T~~ ~ i[HVERSITY Texasr:·::~:~g::'STIN BUSINEsgL LIBRARIES The Bureau of Business Research 153 Deregulation of the Telephone Industry: Implications for Texas Consumers Gail Odell and Judy Spurlock Poole 159 Growth of the Beer Industry in the South Joseph E. Pluta 169 Irrigation and Playa Lakes on the Texas High Plains Otis W. Templer 175 Severance Taxes and Interstate Fiscal Conflicts Charles E. McLure, Jr. 179 A Review of State Severance Taxes in the United States James A. Richardson and Loren C. Scott 183 The Growing Demand for Executives in the Southwest Edwin S. Mruk and Thomas S. Tilghman 187 American Indian Entrepreneurs in the Southwest Marie Adele Humphreys and Jacquetta McClung 193 The Effects of Alternative Strategies for Social Security Reform David L. Baumer and Robert L. Clark 199 Rising Health-Care Costs: A Continuing Cause for National Concern Kenneth W. Hollman and Joe H. Murrey, Jr. 205 Foreign Direct Investment Trends in the Southwest Donald L. Bumpass July-August 1982 . Texas Business Review reports the results of research in business, the social sciences, and the physical sciences in language that is readily understandable. Our readership includes policy makers in government, members of the busi· ness community, university faculty, and the general public. Articles focus on topics of special interest to readers both in Texas and throughout the Southwest and South. These topics include energy inflation ma~ufacturing, population, labor, public policy, transportation,' the smali business, regional economic development, and other related areas. Because Texas Business Review encourages a free exchange of ideas opinions expressed in articles are those of individual authors and not neces'. sarily those of the editors or the Bureau of Business Research. Texas BUSINESS The Bureau of Business Research • ev1ew The L'niversityof Texasat Austin Vol. 56, No. 4 July-August 1982 Bureau of Business Research Charles C. Holt, Director Review Staff Joseph E. Pluta, Editor Lois Glenn, Publications Manager Charles F. Dameron, Jr., Managing Editor Mary Jo Powell, Editorial Assistant Mildred Anderson, Data Compilation Jean Stenger, Computer Graphics Robert T. Jenkins, Production Assistant Joan F. Dameron, Compositor Meade E. Collard, Compositor Editorial Advisory Board Vernon M. Briggs, Jr. Cornell University George G. Daly University ofHouston John F. Due University ofIllinois Peter C. Frederiksen Naval Postgraduate School Malcolm Gillis Harvard University Robert W. Gilmer Tennessee Valley Authority John Stuart Hall Arizona State University Jared E. Hazleton University of Washington William H. Leahy University ofNotre Dame Charles G. Leathers University ofAlabama Edward J. Malecki University of Oklahoma Charles E. McLure Stanford University Ed ward M. Miller Rice University Jerome Olson University of Texas at A ustin Thomas R. Plaut University of Texas at A ustin James P. Rakowski Memphis State University James A. Richardson Louisiana State University R. Lynn Rittenoure University of Tulsa William J. Serow Florida State University Joseph A. Ziegler University ofArkansas Subscription rate: $20.00 per year. Single copy: $3.50. Published six times a year. Second-class postage paid at Austin, Texas. Publication number 540400. ISSN 00~0· 4209. Copyright © 1982, Bureau of Business Research, University of Texas at Austin. Address manuscripts to Editor, Texas Business Review, P.O. Box 7459, Austin, Texas 78712. Address subscription inquiries to Sales Office, Bureau of Business Research, P.O. Box 7459, Austin, Texas 78712. Telephone: 512471-1616. Texas Business Review is indexed in Marketing Information Guide and Public Affairs Information Service and is available on microfilm from University Microfilms. Deregulation of the Telephone Industry Implications for Texas Consumers The settlement of the U.S. Justice Department's anti­trust suit against American Telephone and Telegraph (AT&T) on January 8, 1982, brought the issue of telephone industry deregulation to the attention of the U.S. public. The divestiture agreement led to worries about impending increases in local telephone rates, and many consumers wondered what benefits, if any, would accrue to them from the antitrust settlement. The deregulation process, however, had really begun in the 1960s and was being played out simultaneously in the U.S. Congress, the courts, and the Federal Communications Commission (FCC). Overview of the Texas Telephone Industry The telecommunications industry in Texas is strongly affected by two rather distinctive features of the state: its immense area (containing several large urban populations separated by hundreds of miles of low population density) and its healthy and growing economic environment. These two factors will influence the manner in which deregulation of the telephone industry affects Texas consumers. Seventy-three telephone utilities operate in the state, and, although Southwestern Bell Telephone Company operates approximately four out of five of the state's telephones, the other seventy-two independent companies serve more than half of the 250,000 square miles of certi­ficated service territory (see table 1 ). One small utility (Big Bend Telephone Company) serves only 2,100 customers in a service area that covers 18,000 square miles. All of these utilities are regulated by the Texas Public Utility Commission (PUC), which is responsible for the regulation of local exchange and intrastate toll rates; the FCC is responsible for the regulation of interstate toll rates. Because the same facilities are used for both intra­state and interstate toll calls, the common costs and reve­nues associated with toll service are divided through the Gill"Odell is Senior Financial Analyst, Economic Research Division, Public Utility Commission of Texas. Judy Spurlock Poole is Regu­latory Accountant, Accounting Division, Public Utility Commission ofTexas. Gail Odell Judy Spurlock Poole jurisdictional settlements process. A joint board , composed of representatives of the FCC and the state commissions, is responsible for allocating revenues and costs between inter­state and intrastate jurisdictions. The settlements process, or the distribution of toll revenues to the independent tele­phone companies, is extremely important to these com­panies. Toll settlements frequently make up well over 50 Table 1 The Telephone Industry in Texas: Statistical Highlights Nu mber of Company telephones All seventy-three Texas companies 11,531,0 00 Southwestern Bell Telephone Co. 9,212,600 Independent co mpanies 2,318,400 Thirty-t wo companies w ith operating revenues under $1 million 44,500 Number of Operating revenues companies Less t han $250,000 11 $2 50,000 to $1 million 21 $1 million to $5 million 27 $ 5 million to $1 0 million 6 $ 10 million to $1 00 million 6 More than $100 million 2• Number of Number of telephones companies Oto 1,000 13 t 1,000 to 2,500 19 2 ,500 to 5,000 11 5,000 to 10,000 12 l o,ooo to 50,000 More than 50,000 135•• *Incl udes So uthwestern Bell Telephone Co. (more than $3.8 bil­lion) and General Tele phone Co. of the Southwest (more than $ 500 million). tThe smallest co mpany is K.nippa Telephone Co. (264) in Uvalde County . ••Includes Southwestern Bell Telephone Co. (9,212,644), General Telephone Co. of the Southwest (l ,440,000), Continental Telephone Co. of Texas (186,726), United Telephone Co. of Texas (133,528), and Central Telephone Co. of Texas ( 100,393). percent of the operating revenues of independent telephone companies. Under the formula for allocating joint costs, toll service has generally been said to subsidize local rates. The telephone industry today is dual in nature. Basic telephone service remains, for the time being at least, a natural monopoly and is regulated by the FCC and the PUC. The high-technology aspects of the industry (manu­facture and sale of terminal equipment, mobile telephone service, long haul transmission, and data processing), how­ever, are subject to more competition and are being deregu­lated. AT&T has agreed to divest itself of about two-thirds of its total assets. Specialized common carriers, like MCI, Southern Pacific, Western Union, and International Telephone and Telegraph, provide toll services alternative to those offered by AT&T and pay an access charge to the telephone companies for the use of the local exchange facilities. This charge is cur­rently regulated by the FCC under a tariff called Exchange Network Facilities for Interstate Access. Twelve specialized common carriers now operate in the state, and these com­panies compete with AT&T for the long distance market. While their precise share of the state's toll market is un­known, it is probably equivalent to the specialized common carriers' share of the national long distance market (between 1 percent and 4 percent). The interconnect industry encompasses all of the state's several hundred terminal equipment vendors, which range from purveyors of basic telephone sets (Montgomery Ward and Radio Shack) to marketers of highly sophisticated PBX and key systems (Fisk and Modcom) and data-processing equipment (Datapoint). Southwestern Bell and the large independent telephone companies, like General Telephone and Central Telephone, are, of course, major participants in this rapidly growing market. Texas is an attractive market for both the specialized common carriers and the intercon­nect industry. The oil and gas, insurance, and computer in­dustries are receptive consumers of new types of telecom­munications technology. History of Deregulation Science and technology have transformed the telephone utility business into the telecommunications industry. The convergence of the communications and computer indus­tries, in addition to other scientific advances like microwave technology, prompted the federal government to begin de­regulating the telephone industry in the 1960s on the as­sumption that the public interest would be best served by removing regulatory restrictions on the industry and that competition would further promote technological develop­ment and cost advantages. Deregulation was also considered necessary to help U.S. industry maintain its international preeminence in the telecommunications and computer fields. In recent years the U.S. Congress, the FCC, and the De­partment of Justice have been pursuing independent paths to deregulation. The complexity of the industry and of cur­rent regulation means that the process of deregulation will be difficult. One thing now seems fairly certain: the Bell system, which serves 80 percent of the nation's telephones and is responsible for the world's most efficient national telecommunications network, will be dismembered. AT&T had, since its formation in the nineteenth cen­tury, pursued a policy of expansion, acquiring other tele­phone companies and establishing itself as a national mono­poly. In 1913 the Department of Justice tacitly approved of AT &T's expansionary practices, and until 1949, when the Justice Department sought to divest the company of its manufacturing subsidiary (the Western Electric Company), the federal government did not protest AT &T's monopoly power. This suit was settled in 19 5 6 by a consent decree that barred AT & T from engaging in nonregulated communi­cations businesses, thereby preventing the company from entering the fields of computer technology and data proces­sing. By the spring of 1980, Congress was attempting to pass a new communications act, and the Justice Department seemed bogged down in its second lengthy antitrust suit against AT&T, which had begun in 1974. In April of 1980, however, the FCC surprised the industry with the resolu­tion of its second computer inquiry. (The FCC had initiated the inquiry in 1976 to investigate the issues and problems brought about by the merging of telecommunications and computer technologies.) The decision effectively rescinded the 1956 consent decree by allowing AT&T to compete in unregulated markets through a separate subsidiary. The FCC also effectively deregulated all equipment used on cus­tomer premises and enhanced communications services. In addition to the 1980 decision, a series of FCC actions fostered competition within the telephone industry. These include decisions on accelerated capital recovery methods and the expensing of certain costs associated with the in­stallation of telephones or station connection costs (which had previously been capitalized by the telephone compa­nies). All of these decisions significantly affect telephone rates and the way consumers purchase and use telecommu­nications services. While the FCC was pursuing this course of action, both branches of Congress were coming closer to passing a new communications act. Senate Bill 898 was overwhelmingly passed by the Senate in October 1981, and House Bill 5158 was introduced to the House Telecommunications Sub­committee in December 1981. Both bills permitted AT&T to offer competitive services through subsidiary organiza­tions and relied on the subsidiary relationship to solve two problems: how to prevent AT&T from using its size and re-sources to smother competition and how to prevent AT&T from using its profits from regulated services to subsidize its competitive operations. In both pieces of legislation, basic local and toll telephone service would continue to be regulated, while other types of services (enhanced tele­phone services, data transmission, videotext and viewdata services, and the manufacture and sale of terminal equip­ment) would be deregulated. AT & T and the Bell system would have remained largely intact under both pieces of legislation. On January 8, 1982, the Justice Department and AT&T announced that a settlement had been reached in the gov­ernment's seven-year-old antitrust suit against the giant company. The settlement dismembered the Bell System and, thereby, solved the problems of anticompetitive abuses and cross-subsidization. AT&T agreed to divest itself of its twenty-two operating companies (representing approxi­mately two-thirds of its assets) while retaining Western Electric, Bell Laboratories, the Long Lines division, the cus­tomer equipment business, and responsibility for all long distance services. The divestiture will be accomplished by issuing proportional shares of stock in the newly indepen­dent operating companies to AT & T shareholders. The spun­off Bell operating companies would be prohibited from of­fering any competitive services themselves. Independent telephone companies, like General Telephone and Central Telephone, would continue to provide terminal equipment as well as interexchange services within their contiguous operating territories. The new AT&T may compete with the local companies by offering substitutes for local exchange service like digital termination systems, but the operating companies would be prevented from offering any services that compete with AT&T. (The settlement defines an exchange service area as being limited to a single standard metropolitan statistical area-SMSA-and to parts of ad­jacent SMSAs in which a community of interest exists. The operating companies would be limited to providing local telephone service within these exchange service areas.) The present system of dividing toll revenues between AT&T and the independent telephone companies and the spun-<>ff Bell operating companies would be replaced by a system of exchange access charges that would be applied to AT&T and other common carriers on an equal basis. The local telephone companies and AT&T would be required to provide, over a phase-in period of five years, equal access ar­ rangements to all long distance carriers in terms of cost, quality, and number of coding digits. By keeping its Western Electric, Bell Laboratories, and Long Lines divisions, AT&T remains a considerable power in the telecommunications industry because it keeps its profitable long distance, terminal equipment, and yellow pages businesses. Under a complete modification of the 1956 consent decree, the new AT&T would be free to offer (probably through a separate subsidiary arrangement) en­hanced voice services, videotext services, a packetswitching data communications network, and any other products or services it may desire. Indeed, many industry analysts fore­see AT&T competing with International Business Machines (IBM) for the data-processing and computer markets. The relatively brief agreement between the Justice De­partment and AT&T leaves many questions unanswered. Under the terms of the accord, AT&T has six months to draw up its divestiture plans and eighteen months for im­plementation. AT&T has recently proposed plans dividing the twenty-two operating companies into seven regional corporations. Southwestern Bell would remain largely in­tact and would encompass Texas, Oklahoma, Kansas, Mis­souri, and Arkansas. Interested parties had until April 20, 1982, to file written comments on the proposed settlement of the antitrust suit with the presiding judge. Many of the state commissions, AT&T competitors, and members of Congress expressed reservations about various aspects of the agreement. On May 25, Judge Harold H. Greene ordered public hearings to be held beginning June 28 to explore cer­tain controversial issues of the accord. In addition to filing written comments on the divestiture agreement with Judge Greene, Commissioner H. M. Rollins testified on behalf of the Texas PUC before the House Telecommunications Subcommittee in February of 1982. In March 1982, the House Telecommunications Subcom­mittee, chaired by Representative Timothy Wirth (D., Colo­rado) reported H.R. 5158 out to the full House Energy and Commerce Committee by a unanimous vote of the fifteen subcommittee members. (The bill is currently being marked up by the full committee.) H.R. 5158, the House version of a new communications act, incorporates many of the con­cerns expressed by the state commissions. The twenty-two local exchange companies would be permitted to retain ownership of existing equipment used on consumer pre­mises and to sell such equipment for five years after the re­organization. The local companies would also retain the yel­low pages business, a lucrative operation that currently generates about $173 million of annual revenues for South­western Bell in Texas. Furthermore, the local companies would be divested from AT&T before assets and revenues are divided and, thus, would have more independence in negotiating with the parent AT&T about the valuation of the assets to be transferred and in ensuring that fair com­pensation is provided to local ratepayers for the investment in local telephone plant. Other provisions prohibit the new AT&T from establishing any new local exchange networks for at least six years after the reorganization and require that AT&T continue to license new patents received by Bell Labs for two years after the divestiture. While many questions about the antitrust settlement re­main unresolved, industry analysts currently expect that if no major changes are made by Judge Greene or by Congress causing AT&T or the Justice Department to abandon the settlement, the newly organized operating companies prob­ably will be split off in January 1984. The toll separations procedures