BACKGROUND PAPER

Incomes Policies

in the United States:

Historical Review

and Some Issues

May 1977

Congress of the United States

Congressional Budget Office

Washington, D.C.
INCOMES POLICIES IN THE UNITED STATES:

HISTORICAL REVIEW AND SOME ISSUES

The Congress of the United States

Congressional Budget Office
PREFACE

Inflation, its consequences, and ways to control it

are issues of continuing concern to policymakers, the

general public, and economists. Incomes Policies in the

United States: Historical Review and Some Issues is a

survey of the United States government's attempts to influence directly wage and price decisions through the

use of incomes policies in the post-World War II period.

It also presents an analysis of the various forms taken

by these policies and the problems encountered with them.

This paper is one of several Congressional Budget

Office studies concerning inflation in the economy and

possible policies for controlling it. It was prepared

by George Iden and Joan Schneider under the supervision

of Frank de Leeuw, all of the Fiscal Analysis Division,

at the request of the Senate Committee on the Budget.

Editorial assistance and typing were provided by Patricia

Johnston and Barbara Saragovitz, respectively. In keeping with the Congressional Budget Office's mandate to

provide nonpartisan analysis of policy options, the report contains no recommendations.

Alice M. Rivlin

Director

111

CONTENTS

Preface iii

Summary ix

Particular U.S. Incomes Policies Reviewed ix

Problems and Issues Associated with

Incomes Policies xiv

Chapter I: Historical Experience with Incomes

Policies in the United States 1

Introduction 1

Korean War Period 2

Guideposts of the 1960s 13

The New Economic Policy 28

The Council on Wage and Price Stability 53

Chapter II: Issues and Problems with Incomes

Policies 61

Review of Issues and Problems 61

Desirable Conditions for an Incomes Policy .... 77

TABLES

Page

Table 1. Consumer Prices and Wholesale Prices

by Phases of the Stabilization Program 30

FIGURES

Figure 1. Percent Changes in the WPI, CPI,

and Unemployment Rate, 1948-55 6

Figure 2. Percent Changes in the WPI, CPI,

and Unemployment Rate, 1958-66 18

Figure 3. Percent Changes in the WPI, CPI,

and Unemployment Rate, 1969-76 50

vn

SUMMARY

As a supplement to other macroeconomic policies,

the United States has several times adopted a variety

of incomes policies since World War II. These policies have involved measures by the federal government

to influence directly wage and price decisions. While

the particular rules or standards applied have varied,

as have the institutional arrangements, the general purpose of these policies has been to control inflation.

Associated with the use of these incomes policies

have been both benefits and costs. The incomes policies surveyed have generally produced a reduction in

the pace of inflation; however, at least some of the

reduction has usually been only temporary. The policies have had varying costs associated with them, including costs of administration and compliance, and

some inequities, inefficiencies, and distortions of

markets. Moreover, to the extent that prices are held

down, incomes policies may influence monetary and fiscal policies to be overly expansive. Generally, the

benefits of the incomes policies have been experienced

early, and some of the costs and frustrations associated with the policies became more prominent after a

period of time.

The United States' experiences with incomes policies have involved only a few of many possible approaches

to such policies. The conclusions drawn in this paper

thus apply only to those approaches.

PARTICULAR U.S. INCOMES POLICIES REVIEWED

This paper provides a history and critique of

three principal experiences with incomes policies in

the United States in the post World War II period:

IX

8-478 O - 77 - 2
• The mandatory controls of the Korean War period.

• The largely voluntary guideposts of the 1960s.

• The mandatory controls of the New Economic

Policy, 1971-74.

In addition, the current informal policy is reviewed. This policy involves monitoring wages and

prices, analyzing potentially inflationary situations,

and, on occasion, using persuasion to influence wage

or price decisions.

Korean War Period

After the outbreak of war in June 1950, emergency

legislation was quickly passed to aid military production and to control inflation. Initially, wage and price

controls were thought to be unnecessary. However, by

December, a gradualist approach to controls was begun; by

the end of January 1951, there was a general wage-price

freeze, which was followed by a set of mandatory controls

specifying the conditions under which prices would be

allowed to increase. In addition to regulations concerning allowagle wage and price increases, a variety of

measures were used to reduce demand in some sectors of

the economy and to increase production in other sectors

critical to the war effort. The controls program formally ended in early 1953 in anticipation of the end of

the Korean War.

A large bureaucracy was involved with the formulation and administration of the stabilization program

during the Korean War period. The Stabilization Administrator was in charge of overall policy, with separate

agencies established to administer the program—an

Office of Price Stability and Wage Stabilization Board.

Price advances were far more moderate after the institution of mandatory controls than during the 6 months

preceding their adoption; however, it is not clear how

much the controls themselves contributed to this slowing

in inflation. For one thing, the fear of shortages and

of prolonged military conflict had somewhat abated by

the time controls were adopted.

x
The controls program was also marked by periodic

disagreements among the agencies responsible for the

controls, the Administration, and Congress. Such disagreements hampered the policy.

Guideposts of the 1960s

In the interim between the Korean War period and the

early 1960s, the United States was without an explicit

incomes policy, although public exhortation to exercise

restraint in wage and price decisionmaking was used

during that period.

