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Tony Snow Subject Files
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4
Health care
HOUSE OF REPRESENTATIVES
SENATE
PAUL S. SARBANES, MARYLAND,
LEE H. HAMILTON, INDIANA,
VICE CHAIRMAN
CHAIRMAN
LLOYD BENTSEN, TEXAS
DAVID R. OBEY, WISCONSIN
EDWARD M. KENNEDY, MASSACHUSETTS
JAMES H. SCHEUER, NEW YORK
JEFF BINGAMAN, NEW MEXICO
FORTNEY PETE STARK, CALIFORNIA
ALBERT GORE, JR., TENNESSEE
Congress of the United States
STEPHEN J. SOLARZ, NEW YORK
RICHARD H. BRYAN, NEVADA
KWEISI MFUME, MARYLAND
WILLIAM V. ROTH, JR., DELAWARE
RICHARD K. ARMEY, TEXAS
STEVE SYMMS, IDAHO
JOINT ECONOMIC COMMITTEE
CHALMERS P. WYLIE, OHIO
CONNIE MACK, FLORIDA
OLYMPIA J. SNOWE, MAINE
ROBERT C. SMITH, NEW HAMPSHIRE
(CREATED PURSUANT TO SEC. 5(a) OF PUBLIC LAW 304, 79TH CONGRESS)
HAMILTON FISH, JR., NEW YORK
STEPHEN A. QUICK,
Washington, DC 20510-6602
EXECUTIVE DIRECTOR
November 26,1991
INPUT AND OUTPUT IN MEDICAL CARE
Dear Colleague:
We are pleased to distribute today Nobel Laureate Milton Friedman's paper "Input and
Output in Medical Care" as the second in a series of Health Care Briefing Papers. Dr. Friedman
details the deleterious effects of governmental intervention in the U.S. market for medical care and
provides a compelling case for reprivatizing health care. Without endorsing any specific health
reform, we put this paper forward as deserving serious consideration.
This analysis provides a long-term perspective on the medical market, focusing particular
attention on inputs and outputs since the introduction of Medicare and Medicaid in 1965. Of
particular note:
There has been a dramatic rise in the number of hospital personnel and the cost of
hospital services, while at the same time the number of beds was declining and the
rate of occupancy is lower than in 1940. Dr. Friedman uses this as an example of
what he calls "an economic black hole" resources are sucked in and output
nonetheless shrinks.
The study shows that based upon long-term trends in private, public and total
spending, in the absence of Medicare and Medicaid, total health care spending would
be half as much as it actually is today.
Further, the sudden slowdown in the rate of increase in the life expectancy of women
is nearly coincident with the massive infusion of government in the health care market
and is, as far as we can tell, an unreported phenomenon that bears further
examination.
Dr. Friedman suggests that returning the medical market to the private sector by
returning responsibility to the individual for the financing and provision of health care
by (1) requiring each family to have medical insurance and (2) ending the tax
exemption for employer-provided medical care would go far toward curing the ills of
this market.
An abridged version of Dr. Friedman's study appeared in the November 12, 1991 edition of
the Wall Street Journal. We distribute the original paper with their permission. We are sure that
you will be interested in this original unedited text of the study, complete with additional charts. In
future health care policy debates, we would do well to consider the insights presented by Dr.
Friedman.
Sincerely,
Disk Arney DICK ARMEY
Bill
WILLIAM V. ROTH
Ranking Republican
Senior Republican Senator
Joint Economic Committee
Joint Economic Committee
HEALTH CARE BRIEFING PAPER
November 26, 1991
Released by Richard K. Armey (R-TX),
Ranking Republican, and William V. Roth (R-DE),
NO. 2
Senior Republican Senator, Joint Economic Committee
INPUT AND OUTPUT IN MEDICAL CARE*
by Milton Friedman, Senior Research Fellow, Hoover Institution
Some years ago, I came across a study by Dr. Max Gammon comparing input and
output in the British socialized hospital system. He took the number of employees as his
measure of input and the number of hospital beds as his measure of output. He noted that
long waiting lists for hospital admission assured that all beds were in use so that the total
number of beds could be taken as equal to the number of occupied beds. He found that
input had increased sharply, while output had not only failed to keep pace but had actually
fallen. He was led to enunciate what he called "the theory of bureaucratic displacement."
In his words, in "a bureaucratic system increase in expenditure will be matched by fall in
production Such systems will act rather like 'black holes,' in the economic universe,
simultaneously sucking in resources, and shrinking in terms of 'emitted' production."
I have long been impressed by the operation of Gammon's law in the U.S. schooling
system: input, however measured, has been going up for decades, and output, whether
measured by number of students, number of schools, or even more clearly, quality, has been
going down.
The recent surge of concern about the rising cost of medical care, and the flood of
proposals to do something about it, most involving a further move toward the complete
socialization of medicine, reminded me of Gammon's study and led me to investigate
whether his law applied to U.S. health care.
There has clearly been a major advance in medical care in the past half century, from
which most of us have greatly benefitted: indeed, I would not myself be alive today if it were
not for some of those advances. Yet the question remains whether these gains were
promoted or retarded by the extraordinary rise in the fraction of national income spent on
medical care. How does output compare with input?
*An abridged version of this paper appeared in the November 12, 1991 Wall Street Journal. This original text,
including charts not previously published, is printed with the permission of the Wall Street Journal.
1.
Hospitals
Even a casual glance at figures on input and output in U.S. hospitals indicates that
Gammon's law has been in full operation for U.S. hospitals since the end of World War II,
and especially since the enactment of medicare and medicaid in 1965.
Before 1940, input and output both rose, input somewhat more than output,
presumably because of the introduction of more sophisticated and expensive treatment. The
cost of hospital care per resident of the U.S., adjusted for inflation, rose from 1929 to 1940
at the rate of 5 percent per year. the number of occupied beds, at 2.4 percent a year (see
Table 1). Cost per patient day, adjusted for inflation, rose only modestly.
Table 1 -- Summary Data on Hospitals and Medical Expense, Selected Years, 1923-1989
1923
1929
1940
1946
1965
1989
Beds per 1,000 population
6.8
7.5
9.3
10.3
8.8
4.9
Percentage of beds occupied
73.0
80.0
84.0
80.0
82.0
69.6
Cost per patient day in
constant (1982) dollars
$18
$22
$21
$71
$545
Personnel per occupied bed
0.7
1.4
4.6
Hospital expense as percentage
of total medical expense
17.8
24.3
24.0
32.1
35.6
Medical cost per person per
year in constant (1982) dollars
Hospital
$30
$52
$63
$190
$683
Other
$143
$164
$200
$403
$1,237
TOTAL
$136
$173
$216
$263
$593
$1,920
Physicians
Number per 100,000
population
130
125
133
135*
153
252*
Median income***
Constant (1982) dollars
$21,722
$23,191
$34,407
$82,391
$99,016**
Ratio to per capita income
5.1
5.2
6.6
10.7
9.1**
*1949.
1987.
**Non-salaried physicians" through 1965; "incorporated and unincorporated" in 1987.
The situation was very different after the war. From 1946 to 1989, the number of
beds per capita fell by more than one-half, and the occupancy rate, by one-eighth. In sharp
-2-
contrast, input skyrocketed. Hospital personnel per occupied bed multiplied nearly seven-
fold and cost per patient day, adjusted for inflation, an astounding 26-fold, from $21 in 1946
to $545 in 1989 at the 1982 price level.
Figure 1, which charts postwar data year by year, is a dramatic portrayal of the effect
of the enactment of medicare and medicaid on both input and output.¹ A mild rise in
input was turned into a meteoric rise; a mild fall in output, into a rapid decline.
Figure 1 -- U.S. Hospitals: Input VS Output, 1946-1989
Before Medicare
After Medicare
12
$600
Number of beds per
C
1000 population
o
10
$500 S
N
T
U
M
P
B
8
$400
E
E
R
R
Number of occupied beds per
6
P
O
1000 population
$300
A
F
T
I
B
4
E
E
$200
N
D
T
S
Cost per patient day in
2
constant (1982) dollars
$100 D
A
Y
0
$ 0
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
Taken by itself the decline in the number of occupied beds could be interpreted as
evidence of the progress of medical science: the population is healthier, needing
1
Because the scales are arithmetic, the percentage rate of decline in output is understated, and the
percentage rate of rise in input, overstated. However, the percentage rate of growth of input, like the absolute,
did speed up after medicare -- from 6 percent per year before medicare to 9 percent after, according to
exponential trends fitted to hospital costs per patient day for 1946-1964 and 1965-1989, respectively.
-3-
hospitalization less, and advances in science and medical technology have reduced the length
of hospital stays, and enabled more procedures to be performed outside the hospital.
That may well be at least part of the reason for the decline in output, perhaps a
major part. But it does not explain much, if any, of the rise in input. True, care has
become more sophisticated and expensive, and medical machines more complex. Yet
improvements in health and in the quality of hospital care do not appear to have proceeded
more rapidly after 1965 than before. Indeed, there is some evidence that the reverse was
true. Reported expenditures on research (as with other data, per capita and in constant
dollars) rose at the rate of 15 percent a year from 1948 to 1964, at less than 2 percent a year
from 1965 to 1989. Yet the number of occupied beds per capita fell by 1 percent a year
from 1946 to 1964, and by 2.5 percent a year from 1965 to 1989. Cost per patient day rose
by 6 percent in the first period, 9 percent in the second.
Gammon's law, not medical miracles, was clearly at work. The Federal government's
assumption of responsibility for hospital and medical care for the elderly and the poor
provided a fresh pool of money, and there was no shortage of takers. Personnel per
occupied bed, which had already doubled from 1946 to 1965, more than tripled from that
level after 1965. Cost per patient day, which had already more than tripled from 1946 to
1965, multiplied a further eight-fold after 1965. The difference between the rise in
personnel and costs reflects expenditures on expensive equipment and higher prices for
medical personnel relative to other goods. Growing costs, in turn, led to more regulation
of hospitals, further increasing administrative expense. Unfortunately, I have been unable
to uncover comprehensive and readily available data for a sufficiently long period to judge
how large a role was played by increasing administrative costs. Anecdotal evidence suggests
that increased administrative complexity played a major role in the explosion of total cost
per patient day, and led to a snift from hospital to outpatient care, accelerating the decline
in occupied beds.
Experts in medical care and in hospital administration can doubtless expand this
amateur's explanation and put flesh on the stark evidence from the limited statistical data.
But a fuller description is hardly likely to alter the bottom line: in Gammon's words, "a
bureaucratic system will act rather like "black holes," in the economic universe,
simultaneously sucking in resources, and shrinking in terms of 'emitted' production."
2.
Other Medical Care
Though hospital cost has risen as a percentage of total medical cost from 24 percent
in 1946 to 36 percent in 1989, it is still a minor part of total medical cost. It is tempting to
apply Gammon's analysis to total medical cost rather than simply to hospital care.
There is no problem about input. Estimates of expenditures on medical care are
readily available for the postwar period, can be estimated back to 1919, and can be
corrected readily for the rise in population and in the price level.
-4-
Figure 2 shows total health spending as a percentage of national income from 1919
on, and its division between private and governmental spending. Except for the Great
Depression, when the collapse of incomes raised the percentage sharply, health spending
rose gradually but stayed between about 3 and 4 percent of total national income.
Government spending was only a modest part of that total and was primarily state and local
rather than Federal. For example, in 1940, Federal spending was about one-sixth of total
government spending on health care. After the war, total spending on health care tripled
as a fraction of national income and government spending, particularly Federal, became a
larger and larger fraction of the total.
Figure 2 -- Health Spending as Percentage of National Income: 1919-89
16
Medicare
14
NOTE: Spending expressed as
Enacted
percentage of national income
12
A T P N R E E E C G
10
8
GOVERNMENT
6
4
PRIVATE
2
0
1919
1929
1939
1949
1959
1969
1979
1989
Figures 3, 4, and 5 present the same data in a somewhat different way, as dollars per
capita in constant prices. Private spending rose at a steady arithmetic rate up to the end
of World War II, increasing by $3.30 a year, with only minor deviations as a result of cyclical
forces. The increase reflected mostly the long-term increase in income. As a percentage
of national income, private spending stayed between 3.5 and 5 percent from 1922 to 1958
except for some of the depression years. From 1958 on, private spending began to rise as
a percentage of national income, at first slowly, then more rapidly, reaching more than 8
percent by 1989.
-5-
Figure 3 -- Private Health Spending, 1919-89, and Linear Trend Fitted to 1919-40
D
1200
Medicare
O
NOTE: Spending expressed per
L
capita and deflated to 1982 prices;
Enacted
L 1000
trend fitted to data for 1919-1940
A
R
S 800
P
E
600
PRIVATE SPENDING
R
400
C
A
P
200
LINEAR TREND
I
T
A
0
1919
1929
1939
1949
1959
1969
1979
1989
Figure 4 -- Government Health Spending, 1919-89, and Long Trend Fitted to 1919-40
D 900
O
NOTE: Spending expressed per
Medicare
capita and deflated to :982 prices;
Enacted
L 800
L
trend fitted to data for 1919-1940
A 700
GOVERNMENT
R
SPENDING
S 600
500
E R P
400
300
C
A
200
P
LOGARITHMIC TREND
I
100
T
A
0
1919
1929
1939
1949
1959
1969
1979
1989
-6-
Figure 5 -- Total Health Spending, 1919-89, and Composite Trend Fitted to 1919-40
Medicare
D
2000
Enacted
O
L
1800
L
A
1600
R
1400
NOTE: Spending expressed per capita and
S
deflated to 1982 prices; composite trend is
1200
sum of linear trend for private and
P
logarithmic trend for government. both
E
1000
fitted to data for 1919-1940
R
800
C
600
TOTAL SPENDING
A
400
P
COMPOSITE TREND
I
200
T
A
0
1919
1929
1939
1949
1959
1969
1979
1989
Government spending behaved somewhat differently. It rose at a rather constant
percentage rate, 3.5 percent a year, from 1919 all the way to 1965, except for a short
postwar bulge. The enactment of medicare and medicaid produced an explosion in
government spending, which went sharply higher than the extrapolated trend. In the
process, government's share of total spending went from 15 percent during the 1920s to 25
percent in 1965, before surging to 42 percent in the next two decades, or from less than 1
percent of national income to nearly 6 percent.
Figure 5 combines the data from the two prior charts. As it shows, if the prior trends
had continued, total spending in 1989 would have been about half as much as it actually
was.
One major physical input is the number of physicians. Physicians numbered 157 per
100,000 population at the turn of the century, gradually declined in number to 125 by 1929,
and then rose slowly to 133 by 1959 before beginning an exponential climb to 252 by 1987,
the latest year for which I have data. As the final line in Table 1 indicates, the rapid
increase in the number of physicians was preceded by a sharp rise in their median income
from a level less than seven times per capita income to a peak of 11.6 to 1 in 1962. As cost
containment became more and more pressing, the rise in the number of physicians was
accompanied by a decline in their relative income, even though their income continued to
rise in absolute terms. By 1987, the ratio had declined from 11.6 to 9.1, and no doubt the
decline is continuing.
-7-
Despite the sharp rise in the number and income of physicians, it is worth noting,
first, that the cost of physicians' services accounts for only about one-fifth of total health
care cost, and, second, that the share is less than it has historically been. In 1929, the cost
of physicians' services was about 27 percent of total health cost, and after World War II,
about 25 percent. The explanation is presumably a combination of more expensive
equipment and greater administrative expense.
So much for input. What about output? That is the real problem. The output of
the medical care industry that we are interested in is its contribution to better health. How
can we measure "better health" in a reasonably objective way and in a way that is not greatly
influenced by other factors? For example, if medical care enables people to live longer and
healthier lives, we might expect that the fraction of persons aged 65 to 70 who continue to
work would go up. In fact, of course, the fraction has gone down drastically -- thanks to
higher incomes reinforced by financial incentives from social security. With the same "if,"
we might expect the fraction of the population classified as disabled to go down. That
fraction has gone up, again, not for reasons of health but because of government social
security programs. And so I have found with one initially plausible measure after another
-- all of them are too contaminated by other factors to be regarded as reflecting the output
of the medical care industry.
The least bad measure that I have been able to come up with is length of life. That
too is seriously contaminated by other factors. Improvements in diet, housing, clothing and
so on made possible by increasing affluence as well as such government measures as the
provision of purer water, and better garbage collection and disposal have doubtless
contributed to lengthening the average life span. Wars, epidemics, and natural and man-
made disasters have played a part. Even more important, the quality of life is as important
as the length of life. Perhaps someone more knowledgeable in this field than I can come
up with a better measure of the relevant output of the medical care industry. I have not
been able to.
Figures 6 and 7 present two different sets of data on length of life: Figure 6, on
length of life at birth; Figure 7, on remaining length of life at age 65. The two tell rather
different stories. For length of life at birth, data are readily available by sex and race, and
I have concentrated on the length of life of females, and of white and black separately, in
order to keep the populations involved as homogeneous as possible over a long period.
Figure 6 shows the average length of life at birth of white and black females since 1900.
As in the preceding chart, I have also included trends fitted to prewar data. The trends fit
the data surprisingly well until the late 1950s.
-8-
Figure 6 -- Length of Life at Birth of Females, 1900-86, and Linear Trend for 1900-40
LINEAR TRENDS FITTED
TO 1900-1940
90
80
70
WHITE FEMALE LENGTH OF LIFE
60
BLACK
Y E R S
FEMALE
A 50
LENGTH OF LIFE
40
Influenza Epidemic
Medicare
30
Enacted
NOTE: In computing trend. 1918 observation
20
replaced by average of 1917 and 1919 to
eliminate effect of influenza epidemic.
10
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
Figure 7 -- Male and Female Life Expectancy at Age 65: 1900-1988
20
L
I
18
FEMALE
F
E
16
E
14
X
A
P
G
12
E E
MALE
10
C
T
6
8
A
5
N
6
C
Y
4
A
2
NOTE: TWO TRENDS: 1900-1939, 1940-1988
T
0
1900
1910
1920
1930
1940
1950
1960
1970
1980
-9-
Until then, life expectancy at birth of white females went up steadily from 48.7 year
in 1900 to 74.2 years in 1959, and of black females from 33.5 to 65.2 years -- or, during the
intervening 59 years on the average by 0.43 years per year for white females and 0.54 for
black. The rise then slowed drastically. Life expectancy went from 74.2 and 65.2 in 1959
to 79.0 and 75.6 in 1989 for white and black females respectively -- or at the average of only
0.16 and 0.35 years per year during those 30 years. The rate of rise was more than halved
for whites, cut by more than a third for blacks.
As the length of life increases, further increases are presumably more and more
difficult to achieve -- early gains would seem to be the easiest. Yet Figure 6 shows no sign
of any slowdown for the first 59 years of the twentieth century. The shift to a lower rate of
improvement comes suddenly, not long before the rapid expansion in the Federal
government's role in medical care and the sharp slowdown in the rate of increase in the
amount of funds going to research.
Figure 7, on life expectancy at age 65, is for both races combined, since I have been
unable to get data going far enough back for blacks and whites separately. In sharp contrast
to Figure 6, it shows very slow though steady progress to about 1939, and then decidedly
more rapid progress, especially for females. Does the speeding up around 1939 reflect the
discovery about that time and subsequent wider use of a widespread range of antibiotics?
I leave that as a puzzle for others. In terms of my own concern, the effect of greater
government involvement, Figure 7 is of little help. For females, medicare is followed by an
initial speeding up, then tapering off; for males, the pattern is almost the reverse: little or
no change from 1950 to 1970, then a speeding up. In short, it will take a far more detailed
and informed analysis to reach any clear conclusions about what has been happening to the
output of the medical care industry, whether in terms of the length of life, and even more,
the quality of life.