will be replaced by a system of access charges, and the local operating companies will charge AT&T and its long distance competitors for access to the local switching facilities. In 1983 Congress will probably enact legislation to give the FCC jurisdiction over intrastate and interstate toll access charges (despite the concerns of Texas and many other state commissions that favor retaining state jurisdic­tion over intrastate toll). The portion of the access charge that is said to subsidize local service is likely to be gradually eliminated between 1984 and 1989. Potential Effect on Rates In the past, pricing strategies permitted telephone com­panies to provide modern telephone service at reasonable rates to all customers, regardless of the actual costs of such services. These strategies were developed, in part, to pro­mote the goals stated in the Communications Act of 1934. One goal, generally known as universal service (whereby all Americans have access to the telephone network at a rea­sonable cost), is still considered an essential part of our modern life. The new communications act proposals reaffirm the concept of universal service but also include additional goals; competition, rather than regulation, is supposed to determine the variety, quality, and cost of telecommunications services. The entire evolution of the telephone industry over the years was based on universal service. The separations and settlements process, rate design methodologies, and indus­try accounting procedures resulted in cost allocations that made basic telephone service affordable for almost everyone. The introduction of deregulation and competi­tion has resulted in the need for cost-based pricing to replace the price subsidies that were built into the system. Several types of price subsidies will be affected by de­ regulation. Now, present service is subsidized by future service because of the way capitalization of station connec­ tion costs is handled and because the depreciation lives ex­ ceed the economic lives of many plant items. The FCC has recently ordered that station connection costs will be ex­pensed rather than capitalized and allowed the telephone companies to use certain forms of accelerated depreciation and shorter depreciation schedules. These changes in capital recovery alone will probably increase AT &T's revenue re­quirements by about $5 .5 billion between 1981 and 1984. Residential service is also subsidized by business service. Currently, in Texas the Southwestern Bell business custom­er in Rate Group 8 (which includes the Houston exchange) pays $27.45 a month for local service, while the residential customer in the same rate band pays $9.90 a month. To justify this disparity between rates, telephone service has been said to be worth more to a business customer than to a residential customer. The subsidization of intrastate service by interstate ser­vice is another price subsidy that will be affected by deregu­lation. The process of allocating joint costs through the separations and settlements process has already been dis­cussed. The present separations formula is said to allocate a greater proportion of joint costs to interstate toll, causing interstate toll prices to be substantially greater than they would be had they been based on use alone. The loss of support of interstate and intrastate toll sepa­rations will severely affect local rates in Texas (see table 2). The toll contribution to operating companies' revenues is quite significant. Under the terms of the divestiture agree­ment, the local operating companies will charge the Long Lines division of AT&T and AT&T competitors for access to the local switching facilities. During a five-year period, equal access charge arrangements will be phased in, and the subsidy portion of the access charges will probably be elimi- Table 2 Potential Effects of Divestiture on Local Rates of Selected Telephone Companies Large companies Medium-sized companies Small companies• Category Southwestern Bell General Kerrville Sugarland Class A Class B Loss of interstate separations support from elimination of toll contributions (in dollars) -183,765,000 56,494,000 -361,143 786,863 -48,368 -43,390 Loss of intrastate separations support from elimination of toll contributions (in dollars) -267 ,306,000 -58,826,000 499,987 373,790 -148,075 -8,743 Loss of separations support from detariffing of consumer equipment (in dollars) Loss of Yellow Pages contribution (in dollars) -187,813,000 -173,000,000 -19,041,000 7,100,000 362,523 114,261 t n.a. -31,161 5,603 -36,184•• Total revenue requirement effect (in dollars) -811,844,000 -141 ,461,000 -1 ,337,914 -1,160,653 -233,307 -88,317 Percentage of total revenues 24 35 30 19 57 27 Number of customers 4,293,098 737,716 10,002 7,853 986 580 Resulting average monthly increase in local rates due to loss of interstate and intrastate toll separations support (in dollars) 8.76 13.03 7.18 12 .32 16.60 7.49 Resulting average monthly increase in local rates due to loss of consumer equipment separations support (in dollars) 3.65 2 . 15 3.02 n.a. 2.63 5.20 Resulting average monthly increase in local rates due to loss of yellow pages contributions (in dollars) 3.35 0 .80 0 .95 n.a. 0.47 n.a. Present average monthly residential local rates (in dollars) 8.40 10.65 7.40 10.25 9.38 7.10 Potential residential local rates (in dollars) 24.16 26 .63 18.55 22.57 29.08 19.79 Ratio of potential residential rates to present rates (percentage) 288 250 251 220 310 279 •The small companies requested to remain unidentified. tLoss of separations support from the detariffing of consumer equipment is included in the elimination of toll contribution calculations. ••company has no yellow pages revenue. TEXAS BUSINESS REVIEW nated beginning in 1984. Nationally, this arrangement is expected to result in increased local rate requirements for the Bell operating companies of about 1 5 percent a year from 1984 to 1988, and local rate increases of about 18 percent to 22 percent a year are expected for the indepen­dent (non-Bell) telephone companies. Toll rates, on the other hand, are expected to decline about 2 percent a year because of deregulation. Texas consumers will be affected by the way the access charges are determined. Houston, Dallas, and San Antonio are more than two hundred miles from each other. El Paso is more than eight hundred miles from the eastern part of the state. Therefore, intrastate toll revenues contribute sig­nificantly to the joint operations costs even though the intrastate toll rates set by the PUC are fairly comparable to the interstate toll rates set by the FCC. In the areas of Texas made up of small towns and rural agricultural and ranching settlements, where local telephone service is more a necessity of life than a luxury, the costs of operating telephone systems are quite high. To maintain telephone service in these areas at a reasonable price, the special problems of these systems with low density and high costs must be recognized in the access charge formulation. In Texas, revenue from the yellow pages contributed about $173 million to Southwestern Bell and $7.l million to General Telephone of the Southwest in 1980. Deregula­ tion of consumer telephone equipment and loss of direc­ tory advertising revenue, when the divestiture agreement goes into effect and gives AT&T revenue from the yellow pages business, will increase the monthly bill of the cus­ tomers of the local companies. If these changes had been in effect in 1980, the monthly bill of the Southwestern Bell customer would have increased by $3 .35 and that for the General Telephone customer by $0.80. The Texas PUC, as well as many other state commissions, has strongly pro­ tested the loss of this revenue without fair compensation to local ratepayers. In its second computer decision the FCC determined that all customer premises equipment installed after Janu­ ary 1, 1983, would be deregulated, while equipment that was in place before that date would remain under state regulation for an indefinite period. The agreement between AT&T and the Justice Department provides for the transfer of all consumer equipment business to AT&T. Local operating companies would be deprived of a significant revenue source, and this loss would also have to be made up from local rates. The transfer of assets from the local operating compa­ nies to AT&T is one of the most controversial issues in the divestiture accord. Under the terms of the agreement, local operating companies will be required to transfer to AT&T a significant portion of their more than $85 billion in as­ sets, including their interexchange facilities, customer pre­ mises equipment and associated wiring, and all their inter­ ests in unregulated activities like directory advertising. The state commissions have urged that the local operating com­ panies be given fair compensation for their investment and that provisions be made so that the local companies are not stranded with obsolete, nonproductive equipment. The local operating companies will be able to continue to provide good service if their financial integrity and eco­nomic viability are preserved. The future health of the operating companies will depend in large part on how assets are transferred to AT&T and on the types of services that the local companies are allowed to provide. Under the present divestiture terms, local operating companies cannot offer any of the high-growth, high-profit, high-technology businesses like directory advertising, terminal equipment, information services, and intrastate and interstate long dis­tance and interexchange private line services. AT&T retains that part of the business with the most growth potential, while the local operating companies are left with the part of the business characterized by low profit potential and moderate growth prospects. The courts, the Congress, and the regulatory authorities, however, could change this aspect of the divestiture agreement. AT&T and the independents will most likely provide an increasing array of telecommunications products and ser­vices for the residential and business markets. Telecom­munications may be used to switch lights and sprinkler systems on and off, control fire and burglar alarms, read electric and water meters, control energy systems, and provide videotext and viewdata services. Customers will be able to do their banking as well as shop and select restaurants through telecommunications. Cellular mobile telephone service, which can serve a larger market than is now served by conventional mobile means, should become an increasingly widespread offering. Phone marts could also become computer stores selling data sets, software, data base services, and personal computers. Consumers, however, will have to accustom themselves to dealing with a number of companies to obtain telecommunications services and products. While obtaining local exchange service from the local operating telephone company, a consumer might purchase long distance service from another company and videotext services from a third, purchase equipment from a fourth, and hire a fifth to wire the home and install the equipment. Effect on Stockholders Divestiture will also affect AT&T stockholders. With 3. l million shareholders, AT&T is the most widely held stock in the country in addition to having more shares outstand­ing (about 800 million) and greater book value (over $5 5 billion) than any other corporation. On the whole, invest­ment analysts' initial reaction to the divestiture agreement was positive; AT&T's ability to enter fast-growing, high­technology, unregulated businesses was considered to be favorable. Also, the agreement removed the uncertainty over antitrust actions, and the newly restructured AT&T was thought to be in a better position to compete in the long distance market because the Long Lines department will eventually be able to price its services on the basis of cost rather than distance and because the subsidization of local service by toll service will be phased out. AT& T shareholders will receive proportional shares in the newly formed operating companies based on each company's share of the total assets, but the prospect of owning shares in these wholly regulated entities may not seem attractive to many AT&T investors. The local operat­ing companies will no longer enjoy the financing, manage­rial, and other advantages of the AT&T umbrella, nor will they be allowed to participate in any nonregulated busi­nesses under the present terms of the divestiture agreement. Some analysts view the settlement as having negative implications for current AT&T stockholders, particularly over the next few years. In fact, the price of AT&T stock has suffered during the last few months, and it seems that investors are wary about the effects of the divestiture and the many unresolved issues in the deregulation of the in­dustry. Under the terms of the agreement, the local operat­ing companies, with two-thirds of all AT&T assets, will be under the jurisdiction of the state regulatory commissions and will be faced with ever-increasing requests for local rate hikes as the toll subsidization of local service is phased out, the yellow page contribution is lost, and consumer equip­ment is deregulated. From the AT&T shareholder's point of view, any beneficial results to be derived from the modified consent decree will likely be realized only over the long term. Effect on State Regulation The Justice Department specified that the divestiture settlement would neither limit nor expand present federal and state regulatory authority. Therefore, any changes in the regulatory role of the FCC and state commissions would have to be made by the Congress or by the regula­tory authorities themselves. While it is conceivable that the state commissions could expand their roles, many industry analysts expect Congress to enact legislation giving author­ity over intrastate toll rates to the FCC. The state commissions will have a particularly crucial role to play during the implementation period of the agree­ment. State regulators may well have to help resolve ques­tions concerning financial arrangements, the proper valua­tion and treatment of assets, expenses and liabilities, cost allocations, depreciation practices, and the dissolution of the Bell license contracts. Furthermore, state regulators may be called upon to scrutinize transactions between AT&T and the operating companies to ensure that the interests of the ratepayers are protected. After the divesti­ture is implemented, state regulators will undoubtedly have to make sure that AT&T and the operating companies are fulfilling their specified requirements. Texas telephone consumers may well feel powerless to affect the future course of the telephone industry. While the Texas PUC currently plays a significant role in the regulation of Texas telephone rates and services, the deregu­lation of the industry is largely being enacted at the federal level, and the state commissions can only attempt to in­fluence federal policy. In a long-range view, the course of deregulation is supposed ultimately to have positive effects on telecommunications consumers and the national econo­my. Over the short range, however, the complexity of the industry and of the regulatory structure that encompasses it will undoubtedly result in a somewhat difficult period of adjustment. Note This paper does not represent a policy statement of the Public Utility Commission of Texas or a consensus view of the commission staff. It was prepared for discussion purposes only. No part of this paper should be reproduced, nor should any statements or conclu­sions expressed herein be quoted, without reference to this dis­claimer. Individuals with questions or comments regarding this report should contact the authors at the Public Utility Commission. ~ Atlases. For research, reference, or just plain curiosity. Atlas of Texas Stanley A. Arbingast et al. 1976. 179 pages. 11" x 14" spiral bound. Sketches by Buck Schiwetz and Charles Beckendorf; many color maps. $29.95. "Among state atlases, this volume is second to none." -Southwestern Historical Quarterly "An almost inexhaustible mine of factual informa­tion about the state, its history, its development, its resources, and its people." -The Cattleman Atlas of Mexico Stanley A. Arbingast et al. 1975. 164 pages. 11" x 14" spiral bound. $20. "An excellent compilation of over 200 maps plus tables." -The American Cartographer "All school libraries should have it and all Mexi­canists will want it." -journal of Geography Atlas of Central America Stanley A. Arbingast et al. 1979. 70 pages. 11" x 14" spiral bound. $18. "Very well done." -North American Congress on Latin America "The only cartographic treatment of the Central American region published in English since 1955." -The American Cartographer Bureau of Business Research P.O. Box 7459 •Austin, Texas 78712 ~ Growth of the Beer Industry in the South Concentration in the brewing industry has increased re­cently both nationally and regionally. Nationally, major de­velopments include a drastic fall in the number-of breweries operated, the emergence of two major producers (Anheuser­Busch and Miller) whose market shares are growing rapidly while most other brewers struggle to maintain their market shares, and fairly sizeable increases in beer production and brewery sales. The demand for malt beverages nationally has grown because of a number of demographic, legal, and cultural changes. Regionally, a primary development has been the emer­gence of the South (especially the states of Texas and Florida) as a major beer-producing and beer-consuming region. 1 The significant national trends can also be seen in the South but with important modifications. While the number of breweries operated in the South has fallen , the decline has been less pronounced than the national trend so that a much larger percentage of U.S. breweries are now lo­cated in the South. While the southern and national mar­kets are both dominated by Anheuser-Busch and Miller, other brewers (notably Schlitz and Coors) are stronger in selected portions of the South than they are nationally. In fact, a major consideration in the Stroh-Schlitz merger, an­nounced in April of 1982, was the market strength of Schlitz in the South and its well-established system of southern distributors. In a similar effort aimed at the rapid­ly growing southern market, Pabst, attracted largely by Olympia's Lone Star brewery in Texas, announced a merger with Olympia in June of 1982. During the 1970s, beer pro­duction and brewery sales grew more rapidly in Florida and in Texas than in any other states in the nation. Since 1940, the demand for beer has grown faster in the South than in any other region. Led by dramatic increases in a number of southeastern states, per capita beer con- Joseph E. Pluta is an economist at the Bureau ofBusiness Research, University of Texas at Austin, and Editor, Texas Business Review. He would like to thank numerous representatives of the brewing industry for providing valuable information and Mildred Anderson for preparing much ofthe statistical material. Joseph E. Pluta sumption in the South has risen from less than half the U.S. average in 1940 to just below the U.S. average in 1980. The beer industry has prospered in the South despite heavier taxation of the industry there than in any other region of the country. For example, Texas breweries in recent years have expanded plant capacity and have had a considerable economic effect on the local and state economies. Major National Brewers: Some Recent Developments Although historically characterized by many small re­gional producers, the U.S. brewing industry today may be classified as an emerging oligopoly, a market structure dom­inated by only a few firms. In 1876, there were 2,685 oper­ating breweries in the United States. 