The guidepost policy was initiated in 1962 at a time

when substantial unused resources and price stability

characterized the economy. The policy was largely voluntary since it was not established by legislation, although intense governmental pressures were occasionally

applied to limit wage and price increases. The guidepost policy was used in conjunction with monetary and

fiscal policies in an attempt to stimulate the economy

without giving rise to premature inflation in sectors of

the economy characterized by a high degree of market

concentration.

The guidepost policy attempted to establish standards for noninflationary wage and price behavior. The

general guidepost for wages was that nominal wage increases shoul»d occur at the long-term rate of increase

in labor productivity for the economy as a whole; the

general guidepost for prices was that prices should fall

in industries with above-average increases in national

productivity, remain constant in industries in which

productivity gains were in line with the national trend,

and increase in industries with below-average productivity

trends.

The guideposts did not have legislative or executiveorder status and thus no formal channels existed to insure that they were observed. Neither was there special

funding for administrative and bureaucratic apparatus

associated with the guideposts. The Council of Economic

Advisers was the group in government most directly involved with the program. Council members, the President,

and other administrative officials used "jawboning" or

XI
"moral suasion" as tools for achieving compliance. These

officials, in other words, applied pressure or persuasion

to labor groups and to large firms in efforts to get them

to modify wage and price changes from those which would

have occurred in the absence of a guidepost policy.

The guidepost policy is generally credited with

lowering the rate of increase in wages and prices during

the period 1962 to 1965. However, as the economy neared

full employment, inflationary pressures intensified. The

wage standard became viewed as unfair in the face of

rising prices; in addition, unions found themselves in

an economic position to win gains substantially in excess

of the wage guideposts. As key wage settlements exceeded

the guideposts, the Administration was forced to abandon

the policy.

The guidepost policy has sometimes been criticized

for not including labor and management groups in the

process of policy formulation and implementation. In

addition, the policy was viewed by some individuals as

unfair because of uneven compliance and uneven application of the standards by the government.

The New Economic Policy

The comprehensive economic controls of the 1970s

were introduced in August 1971, at a time when there

was also substantial slack in the economy. While there

was a cost-push inflation as an aftermath of the demandpull inflation of the Vietnam War period, the inflation

was slowly decelerating. The wage-price controls were

part of a package of policy changes designed to stimulate the economy and to reduce the unemployment rate

without rekindling inflation. The purposes of the controls included lowering inflationary expectations which

had played a major role in perpetuating the price-wage

spiral.

The first phase, lasting 90 days, involved a comprehensive wage-price freeze. Under Phase II of the program, wage increases were in general limited to 5.5 percent per year (plus another 0.7 percent increase in

fringe benefits) and price increases were in general required to be cost-justified. Under Phase III, which began in early 1973, the program was shifted from a mandatory status to a largely voluntary status.

xii
At the time of the shift from a mandatory program

to the largely voluntary program of Phase III, there

was an acceleration in inflation due in large part to

sharp increases in food prices. The higher food prices

were caused by such factors as poor harvests and large

foreign sales of grain. However, the acceleration in

inflation was attributed by many people to the lifting

of mandatory controls. Public and Congressional attitudes developed that favored a return to stricter price

and wage standards and to strict enforcement. Consequently, a second freeze took place in the summer of

1973 and was followed by a program of fairly comprehensive and strict rules under Phase IV. During Phase IV,

a gradual or selective approach to decontrol was followed

and much of the economy was decontrolled by the time the

authorization for the stabilization program expired in

April 1974.

While the economic controls were introduced when

there was excess capacity and slowly decelerating inflation, these underlying conditions became unfavorable

during the life of the policy, as the margin of unused

resources narrowed and as the world-wide commodity inflation, particularly in food and energy, got underway.

The economic controls exacerbated shortages of many

commodities and, in turn, the commodity inflation

(among other factors) tended to undermine support for

the controls.

The controls program during its first two phases

seemed to hold down inflation below what would otherwise have been the case. However, the longer term impact on inflation, particularly the impact of the latter

phases, is more questionable.

A special effort was made in the design and implementation of the 1971-74 stabilization program to keep

the size of the bureaucracy to a minimum and to a degree this effort succeeded. The program, though comprehensive, was administered by far fewer people than was

the case with the Korean War stabilization program.

Even so, the rapid succession of different phases and

different rules was confusing to the public. Moreover,

as was the case with the Korean War experience, some

Xlll
confusion arose because of disagreements among the agencies responsible for the program.

Current Policy

The United States does not currently have a formal

incomes policy in which the government sets standards

to influence wage and price decisions directly. It

does have an agency, the Council on Wage and Price Stability (CWPS), for monitoring and analyzing problems

in specific sectors of the economy. The focus of the

agency is on identifying potential inflationary problems,

including possible inflationary implications of government regulations, analyzing measures that influence

the competitive performance of various sectors of the

economy, and, in general, monitoring wage and price developments. Occasionally, the CWPS has used persuasion

or "jawboning" in attempting to gain a rollback or partial rollback for particular price increases in the

private sector.

