When Entrepreneurs Become Victims; P. Groff

It is a violation of the cardinal precepts of free markets, as well as common moral sensibilities, for government to publicly vil ify legitimate entrepreneurs. The Federal Trade Commission has often been guilty of such vilification. Recently it took after a popular educational product called "Hooked on Phonics," driving the producer, Gateway Educational Products, into bankruptcy. The product may be forced from the marketplace. Anyone who views, listens to, or reads the mass media regularly is doubtless aware of the catchy slogan " 'Hooked on Phonics' works for me!" The large amount of adver tising for "Hooked on Phonics" made the product highly recognizable. The company was planning to take the product to the United Kingdom. Then it was targeted by the FTC. For anyone who is too far removed from his or her school days to remember, "phon ics" is a method of teaching reading that relates how letters are used to represent the sounds of spoken words. The aim of phonics teaching is to develop students' abilities to look at a written word, recognize its letters, attach speech sounds to them, blend the Dr. Groff is professor emeritus of education at San Diego State University.

sounds together, and finally pronounce the word. According to experimental research, students who learn to decode written words through application of phonics information inevitablylearn to read better than those who do not do so. By learning the relationship between spoken and written language, stu dents acquire an independent means to read and understand any written text that they could fathom were it read aloud to them. "Hooked on Phonics" was designed in ac cordance with the research results. The FTC Charges As a specialist in reading development who closely follows the experimental re search, I was shocked to learn that the FTC charged that advertising for "Hooked on Phonics" illegally exaggerated its potential for helping people learn to read. As those who have seen the ads will recall, they by and large contained testimonials by ordinary people who used the product, and found that it dramatically improved their or their chil dren's reading.

The FTC does not usually file complaints against advertising that contains testimoni als, especially by noncelebrities. Nonethe less, the agency ordered Gateway "to forth with cease and desist from representing, in any manner, directly or by implication," that "Hooked on Phonics" will "quickly and easily teach [large numbers of] persons 504 The Foundation for Economic Education Irvington-on-Hudson, New York 10533 Tel. (914) 591-7230 Fax (914) 591-8910 E-mail: freeman@westnet.com July 1996 Jobs and Trade U nemployment is the great puzzle of our time. It perplexes politicians, confuses officials, and even entan gles economists. It persists and continues to grow despite all the government pro grams that mean to reduce it and the tax dollars spent to alleviate it. Some writers continue to echo the teach ing of Karl Marx. For them, capitalism always creates an "industrial reserve army of labor" consisting of the mass of wage earners who are exploited and then thrown out of their jobs. Most economists are at one with John Maynard Keynes, the economic guru of our time, who viewed unemployment as a symptom of insuffi cient spending. Politicians continue to cling to the Keynesian view because it sup ports their spending predilection.

Some old-guard politicians and writers explain unemployment in protectionist terms which are among the oldest and most controversial in economics. Unemployment, they blaze about, is the price we pay for bur participation in a global economy with millions of unem ployed and underemployed people who are willing to work for 25 cents an hour. "Free trade" is "unfair trade" for Americans who are condemned to the indignities and hardships of unemploy ment. If foreign trade actually were responsi ble for the corporate layoffs, the phenomenal rise of imports and exports in recrent years should have disemployed most Americans. According to U.S. Department of Commerce statistics, U.S. general imports in 1950 amounted to $8.954 billion. By 1960 they had nearly doubled to $15.073 billion. By 1970they had risen to $40.356billion. During the 1970s they soared to $244.871billion, and during the 1980s to $495 billion. This year they may exceed $700 billion. Surely, if imports would destroy jobs, this 7,800 percent rise in imports since 1950 should have thrown most Americans out of work.