2 By 194 7, fewer than 500 breweries were operated by about 400 independent companies; in 1980 fewer than 90 plants were operated by only 41 independent companies. Equally dramatic has been the increased concentration of the business done by major beer companies. In 194 7, the five largest brewers combined for 19 percent of industry sales; by 1980, their share had grown to 75 percent and the share of the top two had reached 50 percent.3 Ranked according to 1981 sales, the top five brewers in the nation were Anheuser-Busch of St. Louis; Miller Brew­ing Company of Milwaukee (a subsidiary of Philip Morris, Inc., of New York City); Joseph Schlitz of Milwaukee; G. Heileman Brewing Company of La Crosse, Wisconsin; and Pabst of Milwaukee. A 1982 estimate of national market share places Anheuser-Busch at 30.4 percent and Miller at 22.5 percent.4 Their combined share is expected to grow largely at the expense of other producers. Schlitz and Pabst have both suffered declining market shares in recent years. In fact, other than the top two producers, only Heileman among the top ten gained market share between 1979 and 1981 . The second five brewers in 1981 were Adolph Coors of Golden, Colorado; Stroh Brewery of Detroit; Olympia Brewing of Tumwater, Washington; Genesee Brewing of Rochester, New York; and C. Schmidt and Sons of Philadel­phia. Brands produced by this second group (either directly or through subsidiary companies) include such previously independently produced names as Hamms and Lone Star (now produced by Olympia) and Schaefer (by Stroh); among the first five brewers, Heileman, in addition to its famed Old Style, currently produces Blatz, Black Label, Pfeiffer, and Colt 45. 5 As an illustration of the extent of nearly 13 percent of the U.S. market while the combined sales of Heileman and Schlitz at the time of their proposed merger was about 16 percent. The differences in combined market share hardly appear sufficient to justify approval of a Stroh-Schlitz merger and opposition to a Heileman acqui­sition. A Heileman-Schlitz merger would have resulted in a combined 67 percent market share for the top four firms, a concentration level the Justice Department claimed would be too high. The Stroh-Schlitz merger (and growing sales by When 1982 sales figures are released, the combined market share of the top five firms could reach 86% to 87%, while that of the top two should exceed 55%. concentration in the brewing industry, the 1981 sales of Anheuser-Busch were roughly equal to the combined sales of Schlitz, Heileman, Pabst, and Coors, and the 1981 sales of Miller were greater than the combined sales of the entire second group of five. 6 As more recent official figures became available, some changes among the top ten brewers will become apparent. The 1982 acquisition of Schlitz by Stroh brewery, which was ranked seventh, will make Stroh the third largest brewer in the United States. 7 The Pabst-Olympia merger, if approved by the Justice Department and Olympia stock­holders, would create the nation's fourth largest brewer. Heileman, which had offered to buy Pabst before the latter bought Olympia, was rumored to be interested in purchas­ing the newly merged combination of Pabst and Olympia. 8 Because both Heileman and Pabst are strong in the Mid­west, however, the Justice Department ruled against any proposed Heileman-Pabst merger on antitrust grounds, effectively ending such speculation. Despite a history of Justice Department opposition to mergers involving relatively large brewers,9 the department approved the Stroh purchase under the condition that Stroh sell within two years one of two Schlitz breweries in the Southeast to a buyer other than Anheuser-Busch or Miller. 10 Without such divestiture, anitrust laws in the southeastern market would have been violated, according to Justice Department interpretation. This sudden reversal in federal merger policy came short­ly after a proposed 1981 Heileman-Schlitz merger was re­jected on antitrust grounds, an action that both brewers decided not to fight. Schlitz's southern breweries were also attractive to Heileman, which, although a growing firm, consists largely of a collection of regionally brewed brands in the Midwest that are fairly difficult to market in the South. Although other factors were important in both rul­ings, it is difficult to find any thread of regulatory consis­tency on the basis of differences in combined market share in the Heileman-Schlitz and Stroh-Schlitz cases. The com­bined sales of Stroh and Schlitz in 1981 accounted for Anheuser-Busch and Miller) gives the top four firms an estimated market share of over 72 percent, a concentration level the department is now mysteriously willing to toler­ate. Whether Stroh, with its newly acquired subsidiary, will be able to challenge the positions of Anheuser-Busch and Miller, even within selected southern states, remains to be seen. When 1982 sales figures are released, the combined market share of the top five firms could very likely reach 86 percent to 87 percent, while that of the top two should exceed 55 percent. What caused this pronounced and relatively rapid con­centration? Although Stroh more than doubled market share and vaulted from seventh place to third place among the nation's brewers by acquiring Schlitz, large increases in market share by merger have actually been more the exception than the rule. Historically, both mergers and pricing rivalries have contributed only a limited amount, if at all, to the present concentration. Brewery mergers have been numerous in the past, but, since none of the industry leaders (before the Stroh-Schlitz merger) have gained much in market share by merger, such combinations have had, at best, minimal influence. While price cutting has occurred in the past, there is little evidence that it alone has produced a price-cost squeeze severe enough to harm the small brewer. Moreover, the solid performance of Anheuser-Busch and Miller during the past decade occurred without price reductions for their products. Miller's success, in fact, is due largely to its Lite brand, which is priced as a premium beer even though it costs considerably less to produce (because it contains less of all ingredients except water) than popu­larly priced beer. The major causes of the national beer industry oligopoly appear to be economies of scale and product differentia­tion. 11 Economies of scale, which occur if large plants pro­duce at lower unit costs than small ones, appear to exist in the beer industry where brewing and bottling processes have become increasingly mechanized. The increased capa­city attained by many individual breweries over the past twenty years has forced the closing or sale of numerous small regional producers. Successful product differentiation occurs when a firm is able to convince customers that real or imagined dif­ferences in its beer render it preferable to that of rivals. This process has a number of dimensions and subtleties. 12 One dimension is the fostering of an attractive or "high quality" image. Large brewers with national sales and multiplant operations can often more easily capture this image than can local or regional brewers with single brew­eries. A second dimension is escalating advertising expendi­ture: if the largest brewers can induce their smaller com­petitors to expend huge amounts for media advertising, the former should be better able to withstand the resulting cost-price squeeze because of their superior financial resources. A third and related possibility is economies of scale in advertising. Large brewers can carry out brand proliferation more easily because the high fixed costs associated with advertising new brands can be spread over a larger sales volume that smaller brewers do not have. Large firms, therefore, can realize lower advertising cost per barrel than can small firms. A fourth possibility is stepped­ up advertising funded by an outside source. All four forms of product differentiation have accelerated concentration in the beer industry, especially since the mid-l 970s. The fourth possibility merits further discussion. Acquired by Philip Morris in 1970, Miller Brewing Com­ pany has since that time experienced a turnaround in per­ formance that is generally credited to the marketing exper­ tise of the parent cigarette company. Recognizing that 30 percent of the American population drinks 80 percent of all beer,13 Philip Morris repositioned its Miller High Life brand through an advertising appeal to the blue-collar consumer. A similar strategy was used with Miller Lite. Aimed largely at the same group of consumers, Miller Lite was advertised by former athletes to dispel the view that low-calorie beer was for "sissies." 14 Both efforts have been remarkable suc­ cesses. Miller rose from seventh in 1970 to the nation's number two brewer in only seven years; Lite, " the most popular new product in the history of the beer industry ," 15 is now the third largest-selling national brand. The light beer market is the one area where Miller has been able to outperform Anheuser-Busch. Even though the industry's two leading firms increased both profit per barrel and market share at a time when their advertising expenditures per barrel increased, the evidence that high advertising expenditures and high profit levels are positively correlated is somewhat mixed (see table 1 ). (The standard measurement in the brewing industry is the barrel, which consists of thirty-one gallons.) At Schlitz, for exam­ple, advertising expenditures per barrel rose dramatically at a time when sales and operating profit per barrel both fell. Similarly, Coors had higher profit figures when advertising expenditure levels were extremely low and lower profit figures when advertising outlays accelerated. Both of these, however, may be special cases since Schlitz's boosted ad budgets were an effort to rebound from a previous sales slide and Coors increased its advertising spending to widen its geographical market. Whatever the precise link to JULY-AUGUST 1982 profits, the fact remains that advertising expenditures have grown considerably in the beer industry, and most industry analysts contend this trend will continue. Among the top five 1980 brewers, only Anheuser-Busch and Miller had operating profit per barrel that rose appre­ciably between 1975 and 1980. While profit per barrel fell over the period for Coors, its 1980 figure was still the high­est among the top five. Profit per barrel has fallen in recent years for both Schlitz and Pabst, while the figure has also declined for the brewing industry as a whole. The home offices of major brewers remain in such tradi­tionally famous brewing cities as St. Louis and Milwaukee, but the major firms have become increasingly conscious of the need to serve the southern market. High transportation costs have always encouraged brewers to locate near centers of high beer consumption. As population has migrated to the South and as per capita beer consumption levels there have risen, added incentives have been created for breweries to locate in such rapidly growing states as Texas and Flori­da. Large brewers have, therefore, been willing to purchase the breweries of struggling regional brewers in the South. As a result, substantially greater portions of major brewers' operations are now located in the southern states than was the case, say, thirty years ago. Of the ten breweries current­ly operated by Anheuser-Busch, for example, four are lo­cated in the South: two in Florida, one in Texas, and one in Virginia. Three of six existing Miller breweries16 are located in the South (in Texas, Georgia, and North Carolina). Four of the five breweries owned by Schlitz are located in the South (in Texas, Florida, Tennessee, and North Caro­lina) ; the other is in Los Angeles. 17 (With the 1981 closing of the Schlitz Milwaukee brewery and the 1982 Stroh an­nouncement to relocate Schlitz's home office to Detroit, "the beer that made Milwaukee famous" is no longer brewed there and soon may no longer be headquartered there.) Although Coors continues to brew beer only in its Table 1 Profit and Advertising Trends: Top Five 1980 Brewers (In dollars) Operating profit per barrel Brewer 1975 1977 1979 1980 Anheuser-Busch 4 .98 S.04 S.35 5.73 Miller 2 .24 4.42 S.06 3.88 Pabst 2 .28 2.36 1.31 1.45 Schlitz 3.59 2 .75 -0.46 2.00 Coors 9.95 8.50 7 .59 6 .75 Industry average 4.47 4.46 4 .24 4 . 17 Advertising expenditures per barrel 1975 1977 1979 1980 Anheuser-Busch o.ss 1.24 1.89 1.87 Miller l.62 l.74 2 . 10 2 .37 Pabst 0 .57 0 .68 1.22 l.17 Schlitz 0 .99 l.85 2 .87 2 .95 Coors 0 .07 0 .31 l.16 l.57 Industry average• 0.74 1.28 l.92 2 .02 *Weighted by estimated sales volume. Source: Goldman Sachs Research as reported in Beverage World, May 1981 and July 1981. 161 Colorado brewery, the largest in the country, the company recently purchased land in Virginia's Shenandoah Valley for construction of a second brewery to serve the East Coast and South but has since decided to delay construction. Market Structure: The South and Texas Number of Breweries Nationally, the geography of the beer industry shows concentrations of breweries in Pennsylvania and New York, in southern Minnesota and Wisconsin, in California and Washington, and in Texas and Florida. A number of western states in the Rocky Mountain region and states in the Deep South now have no breweries at all, despite the recent emergence of the South and West in beer produc­tion. Even though the South has only half as many breweries as it had in 1952, brewery closings have occurred at a slower pace in the South than they have in the United States as a whole. As a result, the share of U.S. breweries located in southern states has been increasing (see table 2). In 1952, the South had 12 percent of all U.S. breweries; by 1980, it had 24 percent. Texas, which has a larger number Table 2 Number of Breweries Operated in Southern States Region State 1952 1960 1970 1980 South Atlantic Florida 6 7 4 4 Georgia 1 1 1 2 Maryland 7 6 5 1 North Carolina 1 0 1 2 Virginia 4 2 1 2 West Virginia 1 1 1 0 East South Central Kentucky 6 5 2 Tennessee 2 0 0 West South Central Louisiana s 4 3 1 Oklahoma 1 1 1 0 Texas 7 6 7 7 Total South 41 33 26 21 Total United States 357 229 154 88 Total 21.9 24.4 Source: United States Brewers Association, Brewers Almanac (Wash­ington, D.C.: USBA, selected issues). Table 3 Regional Mariwned Firms owned by Survey respondents. A higher propor-Group small firms firms American Indians respondents tion of the women than the men Construction had never been married; 25 per­ 11.3 9.3 17.6 29.3Manufacturing 2.9 2.1 4.8 7.3 cent of the women and only 5.6 Wholesale and percent of the men were either retail trade 26.4 27.9 28.0 21.1 Finance, insurance, widowed or divorced (see table 14.3 5.0 2.5 2.4 5). Census data indicate that and real estate Selected services 36.8 41.8 33.1 Other 31.7 American Indian women are 8.3 13.9 14.0 8.1 more likely to have never been Sources: See table 2. married and more likely to be TEXAS BUSINESS REVIEW separated or divorced than other women in the United States.3 In addition, a higher divorce rate has been observed among female than among male entrepreneurs. The respondents to this survey were extremely well educated; over 63 percent of both male and female respon­dents had at least some college, and 42.1 percent of the men and 34.4 percent of the women were college graduates (see table 6). According to the Bureau of the Census, 4 7 percent of U.S. men and 42 percent of U.S. women age 25 to 29 had at least some college education in 1978, and available data suggest that, on average, owners of small businesses have fewer years of formal schooling than the general population.4 It is highly probable, given these statistics, that the respondents to our survey were drawn disproportionately from highly educated American Indian business owners. On the other hand, it should be noted that 1977 eco­nomic census data for businesses owned by women indi­cated that 60 percent of female small business owners in 1977 had at least some college. Thus, at least for that group of minority entrepreneurs, business ownership is associated with higher educational levels than those found in the general population or among business owners in general. Perhaps social, cultural, legal, and financial problems faced by women and American Indian potential business owners suggest to them that they cannot compete as entrepreneurs unless they have more formal schooling. Whatever the situation might be, the relation between educational levels and minority business ownership remains an intriguing question for further research. Of the business firms owned by respondents to the sur­vey, 19.5 percent were located in cities with populations below 25,000, 57.6 percent were located in cities with populations between 25,000 and 99,000, and 22.9 percent were from the two largest cities in Oklahoma, with popula­tions of slightly more than 300,000. Dates when their current businesses began operating ranged from 1935 to 1980, and 57 .1 percent of the businesses had existed for five years or less. Because of recent high rates of inflation, Table 5 Marital Status of Survey Respondents (Percentage of responses) Marital status Males Females Never married 4.5 6.3 Married 89.9 68.8 Once married, now single 5.6 25.0 Table 6 Formal Schooling of Survey Respondents (Percentage of responses) Category Males Females High school or less 28.4 21.9 Vocational or technical school 8.0 6.3 Some college 21.6 37.S College graduate 42.1 34.4 absolute dollar comparisons across several years may be misleading, but the firms in the survey probably con­siderably overrepresent medium-sized American Indian firms (those with gross receipts between $100,000 and $499,000). Additional support for this conclusion is ob­tained from the distribution of paid employees among firms in our sample. Nearly one-half ( 43. 