It is especially difficult to assess the contribution of the Council on Wage and Price Stability in controlling inflation in the economy. Its influence on

prices is primarily indirect, and it has no legal power

to compel a price or wage rollback. Nevertheless, the

current policy may cause decisionmakers inside and outside of government to evaluate more carefully the inflationary consequences of their actions. For example,

the CWPS administers a program requiring "inflation impact statements" from government agencies which initiate

new rules, regulations or programs that might have a

significant impact on prices.

PROBLEMS AND ISSUES ASSOCIATED WITH INCOMES POLICIES

While some problems were more prominent during particular experiences with incomes policies than others,

there were common threads. Under the guideposts of the

1960s and the New Economic Policy of the 1970s, overly

expansive monetary and fiscal policies exacerbated problems associated with incomes policies. Moreover, for

a variety of reasons, the initial consensus underlying

the incomes policies has tended to break down, which,

xiv
in turn, has hastened the abandonment of the policies.

Achieving effective and equitable administration has

also proved to be a recurrent problem. In addition,

price increases in uncontrolled or uncontrollable sectors (for example, food and fuel in the recent experience) cause difficulties for an incomes policy by exposing the limitations of the rules or standards for wage

and price increases and by eroding the real wage increases implicit in the policy.

Many of the particular problems encountered with

incomes policies stem from the basic difficulty of designing the policy. It needs to alter complex market

relations in an effective and equitable manner without

serious disruptions. Decisions have to be reached

about standards or rules for adjusting wages and prices,

types of incomes to be included, and the degree of comprehensiveness of the program.

Some of the rules or standards used have been

based (in part) on productivity trends in the economy;

however, such general considerations are of limited use

in day-to-day decisionmaking on wage and price changes.

Some of the price rules have involved a fairly mechanical pass-through of cost increases, but such rules have

not accorded much of a role to changes in demand. A

problem with rules in general is that some inequities

will inevitably arise.

Behind the loss of support for the policies lies

the problem of establishing standards that are effective

yet simple, equitable, and not upsetting to normal market conditions. Recurrent issues and problems have been

experienced with the design and administration of the

incomes policies. To include the entire economy under

controls seems fairest to some individuals, but that

may be impractical for administrative and economic

reasons. For example, prices of many commodities are

responsive to world conditions of supply and demand,

and efforts to suppress commodity prices in one country

can entail export controls and can be counterproductive

over a period of time.

The more comprehensive a controls program, the more

likely it is that exceptions to the general standards

will have to be made for reasons of equity and efficiency

xv
Special treatment for low-wage workers, firms needing to

attract more labor, multiproduct firms, and goods traded

internationally, for example, might have to be granted.

A further problem is that a larger organization needed

to run a comprehensive program with allowances for equity

and efficiency considerations also entails higher administrative costs. In addition, there are risks that disruptions in markets and economic relationships will be

aggravated by an incomes policy although the cost of this

cannot be accurately measured.

The survey of past experiences indicates that an incomes policy might be most likely to succeed in reducing

inflation below what would otherwise be the case, with

minimal adverse side effects, when there are substantial

unused resources in the economy, widespread support for

the policy, coordination with other economic policies

(particularly monetary and fiscal policies), and an absence

of major exogenous increases in commodity prices. In

addition, the potential problems associated with incomes

policies are also apt to be less severe under such conditions. These conditions may exist at some points in

time but are unlikely to prevail over a longer period

during which an incomes policy is in effect.

If the adoption of an incomes policy is considered

again, there are some measures that might help to avoid

or minimize problems associated with such policies. For

example, measures to stimulate supply in potential bottleneck industries might reduce the risk of shortages and

other inefficiencies. Labor and management might be consulted about and participate in the formulation of the

policy. Designing wage and price standards with the

possibility of exogenous price shocks in mind might also

help. In general, the problems encountered with incomes policies might be lessened by keeping the policy

loose and flexible. Whether or not such measures could

succeed in avoiding the problems associated with past

incomes policies is, however, uncertain.

xvi
CHAPTER I HISTORICAL EXPERIENCE WITH INCOMES

POLICIES IN THE UNITED STATES

INTRODUCTION

"Incomes policy" refers to a diverse collection of

policy actions through which the government tries to

influence directly wage and price decisions. In contrast,

monetary and fiscal policies concern changes in the

money stock and government receipts and expenditures and

how these indirectly influence prices and overall economic activity. An incomes policy can take forms ranging

from exhortation to mandatory controls and it can be

comprehensive or selective with respect to groups in the

economy to which it applies; it can also be either temporary or permanent in nature.

Varied goals have been associated with the uses of

incomes policies; among these are: (1) improvement of

the unemployment-inflation configuration resulting from

the use of standard monetary and fiscal policies; (2)

dampening of inflationary expectations and hence their

influence on inflation and economic activity; (3) dealing

with administered prices and the power of unions to obtain large wage increases; (4) managing the problems

associated with allocation and capacity constraints during wartime; and (5) providing a means other than the

tax system for income redistribution.1 In the United

States, recent use of and concern with incomes policies

have focused mainly on controlling inflation.

This section presents an historical review and critique of three U.S. experiences with incomes policies

since World War II and outlines the role of the Council

on Wage and Price Stability. For the most part, problems

1. This last goal does not apply to the United States'

experience but has been a goal of some European policies.