It is difficult to imagine our present working conditions and standards of liv ing if the U.S. government had turned inward and closed its borders in 1950, as the Hoover Administration managed to perpetrate in 1930. Even if the disruption of trade and immediate foreign retaliation would not have brought another depres sion, the crushing burden which radical liberal administrations placed on the econ~ omy during the 1960s and 70s would sure ly have depressed the economy and drasti cally lowered American levels of living. Similarly, if there had been no foreign investments, the staggering budget deficits of the 1980s and '90s would have drained the capital market and paralyzed the econ omy. Employmentalwaysis a phenomenonof productivityand cost. In a marketeconomy,in booms and depressionsI there is an unlimited demandfor labor that makes productivecontri butions.Labor that costs more than it is expect ed to produce,whetherit is unskilledor armed with tripledegrees,is devoidofany demand. In the eyes of potentialemployers,it is utterly uunproductive."This applies to actors and administrators, systems analysts, software programmers, automatic engineers, and aeronautical scientists. If young Ph.D.s in mathematics are unable to find employ ment, employers believe them to be rather "unproductive" considering their cost and productivity.

Much university-educated labor remains unemployed because it is not in touch with the labor market. It is govern ment-directed and taxpayer-financed. Graduating from mammoth state universi ties and guided by Pell grants, Work Study grants, Stafford loans, Perkins loans, and numerous other federal and state sup port programs, many graduates are ill equipped for useful employment. In nearly all fields of economic activity employers provide most of the productivity training. But they are reluctant to offer it if the expenses of the trainee are prohibitive and the final results of the training are not expected to cover the outlays. Businessmen continually adjust to changes in demand, supply, transporta tion, technology, cost of labor and capital, government levies and obstacles, domestic and international competition. Every member of the market order is under pres sure to adjust in order to stay productive.

Of course, a person is free to ignore the pressures; the typist may continue to pound the typewriter. But she cannot just ly insist that she be subsidized by fellow workers and employers. The same is true of a university-trained aeronautical engi neer who has learned to build great mili tary planes. In times of war and prepara tions for war he is in great demand. In peace he will have to learn peaceful pur suits. He does not have the natural right to live off the labors of others. International competition is as benefi cial as domestic competition; it forces sell ers to outdo one another by offering better and cheaper goods and services and forces buyers to outdo one another by offering higher prices. Protective tariffs and other trade restrictions effect the very opposite; they permit the protected producers to offer inferior products at higher prices. They cause production to shift from places in which the natural conditions of produc tion are more favorable to places in which they are less favorable. They force labor to move from export industries paying high wages to the protected industries that gen erally pay lower wages. In short, trade restrictions hamper production and thus lower the standards of living.

The competitive position of an enter prise in domestic as well as international markets is determined by its total costs of which labor costs merely are one of many components. In capital-intensive indus tries, such as the pharmaceutical, chemical, aeronautical, steel, tool-and-die industries, the cost of capital tends to determine com petitiveness; in labor-intensive industries the total cost of labor is decisive. There are no labor-intensive American industries that compete with foreign labor. Our ser vice industries which render valuable labor services need not fear foreign compe tition; they are protected by onerous immi gration restrictions. Free trade is fair trade; those who deny it to others do not deserve it for them selves. Hans F. Sennholz Exclusive! FEE Gold Anniversary Coin T o commemorate FEE's fiftieth anniversary and to honor Margaret Thatcher, speaker at the Golden jubilee celebration, we struck a medallion of great beauty and perfect purity, the Margaret Thatcher Coin. The obverse side features a beautiful image of Lady Thatcher; the reverse bears the FEE logo and the leg end "ONE TROY OUNCE .999 FINE GOLD." The issue price is $555.00per coin.

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with readingproblems or disabilitiesto read." In deciding to proceed against "Hooked on Phonics," the FTC had to reject or ignore the abundant evidence that phonics teaching is the best way for students to learn to recognize written words quickly and accurately. Gate way was prohibited from telling potential customers that no method of teaching reading has been more successful, or that a great number of parents who school their children at home say its product works. The FTC also dismissed, without reason able cause, the results of a recent, well designed experimental study of" Hooked on Phonics" in schools with low-income urban children. The independent study revealed that those children made uncharacteristi cally high gains in reading competence thanks to "Hooked on Phonics." The com pany's unconditional money-back guaran tee did not deter the FTC from telling the public that the product could not be trusted to meet its claims. The mass media, always attracted to a scandal, interpreted the FTC's action to mean that "Hooked on Phonics"