Nonetheless, for total medical care, as for hospitals, it is hard to avoid the conclusion
that Gammon's law is at work. No question that medicine in all its aspects has become
subject to an ever more complex bureaucratic structure. No question that input has
exploded. No evidence that output has come anywhere close to keeping pace, though we
lack a firm basis for going beyond this very general statement. "Black holes" indeed.
Why should we be surprised? Evidence covering a much broader range of activities
documents that bureaucratic structures produce high cost, low quality, and inequitable
distribution of output. That is the dramatic lesson taught recently by the collapse of
socialism in the Soviet Union, China, and the Eastern European satellites of the Soviet
Union. The U.S. medical system has become in large part a socialist enterprise. Why
should we be any better at socialism than the Soviets? Or the East Germans? Or the
Czechs? Or the Chinese? And on and on. Medicine is not unique. Our socialized postal
system, our socialized schooling system, our socialized system of trying to control drugs, and
indeed our socialized defense industry provide clear evidence that we are no better at
socialism than countries that have gone all the way.
-10-
Yet not only do we keep on being surprised, but we continue in each of these areas
to increase, not reduce, the scope of socialism. Nearly all the numerous suggestions for
improving the glaring deficiencies in our medical system involve expanding the role of
government, at the extreme moving from a partly socialist system to a completely socialist
system!
3.
Solution
I believe that the inefficiency, high cost, and inequitable character of our medical
system can be fundamentally remedied in only one way: by moving in the other direction,
toward reprivatizing medical care. I conjecture that almost all consumers of medical
services, and many producers, would favor a simple reform that would privatize most
medical care. Yet that reform is politically not feasible because it would be violently
opposed by the bureaucracy that plans, controls, and administers the current structure of
medical care.
The reform has two major steps: (1) end both medicare and medicaid and replace
them by a requirement that every U.S. family unit have a major medical insurance policy
with a high deductible, say $20,000 a year or 30 percent of the unit's income during the prior
two years, whichever is lower; (2) end the exemption from tax of employer-provided medical
care; it should be regarded as a fully taxable fringe benefit to the employee -- deductible
for the employer but taxable to the employee. Each of these reforms needs further
discussion.
(1)
Preferably, the major medical insurance policy should be paid for by
the individual family unit, which should receive a reduction in taxes reflecting
the reduction in cost to the government. There would be an exception for
lower income families and for families who were unable to qualify for
coverage at an affordable fee. The Government would help them finance the
policy though not administer it. That would be done by private competitive
insurance companies, chosen by each individual or family separately, who
would, of course, be free to buy supplementary insurance if they so desired.
However, even if the government were to pay directly for major
medical insurance for everyone -- rather than by reducing taxes -- there is
little doubt that both government and total heath cost would decline
drastically because of the elimination of the tremendous governmental
bureaucratic structure that has been built up to supervise a large fraction of
all health activities.
(2)
The tax exemption of employer-provided medical care has two different
effects, both of which contribute to raising health costs. First, it leads the
employee to rely on the employer rather than himself to finance and provide
medical care. Yet the employee is likely to do a far better job of monitoring
health care providers in his own interest than is the employer. Second, it
-11-
?
leads him to take a larger fraction of his total remuneration in the form of
I
health care than he would if it had the same tax status as other expenditures.
If the tax exemption were removed, employees could bargain with their
employers for a higher take-home pay in lieu of health care, and provide for
their own health care, either by dealing directly with health care providers or
through purchasing health insurance.
These two reforms would completely solve the problem of the currently medically
uninsured, eliminate most of the bureaucratic structure, free medical practitioners from the
incredible burden of paperwork and regulation to which they are now subject, and lead
many employers and employees to convert employer provided medical care into a higher
cash wage. The taxpayer would save money, since total governmental costs would go down
drastically. The family unit would be relieved of one of its major concerns -- the possibility
of being impoverished by a major medical catastrophe -- and most could readily finance the
remaining medical costs, which I conjecture would return to something like the 5 percent
of total consumer spending that it was before the Federal government got into the act.
Families would once again have an incentive to monitor the providers of medical care and
to establish the kind of personal relations with them that once were customary. The
demonstrated efficiency of private enterprise would have a chance to operate to improve
the quality and lower the cost of medical care.
There is only one thing wrong with this dream. It would displace and displease the
large number of people who are now engaged in administering, studying, and daily revising
the present socialized system. including a large private sector component that has adjusted
to the system. Most of them are highly competent at what they do, and would be able to
use their abilities in productive activities if their current employment were terminated. But
understandably, they will not see it that way, and they are sufficiently potent politically to
kill any such reform before it could ever get a real following, just as the educational
bureaucracy has repeatedly been successful in killing even modest programs for privatizing
the educational system, even though poll after poll shows that the public supports
privatization through parental choice.
Medical care provides a clear example of the basic difference between private and
governmental enterprise. That difference is not in the quality of people who initiate or
operate new ventures, or in the promise of the ventures. The people proposing and
undertaking government ventures are generally as able, ingenious, and of as high moral
character as the people undertaking private ventures, and the ventures they undertake may
well be of equal promise. The difference is in the bottom line. If a private venture is
unsuccessful, its backers must either shut it down or finance its losses out of their own
pockets, so it will generally be terminated promptly. If a governmental venture is
unsuccessful, its backers have a very different bottom line. Shutting it down is an admission
of failure, something none of us is prepared to face if we can help it. Moreover, it is likely
to mean the loss of a remunerative job for many of its backers and promoters. And they
need not shut it down. Instead, in entire good faith, the backers can contend that the
apparent lack of success is simply a result of not carrying the venture far enough. If they
are persuasive enough, they can draw on the deep pockets of the taxpaying public, while
-12-
replenishing their own, to finance a continuation and expansion of the venture. Little
wonder that unsuccessful government ventures are generally expanded rather than
terminated. In my opinion, that is what is responsible for Gammon's "black holes," whether
in medicine, schooling, the "war on drugs," agricultural subsidies, protectionism, and so on
and on. That is the way high-minded motives and self-interest combine to produce what
Richard Armey once labelled "the invisible foot of government." I challenge you to find
more than a very exceptional counter-example.
I am indebted for helpful comments and assistance to Professor Gary S. Becker, Dr. Robert J. Cihak, Dr. James
F. Fries, Dr. Thomas Moore, and, as always, to my assistant, Gloria Valentine, who did much of the detailed
work of digging out the statistical data from a wide variety of sources.
-13-
Taxes Inceative effects
Memorandum
RUSH!
The
Heritage Foundation
214 Massachusetts Avenue, N.E. Washington, D.C. 20002-4999 (202) 546-4400
11/20/91
Number
316
HOW THE KASTEN-WEBER TAX CUT
WILL SPUR ECONOMIC GROWTH
The deep and painful recession afflicting America is the result of seriously flawed economic policies sup-
ported by George Bush and Congress. Record tax increases, costly new regulatory burdens, and unprecedented in-
creases in federal spending all have combined to discourage job creation and entrepreneurship. Even though the
evidence is clear that the economy remains stagnant, Bush Administration economic advisors actively are oppos-
ing growth legislation. And Bush apparently is following their bad advice. Warned The Wall Street Journal this
week in an editorial: "Even as lusty a beast as the U.S. economy can take only so much punishment from its
political masters in Washington. The long and short of it is: The world's most important economy is in the grip of
economic incompetents." As long as it remains in their grip, American workers and families will remain con-
demned to lower living standards and rising unemployment.
Yet the economy can grow again if policy makers remove the shackles placed on it last year by the tax and
spending increase. To do so, lawmakers must reverse course and correct the mistakes that are causing the reces-
sion and adopt policies that encourage job creation and increase incentives to work, save, and invest.
A good start is the Economic Growth and Family Tax Freedom Act of 1991 (S. 1920, H.R. 3744) introduced
by Senator Robert Kasten of Wisconsin and Representative Vin Weber of Minnesota, both Republicans. The Kas-
ten-Weber growth package cuts the tax on savings and investment, technically known as the "capital gains tax,"
lowers taxes on business investment, expands Individual Retirement Accounts (IRAs), offers real estate tax relief,
and establishes enterprise zones. Kasten-Weber also relieves the tax burden on families by granting a $1,000 non-
refundable tax credit for children under age 6 and a similar credit of $300 for children age 6 to 18. The credit sig-
nificantly would reverse the rising tax burden on families caused by inflation's erosion of the dependent exemp-
tion over the past four decades.
With the economy mired in recession, the portion of the Kasten-Weber package designed to promote economic
growth is particularly critical. Its key features:
15 Percent Capital Gains Tax-Germany, Hong Kong, the Republic of China on Taiwan, and South Korea
do not tax long-term capital gains, the difference between an asset's purchase and sale price. In Japan, the maxi-
mum tax on capital gains is a mere 5 percent. In the United States, by contrast, capital gains are subject to a 28
percent tax. To make matters worse, the tax code ignores the fact that much of the higher sales prices and profits
on savings and investments are due to inflation. American investors cannot use indexing to ensure that taxes only
are paid on actual gains rather than changes in asset value caused by inflation.
The Kasten-Weber proposal would cut to 15 percent the capital gains tax for savers and investors in the upper
tax brackets and to 7.5 percent for those in the lower bracket. To prevent the unfair taxing of gains that reflect
only inflation, the legislation also permits indexing. By calling for a lower rate and including indexation, the Kas-
ten-Weber capital gains proposal goes well beyond the anemic proposal endorsed by the White House and would
provide a much stronger stimulus to the economy.
Note: Nothing written here is to be construed as necessarily reflecting the views of The Heritage Foundation or as an
attempt to aid or hinder the passage of any bill before Congress.
Washington-based economists Gary Robbins and Aldona Robbins of Fiscal Associates, Inc., estimate that
lowering the tax to 15 percent would create more than 900,000 new jobs over ten years and boost gross national
product growth by an average of 0.36 percent for each year over the ten-year period. Other economists find
similar impact from a capital gains tax cut. Allen Sinai, Chief Economist of The Boston Company, estimates that
a 15 percent capital gains tax would boost employment by 600,000 within five years and increase the gross na-
tional product by 0.2 percent annually. Reducing the capital gains tax also would boost asset values, thus
strengthening American banks and homeowners as well as reducing the cost of bailing out the federal
government's savings and loan deposit insurance scheme.
Neutral Capital Cost Recovery-Kasten-Weber increases the amount of deductions businesses can take for
investment expenses by adjusting "depreciation" schedules for inflation and the value of money. This reform sub-
stantially would boost capital formation by reducing the after-tax cost of investment. Under current tax law, busi-
nesses cannot deduct the cost of investments in the year when they are incurred. Instead, these costs must be
"depreciated" over time, up to 31 years. Eventually, of course, the business is permitted to deduct the entire
nominal amount invested. But the true value of this deduction is eroded enormously by inflation.
The Kasten-Weber neutral capital cost recovery approach would address the tax code's bias against business in-
vestment. If a business originally was supposed to depreciate $10 million of an investment in the second year, for
instance, Kasten-Weber might increase that depreciation to $10.8 million, with similar adjustments in following
years so that the value of the deduction would keep pace with inflation and the cost of funds. Correctly struc-
tured, neutral capital cost recovery would provide the same incentive for increased investment as plans permitting
immediate deductibility of business investment in the first year. This would remove some of the current penalty
on productive investment.
IRA-Plus-Kasten-Weber expands upon current IRAs by giving all taxpayers the option to invest in In-
dividual Retirement Accounts. Savers, moreover, would get the option of investing in IRAs that would allow for
tax-free withdrawal of both principal and interest income upon retirement. Taxpayers taking advantage of this
"back-ended" IRA, however, would not be able to deduct contributions in the year they are made. In addition to
allowing tax-free withdrawals upon retirement, Kasten-Weber would permit 25 percent of the IRA to be
withdrawn before retirement for initial home purchases, education, and medical emergencies.
Passive Loss Reform-As part of the 1986 Tax Reform Act, so-called passive investors in real estate, those
defined as not principally engaged in the business, cannot use rental properties losses to offset other income.
Many experts say that this provision has helped trigger the decline in American real estate values and thus has in-
creased the cost of the savings and loan deposit insurance bailout. Kasten-Weber would reform passive loss rules
for real estate so they more closely resemble guidelines for other business investments.
Enterprise Zones-To encourage economic growth in impoverished urban centers and other particularly
depressed sectors of the country, Kasten-Weber would allow the creation of 50 enterprise zones. Employers open-
ing operations in the zone would receive a tax credit for workers in the zone. No taxes would be levied on capital
gains in the zone, and investments in zones could be immediately deducted from taxes in the year they are in-
curred. These zones especially would help create jobs in inner cities.
Bush Administration and congressional policies have made it unprofitable for businesses to hire new workers
and for investors to put their money at risk. Excessive taxation and overregulation have ground the economy to a
halt and pushed nearly two million additional Americans into unemployment lines. Meanwhile, Washington
policy makers seek not answers, but how to assign blame elsewhere. Bush clumsily blames credit card issuers for
high interest rates, while liberals in Congress think higher taxes on the "rich" will spur growth.
There is no mystery about how to restore growth: simply reduce or remove government penalties on job crea-
tion, savings, and investment. The Kasten-Weber bill will not solve every economic problem created by policy
mistakes, but enactment of the pro-growth legislation would stimulate increased economic activity and reduce the
tax burden on families.
Daniel J. Mitchell
John M. Olin Senior Fellow
THE
HERITAGE
LECTURES
Israel
350
Israel's Economic
Challenge:
How the U.S.
Can Help
By Daniel Doron
The
T
Herîtage Foundation
The
Heritage Foundation
The Heritage Foundation was established in 1973 as a nonpartisan, tax-exempt policy
research institute dedicated to the principles of free competitive enterprise, limited govern-
ment, individual liberty, and a strong national defense. The Foundation's research and study
programs are designed to make the voices of responsible conservatism heard in Washington,
D.C., throughout the United States, and in the capitals of the world.
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Note: Nothing written here is to be construed as necessarily reflecting the views of The Heritage
Foundation or as an attempt to aid or hinder the passage of any bill before Congress.
The Heritage Foundation
214 Massachusetts Avenue, N.E.
Washington, D.C. 20002-4999
U.S.A.
202/546-4400
Israel's Economic Challenge: How the U.S. Can Help
By Daniel Doron
Especially now, when everyone's attention is riveted to the divisive issue of whether the
United States should grant loan guarantees to the Israeli government, and if it does should it ex-
ploit its leverage to extract economic or political concessions from Israel, it may be useful to step
back and consider these questions in a historical perspective. A proper understanding of the Is-
raeli predicament-of how a nation so rich in human capital came to have such a lame economy
-and of the steps that must be taken to help it overcome its difficulties may also have a sig-
nificance transcending the particular case of Israel.
"Of all the lands there are for dismal scenery," Mark Twain wrote in 1867 in The Innocents
Abroad, "I think Palestine must be the prince. The hills are barren
dull
The valleys are un-
sightly deserts fringed with a feeble vegetation [peopled by] swarms of beggars and peddlers
[struck with] ghastly sores and malformations
Palestine sits in sackcloth and ashes
Only
the music of angels could charm its shrubs and flowers to life again.
"
It took, indeed, religious visionaries and, later-when the enlightenment secularized Europe's
Jewish intelligentsia- utopian socialists to revive this "hopeless, dreary, heartbroken land." No
Homo Economicus moved by rational expectations would have submitted himself to hunger, dis-
ease, pillage, and murder in lawless Ottoman Palestine in order to resuscitate its "waste of
limitless desolation."
Thus I wrote in 1988, thoughtlessly repeating the prevailing myth that socialism played an es-
sential role in the resettlement of what was then desolate Ottoman Palestine. The truth was that
from the modern Jewish resettlement, Palestine in the mid-1800s, it was entrepreneurs, later
aided by private charities, who established the first agricultural colonies and towns. They took
enormous risks because they were moved by a deep religious faith that this was the way to
redeem Israel from its atrocious exile.
Socialist Myth. After the turn of the century and until 1914, the Jewish population in Pales-
tine doubled from 35,000 to 70,000. During that fourteen year period, private entrepreneurs
established or extended in a most hostile environment three thriving towns, ten colonies,
rudimentary industry and commerce, and an impressive educational and cultural network. It was
during this same period that about 3,000 young, secular, penniless, socialist pioneers also ar-
rived, five hundred of them to establish three collective settlements that were maintained by
public support. Yet Zionist mythology credited the young socialist pioneers of the Second Aliyah
with founding modern Israel. It obliterated all memory of the true founders, so much so that even
though my great-grandfather was among the first settlers, and our family cherished the memory
of his remarkable achievements, I, too, thoughtlessly accepted the myth about Israel's socialist
origin.
This little episode is worth relating because the story of how socialism came to dominate the
Zionist enterprise-reshaping its history, as well as eventually transforming the nature of the
Jewish community in Palestine-contains a moral far transcending Israel's particular predica-
ment. An Eastern European ethos has conditioned the development of modern Israel ever since
Daniel Doron is Director of the Tel Aviv-based Israel Center for Social and Economic Progress.
He spoke at The Heritage Foundation on September 20, 1991.
ISSN 0272-1155. ©1991 by The Heritage Foundation.
1
the very inception of Zionism about 130 years ago, as I shall later explain. Therefore, the trials
and tribulations of the Israeli economy, as it struggles to make the transition from a statist to a
market economy, can shed significant light on the challenges and difficulties that Eastern
European countries may encounter and can guide friends wishing to help.
I have advisedly chosen to dwell on what might seem as a tangential issue: the secondary role
outside influences can play in an economic system's evolution. Many here may be involved in
facilitating the transition in Eastern Europe. Israel's case demonstrates that the role of outside in-
fluences can sometimes be quite critical in shaping developments and alas, despite the best of
intentions, not always in the most salutary manner. For sometimes help misapplied cannot only
be counterproductive, but positively harmful and regressive.
Well-Intentioned Friends. To return, then, Zionism certainly has a predisposition to contract
socialism fever. Historical circumstances, especially the long entrenched autocratic abusive
regimes that were legitimized by orthodox Christianity, made all of Eastern Europe, particularly
the Jews, vulnerable to revolutionary fervor and utopian temptations. However, this disposition
could not have successfully taken over Zionism if not for the well-intentioned intervention of
friends, most from the West, many from America, who participated in events in Palestine without
much foresight or care.
When in 1920, under the British Mandate, Palestine's doors opened, tens of thousands of dis-
placed European Jews clamored to emigrate. A totally unprepared Zionist organization stopped
them, ostensibly for economic reasons, but really because its purpose was to shape the develop-
ment of Palestine's Jewish community in a certain direction.
Eastern European Zionist leaders such as Chaim Weizman accepted the anti-Semitic calumny
that Jewish society was at least partially responsible for its misery because Jews were not a
productive, land-tilling people, but parasitic capitalists. They therefore wanted to create a new
Jewish person and society, based on "honest" labor, and not the traditional middle class society
of entrepreneurs.
Conversely, Judge Louis Brandeis and his followers in American Zionism were convinced that
only the encouragement of private enterprise could provide a sound economic basis, and that a
collectivist system would pose a danger to democratic society. But they remained a minority.
The Utopian collectivist ideology prevailed; Brandeis resigned from the Zionist Organization of
America, and Weizman and his supporters were able to channel all Zionism's resources into the
collectivist sector, thus turning it from a tiny minority to the dominant economic and political
force in Zionism.