8-478 O - 77 - '
encountered with the policies are highlighted and a general appraisal of their effectiveness is given. No attempt is made, however, to give a comprehensive assessment of all the costs and benefits of each policy. Indeed, not all cpsts and benefits can be measured—a lower

rate of inflation under an incomes policy, for example,

may be due to both general economic conditions and the

incomes policy, and it is virtually impossible to distinguish the exact contribution of each. If a policy is

evaluated relative to a "no policy" situation, a similar

problem arises—one cannot say what rates of inflation,

economic activity, and the like would have been experienced in the absence of an incomes policy, although intelligent estimates can be made.

The difficulties associated with distinguishing between the effects of a policy and those of other variables

also relate to current policy discussions and evaluations

of whether or not the current set of economic conditions

is amenable to the successful use of an incomes policy.

In some ways, the current economy resembles conditions

when the 1960s guideposts or 1971-74 controls began—

there is slack and relatively high unemployment in the

system. In other ways, it differs—today's labor force

composition is changed, inflation expectations are still

held by many, and the recent experience with an incomes

policy is remembered. To introduce a policy identical

to the guideposts, for instance, would lead to different

results today than it did in the 1960s. Care must be

taken, therefore, when comparing former experiences and

contemporary conditions.

KOREAN WAR PERIOD

Background

A month after the outbreak of the Korean War in

June 1950, President Truman's Midyear Economic Report

suggested that the U.S. economy was capable of meeting

the increased defense requirements without any dramatic

policy changes or direct controls on wages and prices.

In doing so, it underestimated the strain on the economy
associated with the wartime buildup. Further, active

fiscal and monetary policies were difficult to employ because of resistance to further tax increases and a desire to maintain low interest rates on government securities. Eventually, the Truman administration opted for

a system of comprehensive wage and price controls patterned

after the system used during World War II.

Following Truman's request in July for emergency

legislation to aid military production and to control

inflation, a Defense Production Act was passed by Congress

and implemented in September 1950. This act set up the

Economic Stabilization Agency (ESA) and two subordinate

agencies, the tripartite Wage Stabilization Board (WSB)

and the governmental Office of Price Stability (OPS).

It also gave the President the power to control wages

and prices, allocate materials for the war effort, put

limits on nondefense federal spending, offer production

loan guarantees to business, and restrain credit. While

one part of the act appealed for voluntary restraint by

all groups in the economy, provision was made, nevertheless, for selective or general price ceilings that would

be accompanied by simultaneous wage stabilization efforts.

Selective credit controls in the form of Regulations

X and W were adopted in September and October. Regulation W had been used during World War II and in the postwar period until July 1949. It set minimum down payments

on purchases of the main types of consumer durable goods.

Regulation X regulated the terms of residential mortgages.

Both of these regulations aimed at restricting credit

available for housing and durable goods purchases so that

demand for these would be reduced too. No provision was

made, however, to control credit terms on the sales of

existing housing, except on mortgages insured or guaranteed by the federal government.

The People's Republic of China entered the Korean

War in November 1950, prompting a spending spree by consumers and businesses who anticipated the possibility of

involvement in another war and of associated price and

wage controls. China's entry into the conflict also
shifted U.S. economic policymakers from a state of semiemergency where the acceptance of controls was questionable to one of national emergency in which mobilization

efforts and comprehensive controls would be supported.

The Controls Program

A national emergency was declared and a gradualist

approach to controls announced in December 1950. The approach to controls involved a set of voluntary pricing

standards and the request that several hundred large firms

give advance notice of price increases. New automobile

prices and auto-workers' wages were frozen and rent controls were extended at this time.

An excess profits tax was approved by Congress early

in 1951. Under this bill, firms paid a tax or surcharge

on excess profits in addition to their normal corporate

income taxes.2 This tax was viewed as an effective antiinflation measure because it reduced aggregate demand by

decreasing the funds available to firms for financing

business expansion, and weakened demands for large wage

increases on the grounds that firms were making very

large profits that should be shared with labor.

Problems associated with voluntary and partial controls along with the increasing inflation rate, however,

led to a general wage and price freeze at the end of

January 1951. The administrative structure for carrying

out the economic part of the defense effort—the ESA,

WSB, and OPS—had already been authorized by the Defense

Production Act in September.

A General Ceiling Price Regulation issued in late

January by the OPS froze most prices at the highest

levels at which deliveries had been made between December

19, 1950 and January 25, 1951; the price ceiling covered

2. Excess profits were defined as the increase in a

corporation's profits over a prewar base period or over

a "normal" rate of return on invested capital.
65 percent of the CPI. In a parallel move, the WSB froze

wages and other compensation at their January 25th levels,

Production and allocation controls were used in

addition to ones on wages and prices. They were to address the problem that a "price structure geared to

peacetime patterns of demand cannot be expected to bring

about the pattern of output necessary to an advanced defense economy."3 Incentives for private firms to expand

production for defense purposes were provided by a program of accelerated tax amortization, direct government

loans for fixed investment or developmental work, and

loan guarantees to provide working capital for firms

producing military supplies. Other regulations set

priorities on firms' output for defense purchases, forbade inventory hoarding, authorized government stockpiling of materials, and limited nonessential uses of

materials.

