics, Canberra, Australia, May 1988,
p. 2.
77. Thomas W. Hertel, Robert L. Thompson, and Marinos E.
Tsigas, "Economic Side-Effects of Unilateral Trade and Poli-
cy Liberalization in U.S. Agriculture," paper prepared for
the Global Agricultural Trade Study, 1988, p. 37.
78. Daniel A. Sumner and Julian M. Alston, "Effects of the
Tobacco Program: An Analysis of Deregulation," American
Enterprise Institute, November 1984, p. iii.
79. James Bovard, The Farm Fiasco (San Francisco: ICS Press,
1989), pp. 72, 180f.
Page 26
80. John Stuart Mill, Utilitarianism, Liberty, and Represen-
tative Government (New York: E.P. Dutton, 1951), p. 210.
81. Cited in Leland Yeager and David Tuerck, Foreign Trade
and U.S. Policy (New York: Praeger, 1976), p. 83.
82. "Cost of Lumber Protectionism Revealed," CSE Reports,
Citizens for a Sound Economy Foundation, Winter 1987. The
citation in CSE Reports was derived from a study by Wharton
Econometrics.
83. Congressional Record, May 20, 1986, p. H2985.
84. U.S. International Trade Commission, Estimated Tariff
Equivalents of U.S. Quotas on Agricultural Imports and Anal-
ysis of Competitive Conditions in U.S. and Foreign Markets
for Sugar, Meat, Peanuts, Cotton, and Dairy Products (Wash-
ington: U.S. International Trade Commission, 1990), p. xvi.
85. The White House, Economic Report of the President (Wash-
ington: Government Printing Office, 1989), p. 172.
86. F. W. Taussig, State Papers and Speeches on the Tariff
(Cambridge: Harvard University Press, 1892), p. 229.
87. William O. Douglas, An Almanac of Liberty (New York:
Doubleday, 1954), p. 129.
88. Congressional Record, September 14, 1988, p. S12462.
89. Linn Williams, speech to the American Institute for Im-
ported Steel, New York City, December 4, 1989.
90. Marilyn Werber, "Pennsylvanian Congressmen Speak Out
against Steel Imports," American Metal Market, February 18,
1988.
91. Peter Truell, "Textile Makers Demanding More Protection
Threaten Hopes for Seamless U.S. Trade Policy," Wall Street
Journal, May 16, 1990.
92. V. A. Demant, ed., The Just Price (London: Student
Christian Movement Press, 1930), p. 64.
93. Ralph Waldo Emerson, The Conduct of Life (Boston:
Houghton Mifflin, 1888), p. 85.
OTHER STUDIES IN THE POLICY ANALYSIS SERIES
163. Replacing the Ruble in Lithuania: Real Change versus
Pseudoreform by Kurt Schuler, George Selgin, and Joseph
Sinkey, Jr. (October 28, 1991)
162. False Dreams and Broken Promises: The Wasteful Federal
Investment in Urban Mass Transit by Jean Love and Wendell
Cox (October 17, 1991)
161. Contrived Distinctions: The Doctrine of Commercial Speech
in First Amendment Jurisprudence by Jonathan W. Emord
(September 23, 1991)
160. Sweden: From Capitalist Success to Welfare-State Sclerosis
by Peter Stein (September 10, 1991)
159. "Ancient History": U.S. Conduct in the Middle East since
World War II and the Folly of Intervention by Sheldon L.
Richman (August 16, 1991)
158. The Americans with Disabilities Act: Time for Amendments by
Robert P. O'Quinn (August 9, 1991)
157. Alcohol Prohibition Was a Failure by Mark Thornton (July
17, 1991)
156. The Drug War VS. Land Reform in Peru by Melanie Tammen
(July 10, 1991)
155. Only Freedom of Education Can Solve America's Bureaucratic
Crisis of Education by Jack D. Douglas (June 17, 1991)
154. Extricating America from Its Middle Eastern Entanglement
by Leon T. Hadar (June 12, 1991)
153. When Business "Adopts" Schools: Spare the Rod, Spoil the
Child by John Hood (June 5, 1991)
152. State Spending Splurge: The Real Story behind the Fiscal
Crisis in State Government by Stephen Moore (May 23, 1991)
151. The Poison of Professional Politics by Mark P. Petracca
(May 10, 1991)
150. Intelsat and the Separate System Policy: Toward Competitive
International Telecommunications by Milton Mueller (March
21, 1991)
149. Judging the 1991 Reform Effort: Do U.S. Banks Have a
Future? by Catherine England (March 12, 1991)
148. How Rising Tax Burdens Can Produce Recession by William C.
Dunkelberg and John Skorburg (February 21, 1991)
147. The Profligate President: A Midterm Review of Bush's Fiscal
Policy by Stephen Moore (February 4, 1991)
146. Slower Is Better: The New Postal Service by James Bovard
(February 1, 1991)
145. What Now for U.S. Energy Policy? A Free-Market Perspective
by Robert L. Bradley, Jr. (January 29, 1991)
144. Long-Term Care: Why a New Entitlement Program Would Be
Wrong by Peter J. Ferrara (December 13, 1990)
143. Why Trade Retaliation Closes Markets and Impoverishes
People by Jim Powell (November 30, 1990)
142. Arabian Nightmares: Washington's Persian Gulf Entanglement
by Christopher Layne and Ted Galen Carpenter (November 9,
1990)
141. Term Limitation: An Idea Whose Time Has Come by John H.
Fund (October 30, 1990)
140. The Collision Course on Textile Quotas by Thomas Grennes
(September 12, 1990)
139. Aiding Eastern Europe: The Leveraged Harm of "Leveraged
Aid" by Melanie S. Tammen (September 10, 1990)
105. The Canada-U.S. Free Trade Agreement: Now or Never by
Michael I. Krauss (May 3, 1988)
99. The Semiconductor Industry and Foreign Competition by
Eugene Volokh (January 28, 1988)
91. Our Trade Laws Are a National Disgrace by James Bovard
(September 18, 1987)
88. Stumbling toward a U.S.-Canada Free Trade Agreement by
William A. Niskanen (June 18, 1987)
64. What's Wrong with Trade Sanctions by Bruce Bartlett
(December 23, 1985)
31. Panic in Silicon Valley: The Semiconductor Industry's Cry
for Help by Scott Palmer (December 21, 1983)
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