Inhibiting Entrepreneurship. The Zionist settlement department and its considerable resour-
ces were devoted to the promotion of a socialist-dominated society, while great handicaps were
devised to inhibit the growth of middle class entrepreneurship. This occurred despite repeated
failures of the collectivist sector, which survived only through constant infusions of public
money. Public money was raised, ironically, mostly from middle class American Jews who sin-
cerely wanted to help, but could not really bother to learn the issues facing Zionism or to act
carefully to prevent their help from tilting the balance in favor of socialism.
As it has had elsewhere, socialism has had a devastating effect on Israel. In the thirty years
preceding the State's establishment, and in the forty years following it, Israel created, with the
benefit of huge capital inflow (over $70 billion since the State's creation), with back-breaking
work and with sometimes superhuman sacrifice, a laggard economy incapable of offering the Is-
raeli worker more than a measly $1,000 monthly average salary. Instead of permitting the Jewish
people to invest their considerable talents and resources in creating an urbanized, highly-in-
dustrialized center with advanced service industries and a sophisticated financial industry
2
capable of absorbing millions of highly-educated Jews, Zionism established, before inde-
pendence, only a small community based on a weak, agrarian economy. After independence, it
spawned a centrally-dominated and collectivist economy, which made Israel economically de-
pendent on foreign help.
Zionism's inhibitions on urbanization and industrialization, which could have assured a high
standard of living to all the inhabitants of the land, had serious repercussions. The backward col-
lectivist economy, with its essentially discriminating political manipulation, sharply increased
social and ethnic divisions. Incessant struggles over the division of the pie corrupted politics and
degenerated economics. It also gravely damaged productivity by the wholesale misallocation of
resources and by channelling so much energy into the seeking of privileges.
The economy's politicization also aggravated the Arab-Israeli conflict. Concentrating the
Zionist effort on agriculture inhibited economic growth and naturally intensified the confronta-
tion with the Arabs, who were mostly rural. It focused the struggle on land and water, which are
limited resources that are difficult to share. And slow economic growth and sluggish demand for
labor also sparked a struggle over employment in Mandatory Palestine.
Economic Discrimination. Later, in independent Israel, when much of the economy
belonged to national or public entities, with economic benefits a political coin, the Arab popula-
tion, lacking political clout, was subject to the economic discrimination inherent in excessive
politicization, much in the same way and for the same reasons that the Sephardim were dis-
criminated against. To this day, lack of opportunity and economic discrimination strain the fealty
of Israeli Arabs.
By the time of the creation of the State, socialism was, of course, well entrenched, but its
repeated economic failures forced Labor governments slowly and painfully to reduce their total
control of the economy, though not nearly speedily enough. In the late 1970s, growing discon-
tent with the malfunctioning of the Israeli economy was a major factor in Labor's loss. A
reformist party siphoned off enough Labor votes to gain sixteen Knesset seats, thus enabling
Likud to become the majority party and form a government for the first time.
Ostensibly pro-private enterprise, Likud made a hasty, ill prepared and tentative attempt to
reform the economy. It was so ill conceived and executed that it caused skyrocketing inflation.
Also, soon enough the allure of power and the strength of populist elements in the party led it to
greatly increase the government's involvement in the economy. It had far more involvement than
labor, by exploiting increased foreign aid to greatly extend social benefits, the welfare system,
and huge subsidies to industry and the consumer. Even today, when economic aid mostly covers
the repayment of debt and is therefore merely a bookkeeping exercise, it still enables the govern-
ment to delay vital structural change.
Tangle of Regulations. Under Likud, then, government intervention in the economy reached
new heights. The government owns over 200 corporations in all economic spheres. Despite some
very halting steps toward privatization, it still controls the import of many staples. It sanctions
dozens of monopolies. The government has recently moved to lift many import regulations, but
in too many cases, it has simply switched from bureaucratic restrictions to high duties to protect
inefficient Israeli industries from competition. One can scarcely engage in any profession or
trade without a government permit or compliance with a tangle of regulations, an especially
serious impediment to the Russians wishing to enter the economy.
Government denies free or easy entry to the market and ties the hands of producers with
onerous labor laws. It imposes on labor and employers punitive taxes that destroy their competi-
tiveness and nip in the bud new enterprises. As a result, Israel has a very small proportion of
small businesses, which in turn curtails competitiveness and efficiency. Israel has over two
3
dozen different major taxes and dozens of special levies (imposed, for example, on stud rams,
camel markers, and reburials). As much as 55 percent of gross national product is taken in taxes,
although about 25 percent is returned in subsidies and transfer payments.
Discredited Statism. Yet despite the fact that Israel has perhaps earned its bad annual report
cards, there are tremendous changes afoot there. In the past few years, statist ideology has been
almost totally discredited in Israel. Ironically, even when the government attempts to intervene
in a massive way, as in a recent plan to promote employment by granting generous subsidies to
industry, it does so putatively to "assist the workings of the market" and to "encourage
enterprise." But such excuses do not usually wash, and most of the press and many in the policy
community are quick to expose the absurdity of such government assistance. This is light years
away from what prevailed even as recently as six or seven years ago, when government
proposals were often criticized, but only on the grounds of their ineffective execution, while
their necessity or raison d' etre was seldom questioned. As a result, a number of major economic
initiatives the government planned, that would have cost Israel billions of dollars, have been
squashed.
Even though it seems that the political establishment is reluctant to accelerate change, it ap-
parently understands where the wind blows. In September, we witnessed an astounding
phenomenon: a Labor party that still finds it difficult to separate itself from its red flag and May
Day celebration, launched a massive ad campaign attacking the Likud government for not being
friendly enough to free enterprise. A new Labor election platform calls for privatization and
reduced government interference in the economy.
The refutation of statist ideology has also brought about other changes in policy. While only a
few major reforms have been successfully completed so far, those familiar with political under-
currents can discern significant beginnings for profound future changes.
There were two developments within the Israeli economic and political system that caused
many of these changes and that are worth commenting upon because they may contain sig-
nificant lessons about how the internal dynamics of a statist economy eventually mandates
transition to a market economy.
If we were to analyze Israeli politics strictly by the hypotheses of social choice theory, there
could be very little prospect for economic reform. Since Israeli politicians are in almost total con-
trol of the economy, only revolutionary change could force them to forego their enormous
power. Yet it seems that the extensive use of economic favors to buy political influence finally
makes the political exploitation of the economy self-defeating.
Vested Interests. One can observe an interesting favor-seeking process on the national scene,
even, most significantly, within political parties. Having offered so many government favors to
their followers, Israeli political parties have in effect, been transformed into unstable coalitions
of vested interests vying for government favor. Since even the Israeli government does not pos-
sess unlimited resources, party lords cannot ultimately satisfy the needs of all their
constituencies, whose expectations keep rising much faster than favors can be granted.
Moreover, even if an attempt was made to satisfy them all equally, it would not prevent a des-
tabilizing struggle from developing, for each group would consider itself more deserving and
would demand more favors, not least as a token of its larger political clout. Thus, for every satis-
fied customer that a leader acquires by dispensing political favors, he creates a number of
dissatisfied clients, and several political enemies. Parties then resemble families torn by conflict
and intrigues as a result of a sudden inheritance that must be shared. With no objective economic
criteria to indicate how such a windfall can be divided and no productive effort to be rewarded,
4
personal and political ambition become the predominant factors and rivalries and jealousies
abound. Finally, they destablize and break apart the family or the party.
It seems then that while the setting of a constitutional limit on the economic power invested in
government and in political parties may be necessary, what will make such a limit acceptable
and even desirable to politicians is the realization that the dispensing of political favor is even-
tually counterproductive. Politicians must recognize that rather than securing their hold on
power, in the long run it undermines it. They also must realize that since a nation's strength
depends on its economic viability, its political system cannot long survive massive government
control of the economy, as we have witnessed in Eastern Europe and even in Sweden.
A second process that holds great promise for spontaneous grass roots and market-generated
reform can be witnessed in Israel in the way market forces eroded the political establishment's
economic base while empowering previously disenfranchised citizens. Decades of political
manipulation and misallocation of resources have finally taken their toll on industrial enterprises
owned by government, the Labor Party and the banks, as well as the Labor-affiliated sick fund,
pension funds, and agricultural cooperatives. Moreover, the same relentless forces that are final-
ly weakening Israel's statist economy are also beginning to reward, albeit, haphazardly,
Sephardic Jews who lacked access to the system and therefore had to make it independently,
mostly in the informal economy.
Healthy Attitude. A survey of income disparities in Israel between Ashkenazim (Jews of
European background) and Sephardim (Jews from Arab countries) discovered that despite ex-
tremely high taxes and transfer payments, income gaps kept growing among these groups in the
public sector. But among independent wage earners, Sephardim moved up faster and overtook
the Ashkenazim. Ashkenazim, mostly well established officials, discovered to their chagrin that
while education and contacts gave them access to coveted jobs, they remained highly taxed. The
more recently arrived Sephardim, lacking such connections, moved into trades and small busi-
nesses where they satisfied rapidly expanding demands and participated in the underground
economy. Never having been infected by the ethos of socialism, they were generously rewarded
for their healthier attitude toward enterprise.
Many Sephardim rose in the Israeli political hierarchy through the direct elections of mayors,
making them more responsive to public needs and accountable to their constituencies than Mem-
bers of Knesset who are put on the slate by the executive committee.
However, what might really force the hand of the system and promote change is the massive
wave of new immigrants from the Soviet Union. The challenge of housing and providing jobs for
tens of thousands of new immigrants can simply not be met by Israel's sluggish economic sys-
tem. As a matter of fact, already the government has had to forego its intervention in the initial
absorption process and allow for direct absorption by handing each immigrant family a subven-
tion with which to purchase housing, food, clothing, and education. As a result, Israel was able
to absorb the first wave of almost 300,000 immigrants without initially having to add to the exist-
ing housing stock. Suddenly, tens of thousands of empty apartments, which were owned as
inflation-proof investments, were put on the rental market, and provided the necessary housing.
In the area of employment, too, markets have operated much more gingerly than statistics
reveal. Official figures show an 11 percent unemployment rate in Israel. Yet it is difficult to
secure the services of a maid for even $10 an hour (the average monthly salary in Israel is
$1,000), and there are many thousands of illegal foreign workers from Poland, Portugal, Ghana,
Turkey, Romania, and the Philippines (besides the scores of thousands of Arab workers from the
West Bank, Gaza and even southern Lebanon) who find employment in Israel. This apparent
paradox of jobs going begging while there is apparently such a high rate of unemployment is due
5
not only to the disincentives provided by high unemployment compensation on the one hand,
and significant taxes imposed on low income brackets on the other, but also because much
employment is in the informal sector.
Altogether, the existence of a vigorous informal sector, while saving Israel from being torn
apart by disruptive social tensions and economic hardships, has also reduced the pressures for
reform, especially of the tax system. People often wonder why Israelis, who are among the
highest taxed people in the world, have not declared a tax revolt. The reason seems to be that
they have "privatized" their revolt, sometimes by individual tax evasion, but more often by sec-
torial arrangements whereby although the taxable portion of the salary is small, the worker
receives various perks, on which often only the employer pays taxes. The unfortunate result is
that while take home pay is very low, the cost of labor to the employer is very high.
Once hidden excess capacities in the job and housing markets are exhausted, however, the
need to create additional jobs and additional housing for the immigrants will come up against the
rigidities inherent in Israel's statist economy.
The greatest hope for rapid employment expansion is small businesses. Their proportion in Is-
rael is much smaller than that prevalent in Western economies, because the Israeli economy is
rife with government-sanctioned monopolies, with government bias in favor of large enterprises,
with onerous entry limitations (one, for example, cannot establish a pharmacy within a radius of
500 meters from an existing one), and heavy taxation at low brackets preventing capital ac-
cumulation. If Israel is rapidly to expand employment, massive deregulation and lower taxation
must be instituted.
In housing, too, government interference is the major hindrance to rapid expansion. We have
calculated that the average three-room apartment in Israel that now costs $100,000 contains at
least $65,000 in government-imposed costs: inflated land prices (the government owns 93 per-
cent of the land), capital consuming lengthy planning and regulatory procedures, high taxes on
building materials and labor, government-sanctioned monopolies in steel, iron, cement and in
contracting services.
A Blueprint for Reform. So what can be done besides complaining and issuing bad report
cards? In February 1990, my organization, the Israel Center for Social and Economic Progress,
held an international conference with the participation of over 2,000 people (including Israel's
President, ministers, Knesset members and other pillars of the establishment, and foreign dig-
nitaries, such as Milton Friedman, Justice Antonin Scalia, Trevor DeCleane, Stuart Eizenstat, and
others). With their help we were able to produce a blueprint for reform.
The government budget and taxes must be cut drastically. We put together a detailed plan
that pointed out chapter and verse how to cut 10 percent of the budget simply by
eliminating duplication and waste.
Tax systems and capital markets must be reformed and hidden capital legitimized so a
thriving underground economy can be integrated into the formal one, and thus increasing
productivity.
Government companies, including those in the defense industry, must be sold, but not
through a lengthy piecemeal process that encourages powerful interests to acquire them at
preferential terms. They must be incorporated into two or more competing mutual funds
whose shares should be offered to the public.
Government must release vast tracts of land and sell them to the highest bidder.
6
A pending law to encourage rental housing must be finally enacted. This will help make
the building industry more efficient and competitive.
Once competitiveness and efficiency have been accelerated, municipalities can privatize
their services, and so save a large portion of their outlays. This will enable them to reduce
local taxes, which are a heavy burden, especially on small businesses.
Above all, the Israeli economy must be massively deregulated to become truly
competitive. A blue ribbon committee should be established to review all government
regulation of economic activity. Those that are not proven cost effective or that impede
economic growth should be abolished within a reasonable period of time.
Now that our seven years of work have conspired with circumstances to convince most Israeli
decision makers and public opinion molders that economic reform is a top priority, and that only
a market economy can assure Israel's viability and security, the hard work has only begun on
how to get from here to there. As experts in Eastern Europe point out, it is not enough to con-
vince people that reform is necessary; it is not even enough for them to want it desperately. They
still have to develop concrete strategies, adapted to an economy's particular circumstances, to its
unique institutional setting and its social relationship, if they wish to see reform not only enun-
ciated but actually carried out.
You have to identify the groups that would cooperate on economic reform and try to win over
those resisting it in order to both generate support and eliminate or modify opposition. This re-
quires more than annual rhetorical exhortations telling the government to shape up and do
certain things or to refrain from doing others. It takes a much more arduous effort to persuade
decision makers that reform is in their best interest in the long run, to teach them the ABC's and
the syntax of proper economics so that they can all write a better economic scenario in their own
spheres of action. Holding out a foreign model for reformers and expecting them to follow it on
faith will just not do the trick.
The setting up of foreign models to be emulated may prove to be counterproductive unless
done with the utmost sensitivity and discretion. The particular ethos of different countries, their
unique aspirations, institutional dynamics, and even their peculiar semantics may be so different,
that those opposing reform could easily seize on such differences in order to discredit the notion
of reform.
Judicious Criticism. To those who exhort Israel to follow the example of Hong Kong or
South Korea, many Israelis would retort that since these are not democratic countries, they can
resist the pressure to close great discrepancies in wealth. Also since, at least until recently, large
parts of their populations were not well educated, they could not serve as models to a country
like Israel wishing to integrate a great mass of very educated immigrants who thought that if the
price for democracy and greater equality must be greater government involvement in the
economy, so be it.
It should also be remembered that strident, often simplistic, even slanted, foreign criticism of
Israel, and attempts by outsiders to twist the arm of its government, even if well motivated, may
alienate many Israelis. For they already feel that they are exposed to far too much foreign
scrutiny and double-standard criticism. This criticism may play into the hands of those who resist
reform by enabling them to recruit patriotic feelings.
So, to be effective, foreign critics must act very judiciously and sensitively and not indulge in
generalities and in intemperate rhetoric. They must remember what a daunting task basic
economic reform is even in countries which enjoy relatively free market economies and not ex-
pect that by acting as visiting firemen they can institute reforms in foreign economies overnight.
7
This is not to say that foreign friends should keep away and not lend a helping hand. To the
contrary, they have a vital role to fulfill in encouraging local advocates of reform. Since official
U.S. representatives tend to confine their contacts and attention to official circles and the estab-
lishment that is associated with them in statist economies, the population gains the impression
that U.S. sympathy and prestige are behind the policies they follow.
It is therefore vital that voluntary U.S. organizations find a way to convey to the people in
these countries what the U.S. really stands for in terms of the values and policies associated with
the market economy, by establishing their own ties with their counterparts in these countries.
Where such counterparts are lacking, as in many autocratic regimes in Latin America, the Arab
countries, and the Far East, they might want to emulate the example set by the Open Society
Fund which successfully sowed the seeds of a civil society in many East European countries
when they were still communist.
Local reformers should be helped by permitting them easier access to the experience accumu-
lated by reformers elsewhere, and the means should be provided to help transmit such
knowledge in their native language and in terms assimilable by their own culture. Often it is
most difficult for such reformers to raise funds for their activities in their own countries since the
source of most wealth is in the government's hands and with those who benefit from government
intervention and would therefore oppose reform.
Rethinking Foreign Aid. Above all, the time has come for proponents of economic reform to
give some very serious and urgent thought to how to neutralize some of the very destructive con-
sequences of government-to-government foreign aid that in the past often resulted in creating in
the beneficiary countries an overbearing and injurious public sector. Can government aid be used
as a leverage to encourage the private sector of developing countries, and if so, how?
It is clear that most countries wishing to make the transition from a statist to a market
economy are facing formidable problems. They urgently need help. But, as the saying goes, it is
better to teach them how to fish than to provide them with fish.
Educating people to function in a market economy is a long, arduous process, but there are no
short cuts. It is the reformer's task not to hit their opponents over their heads, but to educate
them patiently, convince them that through individual freedom and free markets their yearning
for a better life can be realized sooner, more peacefully, and even more justly.
8
LBML
Economy
Bell Mueller Cannon,
Watch
Inc.
Lehrman Bell Mueller Cannon, Inc.
November 1991
Lewis Lehrman, Chairman
Frank Cannon, Mg. Director
2111 Wilson Blvd. Suite 416
Jeffrey Bell, President
Ralph Benko, Vice President
Arlington, Va. 22201
John Mueller, VP/Economist
Charles Reid, Dir. of Research
(703) 243-6955
Rest of 1991
1992
Comment
Growth
4th-Q real GNP
Growth slows to
4% + growth in
growth about 3%.
2% at mid-year.
1993's 1st half.
Inflation
CPI 3.0% yr/yr avg.,
3.0% yr/yr avg.,
Inflation jumps to
3.5% annualized.
3.1% annualized.
4%-5% peak in 1993.
Interest Rates
30-yr. T-Bond yield
Yield bottoms
Yield hits 8-1/4% in
just below 8%.
around 7-1/4%.
mid-1993.
Stocks
Stocks move
Rally continues:
DJI peaks at 3,800
generally higher.
DJI hits 3,300.
at end of 1992.
Dollar
Dollar rises V. DM,
Dollar peaks near
Germany struggles
eases against yen.
DM1.90 in 1st half.
with inflation awhile.
After the Fall: Dow at 3,800
Bull markets climb a wall of worry, says
positive surprises, for example in in-
the old adage. The recent 5% + correc-
dustrial production. Meanwhile, a fur-
tion in the Dow Jones Industrials has
ther improvement in the outlook for
raised widespread fears that a bear
inflation reinforces our view of a bond
market is beginning. We don't think so.
rally in 1992. Moderate growth plus a
Like the consensus, we've trimmed our
bond rally add up to a strong advance in
forecast for current-quarter GNP
the stock market. We're raising our tar-
(though not for industrial output), but
get for the Dow Jones Industrials a year
continue to think that we'll soon see
from now to 3,800.