The rapid spending by consumers and producers that

preceded the freeze fell off after January as the military situation stabilized and inflationary expectations

were reduced. Prices in many sectors returned to levels

closer to their usual market clearing ones.4

Functioning of the WSB, OPS, and ESA. The wage controls program began at a time when industrial relations

were unsettled for several reasons. The Taft-Hartley

Act of 1947 had clarified some issues concerning the

standards of conduct expected of unions and employers

but other industrial relation problems were still being

encountered. In addition, wage increases and cost-ofliving escalator clauses added to contracts just before

the freeze had changed the structure of relative wages

to the advantage of some groups and disadvantage of

others. The labor sector of the economy, therefore, was

not in equilibrium when the controls began.

3, Economic Report of the President (U.S. Government

Printing Office, Washington, D.C., January 1951), p. 116

4. The graph on the next page shows the behavior of

inflation as measured by the CPI and WPI.
Figure 1.

Percent Changes in the WPI, CPI, and Unemployment Rate, 1948-55

PERCENT

30

! Percent change in WPI

Unemployment

Rate Percent change

in CPI

-10

1948 '49 '51 '52

CALENDAR YEARS

'54 '55

6
The original mandate of the WSB was to make recommendations concerning wage increases to the Economic

Stabilization Administrator and to carry out wage stabilization functions that he assigned. No dispute-settling

authority was given to the WSB, even if a controversy

arose that involved interpretation or implementation of

its policy.

The first episode in which the WSB differed with

the administration concerned the desirability of voluntary controls and the status of the automobile industry.

WSB members felt that voluntary controls were unrealistic

and, as a result, did not respond in December 1950 to an

administration request for a draft of a voluntary wage

stabilization program. After the OPS froze prices on

new autos in December, the WSB was expected to establish

accompanying wage controls in accordance with the Defense

Production Act.

Strong opposition to such controls was voiced, however, by both the auto-workers' union and the auto manufacturers. The WSB made a recommendation concerning

permissible wage increases in place of controls but this

was shortly made irrelevant by the general wage and price

freeze in late January.

Starting in February, steps were taken to allow more

flexibility in setting wages and prices. The WSB's

Regulation 6 allowed voluntary wage increases of up to

10 percent more than the straight-time wages on January

15, 1950, with the board open to considering other increases in special cases.

Labor members of the WSB, however, became unhappy

with their role in the stabilization program generally,

their lack of dispute-settling power, and the feeling

that workers were being asked to carry most of the burden of the stabilization program. After the issuance

of Regulation 6, they withdrew from the WSB and were

followed by the withdrawal of labor representatives

from all levels of the defense program in late February.
President Truman assumed some of the WSB's powers

during the next three months while also negotiating with

the labor representatives concerning their return to the

stabilization program. He issued several General Wage

Regulations that dealt with escalator clauses, wage rates

for new plants, and tandem relationships among plants.5

In April, the WSB was reestablished and redefined by an

executive order and labor representatives returned to the

defense program. In addition to its wage stabilization

function, the new WSB was given limited dispute-settling

authority. The parties involved in a dispute decided

whether to submit a dispute to the board, which issues

to submit, and whether the WSB's decision would take the

form of a recommendation or a binding mandate. When a

dispute threatened national defense and was referred to

the board by the President, the board investigated the

dispute and made a recommendation to the President.

In another WSB reorganization late in the summer,

14 regional boards and associated regional enforcement

commissions were set up. These boards were under the

supervision of the national board and were to act on

stabilization issues but not on the handling of disputes.

Coordination among the regional boards and consistency

of policy made by them was a problem; the same is true

of the relation of the regional boards to the national

one. The national-level Review and Appeals Commission

reversed 43 percent of the appeals it received from the

regional boards with little explanation of its actions

and of how they fit into an overall set of criteria used.6

To increase price flexibility, the OPS issued a set

of interim price standards in April 1951 for manufactured

goods and machinery that allowed some cost pass-throughs.

These temporary standards were to be in effect until

other regulations designed for particular industries

5. A tandem wage relationship involves wage changes in

one line of work or plant that consistently follow a

wage pattern set elsewhere.

6. Daniel Quinn Mills, Government, Labor and Inflation,

(Chicago: The University of Chicago Press, 1975), p. 35.

8
were prepared. Specific regulations were eventually developed, however, only for several industries considered

to have "highly speculative" markets.7 In markets for

some agricultural goods, speculation was limited by the

setting of a narrow range within which prices could

change in a single trading session.8

In reviewing the Defense Production Act in July

1951, Congress weakened price control powers by prohibiting all price rollbacks, establishing price ceilings

based on percentage rather than dollar-for-dollar markups over costs, and removing quotas on slaughtering beef,

thus opening the way to black markets supplied by unregulated packing houses.9 The July legislation also provided for general pass-through of costs that became effective in November. Relaxation of controls continued

through 1952.

The Steel Industry "Crisis" and the Ending of Controls. Toward the end of 1951, the problem of wage and

price increases in the steel industry gained prominence.

In a sense this industry symbolized the difficulties of

controlling prices in an oligopolistic industry that

dealt with a powerful union and produced goods critical

to the war effort. A willing and efficient labor force,

maximum production, and price stability were difficult

to obtain simultaneously.