is a fraudulent product that consumers should avoid. Challenges to the FTC Action After the FTC announced that Gateway was guilty of false advertising, satisfied customers and defenders of phonics pro tested. The FTC said it received thousands of letters from "Hooked on Phonics" cus tomers. Michael Farris, president of the Home School Legal Defense Association, challenged the FTC's contention that read ing can only be taught by trained profes sionals. He reminded the agency that' 'more than 96 percent of home school parent teachers" have no professional training. Farris offered the FTC standardized test data that indicated children aged five to eight who were taught phonics at home on average achieve the 87th percentile in read ing. By contrast, only 24 percent of public school fourth-graders read proficiently, ac cording to the National Assessment of Ed ucational Progress. House Majority Leader Richard Armey 505 headed a congressional delegation that ob jected to the FTC's treatment of Gateway.

James C. Miller III, a former chairman of the FTC, complained that the agency had used the "power of the state to suppress a com peting technology. " Robert Sweet, head of the research department of the U.S. Depart ment of Education in the Reagan adminis tration, strongly questioned the validity of the advice the FTC said it had received from unnamed "outside experts" that "phonics instruction may not help many people with reading problems." Sweet concluded that the FTC had acted against "Hooked on Phonics" in an attempt to disable "the phonics movement in this country." Thanks to the massive protest, the FTC reversed itself, pleading that it had not intended to put Gateway out of business. It would be naive, however, to assume that the FTC had no preconception of the effect of its original action. The product's reputation was largely damaged. Its sales plummeted. Gateway was driven to seek relief in bank ruptcy court.

Who Profits? It is unlikely that anyone will ever dis cover what special interests prompted the FTC to go after "Hooked on Phonics." But we can determine who would benefit most from its demise. (It certainly would not be people with reading problems.) Sweet, who is now president of the National Right to Read Foundation, points out that "the an tagonism of the education industry and its professional associations against teaching intensive, systematic phonics in schools is almost palpable." The obvious winners in the "Hooked on Phonics" affair turn out to be two influential educational organizations, the International Reading Association (IRA) and the National Council of Teachers of English (NCTE). The great commercial suc cess of "Hooked on Phonics" was a con stant embarrassment to those groups, since they strongly promote an alternative ap proach to reading development called "whole language." IRA and NCTE regard direct and systematic phonics teaching as 506 THE FREEMAN • JULY 1996 dangerously anachronistic, and cavalierly dismiss the empirical evidence of its supe riority as bogus.

The groups' devotion to the whole language method is exemplified by their unwillingness to take seriously the disas trous consequences of its mandated use. Whole language is more popular in Califor nia than in any other state. As a result, California students are the worst readers in the nation. Whole-language teaching in Massachusetts has hurt reading achieve ment so badly that last year 40 distinguished professors of linguistics, cognitive science, psychology, and neurology from several eminent universities petitioned the state's commissioner of education to stop promot ing it. According to those experts, whole language's practices' 'run counter to most of the major scientific results of more than 100 years" in their respective fields. The widespread acceptance of the whole language approach by educators, despite the lack of supporting evidence, is ominous. The FTC attack on "Hooked on Phonics"

therefore was more than just a federal agency trying to destroy a small business. The action also represents a setback to effective reading instruction at a time when; according to the U.S. Department of Edu cation, almost 50 percent of American adults are functionally illiterate. These are ex-students, of course, many of whom learned to read by the method recom mended by the IRA and NCTE. Thus the publisher of "Hooked on Phonics" is not the only victim of the FTC's action. The injured parties in this notorious affair number in the tens of mil lions. They are people of all ages across the nation, who, because of the FTC's inter ference, may have lost their opportunity to learn to read in the most effective manner possible. 0 HOMESCHO~NG Practical Tools ~ & Encouragement for Teaching ... and for Life. DYES, send me a Trial copy of Name I Homeschooling Today at no obligation. ------------I Plus, I'll receive 5 more issues (6 total) by Address _ paying your invoice for only $17.95. If I decide I not to subscribe, I'll write "Cancel" on the City State __ Zip _ invoice & send it back.

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