Copyright © 1991 by Lehrman Bell Mueller Cannon, Inc., Arlington, Va. All rights reserved. This
work may not be reproduced in whole or in part without the express prior written consent of the
copyright owner. The information contained herein has been obtained from sources which we
believe to be reliable, but we do not guarantee its accuracy or completeness.
November 1991
2
Economy Watch
Growth. This is a moment of truth for
should rise to a 4-5% peak in 1993 (Sec-
our growth forecast. After sharp gains in
tions 1.4 & 1.5).
April through July, industrial output
paused for three months (see graph). If
Bonds. We expect the 30-year Treasury
we were right last month in calling this
bond yield to tarry near 8% as stronger-
"a blip down on the way up," industrial
than-expected growth is digested. But
growth should resume in November, and
bonds should rally on low inflation news
continue until
until the yield
about February
Moment of Truth.
reaches
7-
(Section 2.5).
1/4% toward
So far, our
Capacity Utilization: 2 Years Ahead
the end of
forecast of in-
Total industry: Actual vs LBMC forecast
1992. We con-
86%
dustrial output
tinue to expect
has been on the
85%
the jump in in-
button; but real
flation in 1993
84%
GNP
growth
to drive yields
has
been
83%
up 100 basis
weaker than we
points (Sec-
82%
forecast. We're
tions 3.1 &
scaling down
81%
3.2).
our forecast for
80%
the
current
Stocks. We
quarter,
but
79%
think
the
still
expect
November
GNP
78%
to
stock market
surprise
the
77%
correction will
at
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consensus
be followed by
2.9% in the
Model shown unsmoothed.
Actual
+
2-year Forecast
-
Current Forecast
a rally. In fact,
fourth quarter,
we've raised
a bit faster than the third (Section 2.6).
our estimated peak on the Dow to 3,800
by the end of 1992 (Sections 3.3 and
3.4).
Inflation. In May we argued that year-
to-year producer price inflation, then
Dollar. We were right in thinking that
3.2%, "could fall almost to zero in the
the dollar would continue to weaken
fourth quarter." In July we said CPI in-
against the yen. But in November the
flation would fall to a low of 3%. CPI
market strongly disagreed with our view
inflation hit 2.9% and PPI inflation 0.0%
that the greenback would rise against
in October. We expect year-to-year in-
the Deutschemark. Undaunted, we ex-
flation to stay near these levels until the
pect the dollar to rise and the DM to fall
latter half of next year. CPI inflation
from here (Section 3.5).
Lehrman Bell Mueller Cannon, Inc.
Economy Watch
3
November 1991
1.0. The Outlook for Inflation
1.1. LBMC's World Dollar Base
of the World Dollar Base to quicken a
bit in coming months (though probably
Explanation. The world's central
not into double digits). The implica-
banks and basic commodity markets
tions? Despite a sharp slowing in its
operate on a "dollar standard." So
growth, dollar liquidity remains positive
Lehrman Bell Mueller Cannon, Inc.
even after adjustment for inflation and
uses what we call the "World Dollar
should not pose a threat to the economic
Base" as a key forecasting tool. In prin-
recovery (see Section 2.1). Also, it looks
ciple, the World Dollar Base com-
as though the extended commodity-
prises the U.S. monetary base
price disinflation should be interrupted
("high-powered money") plus the dol-
starting in 1992's second half with a
lar reserves held by foreign central
single sharp burst of inflation, lasting
banks to back their domestic currencies.
until mid-1993 (see next page).
When the World Dol-
lar Base grows, it adds
to liquidity in the dol-
LBMC's World Dollar Base
lar market. The first
effect is on financial
US Monetary Base & $ Reserves, 6-mo. AR
35%
markets, then output;
in the longer run,
30%
prices (especially raw
materials, food and
25%
energy prices).
20%
Latest. Despite a
slight reacceleration
15%
of U.S. domestic
monetary growth, the
10%
6-month growth rate
of the World Dollar
5%
Base ticked down to
0%
just over 5% in Oc-
tober. However, in
-5%
November foreign
dollar reserves rose
-10%
sharply in response to
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the dollar's decline,
OCT est MO 7.8% $Res 3.0% $Base 5.4%
and we expect growth
I
SL Fed MO
+ $Reserves
0
$Base
Lehrman Bell Mueller Cannon, Inc.
November 1991
4
Economy Watch
LBMC's World Dollar Base & Commodities
CPI Food & Energy Commodities, yr/yr %
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
60
65
70
75
80
85
90
$Base scaled to commodities, 2-yr + lag
$Base
+
CPI Food & Energy
1.2. Commodity Prices
close agreement with one incorporating
the World Dollar Base until the end of
Explanation. The World Dollar Base is
next year (see graph below). We expect a
useful in predicting overall commodity
spike in food prices in late 1992 and
inflation two years in advance. Of
energy prices in the first half of 1993.
course, specific commodity
Gasoline: Producer Price
prices also reflect relative
& forecast (1982 = 100)
scarcity. For example, due to
100
0
its importance and semi-car-
telized market, energy supp-
90
X
ly must be analyzed
80
separately. We use the price
of gasoline as a benchmark.
70
Latest. Commodity disin-
60
flation continues, thanks in
large part to the monetary
50
tightening that also triggered
000
the recent recession (graph
40
above). The energy futures
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markets remain in fairly
Futures price adjusted for interest
PPI gasoline
+
11-15-91 Futures
LBMC forecast
Lehrman Bell Mueller Cannon, Inc.
Economy Watch
5
November 1991
LBMC's Unemployment Model
1.3. Labor Costs
Civilian Unemployment Rate, %
7.4%
Explanation.
Labor-intensive
7.2%
goods are not priced like com-
7.0%
modities. So LBMC's inflation
6.8%
models contain a monthly proxy for
6.6%
wage costs.
6.4%
6.2%
Latest. Our forecast for un-
6.0%
5.8%
employment, which figures in our
5.6%
forecast of labor costs, is a few
5.4%
tenths higher than before. This may
5.2%
not sound like much, but cumula-
5.0%
tively helps lower our forecast of
4.8%
CPI inflation by about three-
85
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93
94
95
quarters of a percent for 1993.
October: 6.8% (Up 0.1%)
Model
+
Unemployment
1.4. LBMC's PPI Model
year-to-year PPI inflation remaining in
the 0-1% range for the next year, then
Explanation. LBMC's PPI Model
jumping 3 percentage points in 1993,
forecasts producer price inflation for
due to commodity inflation and rising
finished goods. The model is based on
labor costs at that time.
separate forecasts of PPI
sub-indexes for food, ener-
LBMC's PPI Forecast
gy, and other goods.
Producer Prices, year/year %
8%
7%
Latest. Producer prices
rose 0.8% in October
6%
(0.7% after seasonal adjust-
5%
ment). Yet year-to-year PPI
4%
inflation fell to 0.0%, ful-
3%
filling our forecast this year
2%
of PPI inflation falling to
1%
zero. Much of October's
rise was concentrated in the
0%
ex-food-and-energy
-1%
category, but seems to be a
-2%
fluke which should be fol-
-3%
lowed by an abnormally
85
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90
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92
93
94
low rise this month. We see
October: 0.0% (Down 0.8%)
-
LBMC Forecast
+
PPI
Lehrman Bell Mueller Cannon, Inc.
November 1991
6
Economy Watch
LBMC's CPI Model
Based on sub-indexes, year/year %
15%
14%
13%
12%
11%
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
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80
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82
83
84
85
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87
88
89
90
91
Month-ahead forecast shown.
LBMC Model
+
CPI
1.5. LBMC's CPI Model
seasonally adjusted CPI rise of 0.3%. We
expect year-to-year CPI inflation to stay
Explanation. Like our PPI Model,
around 3% until late next year. CPI in-
LBMC's CPI Model is based on
flation should average 4.3% year-to-year
separate explicit forecasts for the food,
in 1991 and 3.0% in 1992. But we expect
energy, and ex-food-and-energy sub-in-
the CPI to rise to a peak of about 4-1/2%
dexes.
year-to-year in 1993.
Latest. The CPI rose
LBMC's CPI Forecast
Consumer Prices, Year/Year Change
0.1% in September (also
7.0%
0.1% after seasonal ad-
justment). Our estimate
6.0%
last month was 0.2%
seasonally adjusted. This
5.0%
cut year-on-year inflation
to 2.9%.
4.0%
The overall number was
3.0%
helped by a drop in so-
called "core inflation" to
2.0%
0.1%, but we expect this to
bounce up in November,
1.0%
resulting in an overall
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94
October: 2.9% (Down 0.5%)
LBMC Model
+
CPI
Lehrman Bell Mueller Cannon, Inc.
Economy Watch
7
November 1991
2.0 The Outlook for Growth
2.1 "Real" World Dollar Base
LBMC's World Dollar Base & Output
$Base/CPI (1-yr lag) v. Indust. Prod'n
14%
13%
Explanation. The level of output is
12%
11%
mostly determined by supply factors; but
10%
business-cycle fluctuations are partly re-
9%
8%
lated to "excess" money -- money not
7%
demanded to exchange wealth at exist-
6%
5%
ing prices (see "The Rueffian Synthesis"
4%
3%
and "The World Dollar Base and Busi-
2%
ness-Cycle Forecasting," June/July &
1%
0%
September 1991 LBMC Reports). A
-1%
-2%
good measure of "excess" money is
-3%
Treasury debt monetized by the banking
-4%
-5%
system (graph below). In recent years,
86
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90
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92
increases in the World Dollar Base have
OCT est: 5.0% year/year
$Base/CPI yr/yr
+
Production yr/yr
formed the bulk of such monetization.
October. Real dollar liquidity points to
Latest. After inflation, LBMC's World
stronger-than-expected growth into
Dollar Base grew 5.0% year-to-year in
early 1992, then a temporary slowing.
Monetized Federal Debt & Capacity Use
Monetized debt/CPI V. Util. rate, yr/yr
12%
10%
8%
6%
.4%
2%
0%
-2%
-4%
-6%
-8%
-10%
-12%
-14%
-16%
60
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75
80
85
90
Debt scaled to util. rate, 1-year lag
Monetized deficit
+
Util. rate
Lehrman Bell Mueller Cannon, Inc.
November 1991
8
Economy Watch
LBMC's Capital Return Index
1-Tax on Capital vs Util. change y/y
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
55
60
65
70
75
80
85
90
Index lagged 1 year
Lagged LBMC Index
+
Util rate change
Lehrman Bell Mueller Cannon, Inc.
2.2.LBMC Capital Return Index
Latest. LBMC's Capital Return Index
rose again in October -- up 2% year-to-
Explanation. The LBMC Capital
year, mostly due to the positive effects of
Return Index is a monthly indicator of
falling inflation and lower interest
the supply-side effect of Federal tax
rates. We expect this to be near the peak.
policy on the return to capital. The
LBMC Capital Return Index
index includes Federal taxes on
Average Marginal After-Tax Return yr/yr
corporate income, personal in-
8.0%
7.0%
come, and capital gains. When the
6.0%
marginal tax on capital falls, the
5.0%
index rises. Even without changes
4.0%
in tax law, the tax rate changes
3.0%
each month with the expected in-
2.0%
flation rate (since capital gains are
1.0%
not indexed for inflation), and with
0.0%
interest rates (which alter the
-1.0%
value of tax deductions for
-2.0%
depreciation). Thus monetary
-3.0%
policy and effective marginal tax
-4.0%
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93
rates are related.
OCTOBER: 2.0% year/year
+
LBMC Index
LBMC Forecast
Lehrman Bell Mueller Cannon, Inc.
Economy Watch
9
November 1991
2.3.
LBMC
Labor
LBMC Labor Return Index
Return Index
Average Marginal After-Tax Return yr/yr
3.0%
Explanation. The LBMC
2.5%
Labor Return Index charts the
2.0%
change in the marginal return
1.5%
to labor after Federal income
1.0%
and payroll taxes.
0.5%
Latest. The supply-side effect
0.0%
on labor of Federal tax policy
-0.5%
remains slightly negative in
-1.0%
1991, largely due to a rise in the
top income and Medicare tax
-1.5%
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rates on January 1.
Latest month: -0.7% (unchanged)
+
LBMC Index
2.4. "Real" Federal Debt
Gulf War payments; recently it's been
about the ballooning federal deficit. As
Explanation. We've come to the view
we've argued in recent months, the infla-
that Federal deficits have no major im-
tion-adjusted growth rate of Federal
pact on growth unless they are
debt should soon peak and decline, lar-
monetized (see Section 2.1). But they
gely due to the economy's bottoming
can affect the composition of output.
and recovery.
Under floating ex-
change rates, a non-
LBMC's Federal Debt Model
monetized deficit can
Debt to Public/CPI, 6-mo. SAAR
14.0%
attract foreign capi-
13.0%
tal, causing the dollar
12.0%
11.0%
to appreciate. Addi-
10.0%
tional domestic con-
9.0%
sumption
or
8.0%
investment financed
7.0%
by the deficit tends to
6.0%
be offset by a decline
5.0%
in net exports.
4.0%
3.0%
2.0%
Latest. Just a few
1.0%
months back, the talk
0.0%
was about the declin-
-1.0%
85
86
ing deficit, thanks to
87
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94
Public debt ex bank bailouts
Model
+
Real debt to public
Lehrman Bell Mueller Cannon, Inc.
November 1991
10
Economy Watch
LBMC Growth Model: Almost 2 Years Ahead
Change in Utilization Rate, year/year
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%
-10%
-12%
-14%
-16%
68
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90
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93
LBMC Model
+
Util. rate
2.5. The LBMC Growth Model
dustrial production to register about 3%
in the 4th quarter, 6-7%% in the 1st
Explanation. LBMC's Growth Model
quarter of 1992, and 3% in the second.
begins with a forecast of the rate of
We look for a wave of strong growth at
change in capacity utilization, based on
the start of 1993, when capacity use rises
the LBMC indexes for government
sharply (see graph page 2). After declin-
monetary and fiscal policies. This is
ing almost 2% in 1991, output should
combined with a forecast of industrial
rise 4-5% in 1992.
capacity to produce a
forecast of industrial produc-
LBMC's Growth Forecast
tion.
Industrial Production, Q/Q SAAR
14%
12%
Latest. Industrial produc-
10%
tion was unchanged in Oc-
8%
tober, though July and
6%
B
September were revised up a
4%
B
2%
bit. If we're right, we should
0%
see healthy monthly in-
-2%
creases for the next three or
-4%
four months, confounding
-6%
the increasingly numerous
-8%
"double-dippers" who look
-10%
for declines. We expect
-12%
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94
quarterly growth rates in in-
O
Actual IP
LBMC Forecast
Lehrman Bell Mueller Cannon, Inc.
Economy Watch
11
November 1991
LBMC's GNP Proxy
Real GNP ($1982) Quarter/quarter SAAR
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
-2.0%
-4.0%
-6.0%
-8.0%
-10.0%
-12.0%
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Real GNP
+
LBMC GNP Proxy
2.6. LBMC's GNP Proxy
lowering our GNP forecast about 1 per-
centage point, to 2.9% in the current
Explanation. LBMC's Monthly GNP
quarter and 3.1% in the first quarter of
Proxy is based on industrial production
1992, followed by a decline to the 2%
and, starting this month, employment.
range in mid-1992. Growth should spurt
Though industrial output is the best
to 4% or more in the first half of 1993.
single proxy for GNP, the forecast can be
Measured fourth-quarter-over-fourth-
improved a bit by adding employment to
quarter, real GNP should rise 0.5% in
represent the non-industrial economy.
1991, 2.6% in 1992, and 3.8% in 1993.
Latest. Our forecast of in-
dustrial production has
Real GNP Growth
$1982, Q/Q SAAR
been very close to the mark.
7%
But we've overestimated
6%
real GNP so far during the
5%
recovery. Just as the in-
4%
dustrial recession began
3%
before the GNP recession,
2%
industry has so far
1%
recovered sooner than the
0%
rest of the economy; and it
-1%
seems that this will persist
G
-2%
for the time being. Leaving
-3%
our forecast of industrial
-4%
85
86
87
88
89
90
91
92
93
94
output unchanged, we're
1991:III: 2.4%
Actual GNP
+
GNP Proxy
LBMC Forecast
Lehrman Bell Mueller Cannon, Inc.
November 1991
12
Economy Watch
3.0. The Outlook For Financial Markets
LBMC's Treasury Bond Model
Yield on 30-Year Treasury Bond
15%
14%
13%
12%
11%
10%
9%
8%
7%
78
79
80
81
82
83
84
85
86
87
88
89
90
91
Month-ahead forecast shown
LBMC Forecast
+
30-year T-Bond
3.1. LBMC Treasury Bond
couple more months as the markets
Model
digest better-than-expected news on the
economy and a couple of slightly worse
Explanation. LBMC's Treasury Bond
CPI reports. But then yields should drop
Model is designed to forecast the
in 1992 to a low of about 7-1/4%, before
monthly average yield of the 30-year
backing up 100 basis points by early 1993
Treasury Bond. The forecast is based on
as inflation rises. Yields should average
LBMC's forecasts of the economy,
7.95% in the fourth quarter of 1991 and
central bank
7.60% in 1992.
policy and in-
LBMC's Treasury Bond Forecast
vestor expecta-
30-year Treasury Bond Yield
9.8%
tions
about
9.6%
inflation and the
9.4%
dollar.
9.2%
9.0%
8.8%
Latest. The 30-
8.6%
year
T-Bond
8.4%
yield remained
8.2%
8.0%
just below 8%
7.8%
for most of
7.6%
November. We
7.4%
expect the yield
7.2%
87
88
89
90
91
92
93
94
to stay there a
LBMC Model
+
30-year T-Bond
Lehrman Bell Mueller Cannon, Inc.
Economy Watch
13
November 1991
LBMC's Corporate Bond Model
Moody's AAA Corporate Bond Yield
16.0%
15.0%
14.0%
13.0%
12.0%
11.0%
10.0%
9.0%
8.0%
7.0%
78
79
80
81
82
83
84
85
86
87
88
89
90
91
Month-ahead forecast shown.
LBMC Model
+
AAA Yield
3.2.
LBMC
Corporate Bond
Bond Model, but the general outlook is
Model
not greatly changed. We see the AAA
corporate bond yield averaging 8.78%
Explanation. The LBMC Corporate
in 1991 and 8.18% in 1992.
Bond Model is
designed
to
LBMC's Corporate Bond Model
forecast the yield
Moody's AAA Bond Yield
10.6%
of Moody's AAA
10.4%
Corporate Bond
10.2%
index. The AAA
10.0%
9.8%
yield forecast is
9.6%
based on a varying
9.4%
markup over our
9.2%
forecast for the
9.0%
Treasury
bond
8.8%
yield.
8.6%
8.4%
Latest.
We've
8.2%
made some techni-
8.0%
cal improvements
7.8%
87
88
89
90
91
92
93
in our Corporate
-
LBMC Model
+
AAA Yield
Lehrman Bell Mueller Cannon, Inc.
October 1991
14
Economy Watch
3.3. The LBMC Liquidity Index
in the past using this method has made
as a Long-Term Stock Guide
possible higher returns than buy-and-
hold. For the chart below, buy-and-hold
Explanation. The LBMC Liquidity
would have yielded 286% in capital
Index is a monthly indicator of li-
gains (ignoring dividends and foregone
quidity growth in the U.S. economy.
interest), but following the Liquidity
The banking system, led by the Fed,
Index would have yielded 521%.
supplies liquidity, while growth or in-
flation "absorbs" liquidity.