Wage negotiations between the union (United Steelworkers of America) and the steel companies became

stalemated because the companies wanted the OPS to establish allowable price increases for steel before setting

wage increases—the industry was asking for price increases greater than those allowed by current regulations,

7. Specific regulations were applied to used machine

tools, feathers and down, and brass and bronze ingots.

8. Wheat prices, for example, were allowed to change

by no more than 10 cents a bushel during a trading

session.

9. Craufurd D. Goodwin and R. Stanley Herren, "The Truman

Administration: Problems and Policies Unfold," in

Craufurd D. Goodwin, ed., Exhortation and Controls,

(Washington, B.C.: The Brookings Institution, 1975), p. 76,

8-478 O - 77 - 4
In an attempt to end the delay in negotiations, Truman

referred the case to the WSB in late December. Three

months later, the WSB recommended that a substantial

wage increase be granted and that certain demands concerning unionization be allowed.

Shortly thereafter, however, the steel firms rejected

the WSB proposal and a steel strike appeared imminent.

On April 8, Truman ordered federal seizure of steel plants

to ward off a strike and to keep steel production going.

This order was declared unconstitutional in early June

and a strike followed later in the month. A settlement

agreeable to all the parties was reached in late July

after Presidential intervention.

In September, the board allowed a wage increase for

coal miners which was below that agreeable to both the

United Mine Workers' Union and the concerned coal companies. In consequence, the coal miners struck in

October. Almost two months later, Truman approved the

higher wage increase demanded by the coal miners, arguing that it was in the interest of industrial peace and

an orderly transition to a new administration. In response, the Chairman and industry members resigned from

the WSB, thus effectively ending wage controls. Controls

were formally eliminated early in 1953 after the presidential election and in anticipation of the end of the Korean

War.

Evaluation of the Korean War Controls

There was a sharp increase in the inflation rate

between the outbreak of the war in June 1950, and the

freeze on wages and prices and imposition of mandatory

controls in late January 1951. This increase came as

consumers rushed to buy goods and businesses to increase

inventories; increased defense spending added further

inflationary pressures. In addition, some wage contracts

were voluntarily reopened and renegotiated to include

wage increases and cost-of-living clauses. Some of these

wage negotiations and price increases were undoubtedly

undertaken in anticipation that controls might be

10
forthcoming and as an effort to beat the effects of such

controls.1* Much of the work of the OPS and WSB after

controls began involved trying to correct distortions

in the wage and price structures which occurred between

the outbreak of the war and the freeze in January 1951.1:L

Throughout the period, the OPS-WSB-ESA triad had

some organizational problems and policy differences.

Presidential and Congressional intervention worsened this

situation at times. When renewing legislation authorizing the controls programs in 1951, for example, Congress

weakened the controls by setting some pass-through standards rather than letting the appointed agencies do this

when they thought it was appropriate. Together, these

factors hampered the administration and potential effectiveness of the program.

Evaluations of the period by economists suggest

that the controls program had a moderate role in shaping

economic conditions and in dampening inflation associated

with the Korean War. In addition, they did not cause

severe supply bottlenecks or disequilibria within markets and a consequent price explosion when the program

ended.

Some feel that the effectiveness of controls would

have been more significant if they had been imposed at

the outbreak of the war when there were large shifts in

the amount and composition of output to deal with in

addition to changes in expectations about future economic

10. The percent change in the CPI was -1.8 in 1949, 5.8

for 1950, and 5.9 for 1951. The percent change in the

WPI was -5.9 for 1949, 14.8 for 1950, and 1.4 for 1951.

(Percent changes are December-to-December ones.) See the

graph for 1948-1955 again.

11. The changed relative wage structure that resulted

from some wage contracts being renegotiated is an example.

For the WSB to allow equal percentage wage changes across

the board would have perpetuated this changed structure

of relative wages even though it did not reflect significant shifts in the supply of and demand for labor among

markets.

11
and political events. Controls might have helped avoid

panic buying and hoarding while allowing time for policies concerning fiscal, credit, and industrial loans to

take effect. This position, in other words, is that controls were imposed too late to have maximum effectiveness,

In turn, it is felt that they were also continued on a

comprehensive basis when selective controls on prices of

a few scarce materials would have sufficed to limit

inflation.

Whether or not controls were initiated too late,

nevertheless, they may have helped limit wage and price

increases relative to what they would have been without

the program. A study that considers the wage side of

the stabilization program concludes that the record is

mixed.12 When compared with the Second World War, wage

rates increased at a slower rate during the Korean conflict. Economic conditions during the Korean War, however, were less expansive and thus there was generally

less pressure for large wage increases during the period.

The extent to which the WSB restrained wages is thus unclear. From January 1950 (before the war began) to

January 1953 (just before controls program ended), money

wages increased faster than the cost-of-living and real

hourly earnings increased 6.9 percent in the durable

goods industry, 3.8 percent in the nondurable goods industry, and at least 5.4 percent in 15 of 22 industries

in the study.13 Real wages were thus allowed to increase during the period, but some WSB members considered their obligation to be the achievement of peaceful

industrial relations as well as wage restraint. The WSB

contribution to harmony or disharmony in industrial relations, however, cannot be explicitly measured.