7 percent) of the re­sponding firms had between five and forty-nine paid em­ployees, while only about one-fifth (18.0 percent) of all U.S. minority-owned firms were of this size (see table 7). Components of Job Satisfaction Existing research on the white male entrepreneur indi­cates that, although he takes the risk of business ownership in anticipation of a monetary return on his investment of capital, time, and effort, he is often interested in profits primarily because of the feedback they give him on how well he is doing, and he attaches a greater importance to the intangible rewards of independence, recognition, and self-fulfillment.5 In this respect, the American Indian entrepreneurs we surveyed were like other entrepreneurs. Over 80 percent of the business owners in our survey indicated that a "feeling of personal achievement" was extremely important to them as business owners (see table 8). "Being my own boss" and a "feeling of responsibility" were also seen as extremely important by a majority of the respondents. External objective indicators of success were generally of lesser importance to the American Indian entrepreneurs we surveyed. "Growth of business" was seen as extremely Table 7 Siza of U.S. Minority·Owned Firms and Respondent Firms by Numbar of Paid Employees (In percentage) Number of u. s. Respondent paid employees firms firms 1-4 63.0 53.1 5-9 11.1 26.0 10-49 6 .9 17 .7 SO or more 19.0 3.1 Source: U.S. Department of Commerce, Bureau of the Census, 1977 Survey of Minority-Owned Businesses: Summary (Government Printing Office, December 1980). Table 8 Components of Job Satisfaction for Respondents (Percentage of responses) Factor Extremely important Feeling of personal achievement 80.8 Being my own boss 64.S Feeling of responsibility 63.9 Growth of business 56.8 Large profits 33.9 Recognition of family, friends 27.7 important by slightly more than one-half and "large prof­its" by approximately one-third of the respondents. Previous research has shown that white male entrepre­neurs score lower than men in general on scales reflecting emphasis on need for support. 6 In their role as business owners, the American Indian entrepreneurs in this survey tended to share this characteristic. "Recognition of family and friends," for example, was seen as least important of all the factors in providing a source of job satisfaction. (Since the family is valued extremely highly in the Ameri­can Indian culture, it is highly probable that these responses do not reflect the importance of the family in the personal lives of the respondents.) Obstacles Encountered by American Indian Entrepreneurs American Indian entrepreneurs cited difficulty in ob­taining capital most often as a major or moderate obstacle to starting or operating their businesses (see table 9). Some of the problems faced by these business owners in raising capital are undoubtedly common to those faced by other entrepreneurs: lack of equity and collateral, lack of pre­vious business experience, and inadequately prepared financial proposals. Although the problem may be exacer­bated by racial stereotypes some lenders may hold concern­ing an American Indian's ability to run a business, only 15.7 percent of the respondents said that discrimination was a major or moderate obstacle; 69.4 percent said that discrimination presented no problems to them in starting or operating their businesses. Lack of business experience has often been cited as a major problem faced by small business owners. Dun and Bradstreet estimate that inadequate managerial aptitude, experience, and skills account for almost 90 percent of all business failures they analyze.7 When respondents were asked to rate the importance of various factors to the suc­cess of their businesses, managerial and financial skills were cited most often as being extremely important, but only 29.2 percent of the respondents cited lack of business ex­perience as a major or moderate obstacle in starting or operating their businesses. Additional findings from the survey may help to explain this apparent inconsistency. First, more than 50 percent of the respondents reported that they had sought outside ad­vice from experts or professionals in management and finance regarding their businesses. In addition, only 16.8 percent said that "difficulty in obtaining expert advice" Table 9 Obstacles Encountered by Survey Respondents (Percentage of responses) Type of obstacle Major or moderate obstacle Difficulty in raising capital 58.0 Lack of previous business experience 29.2 Difficulty in obtaining expert advice 16.8 Discrimination 15.7 Lack of self-confidence 7.5 had presented a major or moderate obstacle to them in starting or operating their businesses. Second, 27 .8 percent of the college graduates in the survey had majored in busi­ness or administration. Third, 79.2 percent of the respon­dents had been employed by others for five years or more before starting their businesses. Thus, the respondents may believe that their previous lack of experience as business owners is not a problem since they either had acquired necessary managerial and financial skills through previous education or employment or could readily obtain expert advice. Differences between Male and Female Respondents American Indian female entrepreneurs constitute a mi­nority within a minority. In the United States, women are far less likely to become entrepreneurs than men. Although women constitute slightly more than 50 percent of the U.S. population, only 7 .1 percent of all U.S. firms are owned by women. When women do choose to start their own busi­nesses, a greater proportion of their firms are in service industries than are firms owned by men. Businesses owned by women in this survey were clustered more heavily in service industries and less heavily in construction industries than were the businesses owned by men (see table 10). Among all U.S. women-owned businesses, 45 percent are found in service industries; in this survey 43.8 percent of the businesses owned by women were service firms. Service firms are typically labor intensive and require low capitalization. The concentration of firms owned by women in service industries may partially explain why the women in the sample experienced fewer problems than the men in raising capital. Two-thirds of the men and only one-third of the women stated that "difficulty in raising capital" was a major or minor obstacle in starting or operat­ing their businesses. Among all U.S. small firms, service businesses also have the smallest average gross receipts. While the average gross receipts for all U.S. small firms in 1977 was $64,000, firms in service industries had average gross receipts of only $33,000. In comparison, construction industry firms averaged $66,000, wholesale and retail firms averaged $112,000, and manufacturing firms averaged $134,000. Thus, the fact that the firms owned by American Indian women respondents had substantially lower total yearly Table 10 Respondent Firms by Industry Group end Sex of Owner (Percentage of responl8S) Firms owned Firms owned Industry group by men by women Construction 35.2 12.5 Manufacturing 8.8 3.1 Wholesale and retail trade 20.9 21.9 Finance, insurance, and real estate 2.2 3.1 Selected services 27.5 43.8 Other 5.5 15.6 sales than those owned by the men was not surprising. In 1979, 34.4 percent of the businesses owned by women and only 18.7 percent of those owned by men had total sales of less than $25,000; on the other hand, 16.5 percent of the firms owned by men and only 6.3 percent of those owned by women had sales of more than $500,000 (see table 11). The female respondents generally considered salesman­ship skills to be more important to the success of their businesses than did the male respondents. The male respon­dents, however, were more likely than the female respon­dents to have sought outside advice on salesmanship from experts or professionals, and a larger proportion of men than women saw themselves as more competent in this area. Both the women and men in this survey saw "personal determination of business owner" as extremely important and "luck" as not very important to the success of their businesses. Female respondents, however, generally saw personal determination as more important than did male respondents. The high importance given to personal deter­mination and low importance given to luck accord with previous research on white male entrepreneurs that found that, compared to other occupational groups, small busi­nessmen are least likely to believe that luck rather than hard work is important for getting ahead. 8 Observations Images of American Indians in our society are drawn from their rich and colorful cultural heritage and often tend to be formulated in terms of pow wows, tipis, war bonnets, and traditional Indian arts and crafts. Perhaps this picture exists because, to a great extent, American Indians have been outsiders to the white-dominated society in the United States; on average, Indians have higher unemploy­ment rates, lower levels of educational attainment, and lower per capita income than other groups in the nation. 9 Historical data suggests that often outsiders in a society will channel their energies into entrepreneurial endeavors because they have limited access to other occupations in traditional channels. 10 Historically, Indians have remained outside the dominant society, yet, in contrast to other minorities, a smaller proportion have channeled their energies into entrepreneurial activities. Table 11 Distribution of Respondent Firms by 1979 Tote! Seles and Sex of Owner (Percentage of responses) Firms owned Firms owned Total sales by men by women Less than $25,000 18.7 34.4 $25,000-$49,000 7.7 9.4 $50,000-$99,000 6.6 25.0 $100,000-$499,999 42.9 15 .6 $500,000 or more 16.5 6.3 Not allocated by sales 1.1 9.4 One explanation for this phenomenon may be the cultural heritage of American Indians, which in many ways is antithetical to the development of entrepreneurial aspirations. For example, Indian values have not custom­arily included the amassing of valuables for private benefit because of the ingrained tradition of sharing that is part of the Indian culture. Motivation, individualism, and drive for "success," as defined by the standards of the dominant society in the United States, do not reflect traditional Indian values. 11 Another explanation may lie outside the Indian culture. The traditional relation between American Indians and the federal government has fostered a lack of self-determination on the part of American Indians. The U.S. government recognized this lack of self-determination when it passed the Self-Determination and Education Assistance Act (Pub­lic Law 93-638) on January 4, 1975. The act provided for tribal management of a tribe's financial and educational affairs, with a major national goal to provide for Indian participation in self-government and opportunities to excel in the "life areas of their choice" and to achieve "the measure of self-determination essential to their social and economic well-being." Partially as a consequence of this act and similar developments, entrepreneurship among both American Indian tribes and individuals is increasing. Busi­ness enterprises, owned and managed by the tribes, are being developed on and off the reservations, and many tribal economic development programs include loans and management assistance programs for business enterprise development. A partial list of the types of businesses owned by the respondents indicates the diversity of their enterprises: a pharmacy; a sawmill; a personnel agency; a wholesale greenhouse ; a beauty salon; a garage and service station; a geological consulting service; legal, medical, and architec­tural services; painting, plumbing, and electrical contracting firms; bookkeeping and tax preparation firms; abstract, real estate, and insurance agencies; and printing and pub­lishing firms. Only 6 of the 123 entrepreneurs in our sample had businesses associated with traditional Indian arts and crafts. Notes 1. John A. Welsh and Jerry F. White, "Recognizing and Dealing with the Entrepreneurs," SAM Advanced Management Journal 43 (Sum­mer 1978): 21-31. 2. See Eleanor B. Schwartz, "Entrepreneurship: A New Female Frontier," Journal of Contemporary Business 5 (Winter 1976): 47-76; James W. Schrier, The Female Entrepreneur (Milwaukee, Wisc. : Center for Venture Management, 1975); James F. DeCarlo and Paul R. Lyons, "The Successful Female Entrepreneur: Psycho­logical Attributes," Proceedings of the Eastern Academy ofManage­ment, May 1979, pp. 63-67; idem, "Comparison of Selected Per­sonal Characteristics of Minority and Non-Minority Female Entre­preneurs," Journal of Small Business Management 17 (October 1979): 22-29; The Bottom Line: Unequal Enterprise in America, report of the President's Interagency Task Force on Women Busi­ness Owners (Washington, D.C.: Government Printing Office, 1977); Randall G. Sleeth and Luther Wade Humphreys, "Small Business Management: A Contrast in Black and White," paper presented at the Southeast American Institute of Decision Sciences, Charlotte, N.C., February 1981; Douglas E. Durand, "Relation of Achievement and Power Motives to Performance Among Black Businessmen," Psychological Reports 37 (1975): 11-14; and John G. Watson and Leo R. Simpson, "A Comparative Study of Owner-Manager Personal Values in Black and White Small Businesses," Academy ofManage­ment Journal 21 (1978): 313-19. 3. U.S. Department of Commerce, Bureau of the Census, A Statis­tical Portrait of Women in the United States, 1978, Series P-23, no . 100 (Washington, D.C. : Government Printing Office, February 1980). 4. U.S. Department of Commerce, Bureau of the Census, Current Population Reports, Population Characteristics: Educational At­tainment of the United States, Series P-20 (Washington, D.C.: Gov­ernment Printing Office, August 1980); combined Spring 1977 and 1978 General Social Survey by the National Opinion Research Center at the University of Chicago; U.S. Department of Commerce, Bureau of the Census, Selected Characteristics of Women-Owned Businesses, 1977 (Washington, D.C.: Government Printing Office, October 1980). 5. David C. McClelland, "Achievement Motivation Can Be Devel­ oped," Harvard Business Review, November-December 1965, pp. 6-24, 178. 6. John A. Hornaday and John Aboud, "Characteristics of Success­ful Entrepreneurs," Personnel Psychology 24 (1971): 141-52. 7.Cited in The Bottom Line: Unequal Enterprise in America, Report of the President's lnteragency Task Force on Women Business Owners (Washington, D.C. : Government Printing Office, June 1978), p. 49. 8. Norval D. Glenn and Charles N. Weaver, "Profile of the American Small Businessman," Texas Business Review, July-August 1979, pp. 127-32. 9. David A. Lester [commissioner, Administration of Native Ameri­cans, Office of Human Development Services) , statement before the Committee on Interior and Insular Affairs, March 27, 1979. 10. Charlotte Taylor, Women and the Business Game: Strategies for Successful Ownership (New York: Cornerstone Library, 1980), p. 20. 11. See, for example, William A. Brophy and Sophie D. Aboude, The Indian, America's Unfinished Business, report of the Com­mission on the Rights, Liberties and Responsibilities of the Ameri­can Indian (Norman: University of Oklahoma Press, 1966), p. 4. 1982 DIRECTORY OF TEXAS MANUFACTURERS Up-to-date information on more than 14,500 manufacturers. 1 2 ALPHABETICAL BY NAME TYPE OF PRODUCT GEOGRAPHICAL BY CITY Complete plant information: location Complete information for each company: phone location chief officers with phone numbers mailing address sales or purchasing agents phone number products manufactured type of company number of employees INDEX OF PRODUCTS chief officer with Standard Industrial Classification numbers sales & purchasing agents product listings $80/set. Texas residents add 5% sales tax . BUREAU OF BUSINESS RESEARCH• BOX 7459 •AUSTIN, TEXAS 78712 The Effects of Alternative Strategies for Social Security Reform The social security system will soon become insolvent unless social security taxes are raised or the current benefit structure, including cost-of-living adjustments, is changed. The social security program has been the federal govern­ment's main instrument for transferring payments to the elderly. Since the population of Texas is significantly younger than the average of the U.S. population (see table 1 ), any changes in the system would not affect Texas as severely as they would parts of the rest of the country. The incidence of the elderly in Texas is much lower in metropolitan areas than it is in rural areas, so the aggregate effects of any changes in the program would be less severe in Texas cities. The regional effects of cost of living also indicate that urban and nonmetropolitan living costs of retired couples at all three levels of income (high, medium, and low) are lower in the South than they are in the rest of the country. The cost of living in Dallas and Houston is lower in all brackets than it is in most other major U.S. cities (see table 2). Current Income of the Elderly The real income of the elderly has improved significantly during the past two decades. Much of the improvement is attributable to increased government support, although liberalization of private pension benefits has also con­tributed. During the 1970s the levels of social security benefits increased generously. In addition, comparative measurements of income are likely to understate actual improvements in standard of living because the government often makes transfers to the elderly in food, housing, medical services, or similar items rather than in cash. The number of individuals age 65 and over who were below the poverty level declined from 5.5 million in 1959 to 3.9 million in 1980 according to the Social Security Administration. Given the large increase in the number of - David L. Baumer is Assistant Professor of Economics and Robert L. Qark is Associate Professor of Economics, North Carolina State University. David L. Baumer Robert L. Clark elderly, this 1 .6 million drop lowers the percentage of aged poor from 35.2 to 15.7 percent. Even 15.7 percent is likely to be an inflated figure because more than 10 percent of the income of the aged poor comes from in-kind trans­fers that are not counted in most studies of income distri­bution.1 The median annual income of families headed by some­one 65 and older has increased from $3,514 in 1965 to $12,881 in 1980. After accounting for inflation, the real income of the median aged household increased 40 percent. Also, the real growth in median income of aged families has been more rapid than the average. The ratio of median income of elderly families to the median of all families has risen from 49.3 percent to 61.3 percent during the same period.2 The elderly do not necessarily enjoy an affluent life, but their relative income position has improved recently. Much of this improvement is attributable to increased government support through expansion of existing programs, particu­larly social security, and through the creation of new programs, such as Medicare and Medicaid. If all transfer income from governments had been taken away from the Table 1 Age Distribution of the Population in Selected Sunbelt States and the United States, 1980 (Percentage of population) Age group Area 0-17 17-34 35-54 55-64 65 and over Florida 23.9 26.3 21.0 11.5 17.3 North Carolina 28.0 30.5 22.0 9.3 10.2 South Carolina 30.0 30.9 21.0 8.9 9.2 Texas 30.0 31.1 21.0 8.3 9.6 Nonmetropoli tan areas 27 .7 25.2 20.4 11.2 I 5.5 Metropolitan areas 30.6 32.6 21.l 7.5 8.2 Sunbelt total 28.2 30.2 21.4 9.2 11.0 U.S. total 27.8 29.8 21.5 9.6 11.3 Source: Sales and Marketing Management, Survey of Buying Power Data Service, I 9 81. elderly in 1976, about 60 percent of them would have been below the poverty level. After adjustments are made for government transfers in kind, about 6 percent of the elderly fall below the official poverty level. 