Between signals, the Long-Term Index is
not intended as a guide for short-term in-
The LBMC Liquidity Index serves
vestments. For our near-term outlook, see
as a useful guide for strategic stock
the following section.
investment. When the Liquidity Index
turns positive, it acts as a major "buy"
signal for stocks; when the Liquidity
Latest. LBMC's Long-Term Liquidity
Index turns negative, it acts as a
Index shows liquidity still rising rapidly,
major "sell" signal.
but we expect it to fall over the next
several months, largely due to year-to-
The LBMC Liquidity Index gives
year rises in output, which "absorb"
relatively few buy and sell signals. But
available liquidity.
LBMC Liquidity Index & Stocks
S
Dow Jones Industrial Average
3.500
S
3.000
2.500
s
S
S
2.000
B
B
1.500
1.000
B
0.500
B
B
0.000
B
-0.500
-1.000
-1.500
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
OCTOBER: 7.2%
DJI ('000)
+
Index X 10
Forecast
Lehrman Bell Mueller Cannon, Inc.
Economy Watch
15
November 1991
3.4. LBMC Liquidity Index as a
to eight months. Being based purely on
Medium-Term Stock Guide
liquidity, the index does not directly in-
clude such influences on the stock
market as valuation, taxation, leverage,
Explanation. The Liquidity Index used
exchange rates or investor expectations.
in Section 3.3 as a long-term bull/bear
market indicator can also be used to
Latest. November's 120-point correc-
gain important information about
tion in a single day was unnerving, and
shorter-term stock market moves.
traditional valuation measures are on
the high side. Nevertheless, because we
In this section the LBMC Liquidity
expect continued recovery and a larger
Index is rescaled for comparison with
bond rally over the next year, we are
the year-on-year increase in the Dow
raising our target for the Dow Jones In-
Jones Industrials. The LBMC Liquidity
dustrials, to peak at about 3,800 by the
Index leads the stock market by about six
end of 1992.
LBMC Liquidity Index & Change in Stocks
Index sized as regression on DJI y/y
60%
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94
DJI y/y
+
Index, 8-mo lag
Forecast
Lehrman Bell Mueller Cannon, Inc.
November 1991
16
Economy Watch
LBMC's Yen/Dollar Signal
Based on Yen/Dollar Trend Model
320
300
280
260
240
220
200
180
160
140
120
100
80
60
40
20
o
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
Yen/$
+
LBMC Model
Buy/sell
Section 3.5. LBMC's Yen/Dollar
Latest. We've recalibrated the model
Forecast
slightly, but the forecast is still for the
dollar to decline to the low-120- yen
Explanation. LBMC's Yen-Dollar
range by mid-1992, then recover into
Trend Model is designed to help deter-
1993. Despite November strength of the
mine turning points in the yen/dollar ex-
Deutschemark, which we did not an-
change rate. The basic factors in the
ticipate, fundamentals including
forecast are central bank policy and the
Germany's inflation problem still point
terms of trade. The top graph shows
to a rise of the dollar against the DM.
how the model can be used
as a buy/sell signal. A buy (or
LBMC's Yen/Dollar Trend Forecast
sell) is indicated when the
Japanese Yen per U.S. Dollar
170
model's rate of change turns
positive (or negative); the
160
zero line is shown here as
100. The graph below trans-
150
lates the economic fun-
damentals of the model into
140
a forecast for the actual
yen/dollar rate, taking into
130
account the "bandwagon ef-
120
fect" of trend-followers. The
forecast "band" reflects the
110
confidence limits of a 1-
87
88
89
90
91
92
93
month-ahead forecast.
October average: 130.77
LBMC forecast
+
Yen/$
Lehrman Bell Mueller Cannon, Inc.
CAPITOLCOMMENT
A TIMELY PERSPECTIVE ON CURRENT PUBLIC POLICY.
No. 70
March 13, 1991
Economic / Taxes / Incentive starts STEWARDSHIP AND ECONOMIC GROWTH
Just as campaigns for elected office are won and lost at the
margins, so is long-term economic growth. Winning at the margins
for economic growth may not seem like very much on a case-by-case
basis. But the sum total of efforts to enhance productivity,
investment, and savings will enrich everyone in the long run.
Many advocates for policy change frequently ignore the effect
their policy proposals have on the growth of gross national product
(GNP), our broadest measure of prosperity. In the long-run, though,
policy changes that result in seemingly small differences in the
rate of economic growth will substantially change the well-being of
future Americans. In many respects, the prosperity of future
generations depends on good stewardship today.
No one can precisely quantify the difference between economic
policy that leads to stagnation (high taxation, over-regulation, and
protectionism) and that which leads to growth (low taxation,
deregulation, and free trade). But if we could, and the
hypothetical difference was between a 2 percent versus a 4 percent
GNP growth rate, many people would discount that difference as too
small to worry about. But is it?
Table 1 contrasts the effects of a 2 and 4 percent growth
rate on the standard of living of our children and grandchildren.
If misguided economic policy leads to only 2 percent growth
annually through 2016, our children would have a standard of living
63.5 percent above ours today.
Table 1
THE STEWARDSHIP EFFECT: COMPARISON OF GNP GROWTH RATE OVER TIME
Example of 2 percent vs. 4 percent real GNP growth rate
in 25 year intervals (constant 1991 dollars)
2 percent rate
4 percent rate
of GNP growth
of GNP growth
Percentage
Year
(in billions)
(in billions)
Difference
1991
$5,521.3
$5,521.3
0.0
2016
$9,026.2
$14,677.2
62.6
2041
$14,776.5
$39,085.5
164.5
Citizens for a Sound Economy 470 L'Enfant Plaza, SW, East Building #7112, Washington, D.C. 20024, (202) 488-8200
2
But if our annual rate of growth is 4 percent, their standard
of living would be 165.8 percent greater than today's, or 62.6
percent better than if the economy grows at 2 percent. When our
grandchildren come of age, an economy expanding at 4 percent
annually would provide over two-and-one-half times the standard of
living than an economy growing at only 2 percent each year.
No single piece of legislation can guarantee a high rate of
economic growth; there is no silver bullet. But the following
legislative initiatives would make a difference at the margin,
thereby letting the economy grow at a healthier rate.
o
LOWER TAXES ON LABOR. The Wallop-DeLay-Tallon bill (S. 381/
H.R. 960) would cut the Social Security payroll tax rate until
Social Security tax revenues fall to match Social Security
expenditures. Such a tax cut would lower the marginal tax rate for
working people and cut the cost of hiring additional workers,
leading to increased employment.
o
LOWER THE TAX ON CAPITAL GAINS. High capital gains tax rates
raise the cost of capital to American businesses, discourage
investment, and hurt economic growth. The Wallop-DeLay-Tallon bill
cuts the maximum capital gains tax rate from 28 percent to 15
percent; it also reduces the capital gains rate to 7.5 percent for
those in the 15 percent income tax bracket.
o
LOWER TAXES ON SAVING. Economists agree that the level of
saving in an economy is one of the crucial determinants of its
health. The Wallop-DeLay-Tallon bill would create an attractive
savings vehicle called "IRA-Plus" accounts.
o
CAP THE GROWTH RATE OF OVERALL FEDERAL SPENDING AT 4 PERCENT
ANNUALLY. If the "4 Percent Solution" had been implemented in
fiscal year 1983, we would be running a surplus in the budget and
the national debt would be one-third its size. Congress should
pass legislation similar to last year's Burns-Armey-Kasich bill.
o
HOLD THE LINE AGAINST THE RISING TIDE OF MANDATED BENEFITS.
The costs of mandated benefits are a substantial burden on the
economy. Mandated benefits distort markets while hampering
America's ability to compete.
o
PRESS TOWARD ESTABLISHING A NORTH AMERICAN FREE TRADE ZONE.
Increased trade would create jobs in U.S. industries by expanding
exports and would cut consumer costs through cheaper imports.
J. Marc Wheat
Director of Tax & Budget Policy
POLYCONOMICS, INC.
I
Political and Economic Communications
November 7, 1991
WORRIED ABOUT GREENSPAN
Yesterday morning's discount rate cut left the long Treasury bond just marginally higher after an
initial rally. The dissipation of the bond's early gains seems to have coincided with news that Federal
Reserve Governor Wayne Angell disagreed with the decision. Governor John LaWare also resisted the
easing, according to press reports this morning, but ultimately voted with the majority. Forcing the
federal funds rate below 5% makes no economic sense at this point, and raises fears that Chairman
Greenspan has succumbed to political pressures. U.S. bonds and stocks are vulnerable to a substantial
downward correction if the global market perceives a shaky hand at the monetary rudder.
The market is now
especially vulnerable
Gold Price VS. Long Bond Yield
because investors have given
May 1 through November 1
the Fed Governors the
8.7
380
benefit of the doubt during
8.6
the past six weeks, buying
6/12
375
bonds at a higher price than
8.5
370
the behavior of the gold
8.4
price would dictate. As the
8.3
365
adjoining chart shows,
10/10
bonds and gold tracked each
8.2
360
other with great precision
9/30
8.1
355
from early May to mid-
8
September. After that, the
350
bond yield continued to fall,
7.9
345
while the gold price
7.8
stabilized and rose slightly.
7.7
340
Investors were willing to
7.6
335
buy bonds at a premium
Long Bond Yield
Gold Price
relative to goid for two
reasons. First, the market
came to expect that the Fed Governors would take action to keep the gold price within a narrow
trading range; that is, it responded not only to the absolute level of the gold price but to its volatility,
as we have noted on various past occasions. Second, global investors anticipated that a recovery of the
dollar would provide capital gains in dollar bonds, and the anticipated rise of the dollar was factored
into bond prices. Most of the discrepancy between the predicted and actual bond yield, our studies
show, may be attributed to expected changes in the dollar's value against foreign currencies. The
global market will buy dollar bonds when the dollar seems cheap against foreign exchange, i.e., when
the market expects future dollar appreciation, and vice versa. The market will also purchase dollars
when dollar bonds seem cheap, and vice versa. Examining this relationship helped us identify the
February trough and June peak of the dollar (FYI's, 2-11-91 & 6-13-91). One might well ask why
investors would buy bonds rather than dollar options in expression of this expectation. The answer
is that the timing of expectations is often uncertain. Whereas currency options require precise timing,
relative shifts in bond portfolios do not.
86 Maple Avenue
Morristown, N.J. 07960
(201) 267-4640
FAX (201) 539-4025
If expectations of a dollar rally evaporate, the long bond will be in for big trouble. The long bond
yield fell to a low of 7.78% on October 7, when the dollar stood close to its four-month low. The
dollar had just begun to recover when Treasury Secretary Nicholas Brady turned up in Tokyo en route
to the Bangkok International Monetary Fund meeting and demanded that the Japanese engineer an
appreciation of the yen against the U.S. dollar, supposedly to benefit the U.S. balance of trade
position. Brady's attempt to devalue the dollar marked the end of the bond rally, as we warned at the
time ["Budget Agreement: Breaking the Ice," 10-8-91].
"Relative Bond Price" vs. Dollar Index
The adjoining chart
May 1 through November 1
summarizes the way in
97
which the global market
factors currency
96
expectations into the price
95
of the long bond. The
horizontal axis shows the
94
Dollar Index
actual bond price as a
93
percentage of the predicted
bond price (based on the
92
gold-bond correlation).
When this measure stands
91
9/20
9/80
above 100%, bonds are
10*10
90
cheap in terms of gold (the
bond yield is lower and the
89
97%
98%
99%
100%
101%
102%
103%
104%
105%
bond price is higher than the
Bond Price Relative to Gold
gold price would predict it
Five-Day Moving Average of Daily Data
would be). When the index.
stands below 100%, bonds
are expensive relative to gold. The vertical axis shows the dollar's value, according to the Morgan
Guaranty Trust dollar index.
After the dollar fell from its June peak of about 96-98 on the dollar index to 90-92 in October and
November (as shown in the dates marked in the chart), global investors were willing to buy dollar
bonds at a premium with respect to the gold price, anticipating capital gains as the dollar recovered.
Referring back to the first chart you will see where the lines representing the gold price and the bond
yield diverge in late September. During the period from May through mid-September, as shown in
the dates marked on that chart, the bond yield followed the gold price quite closely, that is, the actual
bond price corresponded to the "predicted" bond price. From mid-September through the present, the
actual bond price has exceeded the predicted bond price, due to the market's expectations of dollar
appreciation, as noted above. If the Board of Governors thwarts these expectations, and leads the
market to believe that the dollar will continue to weaken, investors will deduct the currency factor
from the bond price, pushing the long bond yield to 8.20% or even higher. Chairman Greenspan is
playing with dynamite when he encourages the market to believe that he is conducting monetary
policy on behalf of George Bush's political criteria. We hope that no such thing is the case. With no
clear assurances from the Board of Governors, though, we can only recommend caution.
David Goldman
POLYCONOMICS, INC.
Political and Economic Communications
November 11, 1991
ECONOMIC OUTLOOK: A MARKET-BASED GROWTH EXPECTATIONS INDEX
A new index of the stock market's growth expectations shows the economy dead in the water, with
the market anticipating neither economic growth nor decline. (An index level of 1 means no change
with respect to the starting date of August 1, 1990, when real GNP growth was crawling along at 1%).
By this index, the market's growth expectations hit bottom just before Operation Desert Storm began
in January, and peaked last August before heading back to the 1.0 mark. Our measure has important
political implications: it forecasts a likely election defeat for President Bush next year, and
corroborates the views of those in the administration, e.g., HUD Secretary Kemp, who argue that
action is necessary to stimulate growth. The President's economic advisors have told him that the 2.5%
growth they expect will be more than sufficient to ensure his re-election. As matters stand, even 2.5%
real growth appears unlikely between mid-1991 and mid-1992.
Economic Growth Expectations Index
As Measured by Stock and Bond Markets
1.08
1.06
1.04
6/91
1.02
1
8*90
10/90
10/91
0.98
0.96
12/90
0.94
0.92
8/1/90 through 11/1/91
Chart 1
Market-based models of the kind shown in the above chart work well only under highly specific
circumstances; this one depends upon the peculiar effect of inflation on the real rate of capital gains
taxation. In the present tax and monetary environment, the problem is to distinguish between the
effect of growth expectations and inflation expectations upon securities prices. We have always
believed that stock prices provide the best index of growth expectations. Earlier this year, we
documented the stock market's uncannily precise ability to forecast the relative strength of economic
recoveries during the past three decades, ["Economic Outlook: Will Easier Money Help the Economy
Recover?" 5-9-91]. The growth of real stock prices during the first year of each recovery
corresponded closely to real economic growth during the last four recoveries. Today's high rate of
taxation of nominal capital gains, though, makes it harder to infer growth expectations from stock
prices. As we have emphasized, most of the change in stock prices during the past year simply reflects
changing inflation expectations. Lower expected inflation equals a lower expected real tax rate on
capital gains, and thus higher asset prices. The correlation between changing inflation expectations
(i.e., the gold price) and stock prices has been so strong that it is hard to know how much of the
movement of stock prices should be attributed to changes in expectations of real economic growth,
as opposed to inflation.
86 Maple Avenue
Morristown, N.J. 07960
(201) 267-4640
FAX (201) 539-4025
Gold Price VS. Stock and Bond Prices
Change since Dec. 1, 1990
120%
115%
110%
105%
100%
95%
90%
85%
10-Day Average of Daily Data
Gold Price
Average of Change of Stock and Bond Prices
Correlation = 84%
Chart 2
The above chart shows the change in the gold price against the average of the change of the Wilshire
5000 index and the Shearson-Lehman index of government bond prices. Comparing the change of
stock and bond prices, respectively, against the gold price, makes it possible to factor out inflation
expectations from growth expectations, and construct a more-or-less "pure" index of growth
expectations. As the chart shows, the average change of stock and bond prices shows an extremely
close correspondence to changes in the gold price. As gold rises, stock and bond prices fall, and vice
versa. The correlation is 84%, a nearly perfect fit.
Remarkably, the correlation between gold prices and the combination of stock and bond prices is
much higher than for either stock or bond prices individually. That, in fact, is what theory would
predict. Stock prices reflect not only inflation expectations, but growth expectations; thus, the
correspondence of stock prices to a "pure" measure of inflation expectations (gold) should be less than
100%. Bond prices also reflect growth expectations, albeit negatively. When investors expect higher
growth, secured lenders (bondholders) are able to demand a higher rate of return. Real interest rates
rise, and bond prices fall. Rising growth expectations have a negative effect on bond prices and a
positive effect on stock prices; the average of both prices therefore tends to cancel out the effect of
growth expectations, leaving an almost pure reaction to inflation expectations, and a very high
correlation with the gold price.
To isolate the growth component of stock and bond prices, we first took the linear regression of gold
vs. stock and bond prices, and then reconstructed the expected inflation (gold price) predicted by the
correlation with stock and bond prices, respectively. The ratio of the inflation predicted by stock and
bond prices, respectively, as shown in Chart 1, is the market's anticipation of economic growth or
decline; the inflation component is eliminated from the change of stock and bond prices, leaving as
a residual their response to anticipated economic growth.
David Goldman
Bell
Mueller
Cannon, Inc.
Lewis E. Lehrman
Frank Cannon
Chairman
Managing Director
Jeffrey Bell
LBMC Report
Ralph Benko
President
Vice President
October 25, 1991
John Mueller
Charlie Reid
Vice President
Research Director
Chief Economist
The Black Republican Surge
Conclusions of importance to business and investors: The major unreported
fallout of the Clarence Thomas confirmation struggle is a surge toward George
Bush and the Republican Party among black voters. Elements of the political
and media elite are well aware of this trend, but have different reasons for failing
to publicize the data in their own national polling. Liberals are hoping that
black anger at Democrats is a temporary phenomenon, quickly reversible by
Republican stumbles on civil rights and/or economics. Elated White House
strategists, in contrast, are rushing to compromise on the pending civil rights bill
while renewing the attack on the congressional handling of the Thomas nomination
before the public is able to focus on the new polling. Two additional fallouts:
impending further demoralization in Democratic presidential ranks, and a desire
among Democrats in Congress to change the subject toward the economy via
passage of a broad-based tax cut in 1992.
During the electrifying struggle over
No one watching network television or
the Supreme Court confirmation of
reading the op-ed pages could be
Clarence Thomas, the one thing con-
blamed for believing this to be true of
ventional wisdom "knew" was that the
public opinion in the nation at large.
political fallout would divide along
If televised reactions and high-profile
gender lines. Men would be more
opinion and analytical writing were
tolerant of the sexual harassment char-
either the engine or the reflection of
ges being brought by former Thomas
public opinion, the gender gap would
assistant Anita Hill, while women,
be wider than ever and Democrats
drawing on their own experiences and
would have a superb new "women's
those of their friends, would tend to
issue" for the 1992 campaign.
believe Ms. Hill and turn their wrath
on male politicians such as President
Within days, political and media elites
Bush and the members of the Senate
knew from their polling that nothing
Judiciary Committee.
of the kind had happened. Women's
2111 WILSON BLVD., SUITE 416, ARLINGTON, VA 22201
Phone (703) 243-6955 Fax (703) 841-9146
LBMC Report
2
October 1991
support for the Thomas nomination
White House ears. Little wonder that
was a little less than men's support,
in the first full week following Thomas's
but still overwhelming. President Bush
October 15 confirmation, Bush and his
was doing better among men than
top aides devoted the bulk of their
women against his potential Democratic
efforts to an attack on Thomas's
opponents, but not much better. The
treatment by the Senate and to finding
gender gap is somewhat less than it
a compromise on civil rights acceptable
was under Ronald Reagan and not
to Senate liberals--not to an attempt
statistically different from Bush's victory
to craft an Administration growth
over Michael Dukakis in 1988.
package in response to the flood of
new Democratic tax cut proposals.