Large increases took place in the CPI and WPI in

1950 and in the CPI again in 1951; most of this is explained by the spending spree in 1950 that occurred before controls began. In 1952, the WPI fell below its

12. For a detailed discussion, see D.Q. Mills, op. cit.,

Chapter 2.

13. Ibid., p. 36.

12
1951 level while the CPI increase was modest. Much of

this decline in inflation was due to market pressures

rather than to the controls—price increases in anticipation of controls had caused price levels to be far above market-clearing ones before the freeze took place.

There was no spurt of spending and consequent inflation when controls were removed. Real GNP growth was

8.7 percent in 1950 and 8.1 percent in 1951 but fell to

3.8 percent in 1952 and 3.9 percent in 1953. The sluggish general level of economic activity thus helped dampen

inflationary pressures and generate conditions favorable

to the eventual ending of controls in 1953.

GUIDEPOSTS OF THE 1960s

Background and Statement of the Guideposts

During the late 1950s and early 1960s, the U.S.

economy operated at less than full capacity; growth was

sluggish and unemployment moderately high (it averaged

5.3 percent for 1955-61). An increase in economic activity in 1955 was followed by two recessions during which

average unemployment was high and investment fell.

Nevertheless, prices did not fall, as expected, but continued to rise throughout the period. In addition to

this lackluster domestic situation, the United States'

balance of payments position worsened. As the prices of

U.S. goods rose relative to those of other countries,

and as other countries advanced technologically, the

United States' relative trade advantage fell and its international reserve declined.

Anticipating the steelworkers' contract negotiations

upcoming in 1962 as well as the effects on inflation of

expansionary macro policy, the President's Council of

Economic Advisers (CEA) in 1962 made a formal statement

of a policy for wage and price increases that would not

be inflationary. The "guideposts," as this policy came

to be called, involved voluntary standards for wage and

price increases and thus were a less formal incomes policy than had been used during the Korean or Second World

War periods.

13
At the time the guideposts were initiated, the unemployment rate was relatively high by historical standards, only about 83 percent of manufacturing capacity

was being used, and the CPI and WPI were fairly stable.

The economy had considerable room for growth and structural imbalances were few. The Kennedy Administration

did not have to cope with inflationary forces associated

with wartime production, inflationary expectations, or

excess demand. The problem was to devise a program to

stimulate production and employment and to address the

balance of payments situation without also generating

inflation.

The guideposts were used with expansionary monetary

and fiscal policies designed to achieve this. Specifically, the guideposts were to restrain price increases

that did not reflect increases in unit labor costs and

wage increases in excess of productivity growth. They

were to prevent groups with strong market power (for

example, large firms with little competition or labor

unions) from dissipating expansionary macroeconomic policy measures into wage and price increases while the

economy as a whole and key industries still had considerable slack and unemployment.

Since the guidepost policy was voluntary and was established by the President and his Council of Economic Advisers, no new agencies or administrative groups were

established to formulate and oversee the program, handle

disputes and the like. The Council of Economic Advisers

was responsible for formulating the policy and assumed

some responsibility for monitoring wage and price

decisions.

The guidepost standard set up for wages was:

The general guide for noninflationary wage behavior is that the rate of increase in wage rates

(including fringe benefits) in each industry be

equal to the trend rate of overall productivity

14
increase. General acceptance of this guide would

maintain stability of labor cost per unit of output for the economy as a whole—though not of

course for individual industries.14

A 3.2 percent trend rate of productivity growth was

established in 1964 as the guidepost for wage increases.

Problems arose, however, from the use of a productivity

standard. Given that productivity growth is uneven over

the course of a business cycle, the average rate of productivity growth during the slack years in the late 1950s

and early 1960s differed from that experienced as the

economy approached full employment.

The standard for price changes was:

The general guide for noninflationary price behavior calls for price reduction if the industry's

rate of productivity increase exceeds the overall

rate—for this would mean declining unit labor

costs; it calls for an appropriate increase in

price if the opposite relationship prevails; and

it calls for stable prices if the two rates of

productivity increase are equal.15

Exceptions to the standards were made for hardship

cases and others where structural imbalances might otherwise occur. Wages could exceed the general rule, for

example, if an industry would otherwise have trouble

attracting sufficient labor or if wage rates were very

low for one group of workers when compared with wages

earned by similar labor elsewhere. The guide for prices

should be exceeded by an industry in which profits were

too low to attract the needed amount of capital.

14. Economic Report of the President (Washington, D.C.,

U.S. Government Printing Office, January 1962), p. 189.

15. Loc. cit.

15
Profits were not directly regulated but, because of

the standards on wage and price changes, were expected

to rise in the long run at the same rate as wages and

national income. This meant that the relative shares of

national income going to profits and to wages would not

be altered by the policy.

The Guidepdsts Period

The Steel Confrontation and Its Aftermath, 1961-64.

In 1961, the administration feared that steel companies

would raise steel prices in October when a wage increase

for steelworkers, part of a 1959 agreement, was to take

effect. In response, President Kennedy and his CEA

urged the steel companies to absorb the October wage increment and not follow this with an increase in prices.