3 Certainly without government programs poverty among the aged would not increase to 60 percent because private measures would be taken by individuals, their families, and charitable organizations, but the role of the government is, undeni­ably, quite significant. Government expenditures on the income maintenance of the elderly have been increasing. In 1960 an estimated $12.8 billion was spent on the elderly, but by 1978 such expenditures had increased ninefold to $112 billion. The increase in the number of people 65 and over during the same period was only 43.6 percent.4 A recent study esti­mated that government expenditures on the elderly will rise to $187.2 billion in 1982.5 Of course the real increase in expenditures is far less because of inflation. Real ex­penditures (dollar expenditures adjusted for inflation) on programs to aid the elderly increased about fourfold be­tween 1960 and 1980. The proportion of the federal bud­get devoted to financing these programs increased from 13 percent to 24.8 percent during this same period, while the proportion of the gross national product (GNP) allocated to these benefit programs increased from 2.5 percent to 5.6 percent. Clearly these expenditures have raised the real income of the aged both absolutely and in relation to the rest of the population. Social Security Benefit Structure Social security coverage has increased from 64.5 percent of the work force in 1950 to 90 percent of the work force in 197 5.6 Future expansions of coverage will occur only if the largest uncovered group, federal civil service employees, are mandatorily included in the system; these civil servants and their powerful union have strongly opposed being Table 2 Metropolitan Cost-of-Living Indices for Annual Budgets of a Retired Couple at Three Income Levels, 1980 Area Low Medium High To tal United Sta tes 100 100 100 Me tro polita n areas 102 103 104 Nonm etro politan areas 9 5 90 88 Bosto n 108 11 7 123 New Yo r k 10 8 113 115 hi cago 95 98 100 St. Lo uis 100 100 99 Los Ange les 101 99 103 San Francisco 108 107 107 South Atlanta 9 1 93 92 Dallas 94 95 99 Ho usto n 97 98 101 Nonm etropolit an areas 90 86 85 Source: U.S. Department of Labor, Bureau of Labor Statistics "Three Budgets for a Retired Couple, Autumn 1980," August 10, 1981. incorporated. A study of the income of newly entitled ben­eficiaries in 1970 estimated that social security amounted to about 40 percent of the income of the median married recipient and over 50 percent of the median income of single recipients. Social security benefits account for over 80 percent of the income of the low-income aged, but that percentage drops to less than 20 percent for the high­income aged. 7 The benefit structure of social security has been amended numerous times since the program began in 1935. Since 1972, postretirement benefits have been automatically adjusted for inflation. The basic initial social security From 1972 to 1977, social security recipients· were overcompensated for the effects of inflation. benefit is determined by past wages, indexed since 1972 for the growth in average wages, and length of employment. The right to receive this benefit does not depend on need. If the recipient has other sources of income his or her right to receive benefits is unimpaired as long as the recipi­ent is not working for the income. The basic benefit for those who retire at 65 is determined by a formula that replaces the average indexed monthly earnings of the recipient in declining percentages. For 65-year-old retirees (persons 62 in 1979), their 1982 benefit is 90 percent of the first $180 of average indexed monthly earnings, 32 percent of the next $905, and 15 percent of the rest. These break points are indexed to average wages in the economy and change from year to year; however, the percentages are held constant. This formula causes the rates of return for each dollar of social security tax to be higher for lower­income wage earners. Thus, although social security taxes are generally considered regressive, the benefit structure is progressive. Also, an individual's basic benefit is affected by a number of factors including marital status, time of retirement (before or after age 65), and earned postretire­ment income before age 70. Although it is difficult to summarize the benefit struc­ture with one statistic, perhaps the most useful indicator is the replacement rate, which is normally equal to average monthly benefits divided by average monthly earnings for a few years before retirement. The replacement rate de­clined during the 1940s and increased sharply until 1954; between 1954 and 1972 the replacement rate fluctuated between 30 percent and 35 percent (see figure). In 1972, social security benefits were explicitly indexed for infla­tion for the first time. Unfortunately, the inflation adjust­ment mechanism was technically flawed and overcom­pensated newly retired people for inflation. In fact, under certain conditions the adjustment was twice the rate of in- TEXAS BUSINESS REVIEW flation. The result was that by 1977, when the overadjust­ment was eliminated, the replacement rate had risen to 45 percent. Each percentage point represents billions of dollars in current and future commitments. Much of the current short-term financing difficulty of social security results from the faulty 1972 inflation adjustment mechanism, which was not corrected for five years. Current Finances of Social Security A pension fund can be funded in two ways: a trust fund can be accumulated and the interest on the corpus of the trust can be distributed as pension annuities, or it can be financed on a pay-as-you-go basis with only a small trust. Federal law requires private pensions to fund their pension plans the first way, through a trust, and, even before the federal requirements, this method of financing was com­mon. In a pay-as-you-go system, the trust is far less than future obligations and is used to keep the system solvent when unforeseen short-term contingencies arise. This meth­od is the way social security is funded. The basic source of funds for the pensions of currently retired people is the current work force. When this pay-as-you-go system began in 1935 there were few qualified beneficiaries and many workers, so social security taxes were low (2 percent on the first $3,000 of earned income with 1 percent paid directly by the employer and 1 percent by the employee). As the social security system has matured a number of trends have caused higher taxes. The ratio of beneficiaries to taxpaying employees has increased, economic growth has been slug- Replacement Rate of Average Social Security Recipient Percentage so~~~~~~~~~~~~~~~~~~~~~~ 45 40 35 30 25 20 1940 1950 1960 1970 1980 Note: The replacement rate equals average monthly benefits divided by average monthly earnings for several years prior to retirement. Source: Alicia H. Munnell, "The Future of the U.S. Pension Sys­ tem," in Financing Social Security, ed. Colin D. Campbell (Wash­ ington, D.C.: American Enterprise Institute, 1979). gish recently, and the benefit structure has been liberalized, particularly from 1972 to 1977, when benefits were over­indexed for inflation. Consequently, the current social security tax rate is 13.4 percent on an employee's first $3 2,400. Half of the tax is explicitly borne by the em­ployee and half by the employer, but economists generally believe most of the tax is borne by employees. The postwar baby boom has created a huge demo­graphic bulge that is gradually aging. As this group ap­proaches retirement the ratio of beneficiaries to workers will increase significantly, necessitating either a substantial increase in taxes or reductions in the benefit structure. The long-term financing difficulties will be accentuated if fertility rates continue to decline. Economic Rationale Most analysts view social security as a mechanism for social insurance. Certain variables, such as longevity, health, economic growth, and inflation, can significantly affect a person's income needs during retirement but are largely outside of individual control. Even though the average life­span is generally known, it is of little value in determining how much to save for retirement because of the large indi­vidual variance. By pooling their risks (living too long may represent a risk if savings are exhausted) through social security, people can create social insurance for unpredict­able contingencies involving longevity, health, or inflation. Of course the private sector offers opportunities to re­duce these same risks through variable annuities, health insurance, and various investments that historically have been good hedges against inflation. It may be debated whether the private sector is more efficient at reducing the risk of uncontrollable events, but there is no debate that one of the major functions of social security is to provide social insurance. Social security is also viewed as a means of redistribu­tion. In order to finance a pay-as-you-go system, of neces­sity, intergenerational redistribution occurs; current work­ers pay for the social security benefits of the currently retired. As the U.S. age distribution becomes older, inter­generational redistribution will have to be increased if the current benefit structure is maintained. The progressive nature of social security also redistributes income among individuals of the same age group. The rate of return on each dollar of social security taxes for low-income retired workers far exceeds that of high-income retired workers. Perhaps the main justification for mandatory social security originates directly from the fundamental principles of public finance and externality .8 In essence the argu­ments are simple. The presence of utterly destitute old people distresses the nonpoor to the extent that they are willing to pay for a social safety net. The existence of this safety net, however, lowers elderly indigents' costs of inade­quate savings for retirement. People who are unlucky, unwise, or opportunistic are aware of and can make use of this safety net. By imposing mandatory social security "contributions" through taxes, all people, including the un­lucky, unwise, and opportunistic, are forced to contribute to the financing of the retirement portion of the social safety net. Social Security Alternatives Alternative policies for social security include maintain­ing the benefit structure as it now exists or reducing it by making specific cuts, by making across-the-board cuts, or by raising the retirement age. The criteria for evaluating alternative policies should include consideration of whether a policy promotes social insurance or the reduction of un­certainty, whether intergenerational redistribution is in­creased, and its effect on the poverty of the aged. Maintain Current Benefit Structure If the current benefit structure is maintained with auto­ matic adjustments for inflation, social security taxes will have to be raised. The Social Security Administration is required by statute to make seventy-five-year cost projec­ tions on the Old Age Survivors and Disability Insurance. The principal force for higher social security taxes in the future is unfavorable demographic trends. As the popula­ tion ages the number of workers for each retired person declines. The most important demographic variable is the fertility rate. Optimistically, the fertility rate can be as­ sumed to increase 30 percent between 1981 and 2055, while the most pessimistic assumptions see fertility rates over the same period falling slightly relative to 1980 levels. Even if rates are assumed to be somewhere in between these extremes, Old Age Survivors and Disability taxes alone will rise by over 40 percent between 1981 and 2030 (the current rate is 5 .35 percent for both employer and em­ ployee and is scheduled to rise to 6.2 percent by 1990). The implied payroll rate would rise to about 8 percent each for employee and employer under the less extreme alterna­ tives, but if current fertility rates remain low the combined Old Age Survivors and Disability Insurance tax rate will be 28 percent by 205 5. Since the health insurance program that is part of social security is also funded by a payroll tax, that tax will have to be raised to 6 percent by 2005 under the less extreme alternatives.9 The required tax in­ creases for the hospital insurance program are even greater under the most pessimistic assumption (declining fertility rates). By sustaining the current level of benefits, the social insurance objective of social security is maintained, but substantially higher tax rates result. Under the most pessi­mistic alternative, total social security taxes alone could top 30 percent. If the marginal tax rates of all other federal and local taxes were 40 percent for the median taxpayer, marginal tax rates could zoom to 70 percent for middle­class taxpayers in the next century. Such high marginal rates could depress economic growth and make the social security program politically vulnerable. Even in the short run the scheduled rises in social security taxes to about I 5 percent in I 990 may not be sufficient to maintain the current benefit structure. As the baby boom cohorts grow older, additional tax increases will be necessary. Already some politicians are searching for acceptable ways to cut benefits. Reduce Benefits The other method of alleviating short-term and long­term financing problems facing the social security system is to reduce the benefits. The obvious drawback of benefit reductions is that the plans and expectations of current and future beneficiaries are undermined. Politically, proposed benefit cuts are apt to invite united opposition among the aged. Specific Cuts. One way to cut benefits is to eliminate specific programs; for example, the minimum benefit could simply be eliminated. Advocates of eliminating the mini­mum benefit contend that the welfare role of this benefit has been supplanted by the Supplemental Security Income program of 1974 and that elimination would save several billion dollars. Other proposed cuts in the benefit structure have aimed at eliminating or reducing specific programs that affect a relatively small number of beneficiaries. Politically, the advantage of making specific cuts is that they do not inspire such united opposition as do across­the-board cuts, but the economic burdens of such benefit reductions are concentrated. The income and expectations of some recipients are radically affected when specific cuts are made. Since social security benefits for everyone depend on a number of variables that could be affected by abrupt rule changes, one effect of reducing the overall benefit structure through specific cuts is to create un­certainty for all. For those affected by the specific cuts the effect is similar to suffering a windfall loss. Some may actually become destitute. If social insurance is a major objective of social security, then the policy of reducing benefits by making specific cuts does not receive a favor­able rating. Across-the-Board Reductions. As an alternative to specific cuts, social security benefits could be reduced across the board. Although the dollar value of the current benefits could be cut, most proposals call for suspending or reducing the automatic adjustments for inflation. Under these pro­posals, a freeze of dollar benefits while inflation was occurring would lower real benefits. The reduction of the inflation adjustment would allocate the burdens of the social security cuts to all beneficiaries. While all bene­ficiaries may suffer moderate income losses, none will be utterly devastated as would occur with specific cuts. There is, however, a real question as to whether such an option is politically feasible. Such a policy will negatively affect the wealth of current and future beneficiaries in a manner that is apparent to all. Few politicians can survive very long by advocating measures that negatively and un­ambiguously affect a significant portion of their constitu­ency. Relative to specific cuts, this option seems preferable economically but may inspire more political opposition. Another method of reducing benefits across the board is to lower the replacement ratio for future retirees. This TEXAS BUSINESS REVIEW reduction could be accomplished over a number of years and could begin some years in the future to allow people the opportunity to plan for reduced benefits. A gradual lowering of the benefit structure could significantly moder­ate the long-run financial problems of the social security system. Raising Age of Retirement. Raising the retirement age is not necessarily viewed negatively by the aged, who sup­ported congressional raising of the mandatory retirement age from 65 to 70. In some cases, of course, especially where physical labor is involved, raised retirement ages may impose undue hardships on elderly workers. In recognition of this problem, raised retirement ages need not be manda­tory. The reward under Social Security for postponing re­tirement until after 65 is now relatively meager, as is the cost to the recipient of early retirement. Later retirements could be encouraged by reducing more severely (but not eliminating) the benefits received upon early retirement and by rewarding later retirements more. In general, it can be argued that raising the retirement age is politically more palatable than across-the-board reductions and is superior economically to specific cuts because the burden of the cuts would be distributed more widely. Regional Implications No regional data exist to determine how reduced bene­fits would affect various regions and states. If the current benefit structure is maintained and tax increases are neces­sary, then places with a low proportion of elderly residents, such as Texas, will be relatively more adversely affected. For the entire Sunbelt there would be no significant re­gional difference. Social Security benefits are currently adjusted for infla­tion nationally with no regional variations. Social security beneficiaries in the South and Texas have historically bene­fited by the nationally uniform benefit levels under social security because the cost of living in the South is lower than the average cost of living across the country. If two workers, one residing in Texas and one in New York, had exactly the same wage history, the one retiring in Texas would have a higher real income. On the other hand, wages as well as prices have been generally lower in the South and Texas. One of the most commonly discussed methods of reducing benefits across the Proposals to raise the retirement age from 65 to 70 may have regionally dissimilar effects. In both the South and Texas the proportion of those 65 and over that are younger than 70 (the group most affected by a change in retirement age) was greater than the proportion throughout the country in 1970 (see table 3). A policy of reducing bene­fits through higher retirement ages could affect a relatively higher number of the elderly in the South and Texas if the 1970 figures are still an accurate representation of the age distribution. Notes 1. Marilyn Moon, The Measurement of Economic Welfare: Its Ap· plication to the Aged Poor (New York: Academic Press, 1977). 