What leapt out at Washington's insiders
With the Republican surge among
was Bush's strength among blacks. In
pro-Thomas blacks, the last thing the
a fresh Gallup match-up against his
Administration wants is a change of
best-known potential opponent, New
subject. Especially not to a subject
York Governor Mario Cuomo, Bush
where Washington's civil rights lobbyists
wins 44 percent of the black vote
would have a chance to portray Bush
against Cuomo's 46 percent. In 1988
as insensitive to blacks.
among the same voters, Dukakis
defeated Bush by 88 to 10 percent,
For the Democrats, alienation from
according to ABC's exit poll.
black voters is their worst nightmare.
Blacks have been the unassailable
Put another way, in 1988 Bush won 54
Democratic base vote in the vote-rich
percent of all voters and 10 percent
Northern and Western swing states
among blacks. The disparity between
(Illinois, Michigan, California, etc.)
blacks and Americans as a whole in
which Democrats must carry to ever
degree of Republican support apparent-
regain the Presidency. If Republicans
ly has shrunk from 40-50 percent in
became competitive with black voters,
the Reagan-Bush years to under 20
Democrats would need a share of the
percent now.
white vote comparable to their showings
in such landslide years of the past as
Looked at still another way, Bush has
1936 and 1964.
roughly as many white voters leaning
his way against Cuomo as he got on
Democratic presidential candidates
election day against Dukakis. Most of
have every reason to hope that the
his national gain (from 54 percent in
Thomas controversy passes quickly from
1988 to 63 percent now) comes from
the news. But even after it does, the
a quadrupling of his support among
Bush campaign will find it easy enough
blacks.
to resurrect: all six declared candidates
for the Democratic nomination went
At a time when Bush is under growing
on record as opposed to the Thomas
fire for his focus on foreign policy at
nomination. The best-known un-
the expense of such domestic issues as
decided candidate, Mario Cuomo, not
the economy, the post-Thomas numbers
only opposed Thomas but attacked
coming in from Gallup and other
pollsters have provided sweet music to
Democratic members of the Judiciary
Committee for not questioning Thomas
October 1991
3
LBMC Report
more aggressively. Given Thomas's
to want to talk about was tax-cut
firm support among white voters and
packages, some of them quite large.
even stronger approval among blacks,
it is safe to say that Cuomo has not
As we predicted at the beginning of
heard the last of this issue should he
this Congress (LBMC Report, February
decide to run.
1991, "The Next Tax Bill"), the in-
gredients are coming together for a
Democratic congressional incumbents
broad-based package of stimulative tax
will not spend much time mulling over
cuts, including pro-family tax relief,
the effects of the Thomas fight on their
IRA expansion, and capital gains
presidential candidates. A weak top
reform, probably paid for by some
of the ticket endangered few
combination of defense cuts and
Democratic incumbents in 1984 or 1988.
loophole plugging. Democrats have
Their greatest fear is that the public
every interest in shifting toward an
is beginning to focus on disapproval of
issue (the economy) that has been a
Congress as an independent issue.
severe Bush weakness, and once tax
Within hours after Bush's call for an
legislation picks up steam (probably in
independent counsel to investigate the
the first half of next year) the Ad-
Thomas leaks, the Senate had passed
ministration will have every interest in
a similar resolution. In the wake of
coming to a compromise that will go
publicity on check kiting and unpaid
a long way toward taking the economic
restaurant bills, the last thing Congress
issue out of presidential politics. If
needs is to look obstructionist on
this happens, the big loser will be the
tracking down the leaks on Thomas.
Democratic presidential nominee. But
in the post-1968 era of split government,
What congressional Democrats do need
that has never much bothered congres-
is a change of subject. It was no
sional Democrats, and in this regard
accident that for ten full days after the
1992 should be no exception.
Thomas vote, all Democrats seemed
SNPA
Southern Newspaper Publishers Association
P.O. Box 28875 / Atlanta, Georgia 30358 / (404) 256-0444
SOUTHERN NEWSPAPER PUBLISHERS ASSOCIATION
Members are 420 daily newspaper owners and publishers in 15
Southern states. SNPA is headquartered in Atlanta.
This is our 88th annual meeting. 560 delegates are present.
President: Ashton Phelps, Jr., publisher, The New Orleans Times-
Picayune. (Ashton and the President have played tennis).
Other officers and directors attached.
SNPA, through its charitable foundation, provides a wide of
staff members throughout the South.
informational and educational services to newspapers and range their
MAIN ISSUES THAT CONCERN SOUTHERN NEWSPAPERS
1.
Regional Bell Operating Companies and their monopolization of
electronic information services. This is our MAJOR issue. We will
be discussing it and H.R. 3515 - The Cooper Bill.
2.
in recent history in 1990 and 1991. We'll be discussing how we can
The Economy. Newspapers have had the worst two financial years
survive as strong, vibrant businesses despite this situation.
3. Press coverage of minority issues - how can we do it better?
to homes in our areas.
4. Diversifying our services by delivering non-newspaper products
We will also be discussing journalism education and personnel
issues, including employee health care.
OTHER ITEMS OF INTEREST
Monday, November 18.
Defense Secretary Cheney will have visited and spoken to us on
William Dillard, founder of Dillard Stores (Little Rock, Arkansas)
was also a featured speaker. Other special guests include Edward
DeBartolo, one of the largest developers in the United States and
Forum. Al Neuharth, founder of USA TODAY and Chairman of the Freedom
Printed on Aneyclad Paper
THE WHITE HOUSE
WASHINGTON
President
Campaign 92
Date: 12/02/91
TO:
FROM:
Special DAVID Director, TONY Assistant M. SNOW CARNEY Office J of Poltical
to the President and
Affairs
FYI. I thought you might be interested in
the attached newsletter which was forwarded
to this office by Thomas Schwieger, President
of the Greater Manchester (NH) Chamber of
Commerce.
NEWS
GREATER PROVIDENCE CHAMBER OF COMMERCE
Startling Number of Businesses in New England
Exploring Relocation Potential
President Bush Called "Not Responsive" to Region's Problems
November 21, 1991
Contact:
Laurie White
11 a.m. Release
Sandi Seltzer
521-5000
An extensive survey of businesses throughout New England has found that an alarming 40 percent have
considered relocating outside the six-state region. The study also finds that the vast majority of
companies have no plans to expand their workforce over the next six months— both ominous signs for
a region battered by the ongoing recession.
Those are among the results of an economic outlook survey conducted by the New England
Association of Chamber of Commerce Executives in conjunction with Research Results/The Survey
Center Inc., based in Leominster, Massachusetts.
During the month of October, 55,662 companies belonging to 69 chambers of commerce throughout the
region were questioned on such issues as the credit crunch, the recovery timetable and President Bush's
responsiveness to the unique economic needs of New England. Approximately 8,270 completed
surveys were tabulated from companies employing more than 625,000 workers. The study has a margin
of error of plus or minus 2 percent.
30 Exchange Terrace
Providence, Rhode Island
02903-1793
(401) 521-5000
NEW ENGLAND ASSOCIATION OF CHAMBER OF COMMERCE EXECUTIVES
NOVEMBER 21, 1991
"The survey reveals that the New England business community is quite pessimistic about the region's
prospects for recovery," said James G. Hagan, president of the Greater Providence Chamber of
Commerce and president of the New England Association of Chamber of Commerce Executives. "In
fact, the level of pessimism is so profound that four out of every ten businesses who responded to our
survey have considered relocating their operation outside New England. This should send a wake-up
call to our elected officials that there are some real public policy inadequacies that need to be addressed
region-wide."
Businesses based in Rhode Island, Connecticut and Massachusetts register the strongest potential for
relocation. They cite high taxes, high workers compensation costs, a poor government attitude toward
business, and the anemic economy as among the reasons for their dissatisfaction.
On a positive note- the availability of skilled and unskilled labor, quality telecommunications services,
first-class institutions of higher education, and an abundance of cultural opportunities are among the
factors that make New England a desirable place to do business, according to the survey data.
When asked about the short-term prospects for the economy, the average respondent believes the
current New England recession will continue for another 19 months. A mere 14 percent anticipate their
state's economy will improve in the next year, while 32 percent expect further deterioration. Fifty-four
percent say the economy will stay about the same.
Respondents from Maine and Vermont are slightly more optimistic and predict, on average, that the
recession will last another 17 months. Companies based in Connecticut-where a personal income tax
was recently instituted-are the least optimistic.
2
NEW ENGLAND ASSOCIATION OF CHAMBER OF COMMERCE EXECUTIVES
NOVEMBER 21, 1991
OTHER FINDINGS:
An overwhelming 73% of survey respondents say President Bush "has not been responsive" in
resolving New England's unique economic problems; 26% say they believe he has been
"somewhat responsive," while 1% characterize his actions as "very responsive."
Only 16% plan to expand their workforce in the next six months; 77% say they will not hire
additional workers; 7% don't know.
49% say their company's financial position is "worse" today than it was a year ago; 23% say it
is "better"; 28% say it is "no different."
Less than one-quarter, 24%, plan to expand their plant/facility or make any significant capital
expenditures in the next two years; 50% have cancelled or postponed significant capital
expenditures inthe past six months.
69% say the current economic downturn is the "worst" they have ever experienced; 14% say it
is the "same"; 4% believe it is "milder"; 13% don't know.
82% think now is a good time to buy a home; 53% feel it is a good time to buy a car; and 45%
believe it is an opportune time to buy commercial real estate.
Much has been written about the New England credit crunch: 61% of businesses responding say
they have not been "unjustly denied" credit; 39 percent, however, believe they have been
unjustly deniedcredit due to tightened lending standards.
86% say it is more difficult now to obtain a commercial loan. Respondents from Maine and
Vermont report somewhat less difficulty in obtaining commercial loans.
- 3 -
NEW ENGLAND ASSOCIATION OF CHAMBER OF COMMERCE EXECUTIVES
NOVEMBER 21, 1991
63% are in favor of extending state loan guarantee programs to help alleviate the credit supply
problems of businesses in need of short and medium term financing.
Only New Hampshire is rated by a majority of respondents as being a "pro-business" state.
Connecticut is viewed as the most "anti-business" state.
79% of companies responding offer health care coverage to their employees; 42% pick up the
entire cost.
59% support the creation of a New England business promotion office in Europe.
63% feel the labor union movement has too much influence over public policy decision
making in New England.
The project was underwritten by Fleet/Norstar Financial Group, the certified public accounting firm
of KPMG Peat Marwick, and the law firm of Hinckley, Allen, Snyder & Comen.
#########
New England Chamber of Commerce
1991 Economic Study
[ GREATER MANCHESTER ] CHAMBER OF COMMERCE
ECONOMIC OUTLOOK
Question 1: How much longer do you expect the current New England recession to last?
1 6 6 - 12 1 - 22 - 3 > 3
BASE: MONTHS MONTHS YEARS YEARS YEARS
Your Chamber
131
4%
16%
45%
23%
12%
Your State
708
5%
21%
47%
19%
8%
New England
7940
5%
23%
47%
18%
8%
Question 2: In terms of your state's economy over the next twelve months, do you expect it to. .?
STAY ABOUT
BASE: IMPROVE THE SAME DETERIORATE
Your Chamber
135
13%
51%
36%
Your State
717
15%
56%
29%
New England
8222
14%
54%
32%
Question 3: Does your company plan on expanding its workforce within the next six months?
DON'T
BASE:
YES
NO
KNOW
Your Chamber
135
26%
68%
6%
Your State
721
19%
74%
6%
New England
8216
16%
77%
7%
Question 4: Do you think that now is a good time to buy ... a home, a car, commercial real estate?
COMMERCIAL NONE OF
BASE: HOME CAR REAL ESTATE THE ABOVE
Your Chamber
134
80%
53%
51%
Your State
13%
714
83%
53%
53%
12%
New England
8160
82%
53%
45%
13%
Research Results, Inc./The Survey Center, Inc. - 1991
New England Chamber of Commerce
1991 Economic Study
[ GREATER MANCHESTER ] CHAMBER OF COMMERCE
ECONOMIC OUTLOOK
Question 5: Do you feel that your company is in a better position financially, no different,
or in a worse position financially than it was a year ago?
BETTER
NO
WORSE
BASE: POSITION DIFFERENT POSITION
Your Chamber
134
28%
36%
37%
Your State
718
28%
30%
42%
New England
8187
23%
28%
49%
Question 6:
Does your company plan on expanding its physical plant or making any significant
Question 7:
capital expenditures in the next two years?
capital expenditures due to the continued downturn in the economy?
In the last six months, has your company cancelled or postponed any significant
Q6
Q7
DON'T
BASE:
YES
NO
BASE:
YES
NO
KNOW
Your Chamber
135
28%
72%
135
49%
50%
Your State
1%
718
26%
74%
722
47%
50%
New England
3%
8193
24%
76%
8215
50%
46%
3%
Question 8: From a business perspective, please compare the current recession
to other economic downturns you have experienced.
MILDER
DON'T
BASE: WORST SAME THAN OTHERS KNOW
Your Chamber
135
74%
10%
3%
13%
Your State
720
70%
13%
3%
14%
New England
8212
69%
14%
4%
13%
Research Results, Inc./The Survey Center, Inc. - 1991
New England Chamber of Commerce
1991 Economic Study
[ GREATER MANCHESTER ] CHAMBER OF COMMERCE
CREDIT & FINANCE
Question 1: Much has been written about the "New England credit crunch. II Has your
where you believe credit was unjustly denied?
business actually experienced tightened lending standards to the point
BASE: YES NO
Your Chamber
130
43%
57%
Your State
695
41%
59%
New England
7869
39%
61%
Question 2: In general, do you feel it has become more difficult, somewhat more difficult or
not difficult at all for your business to obtain a commercial loan?
MUCH MORE SOMEWHAT MORE NOT DIFFICULT
BASE: DIFFICULT
DIFFICULT
AT ALL
Your Chamber
123
47%
Your State
44%
649
9%
47%
New England
42%
7401
12%
44%
42%
14%
Research Results, Inc./The Survey Center, Inc. - 1991
New England Chamber of Commerce
1991 Economic Study
[ GREATER MANCHESTER ] CHAMBER OF COMMERCE
NEW ENGLAND'S COMPETITIVENESS QUOTIENT
Question 1: Corporate executives and site selection consultants evaluate a host of issues when looking for the
areas, and how you feel New England as a whole compares with other regions of the country.
ideal place to situate a business. Please indicate how you feel your State rates in the following
RESULTS FOR YOUR CHAMBER
Your State
New England
EXC/
EXC.
GOOD
FAIR
POOR
BASE
EXC/ EXC. GOOD FAIR POOR
GOOD
(4)
(3)
(2)
(1)
MEAN
BASE
GOOD
(4)
(3)
(2)
(1)
MEAN
WORKFORCE ISSUES
Availability of skilled labor
130
88%
42%
45%
Availability of unskilled labor
12%
1% 3.29
114
94%
52%
128
42%
86%
6%
41%
45%
- 3.46
Labor costs
13%
1% 3.26
113
87%
35%
51%
123
48%
12%
10%
38%
2% 3.20
45%
Union atmosphere
7% 2.50
108
41%
5%
36%
116
58%
48%
16%
11% 2.34
41%
25%
17% 2.57
104
38%
3%
35%
51%
12% 2.29
INFRASTRUCTURE NEEDS
Telecommunication services
118
86%
42%
44%
12%
Highway accessibility
2% 3.27
104
95%
46%
127
49%
88%
5%
34%
54%
3.41
Railroad service
9%
2% 3.20
109
92%
33%
119
59%
20%
8%
6%
14%
23%
3.25
Airport service
57% 1.69
106
47%
8%
40%
128
67%
32%
23%
45%
27%
21% 2.34
Port accessibility
6% 2.84
111
82%
32%
117
50%
44%
15%
8%
36%
3% 3.11
Technology concentration
38%
18% 2.33
104
77%
20%
116
57%
67%
19%
17%
50%
27%
4% 2.93
6% 2.78
105
92%
47%
46%
5%
3% 3.36
PUBLIC POLICY ISSUES
Government tax incentives
120
23%
6%
18%
41%
Attitude toward business community
36% 1.93
99
17%
2%
15%
124
58%
54%
12%
42%
25% 1.94
34%
Environmental regulation
12% 2.54
105
41%
3%
38%
122
50%
54%
6%
48%
9% 2.35
Corporate tax structure
37%
9% 2.51
103
46%
4%
42%
123
43%
33%
4%
29%
12% 2.38
41%
25% 2.12
102
22%
1%
21%
63%
16% 2.07
FINANCIAL
Availability of Long term financing
112
13%
-
13%
Access to working capital
40%
46%
1.67
97
15%
1%
14%
114
51%
11%
34% 1.82
-
Housing costs
11%
42%
47% 1.63
98
8%
1%
126
7%
33%
54%
5%
38% 1.71
Workers compensation costs
29%
44%
23% 2.15
105
22%
5%
124
17%
19%
52%
1%
18%
26% 2.01
Health care costs
48%
34% 1.85
103
17%
1%
126
16%
6%
47%
37% 1.81
I
Commercial/industrial property costs
6%
45%
48% 1.58
104
4%
123
1%
3%
40%
40%
7%
33%
56% 1.49
Overall cost of living
43%
17% 2.30
104
29%
127
5%
24%
35%
56%
Energy costs
3%
32%
15% 2.18
46%
18% 2.20
107
12%
3%
121
9%
10%
64%
1%
23% 1.92
9%
50%
40% 1.70
102
8%
,
8%
64%
28% 1.79
QUALITY OF LIFE ISSUES
Crime
124
70%
18%
Health care accessibility
52%
23%
7% 2.81
105
31%
3%
129
78%
29%
24%
50%
Public school facilities
54%
19%
19% 2.15
3% 2.99
110
76%
129
34%
43%
67%
19%
13%
Higher education facilities
54%
25%
5% 3.05
8% 2.73
110
66%
8%
129
78%
58%
23%
28%
55%
21%
5% 2.69
Cultural opportunities
1% 3.01
110
95%
56%
129
66%
39%
11%
5%
55%
25%
9% 2.67
3.52
110
94%
51%
43%
5%
2% 3.43
Research Results, Inc./The Survey Center, Inc. - 1991
New England Chamber of Commerce
1991 Economic Study
[ GREATER MANCHESTER ] CHAMBER OF COMMERCE
NEW ENGLAND'S COMPETITIVENESS QUOTIENT
Question 1: Corporate ideal place executives to and site selection consultants evaluate a host of issues when looking for
areas, you feel New England as a whole compares with other regions of the country.
and how situate a business. Please indicate how you feel your State rates in the following the
RESULTS FOR YOUR STATE
Your State
New England
EXC/
EXC.
GOOD
FAIR
POOR
BASE
GOOD
EXC/
EXC.