2. Benjamin Bridges and Michael Packard, "Price and Income Changes for the Elderly," Social Security Bulletin, January 1981, pp. 3-15 ; Theodore Torda, "The Impact of Inflation on the Elder­ly," Federal Reserve Bank of Qeveland Economic Review, October 1972, pp. 3-19; and U.S. Department of Commerce, Bureau of the Census, Cu"ent Population Reports, Series P-60, no. 127, "Money Income and Poverty Status of Families and Persons in the United States," 1980 (advance data from the March 1981 current popula­tion survey), 1981. 3. U.S. Congressional Budget Office, Poverty Status of Families under the Alternative Definitions, Background Paper no. 17 (rev.) (Washington, D.C.: Government Printing Office, 1977). 4. Robert Clark and John Menefee, "Federal Expenditures for the Elderly : Past and Future," The Gerontologist, April 1981, pp. 132-37. 5. Barbara Torrey, "The Implications of an Aging Population for the Federal Budget," paper presented at the American Economic Association Annual Meetings, New York City, December 1981. 6. U.S. Social Security Administration, Social Security Bulletin: Annual Statistical Bulletin (Washington, D.C.: Government Printing Office, 1979). 7. U.S. Social Security Administration, "Income of Newly Entitled Beneficiaries, 1970," Preliminary Findings from the Survey ofNew Beneficiaries, Report no . 10 (Washington, D.C. : Government Printing Office, June 1973). 8. Sherwin Rosen, "Some Arithmetic of Social Secuirty," paper presented at the Conference on Controlling the Cost of Social Security, American Entreprise Institute, Washington, D.C., June 1981. 9. U.S. Social Security Administration, Annual Report ofthe Board of Trustees of the Federal Old Age and Survivors Insurance and Disability Insurance Trust Funds, July 1981 . Table 3 Elderly Population in United States, 1970 board calls for a temporary cessation or partial freeze of the United States South (including Texas) Texas inflation adjustor. To the extent that southern and Texan bene­ Age Number (in millions) Percentage Number (in millions) Percentage Number (in millions) Percentage ficiaries are overcompensated by nationally uniform benefit levels, a policy change that focuses on the inflation adjuster will main­tain the relative attractiveness of low-cost regions, such as the South and Texas, to retirees. Total population 203.21 100.0 62.80 100.0 11.20 100.0 60-64 8.62 4.2 2.65 4.2 0.45 4.0 65-69 6.99 3.4 2.21 3.5 0.36 3.2 70-74 5.44 2.7 1.64 2.6 0.27 2.4 75 and over 7.63 3.8 2.19 3.5 0.36 3.2 Source: U.S. Department of Commerce, Bureau of the Census, 1970 Census of Population: General Population Characteristics: United States Summary (Washington, D.C.: Government Printing Office, January 1972). BBR Publications on Latin America Atlas of Central America Arbingast, Stanley A., et. al. 1979. 70 pp. 11" x 14" spiral bound. $18.00. ISBN 87755-262-2. An economic atlas with maps of Central America and the individual countries-Guatemala, Belize, Honduras, El Salva· dor, Nicaragua, Costa Rica, and Panama. Atlas of Mexico Arbingast, tanley A., et. al. 1975. 164 pp. 11" x 14" spiral bound. $20.00. ISBN 87755-187-1. An economic atlas of Mexico, including political, physical, social, and historical data. Economic Integration in Latin America: The Progress and Problems of LAFT A Mathis, F. john. 1969. 112 pp. $4.00. ISBN 87755-076-X. Studies in Latin American Business No. 8. The study is con­cerned primarily with the Latin American Free Trade Asso­ciation as the organization expected to determine the suc­cess or failure of the common market in Latin America. A Spanish edition is available from Editorial Diana, Mexico. Industrial Polarization under Economic Inte­gration in Latin America Garbacz, Christopher. 1971. 101 pp. $4.00. ISBN 87755· 138-3. Studies in Latin American Business No . 11. The focus is the tendency for an economic union of countries with widely divergent levels of development to result in further extreme concentration of economic activity at a few industrial poles. Industrialization and Employment in Puerto Rico, 1950-1972 Holbik, Karel, and Philip L. Swan. 1975. 82 pp. $4.00. ISBN 87755-208-8. Studies in Latin American Business No. 16. Although de­velopment programs dating from the 1940s have made pos­sible the emergence of Puerto Rico as an industrialized economy, the economic changes have resulted in certain problems, problems that are a major focus in the book. International Tourism and Latin American Development Krause, Walter, and G. Donald Jud. 1973. 74 pp. $5.00. ISB 87755-176-Q . Studies in Latin American Business No. 15. The central ques­tions in the work are (1) What is the potential for tourism in Latin America? and (2) What must Latin America do to realize the potential? Mexican Migration and the U.S. Labor Market: A Mounting Issue for the Seventies Briggs, Vernon M., Jr. 1975. 37 pp. $4.00. ISBN 87755­214-2. Studies in Human Resource Development No. 3. An analysis of the effects of U.S. labor, immigration, and border poli­cies on employment and labor problems of the seventies. The Mexican Migration Numbers Game: An Analysis of the Lesko Estimate of Undocu­mented Migration from Mexico to the United States Roberts, Kenneth, Michael E. Conroy, Allan G. King, and Jorge Rizo-Patron. 1978. 33 pp. $4.00. ISBN 87755­228-2. Research Report 1978-1. A detailed account of methods used to enumerate illegal aliens in this country and a critical assessment of this approach. The Mexico-United States Border: Public Poli­cy and Chicano Economic Welfare Briggs, Vernon M., Jr. 1974. 28 pp. $4.00. ISBN 87755­200-2. Studies in Human Resource Development No. 2. A dis­cussion of the effects of U.S. immigration policies. Monetary Accommodation of Regional Inte­gration in Latin America Ziegler, Lawrence F. 1971. 83 pp. $4.00. ISBN 87755­154-5. Studies in Latin American Business No. 12. The author's focus is the monetary side of the Latin American move­ment toward market integration. Social Class and Consumption Behavior in Sio Paulo, Brazil Cunningham, Isabella C.M., et al. 1976. 177 pp. $4.00. ISBN 87755-258-4. Studies in Marketing No. 23. The authors examined the shopping and consumption behavior of individuals in vari­ous social classes in Sio Paulo. Trade and Industrialization in the Central American Common Market: The First Decade Holbik, Karel, and Philip L. Swan. 1972. 67 pp. $4.00. ISBN 87755-167-7. Studies in Latin American Business No. 13. The authors trace the development of the Central American Common Market and evaluate its results. The United States and Latin America: The Alliance for Progress Program Krause, Walter. 1963. 35 pp. $4.00. ISBN 87755-070-0. Studies in Latin American Business No. 2. A discussion of the political and economic involvement of the United States with Latin America through the Alliance for Progress. Wage Differences between United States and Guatemalan Industrial Firms in Guatemala Maddox, Robert Casey. 1971. 57 pp. $4.00. ISBN 87755­143-X. Studies in Latin American Business No. 10. The wage levels and factors accounting for differences are analyzed. Rising Health-Care Costs A Continuing Cause for National Concern From the 1960s to the 1980s health-care costs increased far more rapidly than did the economy as a whole; health expenditures as a portion of gross national product (GNP) were only 6.2 percent in 1965 but had edged up to 8.8 percent by 1976 and to 9.4 percent by 1980. 1 Per capita expenditures on health care in the United States increased from $569 in 1975 to $803 in 1978; in Texas the increase was from $453 in 1975 to $681in1978 (see table 1). Over­all health-care expenditures tripled from 1967 to 1981, while hospital costs increased fivefold during the same period. Throughout the 1970s hospital care was by far the largest item of expense in health care in Texas (see table 2). The health-care industry is now the third largest employer in the country, after civil service and retailing, and is the fastest-growing industry in the nation.2 Can Costs Be Controlled? The problem in U.S. health care is primarily one of accountability and organization. Accountability involves four participants: patient-consumers, medical professionals, third-party payers, and hospitals. Along with the govern­ment, these four are the keys to resolving issues of health­care costs. Patients The patient-consumer is at the center of the health-care cost crisis and may at first glance seem to be the primary victim of spiraling costs, but the ultimate consumer usually does not pay directly for health care. The majority (64 percent) of physicians' payments are made by private third­party payers (prepaid group health plans, private insurance companies, philanthropic organizations) or public third­party payers (federal, state, or local government). 3 The per- Kenneth W. Hollman holds the Tommy T. Martin Chair ofInsurance at Middle Tennessee State University. Joe H. Muney, Jr., is Director ofthe Insurance Excellence Program at the University ofMississippi. Kenneth W. Hollman Joe H. Murrey, Jr. centage of hospital bills paid by insurers is even greater, about 92 percent. Third-party payments-particularly where there is no deductible or a low deductible-help to create the illusion that health care is relatively free. Fur­thermore, tax breaks offer financial incentives to private­sector employers to provide generous health-care insurance plans for their employees and equally attractive incentives for employees to accept them in lieu of pay raises. Thus, the nation's system of health-care insurance has undoubted­ly added to the patient-consumer's demand for health-care services and to the rise in costs. Patients are sometimes criticized for abusing their health-care privileges through overconsumption of services. Use is said to be directly related to third-party reimburse­ments. In other words health-care insurance is said to in­volve a "moral hazard" -consumers can purchase health­care services without concern over their costs. While many consumers may disregard costs, the health-care system, through perverse incentives provided by third-party inter­mediaries, must shoulder a part of the blame.4 Consumers who use health-care services freely can hardly be blamed for acting in their own self-interest. The system does not en­courage patients to question the need for, or the cost of, a particular service or to shop around for a less expensive provider.5 Nor is the patient-consumer motivated to use relatively inexpensive outpatient services in a doctor's office, clinic, or at home rather than in-patient services in a hospital. Since medical treatment in a hospital is covered in most insurance policies while out-patient service is not, a patient's out-of-pocket cost is less for hospital treatment, even though the hospital bill will be much larger. 6 If efforts to control costs are to be successful, the health-care system must be modified so that the ultimate consumer pays more of the bill directly; the consumer must be made more aware of the cost impact of unnecessary health services. Medical Professionals Any cost-containment program must consider the 44 7 ,000 physicians in the country. Control of health costs depends strongly on their influence. As the determiners of who will receive hospital care, when and where the pa­tient will be admitted, the duration of care, and the number of tests that will be performed as well as of the type of treatment and other services the patient will receive, doc­tors exert a major influence on both hospital decision making and spending levels. In May of 1981 Business Week estimated that physicians control 70 percent of total medical-care expenditures and 93 percent of hospital expenses. Doctors quite likely do not have a basic incentive to introduce efficiencies and help control health-care costs. In fact, their incentives may be in the opposite direction. Our fee-for-service system rewards doctors for providing costly services whether or not such services are necessary or beneficial to the patient-consumer. As a result, some ob­servers have claimed, billions of dollars are squandered each year on unnecessary drugs, hospitalization, surgery, and technology. 7 In recent years doctors have faced a new problem-the malpractice suit. With increased concern over liability for malpractice, a doctor is likely to order more tests, and more sophisticated tests, and to exercise defensive medicine in other ways as a protection from prosecution. The typical patient, with limited knowledge of medical practices and facing the anxiety of a health problem or the urgency of a major illness, can hardly object. Of course, in most cases public or private insurance will pick up the tab for the tests-meaning there is less "discounting" for persons who are less able to pay-so that the cost burden is not borne directly by the patient-consumer. One could hardly fault the physician for exercising self-protection through the purchase of malpractice insurance, but the fact remains that such purchases diminish the physician's incentives to con­trol costs. Consumer groups in the past have suggested that medical associations have intentionally restricted entry into the medical profession to keep physicians' incomes high. The critics contended that an increase in the number of doctors would drive doctors' fees down. There are, however, power­ful arguments against their position. The public's desire for more medical services seems to be nearly insatiable. Among other factors, the aging of the population and rising in­comes have dramatically increased the demand for medical attention.8 The physicians tend to concentrate in heavily populated areas where the demand for their services is greatest and where the latest equipment and technology are available. This maldistribution of the physician population should drive physicians' fees down, but research has shown that the opposite is true. Areas with high physician-population ratios generally have higher fees than those with lower ratios. 9 Other forces are reducing the favorable effect on medical costs of a larger supply of physicians. Physicians have tradi­tionally put in Jong hours, but in recent years, as the num­ber of physicians has increased, the average number of hours each works has tended to decline. Doctors have simply shortened their work week and substituted leisure time for the opportunity to earn more income. 10 Some ob­servers have argued that the health status of the country will rise as the number of physicians increases and that there will be a concomitant decline in costs, but the general improvement in health-care services will probably tend to speed recovery, save Jives, and prolong life, thereby creating the need for more physicians and services. While extending life expectancy is a salutary objective, it works against hope for reducing health costs by increasing the number of physicians. 11 Third-Party Payers Third-party payers also influence health-care costs. These payers-private health insurers or government agen­cies acting as insurers or, in some cases, as providers of care-may reimburse the provider for the cost of the ser­vice or may reimburse the customer for the expense. Some beneficiaries may receive public funds through the private insurance industry, with the relevant government agency retaining financial control. In 1978 57 percent of the funds spent on health care came from private sources and 43 per­cent came from federal, state, and local government sources Table 1 Per Capita Health-care Expenditures in the United States and Texas, 1975-1978 (In dollars) United States Texas Category 1975 1976 1977 1978 1975 1976 1977 1978 Hospital care Physicians' services Dentists' services Other professional services Drugs and drug sundries Eyeglasses and appliances Nursing home services Prepayment and administration Government public health activities Other health services 239 .78 114.66 37.88 12.04 54.33 13.72 46.47 19.05 14.52 16.98 272.70 125 .69 43.08 14.60 58.28 14.68 51.93 21.58 17.38 17.62 306.29 144.06 47.65 16.13 63.26 15.79 57.94 38.49 19.52 18. 12 339.94 160.47 53.31 18.29 68.91 17.68 67.69 32 .28 23.68 20.56 174.03 72.89 33.07 6 .79 66.47 13.71 32.48 22.58 17.42 13.57 219.46 79.39 36.15 9.19 73.59 14.60 38.69 28.03 21.11 17.16 247. 13 95.21 39.63 11.28 81.11 15.62 35.91 37.38 21.82 18.93 280.01 104.36 43.37 12.66 91.40 17.40 44.16 44.14 23.87 19.58 Total 569.42 637.53 727.23 802.81 453.00 537.37 604.01 680.95 Source: Texas Department of Health, "State Health Plan," in press. (see table 3). About 90 percent of the population in 1981 had some sort of health care coverage, relieving it of the im­mediate cost of most health-care services. 12 The incentives of third-party payers-particularly private groups-to keep health costs low may also be weak. Doctors usually sit on the boards of directors of private health plan groups and sometimes constitute majorities. Further, medical society approval is required for membership on the board of many groups, and doctors may dominate the critical fee-setting committees. The insurance carrier is, thus, controlled by the group that stands to benefit most from higher fee schedules-the providers of health care. Doctors face a potential conflict of interest when they serve on the boards of health-care groups and exercise fee-setting dominance; there may be a financial disincentive for the physician community to put a cap on costs. 13 Most insurance companies will pay for services provided by high-cost and by low-cost physicians, thus removing all incentives for doctors to compete in price. Also, the "usual and customary" guidelines used by many payers for reim­bursement to physician providers induce them to adjust their fee schedules upward.14 In recent years, insurance carriers have tried to slow down the rise in health-care costs. They have initiated many programs with doctors and hospitals to fight rising costs and have also adopted promotional programs to encourage more healthful life styles and to educate the public about other preventive medicine and health programs. In addition, they have encouraged preadmission testing, second surgical opinions, same-day surgery, and other programs that would reduce hospitalization costs. While these kinds of activities may not deal with the major areas of cost increases, they should, in the long run, reduce some of the costs of health­ care programs and facilities. Hospitals Hospitals treat patients, but their first task is not to at­tract patients. Rather, they attract physicians who in turn provide patient care through their admitting privileges. Therefore, hospitals are not in competition for patients (there are plenty of those) but for doctors to treat those Table 2 patients. Why do doctors come to hospitals? For good in­come and professional prestige. Most doctors are trained in medical schools that have the latest and most sophisti­cated equipment. They naturally seek hospitals that offer both the same work environment and possibilities for specialization, for earning larger incomes, and for acquiring greater peer recognition and prestige. Hospitals are, therefore, on the spot. The hospital that is not modern and is not technologically equipped to pro­vide the highest quality service cannot attract the best doctors. Since hospitals are recognized by the quality of the The health-care industry is now the third largest employer in the country, after civil service and retailing. physicians on their medical staffs, pressure is on hospitals to buy expensive equipment and to provide additional bed capacity, even when they know the items and space will be underused and may duplicate equipment offered at other facilities in the area. Such overinvestment, duplication, and redundancy mean higher costs to the patient (or a payer). The hospital industry is also not competitive because there is little shopping around for cheaper services. The patient-consumer uses the services recommended by the doctor and is admitted to the hospital where the doctor has staff privileges. Since the patient is likely to be insured and the hospital is, therefore, likely to be protected from the consequences of overtreatment and overservice, the hospital has little incentive to provide services at lower costs by trimming waste and eliminating superfluous tests and treatment. There is, in fact, a basic lack of incentives to contain costs: our cost-based reimbursement methods reward the hospital with more revenue Percentage Distribution of Personal Health-Care Expenditures, for providing more patient care 1975-1978 Texas United States and for providing sive care.15 more expen­ Category 1975 1976 1977 1978 1978 Solutions to Cost Problems Hospital care Physicians' services Den tis ts' services Other professional services Drugs and drug sundries Eyeglasses and appliances Nursing home services Prepayment and administration Government public health activities Other health services Source: Same as table I. JULY-AUGUST 1982 38.4 16.1 7.3 1.5 14.7 3.0 7.2 5.0 3.8 3.0 41.0 14.8 6.8 I.7 13.7 2.7 6.8 5.2 3.9 3.2 40.7 I 5.7 6.5 1.9 13.4 2 .6 6.4 6.2 3.6 3.1 41.1 I 5.3 6.4 I.9 13.4 2.6 6.5 6.5 3.5 2.9 40.2 19.0 6.3 2.2 8.2 2.1 8.0 3.8 2.8 2.4 Government regulation and nonregulatory incentives for health-care organizations, busi­nesses, and individuals seem to be the major choices for containing health-care costs. Both alternatives have major advantages and disadvantages. 201 Government Regulation Governments in the 1960s were primarily concerned with providing quality medical care to all, but in the 1970s they became concerned with rising health-care costs and passed legislation regarding the organization and administra­tion of delivery systems. Governmental control has been exercised largely through its power to control the amount of money channeled to hospitals and individuals. When the federal government provides funds to hospitals for con­struction or other purposes, it can stipulate that the recipi­ent hospital contain costs. Certain stipulations have also been made when funds were provided to hospitals for ser­vices rendered to Medicare and Medicaid recipients. Reim­bursements of service costs to Medicare beneficiaries is now the lesser of costs or charges ; this amendment is an attempt to end hospital cross-subsidization of services (charging more for one service to cover a deficit in an­other). The Social Security Administration is also testing programs to encourage hospitals to control costs. 16 The federal government has also encouraged better state and area planning of delivery of health-care services. Fed­ eral legislation passed in 1965 was designed to avoid or minimize duplication in the provision of health-care ser­ vices and to reduce costs. In the same year, the Com­ prehensive Health-Care Planning Law was passed to provide for state and area health planning. Public Law 93-641, passed in 1974, designed a system to control the purchase of costly equipment and services by hospitals. This law, in contrast to previous federal programs, was mandatory rather than permissive. PL-93-641 established a network of state and local health systems agencies with limited power to shape local health systems in accordance with federally established health priorities. The objective was to provide equal health-care services to consumers all over the country. These agencies are governed at the state level by a board whose composition is representative of the various health­ care interests in the community. They plan, allocate, and regulate with the advice of committees appointed by state governments. Locally these agencies perform basically the same functions as those at the state level but for a more defined geographic area. The government has also attempted to regulate health· care prices through wage and price controls. President Richard M. Nixon imposed such controls in 1971 and lifted them in 1972 for most sectors of the economy, but they remained applicable for hospitals until 1974. When they were lifted, hospital costs soared and have continued to climb rapidly since. Another step taken by the government to control costs, particularly for unnecessary hospitalization and surgery, was the establishment of professional standard review or­ganizations. The review organization monitors patient care and certifies that the care received was required. Treatment that is excessively long or requires a number of tests re· ceives scrutiny. Patients in hospitals not meeting profes­sional review standards will not receive reimbursements from third-party insurers or from Medicare or Medicaid. 17 State efforts to control rising health-care costs, like those at the federal level, have not been overwhelmingly successful. The question whether government regulation has done anything to contain costs is still open to debate. Some analysts of the health-care situation, while conceding that federal regulation has curbed isolated gross excesses, con­tend that in the aggregate the opposite is true. Nonregulatory Incentives Private insurers could be encouraged to offer coverage that provides incentives for consumers to use services more judiciously. In particular, higher deductibles and higher par· ticipation rates would heighten consumer awareness about the cost of health service. More cost-efficient health insur­ance packages could discourage the tendency to use insur· ance for unnecessary services. At present, about 70 percent of emergency-room visits are for nonemergency purposes and could be handled more efficiently and economically through a visit to a private physician's office. In addition, patients sometimes spend time in acute-care facilities when they could be treated as well in limited-care facilities or Table 3 National Health Expenditures by Major Source of Funds and Percentage of Gross National Product, Selected Calendar Years, 1929-1978 Category 1929 1940 1950 1960 1970 1975 1976 1977 1978 National health expenditures (in billions of dollars) 3.6 4 .0 12.7 26.9 74.9 132.1 148.9 169.9 188.6 Percentage of GNP Sources of funds (in billions of dollars) 3.5 4 .0 4 .4 5.3 7 .6 8.6 8.7 8.9 8.9 Private Public Federal State and local Percentage distribution of funds 3.2 0 .5 n.a. n.a. 3.2 0.8 n.a. n.a. 9 .2 3.4 1.6 1.8 20.3 6.6 3.0 3.6 47.1 27.8 17.6 10.2 75.8 56.3 37.1 19.2 85.7 63.2 42.6 20.6 99.3 70.6 47.4 23.2 108.0 80.7 53.9 26.8 Private Public Federal State and local 86.4 13.6 n.a. n.a. 79.7 20.3 n.a. n.a. 72 .8 27.2 12.8 14.4 75.3 24.7 11.2 13.5 62.9 37.1 23.5 13.6 57.4 42.6 28.1 14.6 57.5 42.5 28.6 13.9 58.4 41.6 27.9 13.7 57.2 42.8 28.6 14.2 Source : Sames as table I. in a domiciliary environment, though possibly with some inconveniences.18 Health Maintenance Organisations. Another alternative that offers significant hope for cost containment is the Health Maintenance Organization (HMO). These compre­hensive, prepayment group medical plans typically include a hospital and clinic and several physicians with various specialities. HMOs encourage people to use cheap ambu­latory care instead of the more expensive hospital care by insuring both kinds of care. The success of early HMO programs and the availability of federal funds spurred the creation of several such organizations in the early 1970s. A participant in an HMO pays a fixed monthly premium for all required medical services (medical, hospital, labora­ tory, and x-ray services, plus most prescription drugs) with­ out further charge. Since the HMO operates within a fixed budget and realizes no gain from treating or curing diseases or illnesses, it has a financial incentive to keep a member healthy through preventive medicine and to promote re­ covery from illness or injury as quickly and cheaply as pos­ sible. There is every encouragement for the HMO to econo­ mize on plant and equipment needs, to restrict treatment and services to those necessary for the patient's recovery, and to impose other constraints on use and cost. HMOs also encourage outpatient care rather than more costly in­ patient care. The HMO has obvious incentives to make sure that subscriber-patients get only needed services delivered in the least costly way-outside a hospital if possible. The system has a built-in check, in that members may withdraw if they become dissatisfied with the service provided and make other arrangements for health-care needs. Under the HMO concept, the decision about the quality and cost of health care is returned to the individual consumer. After some initial problems, the HMO concept in recent years has become more widely accepted. Employers are beginning to see it as an alternative method of providing good medical care to employees at a lower cost than they would pay under conventional health-care insurance. Also, some third-party carriers are now investing in the develop­ ment, acquisition, and servicing of HMOs. 19 Shared Premiums. Another private plan is the shared­premium concept. Under such a program, the employer offers employees a choice from three qualified health-care plans, with the employer contributing the same amount for each. If the employee selects a plan with a cost that is less than the employer's contribution, the employee receives the difference as a taxable rebate. Thus the shared-premium concept would promote price competition among health­care providers while stimulating cost awareness among con­sumers.20 Individual Practice Associations. The individual practice association is similar to HMOs in that it features prepay­ment, but it allows the patient to visit a wider range of physicians. One sponsoring insurance company allots the patient's doctor a certain amount of money, and the doctor decides on the scope and method of the patient-subscriber's treatment. The doctor keeps a portion of the money if any is left at the end of the year.21 Tbe Reagan Administration's Health-Care Plan. The Reagan administration's plan for health-care cost control is still being formed. The administration seems to want to shift regulation from the medical infrastructure-doctors and hospitals-to the providers and the businesses that purchase group health insurance on behalf of their employees. Among other provisions of the plan, states would get block grants for providing certain medical and social services that were previously provided by the federal government. In addition to encouraging components of the health­care industry to broaden their base and develop less costly methods of providing services, the new program would raise the national consciousness about the cost of medical care. A basic goal is to promote competition in price as well as in quality and availability of health services. Pro­ponents of the plan recognize that price competition will require major structural changes in the health-care market; that businesses, as significant stockholders in the health­care system, must lend their support; and that a more com­petitive marketplace will result in some major economic dislocations between hospitals, physicians, and other mem­bers of the medical community. The administration seems to feel that the deleterious effects of these dislocations would be more than offset by the resulting reduction in waste, inefficiency, and misuse of the nation's health 22 resources. Critics of the Reagan plan question the efficiency of shifting certain medical programs to states in a period of fiscal austerity. They contend that the new national health­care strategy could become as complex as the old one and that there are more efficient ways to save on health care. Other cost-containment possibilities, such as promoting health changes and providing alternatives to the hospital or nursing home as the population ages,23 also offer hope of cost containment. Notes 1. "The Spiraling Costs of Health Care, RX: Competition," Business Week, February 8, 1982, p. 58, and Louanne Kennedy et al., "Health Planning in An Age of Austerity," Policy Studies Journal 9 (1980-1981): 234. 2. Rose M. Rubin, "The Role of Health Maintenance Organizations in Containing Health-Care Costs," Texas Business Review, January­February 1981, p. 9. 3. "Why More Doctors Won't Mean Lower Bills," Business Week, May 11, 1981, p. 130. 4. The problem is further complicated as a consequence of the al­liance between the medical supply industries and large research hos­pitals, two groups with a strong voice in health politics who seem to have learned early that the greater the amount of services provided to patients, the larger the reimbursement from third-party carriers; see Louanne Kennedy et al., "Health Planning in An Age of Aus­ terity," p. 235 . 5. Quentin L. Smith, "Health Care Coverages and Costs : A Major Challenge for Innovative Managers," Management Review, Decem­ber 1980, p. 38. JULY-AUGUST 1982 6. Jon B. Christianson, "The Competitive Approach to Medical Care Reform: Its Potential in Phoenix, Arizona," Arizona Review, first quarter, 1981, p. 38. 7. "Cite Physicians As Key to Effective Health Care System," National Underwriter 85 (June 13, 1981): 21. 8. Edward S. Sekscenski, "The Health Services Industry: A Decade of Expansion," Monthly Labor Review, May 1981, p. 10. Also see Alain C. Enthoven, "Health Care Costs: Why Regulation Fails, Why Competition Works, How to Get There from Here," National Jour­nal, May 26, 1979, pp. 885-89. 9. "Why More Doctors Won't Mean Lower Bills," Business Week, p. 131. 10. Karl Newmann, "Having More MDs in Practice Won't Cut Medi­cal Bills," American Druggist, June 1978, p. 42 . 11 . The possible correlation between medical care and improvement in the health of the population continues to be a subject of debate. One interesting view is presented in Milton W. Chen and Douglas P. Wagner, "Gains in Mortality From Biomedical Research, 1930­1975: An Initial Assessment," Social Science and Medicine 120 (March 1978) : 73-81. 12. "The Spiraling Costs of Health Care," Business Week, p. 60. 13. Burt Schorr, "Washington Believes It Can Control Medical Costs by Reducing Influence of Doctors in Blue Shields," Wall Street Journal, March 13, 1979, p. 40. 14. "Why More Doctors Won't Mean Lower Bills," Business Week, p. 130. 15. John C. Bedrosian, "The Health Care Industry: Facing the Reali­ties of the Eighties," Vital Speeches of the Day 41 (July 1, 1981): 554-57. 16. C. Stevenson Rowley, "Arizona Programs for Controlling Health Care Costs," Arizona Business, August-September 1978, p. 21. 17 . John P. Schmitt and Carl G. Homer, "The Problem of Rising Health Care Costs," Business and Economic Dimensions 4 (1980): 13. 18. Regina Herzlinger, "Can We Control Health Care Costs?" Har­vard Business Review, March-April 1978, p. 104. 19. A good discussion of HMOs is found in A. S. Arnold, "Health Care and Health Maintenance Organizations," Business and Eco­nomic Dimensions 4 (1980) : 16-20. 20. Oaudia Vine, "David Boren on Health Care Reform," Enter­prise, April 1980, p. 18. 21. "Must Doctors' Fees Be So High?" Changing Times 35 (March 1981): 39. 22 . The Reagan philosophy of a national policy on health care is summed up in Mary Jane Fisher, "Competition, Prevention Keys to Reagan Health Strategy," National Underwriter 85 (June 27, 1981): 2. 23 . This point is made in Burt Schorr, "Home-Care Services for the Elderly and Disabled Are Advocated as Cheaper than Nursing Homes," Wall Street Journal, March 26, 1981, p. 54. Also see Linda E. Demkovich, "No Deregulation Here," National Journal, August 1, 1981 , p. 1389. Research Monograph Series Bureau of Business Research P.O. Box 7459 Austin, Texas 78712 The Gross Regional Product of Texas and Its Regions Thomas R. Plaut and Mildred C. Anderson. 1981. $6.00 plus tax. The study offers quarterly estimates of Texas gross regional product from 1958 to 1979 and annual estimates from 1965 to 1977 for the 24 Texas planning regions. Accompanying the estimates are analyses of trends in the growth of output as well as in the structure of production . Texas Railroads: A Record of Construction and Abandonment Charles P. Zlatkovich. 1981. $7.00 plus tax. Published with the Texas State Historical Society. Previously unpublished information on railroad construction and abandonment in the state. The author offers maps of rail networks from 1860-1980, describes the development of the rail networks in Texas, and comments on the situation at present. Severance Taxes on Coal and Uranium in the Sunbelt Malcolm Gillis and Ignatius Peprah. 1981. $5.00 plus tax. The study covers recent changes in severance taxes on coal and urani­um, assesses the outlook for aggressive and passive state taxation policies, and considers the effects of such taxation on production investment and the environment. While the primary focus is on Sunbelt ~tates, data from other states are presented for comparison. Economic Change along the U.S.-Mexican Border: The Case of Brownsville, Texas Michael V. Miller. Early 1982. $5.00 plus tax. The author examines the industrial development and economic change in the border city of Brownsville . The findings are likely to be applicable to other southwestern border cities as well. Foreign Direct Investment Trends During the last seven years, foreign direct investment has been increasing rapidly in the Southwest, particularly in Texas. Nevertheless, foreign-owned firms still make up a relatively small part of the region's economy. Most of the foreign investments originate from firms based in Western Europe and are distributed among firms that are concen­trated in five manufacturing industries: chemicals, nonelec­trical machinery, petroleum, fabricated metals, and electri­cal equipment. Foreign direct investment is defined as a foreigner having an interest of IO percent or more in a United States­based firm. This enterprise is called a U.S. affiliate of the foreign company. Ownership (or control) of less than l 0 percent is defined as indirect or portfolio investment. The distinction between direct and portfolio investment centers on control. A foreign firm with extensive portfolio interests may have much greater investment commitments in the United States than a firm controlling several U.S. affiliates, but only the latter is a case of foreign direct investment. The economic effects of direct investment are more com­plex than are those of portfolio investment. Foreign investment has traditionally been explained as a response to imperfections in the capital market. Accord­ing to theory, investors in countries with relatively abun­dant capital and relatively low interest rates will export capital to countries with high interest rates and relatively scarce capital. Such a strategy, however, does not ade­quately explain the rapid growth in foreign direct invest­ment after World War II. If interest rate differentials were an important factor, establishment of control over the pro­duction facilities by the foreign firm would be unnecessary. In fact, one could argue that the foreign control itself may reduce profits if the foreign owner is unfamiliar with local markets or business practices. ~dL. Bumpass is Associate Professor ofEconomics, Texas Tech University. • Ill the Southwest Donald L. Bumpass Foreign investment has also been characterized as a response to various other market imperfections. Trade bar­riers, such as distance, tariffs, quotas, or import licensing, can encourage foreign direct investment as a defensive reac­tion to high barriers in markets being served by exports or as a positive response to profit opportunities in more protected markets.1 Empirical studies attempting to identi­fy the importance of trade barriers have reported mixed findings. 