GOOD
(4)
(3)
(2)
FAIR
(1)
POOR
MEAN
BASE
GOOD
(4)
(3)
(2)
(1)
MEAN
WORKFORCE ISSUES
Availability of skilled labor
690
84%
Availability of unskilled labor
35%
49%
14%
2% 3.17
599
677
90%
43%
47%
9%
2% 3.31
Labor costs
84%
36%
49%
14%
2% 3.19
588
677
83%
52%
31%
52%
9%
43%
39%
15%
9% 2.52
2% 3.13
Union atmosphere
586
598
39%
49%
4%
14%
35%
35%
35%
47%
16% 2.47
13% 2.30
532
36%
5%
31%
48%
15% 2.27
INFRASTRUCTURE NEEDS
Telecommunication services
624
85%
Highway accessibility
31%
54%
13%
3% 3.13
538
674
93%
77%
37%
30%
56%
48%
17%
7%
5% 3.02
1% 3.29
Railroad service
576
640
88%
18%
30%
Airport service
4%
58%
14%
32%
11%
50% 1.72
2% 3.16
559
671
40%
42%
6%
Port accessibility
10%
31%
34%
38%
39%
20% 2.32
21% 2.26
573
636
49%
76%
13%
20%
37%
56%
21%
Technology concentration
34%
16% 2.46
3% 2.92
555
610
59%
72%
19%
12%
47%
53%
32%
24%
10% 2.60
4% 2.86
536
87%
34%
53%
10%
3% 3.19
PUBLIC POLICY ISSUES
Government tax incentives
636
22%
4%
Attitude toward business community
19%
39%
39%
1.88
529
661
22%
Environmental regulation
45%
2%
9%
36%
20%
37%
51%
18% 2.37
27% 1.98
551
654
40%
46%
4%
2%
42%
38%
38%
45%
15% 2.28
Corporate tax structure
15% 2.35
543
633
27%
43%
1%
3%
24%
42%
41%
42%
33% 1.97
15% 2.30
529
24%
1%
23%
57%
19% 2.05
FINANCIAL
Availability of long term financing
614
19%
-
Access to working capital
19%
43%
38%
1.81
507
Housing costs
609
18%
21%
-
18%
21%
44%
49%
38% 1.80
30%
1.91
500
667
19%
1%
19%
50%
31%
Workers compensation costs
32%
5%
27%
44%
24% 2.14
1.89
543
653
16%
24%
3%
Health care costs
1%
15%
22%
45%
48%
39% 1.78
28% 2.00
665
526
9%
12%
1%
12%
-
9%
37%
49%
54% 1.55
38% 1.75
Commercial/industrial property costs
536
643
34%
9%
-
5%
28%
9%
43%
38%
Overall cost of living
24% 2.15
54% 1.55
665
527
25%
3%
Energy costs
35%
3%
32%
23%
45%
50%
20% 2.18
24% 2.04
646
545
17%
17%
1%
1%
15%
17%
45%
57%
39% 1.79
26% 1.92
531
17%
-
17%
52%
31% 1.86
QUALITY OF LIFE ISSUES
Crime
Health care accessibility
660
76%
23%
53%
19%
5% 2.94
550
Public school facilities
680
74%
32%
21%
3%
53%
29%
22%
49%
4% 2.91
19%
2.16
681
566
68%
76%
14%
30%
Higher education facilities
54%
45%
25%
20%
7% 2.75
4% 3.01
682
567
76%
63%
26%
10%
Cultural opportunities
51%
54%
20%
32%
3% 2.99
5% 2.68
672
569
60%
93%
15%
55%
44%
37%
32%
6%
8% 2.67
1% 3.47
563
92%
46%
46%
7%
2% 3.36
Research Results, Inc./The Survey Center, Inc. - 1991
New England Chamber of Commerce
1991 Economic Study
[ GREATER MANCHESTER ] CHAMBER OF COMMERCE
NEW ENGLAND'S COMPETITIVENESS QUOTIENT
Question 1: Corporate executives and site selection consultants evaluate a host of issues when looking for the
ideal place to situate a business. Please indicate how you feel your State rates in the following
areas, and how you feel New England as a whole compares with other regions of the country.
RESULTS FOR NEW ENGLAND
Your State
New England
EXC/
EXC.
GOOD
FAIR
POOR
EXC/
EXC.
GOOD
FAIR
POOR
BASE
GOOD
(4)
(3)
(2)
(1)
MEAN
BASE
GOOD
(4)
(3)
(2)
(1)
MEAN
WORKFORCE ISSUES
Availability of skilled labor
7783
79%
34%
45%
17%
4% 3.09
6514
86%
32%
54%
12%
2% 3.17
Availability of unskilled labor
7624
82%
31%
51%
16%
2% 3.10
6376
82%
26%
56%
16%
2% 3.06
Labor costs
7583
28%
4%
24%
44%
27%
2.05
6303
30%
3%
27%
51%
19% 2.14
Union atmosphere
6877
23%
4%
18%
43%
35%
1.92
5817
24%
2%
21%
49%
27% 2.00
INFRASTRUCTURE NEEDS
Telecommunication services
7225
88%
37%
51%
10%
2% 3.23
5918
91%
34%
57%
8%
1% 3.24
Highway accessibility
7646
79%
31%
48%
16%
5% 3.06
6197
85%
26%
58%
13%
2% 3.09
Railroad service
7278
38%
9%
29%
35%
27%
2.19
5953
46%
8%
38%
38%
16% 2.37
Airport service
7567
61%
15%
45%
29%
10%
2.66
6135
67%
14%
53%
28%
5% 2.75
Port accessibility
6934
60%
17%
43%
27%
13%
2.63
5763
67%
14%
53%
28%
5% 2.76
Technology concentration
6923
68%
27%
41%
24%
8% 2.88
5730
82%
26%
56%
15%
3% 3.05
PUBLIC POLICY ISSUES
Government tax incentives
7221
8%
1%
7%
33%
59%
1.50
5659
17%
1%
16%
47%
36% 1.81
Attitude toward business community
7552
18%
2%
16%
38%
43%
1.76
5852
28%
1%
27%
48%
24% 2.06
Environmental regulation
7449
29%
3%
26%
40%
30% 2.02
5803
32%
2%
30%
47%
20% 2.14
Corporate tax structure
7213
11%
1%
10%
44%
46%
1.65
5608
18%
1%
17%
54%
29% 1.90
FINANCIAL
Availability of long term financing
7020
18%
1%
17%
45%
36%
1.83
5392
21%
1%
20%
49%
30% 1.92
Access to working capital
6888
17%
1%
16%
46%
37%
1.81
5288
21%
1%
20%
49%
30% 1.92
Housing costs
7557
19%
2%
17%
41%
40%
1.82
5735
23%
2%
21%
49%
28% 1.96
Workers compensation costs
7509
6%
1%
5%
22%
73%
1.34
5652
10%
-
9%
41%
49% 1.61
Health care costs
7578
4%
-
4%
22%
74%
1.30
5717
7%
-
7%
34%
59% 1.48
Commercial/industrial property costs
7409
20%
2%
18%
48%
32%
1.90
5635
24%
2%
22%
51%
25% 2.01
Overall cost of living
7583
13%
1%
12%
46%
41%
1.73
5735
17%
1%
16%
52%
31% 1.87
Energy costs
7357
10%
1%
10%
45%
45%
1.66
5603
15%
1%
14%
49%
36% 1.80
QUALITY OF LIFE ISSUES
Crime
7501
38%
8%
30%
38%
23%
2.24
5835
40%
3%
36%
44%
16% 2.26
Health care accessibility
7704
72%
25%
47%
21%
7%
2.90
5931
72%
19%
53%
22%
6% 2.85
Public school facilities
7693
57%
11%
46%
32%
11%
2.57
5917
59%
8%
51%
34%
7% 2.60
Higher education facilities
7705
82%
41%
41%
14%
4% 3.19
5965
88%
42%
46%
10%
2% 3.28
Cultural opportunities
7645
75%
33%
41%
20%
5% 3.03
5923
85%
35%
50%
12%
2% 3.18
Research Results, Inc./The Survey Center, Inc. - 1991
New England Chamber of Commerce
1991 Economic Study
[ GREATER MANCHESTER ] CHAMBER OF COMMERCE
NEW ENGLAND'S COMPETITIVENESS QUOTIENT
Question 2: Compared to locate with a business? other regions of the country, do you feel New England is a good place
BASE:
YES
NO
Your Chamber
132
75%
25%
Your State
696
75%
25%
New England
7973
46%
54%
Question 3: How would you rate your State's business climate?
VERY
MODERATELY
ANTI-
BASE: PRO-BUSINESS PRO-BUSINESS NEUTRAL BUSINESS BUSINESS
VERY ANTI-
Your Chamber
132
20%
Your State
62%
702
13%
3%
17%
2%
New England
53%
8100
20%
9%
5%
1%
29%
24%
31%
11%
Question 4: Has your company ever considered relocating outside New England?
GIVEN IT
SERIOUSLY
HAVE ALREADY
BASE: CONSIDERED CONSIDERATION CONSIDERED NEVER OF OUR OPERATION
PASSING
RELOCATED PARTS
Your Chamber
132
5%
Your State
17%
692
73%
6%
5%
New England
17%
7833
72%
12%
5%
23%
60%
5%
Research Results, Inc./The Survey Center, Inc. - 1991
New England Chamber of Commerce
1991 Economic Study
[ GREATER MANCHESTER ] CHAMBER OF COMMERCE
NEW ENGLAND'S COMPETITIVENESS QUOTIENT
Question 5: If your company has considered relocating outside New England, what is the principal reason why?
YOUR
YOUR
NEW
CHAMBER STATE ENGLAND
BASE:
21
High Tax Structure
114
2245
19%
18%
Poor Government Attitude/Antibusiness
29%
5%
Business Costs
7%
16%
5%
Workmen's Compensation Costs
4%
15%
5%
Cost of Living
4%
14%
10%
Labor Costs
9%
14%
19%
Poor Economyy
10%
11%
24%
Poor Business Climate
16%
9%
5%
10%
No progress/Lack of Opportunities
9%
Health Care Cost
14%
9%
9%
-
High Utilities/Energy Costs
4%
6%
10%
High Insurance
7%
5%
-
-
Commercial Property Costs/Real Estate
5%
Costs
Regulation Problems
5%
7%
4%
-
Seasonal Relocation/Move to Southern
1%
4%
States
-
11%
Lack atitude of skilled labor/Poor employee
3%
Expansion
10%
4%
2%
-
Banking Crisis/Lack of Credit
6%
2%
-
Low profits
4%
2%
-
Climate/Weather
3%
2%
-
Poor Environment
4%
2%
-
Union Dominance
2%
1%
10%
Overcrowding/High Crime
2%
1%
-
Personal Reasons
1%
1%
-
-
Transportation Poor credit for small companies
1%
,
-
-
-
Education
1%
-
-
Other
1%
1
None
14%
8%
7%
,
-
-
Research Results, Inc./The Survey Center, Inc. - 1991
New England Chamber of Commerce
1991 Economic Study
[ GREATER MANCHESTER ] CHAMBER OF COMMERCE
REGIONAL COOPERATION
Question 1: From a business perspective, what is New England's principal strength?
YOUR
YOUR
NEW
CHAMBER STATE ENGLAND
BASE:
113
566
Diverse workforce
6287
skilled labor
46%
38%
Quality of Education
36%
24%
14%
Quality of life
20%
Standard of Living
13%
Location
20%
13%
Accessibility to ports
6%
11%
People
12%
Resources
Infrastructure
14%
11%
High technology belt
12%
4%
7%
Geographic attributes (Climate, scenic
11%
beauty, seasons)
4%
8%
Population Density
8%
Large Market
8%
Work Ethics
5%
6%
Yankee Ingenuity
10%
Culture
11%
5%
History
3%
Tourism
2%
4%
2%
Transportation
3%
2%
2%
Health Care
2%
2%
Hospital Services
-
1%
2%
High Income Per Capita Income/Disposable
-
-
-
Job Market
Available work
-
-
-
Other
Don't Know
4%
4%
3%
None
1%
1%
1%
-
1%
1%
Research Results, Inc./The Survey Center, Inc. - 1991
New England Chamber of Commerce
1991 Economic Study
[ GREATER MANCHESTER ] CHAMBER OF COMMERCE
REGIONAL COOPERATION
Question 1: From a business perspective, what is New England's principal weakness?
YOUR
YOUR
NEW
CHAMBER STATE ENGLAND
BASE:
106
549
High cost of living/high energy costs
6418
26%
25%
Corrupt government
23%
Govt Anti Business
politics.
6%
High taxes
11%
21%
13%
Cost of business
14%
20%
3%
6%
Business climate/Poor economy/
10%
Recession/Unemployment
9%
High workers compensation rates
10%
9%
Union environment
4%
2%
9%
bankruptcy) Financial condition (loans, banking,
27%
High Cost of Labor
17%
8%
8%
Anti-Business (n-s)
4%
5%
Anti Business attitude of residents
2%
Real estate costs
2%
4%
7%
Infrastructure
6%
3%
Few specialized industries/No
Diversity
2%
Regulatory problems
2%
3%
-
Location
1%
3%
Lack of resources
4%
Healthcare costs
4%
3%
1%
Transportation
1%
2%
4%
Weak Manufacturing
4%
2%
No manufact.
Climate
3%
2%
2%
weather
No skilled Labor
4%
5%
2%
bad attitudes
Parochialism
1%
1%
2%
Provincialism
-
High % of welfare programs
2%
2%
-
Too Liberal
1%
1%
-
Quality of education
1%
1%
-
Defence concentration
1%
1%
Govt resources channeled into defence
-
Crime/drugs
1%
1%
-
-
Legal Climate
1%
1%
-
-
Excessive gov't spending
-
-
-
Demographics
-
-
Other
-
None
5%
6%
4%
-
-
Don't know
-
1%
1%
1%
Research Results, Inc./The Survey Center, Inc. - 1991
Race
The Washington Post
C. Boyden Gray
THURSDAY, NOVEMBER 14, 1991
Civil Rights: We Won, They Capitulated
Contrary to a rapidly congealing press
Sen. Robert Dole and transmitted through Sen.
In return for Sen. Kennedy's complete capitu-
myth, President Bush did not "cave" or "sur-
John Danforth. This option was virtually identical
lation on quotas, the administration agreed to
render" on quotas in the new civil rights bill.
in substance to the president's bill and to other
several compromises proposed by Sen. Danforth
Nor were any of the president's actions taken
formulations that Kennedy and the private lobby-
on other issues. The question on which the ad-
in response to the Clarence Thomas hearings
ists for his bill had rejected time and again.
ministration was most reluctant was the applica-
or the David Duke campaign. On the contrary,
On most issues, the Dole proposal used lan-
tion of jury trials and punitive damages to em-
the compromise bill the president will sign be-
guage drawn from the president's bill and the
ployment cases under the Civil Rights Act.
came possible only after the Democrats beat a
analytical memorandum that accompanied the
Although the Danforth proposal includes caps on
total retreat on quotas, thereby paving the way
bill. On the contentious issue of "business ne-
such awards, thereby setting an important pre-
for the president to make concessions on other,
less fundamental, issues.
cessity," which defines the standard that em-
cedent for tort reform. such remedies are unde-
To understand what happened, the public
ployers must meet in justifying statistical dis-
niably a dangerous experiment (as is suggested
needs to know the story of an extraordinary
parities, the proposal used essentially
by the senators' 54-42 vote againsta proposal to
amendment that was adopted without debate
meaningless language from the Americans
apply to themselves the same remedies they are
or a vote. But first we must set the stage.
With Disabilities Act that left the term in ques-
imposing on the private sector).
Under the Supreme Court's 1971 Griggs deci-
tion undefined. (Ironically, the negotiators of
Despite our strong misgivings about jury tri-
sion, employment practices having an adverse
the disability law had settled on this empty lan-
als and damages. the agreement was sealed,
statistical impact on certain groups can lead to li-
and our startling success on Wards Cove re-
ability even if there was no hint of discriminatory
mained the most salient component of the
intent. In 1989. the Wards Cove case summa-
package. Imagine. then, how disturbed we
rized the rules under which such lawsuits would
"The president won a
were to learn that Sen. Kennedy went to the
be conducted. noting that unfair rules would
floor of the Senate the very next day to create
drive employers to use quotas to avoid any possi-
clean victory for equal
legislative history, inconsistent with Thursday
bility of being dragged into such a lawsuit.
night's agreement, attempting to resuscitate
For the past two years, Democrats have in-
opportunity, and that
one of the most radically objectionable features
sisted that Wards Cove overruled Griggs and that
of the original Democratic bill. Had we been
legislation was needed to "restore" pre- Wards
victory will survive the
sandbagged? Had the agreement so laboriously
Cove law. The changes they actually proposed,
negotiated ever been meant to stick?
however, would have gone much further. expos-
current round of
The following Monday, the administration
ing countless employers to ruinous litigation and
proposed an innovative statutory provisions spe-
liability any time their numbers were not "right."
fictions."
cially designed to enforce the Thursday night
Administration lawyers always believed that
agreement. This provision directed the courts to
the Supreme Court was right to think that
ignore any legislative history (such as the de-
Griggsand Wards Cove were consistent with
guage because they expected the issue to be
scription of the agreement given by Kennedy on
each other. More important, we knew that the
addressed and resolved in the context of the
Friday) apart from the two sentences originally
Democrats' "restoration" was in fact a radical
upcoming civil rights bill.)
agreed to. Sens. Kennedy and Danforth objected
and destructive distortion of prior legal doc-
In its most critical component, the Dole pro-
to this proposal. while administration negotiators
trine. If "bad numbers" alone became a suffi-
posal included exclusive legislative history that
felt they had to insist. Tense meetings ensued,
cient basis for legal liability, employers would
would supply the definition of "business necessi-
and it seemed at points that there might be no
be foolish not to use quotas.
ty" by referencing the case law as it stood imme-
civil rights bill after all.
Last March, the president proposed a bill
diately prior to the Wards Cove decision. In two
On Tuesday, Sens. Dole and Orrin Hatch en-
that made a symbolically important but practi-
carefully negotiated explanatory sentences, the
gaged in heroic efforts to hold Sen. Kennedy and
cally insignificant concession to the Democrats
proposal indirectly accomplished what the presi-
his allies to the agreement. Republican Leader
on one issue involving the burden of proof. In
dent's bill had done in so many words: codifying
Dole's arguments were particularly effective-
other respects. the president's bill codified the
the law of disparate impact as it stood at the
that night. without any debate or a recorded
law as it existed prior to Wards Cove (and
time of Wards Cove (except on the burden of
vote, the Senate accepted a slightly modified
which we believed was fully consistent with
proof). Because the statutory language provided
version of the administration proposal enforcing
that decision). The Democrats in Congress
no definition. the definition referenced in the leg-
the deal.
never gave this bill the time of day.
islative history would necessarily be dispositive
Heroic efforts to enforce the agreement
Suddenly. on Thursday. Oct. 24, Sen. Edward
in the courts; for that reason, 90 percent of the
would not have been required unless there had
Kennedy stunned administration negotiators by
negotiations centered on the legislative history
been something very significant were at stake.
agreeing to a Wards Cove proposal developed by
rather than on the statute itself.
And there was. Buried in this dispute, as in earli-
er arcane debates over legal terminology. was
the difference between preserving the essence
of current law and creating a new quota mon-
ster. It also meant the difference between a sys-
tem that will encourage kids to stay in school and
a novel system of legal threats against those who
reward hard work and achievement. On these
fundamental issues the president won a clean
victory for equal opportunity, and that victory
will survive the current round of fictions about
some supposed political surrender.
The writer is counsel to the president.