2 Surveys and questionnaires, however, consistent­ly emphasize the importance of tariff policy in foreign di­rect investment. A survey of chief executives by the U.S. Conference Board found that sixty-four of the seventy-six respondents mentioned trade barrier policies as being im­portant, while another survey of thirty-eight European companies operating in the United States found that the existence (or threat) of trade barriers was an important motive for these companies' moving into the U.S. market.3 Imperfections in international labor markets may cause direct investment to move closer to sources of cheaper labor. This eventuality appears to be particularly possible in "mature" industries where technology has become standardized. The movement of the assembly operations of electronics components, textiles, and footwear to such offshore locations as Korea, Taiwan, or Hong Kong suggest that this phenomenon is at work. The importance of this factor for luring foreign investment to the United States appears to be limited, although a 197 8 comparison of wage costs in Texas shows that over half of Texas counties have wage costs below those in Sweden, the Netherlands, and West Germany.4 Imperfections in technology markets are also seen as major explanations of foreign direct investment.5 This transfer factor (also described as knowledge, information, or intangible capital) arises from attempts to maximize the rate of return on technology developed within the firm. The development of new technology is costly, but its transfer to other markets can occur without significant additional cost to the parent company. A recent study notes the importance of technology (measured by research and development activity) as an explanation of inter­national investment by U.S. manufacturing.6 Another approach, called internalization or appropriability, em­phasizes identifying those functions that might be carried out by market processes but have been taken over by intrafirm transfers. Internalization applies not only to trans­fers of technology but also to transfers of management and administrative skills.7 These factors, together with other locational factors (nearness to final consumers) and politi­cal factors (stability of government, attitudes toward for­eign investment, and taxation), affect a firm 's decisions to engage in direct foreign investment. In many instances, foreign direct investment can occur without any capital movement between countries. The parent company can borrow the initial financial capital in the host country itself. In 1979 and 1980, for example, acquisitions and establishments of U.S. affiliates entailed total investment expenditures of over $25 billion (see table 1). Of that total investment just over 40 percent came from U.S. sources; the remainder ($14.25 billion or 56 percent) came from foreign sources. Foreign direct investment can be used to establish a new enterprise or to acquire an existing U.S. enterprise. For 1979 and 1980, foreign direct investment in the United States involved the establishment of l ,644 new firms and the acquisition of 1,297 existing firms. When either costs or employment are used as measures, however, acquisi­tions clearly predominate. During the same two years, acquisitions accounted for nearly 85 percent of the dollar Table 1 Foreign Direct Investment in United States, 1979 and 1980 T_ y_p_e_o_f_in_v_e_st_m_e_n_t Acquisition Establishment Total value of foreign investments. The average investment out­lay on an acquisition was $16 million, while the average outlay on a new establishment was just over $2 million. Acquired firms employed over 575,300 workers (over 93 percent of total) , while new establishments generated over 21,000 jobs. Firms acquired during 1979 and 1980 had an average of over 440 employees, while new establishments had an average of 12 workers. Of the dollar outlays for new establishments, 67 percent ($2.6 billion) was associated with purchases of real estate (mostly purcha ses of un­ improved land). Importance of Foreign Direct Investment The total value of U.S. assets owned by foreign com­panies exceeded $200 billion in 1979 ; total liabilities of these U.S. affiliates were over $150 billion, leaving the net value of assets at around $60 billion. The net value of assets has increased nearly 25 percent (in constant dollars) since 1977. Employment in U.S. affiliates increased from 1.1 million to 1.6 million persons between 1974 and 1979 (see table 2). The growth rate in employment in U.S. affiliates of foreign companies is more than 10 percent a year ; the overall growth rate of employment in the United States is 2 percent a year. U.S. affiliates of foreign companies in the Southwest (Arizona, New Mexico, Oklahoma, and Texas) account for just over 0.1 percent of total U.S. employment. Most of this employment occurs in Texas, which has more than 75 percent of the employment by U.S. affiliates in the region Source of funds (in billions of dollars) Number Average investment Total number __o_f_i______lla.:.:r..:: nv_e_st_m_e_n_ts_U_n_it_ed_S_ta_tes _F_o_r_ei::_gn_...:.(i_n_m_ill_·_io_ns_of_d.:...o.:.:s):..__:_o.:_f.:.:em=.pl:..:o~y.:.ee:.:.s 1,297 9.34 11.94 16.4 575 ,356 1,644 1.58 2.31 2.4 21 ,195 2,941 10.92 14.25 596,S S 1 Source: U .S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business, August 1981, p. 65. Table 2 Employment of U.S. Affiliates in the Southwest, 1974 to 1979 State Number (in thousands) 1974 1979 Average annual percentage change 1974 to 1979 Percentage of state employment Percentage of U.S. employment Arizona New Mexico Oklahoma Texas Southwestern total U.S. total 6.2 1.8 6.5 SO.I 64.7 1,083.4 11.1 4.3 13.6 96.8 126.4 1,642. 1 17.7 27.8 21.8 18.6 19.1 10.3 1.12 0 .90 1.23 1.72 0 .01 0.01 0.02 0 .10 0.13 1.75 Source: U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business May 1981, p. 39, and May 1976, p . 48. ' and over 7 percent of all such employment in the nation. Na­tionally, Texas ranks fifth in em­ployment in U.S. affiliates (be­hind California, New York, New Jersey, and Illinois). Growth in employment in these four states has been nearly twice the nation­al rate and five times the rate of overall growth in employment. In relative terms, however, the level of employment in all U.S. affiliates makes up only 1.5 per­cent of all employment in the southwestern region, with Texas having the largest employment even in relative terms. The gross book value of all foreign direct investment in the Southwest was over $12. 7 bil­lion at the end of 1979, more than 13 percent of the gross book value of all foreign direct investment in the United States (see table 3). Texas dominates the Southwest region with over $10 billion in gross book value, 11 percent of the U.S. total. TEXAS BUSINESS REVIEW Texas ranks second behind California in the nation. This investment in the Southwest includes ownership of about one million acres of land. Ownership of land by foreign­based companies is an emotionally charged issue. An August 1981 poll of Texans showed 61 percent in favor of "definitely" passing laws limiting foreign land ownership in Texas, and another 11 percent agreed that such laws are "probably" needed.8 In spite of such beliefs, however, foreigners in 1981 owned only 819,000 acres of land in Texas, 0.59 percent mate beneficial owner of the enterprise. The ultimate bene­ficial owner is the one in the ownership chain that is not owned more than 50 percent by another. The country of the ultimate beneficial owner may be the same as the for­eign parent, a different foreign country, or even the United States. When the foreign parent is not owned more than 50 percent by another, then the foreign parent and the ultimate beneficial owner are the same. In 1979 and 1980, the Bureau of Economic Analysis conducted additional studies that identified the ultimate U.S. affiliates offoreign companies employed about 1.6 million persons in 1979 and held assets that had a total value in excess of $200 billion. of the state's 139 million acres of agricultural land.9 There seems to be no economic reason to treat ownership of natural resources (like land) differently from ownership of other types of resources (like capital). Thus, when mar­ket processes are properly functioning, foreign direct invest­ment will generate economic gains to both home and host countries. Countries Active in Direct Investment in the Southwest France, the United Kingdom, West Germany, Canada, and Cura9ao (Netherlands Antilles) account for over 75 percent of the manufacturing foreign direct investment in the Southwest (see table 4). The number of U.S. affiliate manufacturing firms increased. sevenfold between 1974 and 1977. Classifying the foreign parent company on the basis of the first foreign person in the ownership chain of the U.S. affiliates may result in a limited misstatement of the identities of those involved in foreign direct investment, because the first foreign person named may not be an ulti- Table 3 Gross Book Value of Land, Plant, and Equipment of U .S. Affiliates in the Southwest, 1974 to 1979 (Billions of dollars) Average annual percentage change, 1974 to 1979 State 1974 1979 (constant 1974 dollars) Arizo na 0 .295 0.797 16.7 New Mexico 0 .311 0 .343 -5.0 Oklaho ma 0 .585 1.084 5.2 Texas 4 .016 10 .52 0 15 .6 Southwestern total 5.2 08 12.7 43 13 .2 U.S. total 45.454 93.725 8.0 Source: U.S. Department of Commerce, Bureau of Economic Analy­sis, Survey of Current Business, May 1981, p. 54, and May 1976, p. 48. beneficial owner and his country for more than 90 percent of the investment outlays. For this two-year period, 13 per­cent of the total outlays involved investment in which the ultimate beneficial owner differed from the foreign parent country. lO When classified by ultimate beneficial owner, investment outlays from the Netherlands and Cura9ao were reduced by over $1 billion each. The two major countries of ultimate beneficial owners were Canada, with a $1 billion increase, and members of the Organization of Petroleum Exporting Countries (OPEC), with $400 million more. The Canadian differences reflect nearly one hundred real estate investments made through Dutch hold­ing companies; most of the OPEC outlays, involving about 2 percent by all investors, were also in real estate. The ad­vantages to ultimate beneficial owners of holding their U.S. investments indirectly include reduced tax liabilities, avoidance of regulatory constraints, and protection of investor privacy. A. potential problem is illustrated by the fact that recently nationalized French-based firms are now con­trolled by the French government. The Committee on Foreign Investment, headed by Marc Leland, the assistant secretary of the Treasury for international affairs, has re­cently studied the takeover by Elf Aquitaine, the national­ized French oil company, of Texas Gulf Inc. "No bank here could own Texas Gulf but the French government owns the outfit that owns Texas Gulf, and it also owns banks," declares Leland. 11 He also notes that among other advantages foreign governments pay no taxes on interest and dividend income from their U.S. holdings. The House Subcommittee on Commerce, Consumer and Monetary Affairs has drafted a bill that would expand the authority of the executive branch in halting foreign government take­overs of U.S. firms. The bill would prohibit a foreign gov­ernment from obtaining controlling interest in companies in such specific industries as defense communications energy high technology, and transporta~ion. One import~t con~ cern centers on the transfer of nuclear technology; the 1981 purchase of Santa Fe International Corporation by Kuwait involved nuclear engineering and construction through the Santa Fe subsidiary, C. F . Braun and Company. Industries Most Affected by Foreign Direct Investment Of the 268 foreign-owned manufacturing firms in the United States in 1977, over 50 percent were in five areas: chemicals (52 firms). nonelectrical machinery (34), petro­leum (30), fabricated metals (26), and electrical equipment (22) (see table 5). Texas alone accounts for over 80 percent of foreign direct investment in manufacturing in the South­west region; over 130 facilities in the state are concentrated in the five main manufacturing areas. The scant empirical evidence available suggests that firms acquired by foreigners are not necessarily the strongest in an industry group but vary across a broad spectrum of financial health.12 In 1979, for example, acquired firms in the industries mentioned Table 4 Number of Foreign-Owned U.S. Manufacturing Firms in the Southwest, 1977 above (except petroleum) tended to be less profitable than the average firm in the industry. The acquired firms may lack some component (technology, management skill, product line) that makes them less attractive than the typical, or average, firm in the industry. To the extent that these firms attract transfers of these components from the foreign investors, these foreign acquisitions also confer some benefits on the entire economy. Notes 1. Thomas Parry, The Multinational Enterprise (Greenwich, Conn.: JAi Press Inc., 1980), pp. 23-25. 2. Thomas Horst, "The Industrial Composition of U.S. Exports and Subsidiary Sales to Canadian Markets," American Economic Review 62 (March 1972): 37, reports that tariffs do play a statistically important part in international investment decisions, while Dale Orr, "The Industrial Composition of U.S. Exports and Subsidiary Sales to Canadian Markets: Comment," American Economic Review 65 (March 1975): 234, found them to be statistically insignificant. 3. Both studies are reported in Simon Webley, Foreign Direct Investment in the United States: Opportunities and Impediments (London: British-North Southwestern U.S. American Committee, 1974), pp. 26­ Country Arizona New Mexico Oklahoma Texas total total 27 . Belgium Canada Cura~ao 0 3 0 0 0 0 0 2 1 5 26 23 5 31 24 66 535 41 4. Sion Raveed, Tim Meinershagen, and Robert B. Morris III, "A Com­parison of Foreign and Texas Labor France 6 0 4 44 54 294 Costs," Texas Business Review, Feb· Japan Netherlands Sweden Switzerland United Kingdom West Germany Other Total for 1977 Total for 1974 1 2 1 0 7 5 1 26 10 0 1 0 0 0 1 0 2 0 1 2 0 1 10 3 1 25 3 8 15 7 10 35 32 10 215 24 10 20 8 11 52 41 12 268 37 203 234 162 141 817 710 230 3,433 1,246 ruary 1978, pp. 40-43. 5. Neil Hood and Stephen Young, The Economics of Multinational En­terprise (London: Longman Group, 1979), pp. 47-49. 6. Parry, The Multinational Enter­prise, pp. 26-28. 7. Steven P. Magee, "Information and Source: Jeffrey Arpan and David Ricks, Directory of Foreign-owned Manufacturers in States, 2nd ed . (Atlanta: Georgia State University, 1979). the United the Multinational Corporation: An Appropriability Theory of Direct Foreign Investment," in Jagdish N. Bhagwati, ed., The New International Table 5 Economic Order (Cambridge, Mass.: MIT Press, 1977), pp. 317-40. Number of Foreign-Owned U.S. Affiliates in the Southwest 8. Lubbock Avalanche-Journal, Janu­ by Standard Industrial Classification, 1977 ary 23, 1981, p. B-11. Category Mining Food Pulp and paper Chemicals Petroleum Rubber Stone, clay, glass Primary metals Fabricated metals Nonelectrical machinery Electrical machinery Transportation equipment Instruments AJI other Total Source: See table 4. Arizona 0 1 1 9 0 3 1 1 1 2 5 0 0 2 26 New Mexico 0 0 0 I 1 0 0 0 0 0 0 0 0 0 2 Oklahoma 1 2 0 2 3 2 3 2 5 3 0 1 0 1 25 Texas 12 11 6 40 26 8 8 16 22 29 17 6 8 8 217 Total 13 14 7 52 30 13 12 19 28 34 22 7 8 11 270 9. Victor Arnold, "Background In­formation on Foreign Investment in Texas," report prepared for the Gov­ernor's Task Force on Foreign Invest­ment, February 1982, p. 70. 10. U.S. Department of Commerce,. Bureau of Economic Analysis, Survey of Cu"ent Business, August 1981, p. 63. 11. "Innocent Abroad?" Barron's, February I, 1982, p. 26 . 12. Jane S. Little, "The Financial Health of U.S. Manufacturing Firms Acquired by Foreigners," New Eng­land Economic Review, July-August 1981, pp. 12-14. 208 TEXAS BUSINESS REVIEW 1974 1976 1978 1980 1982 Industrial Activity (Index: 1967=100) (216.0) ....'"'-•·­... (159.4) Barometers of Texas Business (All figures are for Texas unless otherwise indicated.) All graphs except the one for nonagricultural employment are adjusted for seasonal variation. Data were compiled from the following sources: U.S. Department of Labor, Texas Employment Commission, Texas Railroad Commission, and Federal Reserve Bank. Data on oil refining and total industrial production are current through March 1982; data on consumer prices in Houston and Dallas-Fort Worth are current through April 1982; all other data are current through May 1982. 320 300 280 260 240 220 200 180 160 140 120 100 160 150 140 130 120 110 100 90 80 Consumer Prices (Index: 1967=100) 10.0 ~ Houston United States Dallas-Fort Worth 8.0 6.0 4.0 2.0 1974 1976 1978 1980 1982 Oil Production and Refining (Index: 1967=100) 250 225 200 (115.3) 175 ............. ........, '......... ~ 150 Crude oil production \; \:.. , . ~........ '•-·-........ ,. 125 --.. '.-(80.9) Percentage Unemployed 1oo~~""T;";~r--r:~:::r~r.:::=::i~-r.~~~T---I 1974 1976 1978 1980 1982 .t•-... -' __.._._ .......,,-.,..... ..--­ ---··--....-~ ...----·····Total industrial production . --~ ._.. . (9.5) . ,.' ... . • 1 .' I 1,.1 I : .........,J•,; ,, (7.0) Texas 6,750-r-------------------~ )> -t Ill 6,500 6,250 6,000 5,750 5,500 5,250 5,000 4,750 4,500 4,250 4,000 3,750 1,000 750 50U 250 o,_--r.~::r---r:-;:::;-:::r--"""1""7-:==::-r--~-~-~---1 1974 1976 1978 1980 1982 Data are current through May 1982. c: ::i:: c: en m lJ -t c: m 2 z )> ' -c: -t < 0 mm,, x ~Ill Total (6,291) )> -c: (/) -t ..... -< !!1 co 0 z ...,. ,, m ;::; -t ~ m ::o Xm )> (/) cnm )> )> -t lJ l> n c: ::i:: ~ z (/) Trade (1,574) m n 0 z c h r )> Services ( 1, 130) (/) (/) ,, Manufacturing (1,081) 0 Government ( 1,018) (/) -t )> G) m,, !! c )> Construction (441) -tTransportation and )> public utilities (391) c: Finance (357) (/) ::! Mining (300) z -t m x )> (/)