U.S. NEWS
The Pan Am
bombers
A confession in the Congo and matching pieces
of two bombs point an accusing finger at Libya
A
pollinaire Mangatany was a
three years pursuing those responsible
careful man but also a greedy
for the worst terrorist attack in U.S. his-
one. On the morning of Sept. 18,
tory, the destruction of Pan Am Flight
1989, less than 24 hours before he was
103 over the village of Lockerbie, Scot-
to board an airplane at the Maya Maya
land, have fashioned the first two crimi-
Airport in Brazzaville, the capital of the
nal indictments in the inquiry. Stemming
People's Republic of the Congo, Man-
as they do from the most far-reaching
gatany stopped in for a visit with the
and complex criminal investigation in
local juju priest. The trip would be a
history, the charges against two midlevel
dangerous one, the African psychic told
officials of the Libyan government seem
Mangatany; he should find a reason to
embarrassingly modest. But they are the
cancel it. Mangatany knew
first fruits of a dramatic turn
all about the danger. After
in the investigation, and
all, he had agreed to carry a
they pose a host of new
bomb aboard the plane and
questions for the Bush ad-
blow it up when the aircraft
ministration and for Ameri-
stopped to pick up more
ca's on-again, off-again bat-
passengers in Chad.
Evidence. A meticulous reconstruction of the
Maid of th
tles against terrorism and
Mangatany had a 5-year-
against Libya's Qadhafi
old son and a pregnant com-
(box, Page 26).
mon-law wife. He had no job.
For most of the first two
But if he blew up the plane, a
years after the Pan Am Clip-
spy for the government of
Megrahi. A French
per Maid of the Seas shat-
Muammar Qadhafi would
connection
tered over Lockerbie, killing
pay him a meager sum. The
all 259 passengers and 11
spy, a man named Abdalla
more people on the ground,
Elazrag, had assured him
investigators from the FBI
that everything would be all
and the Scottish police fo-
right. He had even given
cused on a Palestinian ter-
Mangatany a red necktie.
rorist group operating in the
Once he had deposited the
heart of Europe. The evi-
bomb on the aircraft and left
dence seemed compelling.
the plane in Chad, Elazrag
Less than a month before
promised Mangatany, an-
Flight 103 was destroyed, on
other Libyan spy would rec-
Dec. 21, 1988, federal police
ognize the red tie and spirit
Khalifa. Traced to
in Germany had arrested 14
Mangatany out of the airport
the isle of Malta
known and suspected terror-
Success. Acting Attorney General William Barr
to safety. Apollinaire Man-
unveiling t
ists and seized a sophisticat-
gatany thought about the words of the
ed bomb designed especially for the de-
juju man, thought about the money
on the American aircraft appeared to
Iran
struction of an airplane.
be Iran: U.S. intelligence officials
290
promised by the spy, then boarded the
That evidence and more pointed to
traced a wire transfer of several million
B
airplane with the bomb. Not long after
the Popular Front for the Liberation of
dollars from Tehran to a bank account
Soor
takeoff, it blew up, killing Mangatany
Palestine-General Command. Its lead-
in Vienna controlled by the PFLP-GC.
and 170 other people.
Apo
er was an excitable little man with a
Iran's motive, too, seemed compelling
the
From this improbable beginning, the
paunch named Ahmed Jibril. Its patron
enough. On July 3, 1988, the USS Vin-
vesti
investigators who have spent nearly
was Syria. And its banker for the attack
cennes had mistakenly shot down an
hosp
24
PHOTOS: JUSTICE DEPARTMENT
U.S.NEWS & WORLD REPORT, NOVEMBER 25, 1991
U.S.N
Maid of the Seas allowed investigators to link the bombing to an attack on a French airliner in Africa.
BARRY THUMMA-AP
jet belonged to a French firm, Union des
meeting in Tripoli in September 1988 to
Transports Aériennes. Because the flight
discuss the aircraft-bombing campaign
had departed from the Congo, French
against America. In fact, U.S. intelli-
authorities began collaborating with
gence officials say, other evidence indi-
Congolese government investigators.
cates that Libya began planning new at-
It was the Congolese who got the first
tacks on American targets soon after
big break in the case. According to a
the U.S. raid in April 1986.
secret report prepared by the Congo's
Deep involvement. The September
Central Directorate of Military Security,
1988 meeting provided more-specific ev-
a Libyan agent named Bernard Yanga
idence of Libyan plotting. Present, U.S.
said the bombing of the French jet was
intelligence officials say, were Abdullah
part of a wider Libyan campaign to de-
Senoussi, the brother-in-law of Libyan
stroy American aircraft. The motive?
dictator Qadhafi, and Musa Koussa, a
Retaliation for the 1986 U.S. bombing of
Libyan official who earned a Master's
Libya, ordered by Ronald Reagan after
Degree at Michigan State University,
the Libyans directed an attack on a West
writing his thesis on Qadhafi before he
EMENT
OF
Berlin discothèque that killed two Amer-
returned to Tripoli to head Libya's Cen-
ican servicemen and a Turkish woman.
ter to Resist Imperialism, Racism, Back-
Barr
Yanga, who worked days as a ware-
wardness and Fascism. Both men, U.S.
unveiling the grand jury indictments
houseman, was not a willing confessor.
officials say, were deeply involved in
Iranian plane over the Persian Gulf;
But the Congolese, says a U.S. official,
planning the bombings of both the
290 people were killed.
"were enthusiastic interrogators." Yan-
French jet and Pan Am Flight 103.
But the theory, evidently, was wrong.
ga's account, the Congolese report con-
Working from information developed
Soon after the French plane carrying
firms, "was initially somewhat hesitant,
by French and Congolese authorities in
Apollinaire Mangatany exploded over
and then became more coherent."
early 1991, FBI agents and Scottish po-
the Ténéré desert in eastern Nigeria, in-
According to knowledgeable officials,
lice began re-examining the possibility
vestigators were swarming over the in-
Yanga and another Libyan gave sworn
of a Libyan connection to the bombing
hospitable terrain collecting debris. The
statements saying they had attended a
of Flight 103. Qadhafi's government en-
JUSTICE DEPARTMENT
25
U.S.NEWS & WORLD REPORT, NOVEMBER 25, 1991
U.S. NEWS
joys close relations with the gov-
ernment of Malta, and on the
morning the Pan Am jet explod-
ed over Lockerbie, an Air Malta
flight had carried several pas-
sengers to Frankfurt, where they
boarded the first leg of Flight
103. Early on, investigators had
tried to determine whether the
bomb had been transferred to
Flight 103 from the Air Malta
flight. They had rejected the
possibility for lack of evidence.
But the information devel-
oped during the investigation
into the bombing of the French
jet prompted another look for a
Maltese connection. This time,
investigators discovered that the
two Libyans indicted last week,
Lamen Khalifa Fhimah and
Abdel Basset Ali al-Megrahi;
UTA. Wreckage from the French jet, in which 170 died, litters the Ténéré desert.
had slipped an unaccompanied
piece of baggage aboard the Air Malta
the timer on the bomb that blew up Flight
American jetliner is compelling. Some
flight. Both men are members of the
103: They were identical. After nearly
U.S. officials suspect that after the
Jawahira Security Organization, one of
three years, the first of those who mur-
PFLP-GC terrorists were arrested in
Libya's intelligence services.
dered 270 people on a frigid winter night
Germany-weeks before the Lockerbie
The telltale timer. The bag delivered by
in Scotland now face criminal charges.
bombing-Ahmed Jibril, who has long
the two Libyans contained a radio-cas-
Does that mean Libya alone was re-
had close ties to Qadhafi, handed off the
sette player with a bomb concealed in it.
sponsible? The Bush administration has
operation to Libyan intelligence agents.
At Frankfurt, despite airline security reg-
taken pains to avoid linking Iran and
There is no evidence proving that such a
ulations intended to prevent such an oc-
Syria to the Lockerbie bombing. Bush is
transfer occurred. But even if it did not,
currence, the unaccompanied bag with
eager for progress in the Middle East
U.S. counterterrorism specialists say,
the bomb in it was loaded aboard Pan
peace process, in which Syria is a critical
Iran and Syria cannot be pronounced
Am Flight 103. The link was confirmed
actor, and Iran holds the keys to freedom
innocent simply because the Libyans
when a British forensic scientist matched
for Westerners held hostage in Lebanon.
beat them to the punch.
a fragment of the bomb timer used to
But the evidence that Iran paid the Syri-
destroy the French jet with a tiny piece of
an-backed PFLP-GC to destroy an
BY BRIAN DUFFY
CAN AMERICA STRIKE BACK?
the work of the Abu Nidal Organiza-
tion, U.S. officials told U.S. News. Abu
Bad choices: military action,
Nidal is headquartered in Tripoli and
bankrolled by Muammar Qadhafi.
an oil embargo or kidnapping
Still, none of the retaliatory options
available to George Bush is very at-
tractive. An oil embargo would not be
n June 21, 1989, probably long be-
was to announce the indictments of
effective because Libya has invested
fore William Barr ever dreamed
two tibyan officials for the bombing
heavily in downstream refining; sever-
of becoming the government's top
of Pan Am Flight 103.
al big facilities are incorporated in
lawyer, he drafted a secret memoran-
In the cramped quarters of the
Switzerland and would not be subject
dum. Its message: FBI agents have the
Washington, D.C., field office of the
to an embargo. Tomahawk cruise mis-
authority to violate international law
FBI, the elite C-3 squad would likely
siles or Stealth fighters could hit Liby-
by seizing terrorists, drug traffickers
get the call if it appeared that either
an targets more accurately than U.S.
and other fugitives overseas without
of the Libyans could be grabbed.
bombers did in 1986, but military ac
obtaining the consent of the foreign
Both, however, are believed to be in
tion is unlikely while the Middle East
countries where they are hiding. The
Libya, where such an operation would
peace process is crawling forward.
opinion remains controversial, but
be difficult and extremely risky.
That means that the indictments is
law-enforcement sources say it was fit-
Limited options. Still, there is ample
sued against the two Libyan intelli-
ting that Barr's last public act before
reason to act: Libyan terrorists are be-
gence officers last week may serve as
the Senate Judiciary Committee rec-
coming more active-and competent.
little more than paper protests against
ommended his confirmation last week
A car bombing that killed a U.S. Army
governments that promote and pay
as the nation's 77th attorney general
sergeant in Turkey a few. weeks ago was
for terrorist activity.
26
U.S.NEWS & WORLD REPORT, NOVEMBER 25, 1991
Race
The New York Times
Mississippi's
PAGE: DATE: 11/11/91 R8
New Chief Fought Race-Based Plans
By RONALD SMOTHERS
Special to The New York Times
the color of my skin. And that's just
construction company.
JACKSON, Miss., Nov. 8 - When
plain unfair. You can't make up for
Kirk Fordice got his degree in civil
Kirk Fordice was driving home his
past discrimination by making others
engineering in 1956 from Purdue Uni-
campaign theme of passionate opposi-
suffer."
versity and in 1957 earned a masters
tion to quotas and government affirma-
At the same time Mr. Fordice was
degree in industrial management. Af-
tive-action programs in general, he
pursuing his own case, he was a player
ter serving two years in the Army, he
was not just engaging in idle sloganeer-
in an even bigger affirmative action
began working with the family busi-
ing.
case. He was a top official of an indus-
ness, which specialized in fabricating
try trade group, the Associated Gen-
the masssive metal, reinforced con-
Nor was the new Governor-elect of
eral Contractors, that helped finance a
crete mats used to stabilize the banks
Mississippi running a copycat cam-
case called City of Richmond V. Croson.
of the Mississippi River. Because the
paign, despite what some opponents
The case resulted in a United States
work is heavily dependent on Federal
said about his injecting race into the
Supreme Court decision in January
contracts, the elder Mr. Fordice be-
election and echoing the approach of
1989 that said that affirmative action
came active in the industry trade
David Duke, the former Ku Klux Klan
and set-aside programs based on race
group and impressed on his son with
leader and neo-Nazi who is running for
were unconstitutional if they were not
the importance of such involvments.
governor in the neighboring Louisiana.
aimed at redressing specific incidents
In fact, Mr. Fordice was the driving
At one point the business did as much
of past discrimination.
force behind a 10-year legal challenge
as $15 million a year but in the mid-
to an Army Corps of Engineers pro-
Affable in Campaign
1980's Mr. Fordice shrank the company
gram to set aside some contracts for
Mr. Fordice's connection with these
to doing $5 million in business annually
minority and small businesses, and he
efforts was never prominent in his
while maintaining profits.
was the leader of the industry group
campaign. The picture that most vot-
At the same time, said Haley Bar-
that backed a Supreme Court case that
ers got was of his straightforwardness
bour, the state's Republican national
ended up outlawing most such minority
and affability. But the Governor-elect,
committeeman, Kirk Fordice was
set-aside programs.
some friends say, often uneasily walks
among the few well-off businessmen in
Mississippi's first Republican gover-
a tightrope between straight talk and a
the state willing to devote time to Re-
nor in 115 years, is, friends and family
bluntness that is withering and just
publican politics.
members say, a man of "strong opin-
short of inflammatory.
In fact, throughout the campaign,
Mr. Fordice's reputation as a pit bull
ions and an outspoken manner." The
57-year-old owner of a Vicksburg con-
said one friend, James B. Furr, a Jack-
for the industry was burnished last
March when he took on Senator How-
son oil man, some of them held their
ard M. Metzenbaum, the Ohio Demo-
struction company is a conservative
breath fearing that the man who they
crat who is chairman of the Senate
who is no stranger to the White House.
considered "headstrong" and "full of
He brings to the Governor's mansion a
magical self-confidence" would talk
labor subcommittee, in what Republi-
background of nearly 30 years of trying
himself into some controversy or com-
can staff members and industry offi-
to build the Republican Party in the
mit a costly gaffe.
cials recalled was an aggressive de-
overwhelmingly Democratic State. In
But Mr. Furr, who has known Mr.
fense of the construction industry.
that process his role was mostly as a
Fordice for 35 years, insisted that it
"I had my work cut out for me," said
financial backer, and the only other
was Mr. Fordice's own forebearance,
Mr. Fordice, noting that the Senator
elected post he has held was country
and not skillful handling by image
had brought relatives of construction
election commissioner.
accident victims to testify in favor of
But his determination in pressing the
makers, that prevented such problems.
new safety laws. "He took out after me
case involving the Corps of Engineers
"He was just full of self-confidence and
like a schoolyard bully. So I just shot
speaks volumes about who he is and,
not afraid to say anything."
back at him and he was shocked be-
some say, how he is likely to govern in
His colleagues in the Associated
cause nobody else ever stood up to him
the state with its strong Democratic
General Contractors had long known of
like that. That's why the Associated
Party and powerful Legislature.
his unblinking manner as a spokesman
General Contractors has guys like me
That case, Fordice V. Marsh, ended
for their cause. He has served on the
who are businessmen and not profes-
with a little-publicized ruling by a Fed-
group's executive committee since
sional lobbyist doing the testifying. It's
1974 and from 1988 to early this year
a lot harder for them to intimidate us."
eral judge in July 1990 that the admin-
istration of a set-aside program for
held a series of top offices including
Ralph Thomas, executive director of
work on the Mississippi River had been
president. He often appeared before
the National Association of Minority
characterized by abuse.
Congressional committees making the
Contractors, said that Mr. Fordice had
"It was very personal," he said of
industry's case.
forthrightly brought his opposition tc
the lawsuit in an interview. "They al-
"They picked me for the armed com-
set-aside programs to the hostile arena
most put me out of business because of
bat testimony," he said with some rel-
of the minority contractors convention
ish as he discussed his industry in an
in 1990 at which he "toed the conserva-
interview.
tive party line" on the issue.
His wife, Pat, said that the construc-
tion business bred a special kind of
"And a lot of us were impressed with
"focused" and no-nonsense approach.
his willingness to mix it up. I guess his
election in Mississippi is sort of a
A Family Business
mixed blessing for us. At least we know
Daniel Kirkwood Fordice Jr. was
a governor with whom we can talk
born Feb. 10, 1934, in Memphis, the son
cordially and with whom we can agree
of a self-taught construction engineer
on some things. Unfortunately none of
who in 1948 left his job with the Army
those things involve minority partici-
Corps of Engineers to start his own
pation in the construction industry."
PAGE 20,41
Cong ressional
Ethics
The New York Times
DATE: 11/10/91
PAGE: A024
Democrats Worry About Scope of Checks Inquiry
WASHINGTON, Nov. 9 (AP) - Dem-
The Associated Press, and its authen-
And reflecting the concern for pri-
ocratic lawmakers are worried that
ticity was confirmed by Mr. Bruce in a
vacy, it said, "One answer is that we
the House ethics committee's investi-
telephone interview.
will not put canceled checks into the
gation of bad checks written against
Mr. Bruce would not say where the
hands of the Republicans."
accounts at the Capitol Hill bank serv-
comments had been made, but a House
The memorandum also reflected a
ing House members will invade their
official, speaking on condition of ano-
worry that lawmakers would be judged
privacy.
nymity, said they were from last
by ethical standards that did not pre-
And they are insistent that the inves-
Thursday's meeting of the House Dem-
vail before the extent of bad-check
tigation be concluded quickly and that
ocratic whip organization. The House
writing at the bank became public
damaging material related to it be kept
whip meets weekly with the whips
knowledge.
from Republicans.
from each state's delegation to discuss
Addressing that concern, it cited
Those are among the elements of a
party positions and strategies, then
comments at the meeting to the effect
Democratic Congressman's written
pass the information to rank-and-file
that the report resulting from the eth-
account of a meeting among party law-
lawmakers.
ics committee's inquiry "will very like-
makers on Thursday. The memoran-
"We need to protect our privacy and
ly be critical of the bank and its prac-
dum, written by Representative Terry
wrap up the investigation quickly," the
tices, not of individual members,' and
L. Bruce of Illinois, was obtained by
memorandum said.
that "bounced checks will not be an
ethical violation."
The investigation was begun last
month by a subcommittee of the ethics
panel, the Committee on Standards of
Official Conduct. It was ordered by a
House resolution that will also shut
down the bank by year's end.
Seeking Routine Violators
The subcommittee, three Democrats
and three Republicans, is to investigate
several issues related to the bank,
among them whether lawmakers, offi-
cers or employees of the House "rou-
tinely and repeatedly" wrote checks
against insufficient funds.
The inquiry follows a furor over find-
ings by the General Accounting Office,
Congress's investigative and auditing
arm, that from July 1989 through June
1990, there were 8,331 bad checks writ-
ten on accounts at the bank. The G.A.O.
said 134 account holders had written a
total of 581 bad checks of $1,000 or
more.
The bank imposed none of the finan-
cial penalties that other banks charge
depositors who write bad checks. In-
stead, it covered the deficiencies by
taking money from other accounts.
In an interview, Mr. Bruce said his
memorandum's reference to privacy
had nothing to do with any effort to
keep the names of chronic bad-check
writers from becoming public knowl-
edge. The lawmakers' concern, he said,
was only that their private transac-
tions not become public.
And the assessment that writing a
bad check would not be judged an
ethical violation, he said, was a short-
hand way of saying that a person who
had written such checks for only $10 or
$15, and who had done so only rarely,
would not be found at fault.
A Democratic leadership aide who
attended the meeting said, "In part,
what they were looking for was to be
reassured that there would be differen-
tiation between those who occasionally
wrote a check for insufficient funds, as
opposed to those who repeatedly and
systematically abused the system."
Representative Matthew F. Mc-
Hugh, the New York Democrat who
will head the investigation, said in an
interview that "the political climate is
so negative" that members worry that
the subcommittee will be pressured to
recommend punishment, even by ap-
plying ethical standards retroactively.
"That's not going to be the ap-
proach," Mr. McHugh said. "We will
make judgments about standards peo-
ple had reason to know about at the
time."
PAGE
OF
41