Steel prices were not raised but whether this was due to

Presidential influence or not is unclear. Some sources

close to the industry reported that softness in its

markets meant that steel leaders were not inclined to

raise their prices at that time anyway.16 President

Kennedy then wrote to the steelworkers' union requesting

restraint in the upcoming wage negotiations scheduled

for March 1962. The union settled on terms that left

wage rates unchanged for 1962 but gained fringe benefits

of about 10 cents per hour; the increase in hourly compensation was about 2.5 percent and thus within the

limits suggested by the guideposts.

The confidence in the guidepost policy that came with

this success in persuading a group to limit its demands

was threatened the following week, however, when six of

the twelve largest steel companies announced a general

3.5 percent price increase on all of their products.

This happened in spite of the favorable wage agreement

just negotiated and industry operations that were below

16. William J. Barber, "The Kennedy Years: Purposeful

Pedagogy," in Craufurd D. Goodwin, ed., op. ci't. , p. 160.

16
two-thirds of capacity. The price increase was justified by the firms in terms of profit levels and the need

to attract capital for long-run expansion; it was first

announced by the U.S. Steel Company and followed the

next day by five other companies. It may be that U.S.

Steel had grounds for the price increase when judged by

the guidepost criteria whereas the other firms did not.

Some confusion about whether the guideposts were being

violated or not arose, in part because most company statements (concerning costs, productivity, and the like) referred to their individual positions while the government's statistics referred to the industry as a whole.

A confrontation between the President and the steel

companies followed. Government officials, the President,

Congressmen, CEA staff and others pressured the steel

companies to retract their price increases. Their efforts

worked and steel prices were down to their earlier level

within several days. The episode made the guideposts a

new factor that firms would henceforth have to consider

when making price decisions. It also raised the question

of what would happen should firms and unions ignore the

guidepost standards when setting prices and wages.

Reliance on voluntary compliance and occasional

Presidential intervention as the enforcement mechanisms

for the guideposts worked fairly well in moderating price

and wage increases through 1965. They were not effective,

however, in achieving price reductions in high productivity industries where unit costs were falling.1

1965-1966. During the 1961-64 expansion, real GNP

grew at an average annual rate of 4.4 percent while the

unemployment rate fell from 6.7 percent in 1961 to 5.2

percent in 1964. The GNP increase was associated with

rapid productivity increases and labor force growth,

along with the reduction in unemployment.

17. The automobile industry is one where productivity

increases were above average in the early 1960s. Since

prices were not reduced as productivity increased, auto

companies' profits grew noticeably and this led to a

subsequent wage settlement above that recommended by the

guideposts.

17

8-478 O - 77 - 5
Noticeable changes occurred during 1965. The unemployment rate in December was down to 4.0 percent, the

administration's goal. The CPI and WPI, however, increased at faster rates than during the previous five

years.18 Meanwhile, mobilization efforts and defense

spending associated with the Vietnam War rose sharply in

1965. President Johnson, however, did not ask at that

time for increased tax rates to help finance war and

Great Society expenditures and to restrain aggregate demand in the economy.

Given these conditions, administration economists

renewed their focus on the use of wage and price guideposts for controlling inflation. An inter-agency working

group on price and wage statistics was established to improve the flow of information needed to predict large

wage and price changes and to provide a better factual

basis for wage and price recommendations.

To achieve a more satisfactory balance of international payments, guidelines for business investment and

the extension of bank credit abroad were issued.19 In

contrast with the wage and price guideposts' development

by the CEA, these guidelines were drafted after consultation with major organizations and banks involved.

Figure 2. Percent Changes in the WPI, CPI, and

Unemployment Rate, 1958-68

10

o

DC

0

-5

Unemployment Rate

Percent change in CPI

A

V

*T "V

Percent change in WPI

I I i I

1958 '60 '62 '64

CALENDAR YEARS

'66 '68

18. The highest percentage increase in the WPI between

1960 and 1964 was 0.5 (December-to-December basis) and

it declined in three of those years; in 1965, the WPI

increase was 3.4 percent. See Figure 2.

19. These programs were announced by the Federal Reserve

Board and the Department of Commerce in March 1965.

18
By 1966, forces suggesting a breakdown of the guideposts were evident and growing. As the administration

put increased pressure on the prevention of wage and

price increases, major labor unions' antagonism toward

the policy intensified as their real wage increases were

limited. Several unions "sounded as if they cared

almost as much about destroying the guideposts as about

getting wage increases."20 Unions felt the guideposts

prevented them from best representing their members'

interests and demanding high wage increases they otherwise would have sought. The administration realized

that one price of trying to force observance of the guideposts was likely to be increased problems during labor

negotiations and hence the increased possibility of

strikes. Federal mediators, moreover, found themselves

in a precarious position since their function is usually

seen as the maintenance of industrial peace rather than

as the restriction of wage increases.

A number of crucial wage negotiations took place

during 1965 and 1966.21 In the fall of 1965, steelworkers

settled for a 3.2 percent increase in wages and benefits

after executive branch intervention in its negotiations

and in spite of a 4.1 percent settlement by aluminum

workers during the summer.

A strike by dockworkers in East Coast and Gulf ports

began in mid-June and was settled at a 3.2 percent wage increase in September after government intervention. The

intervention was on the part of the Maritime Commission

which was trying to slow the rapid relative rise in maritime wages that had been occurring over several decades.

Using the guidepost standards, the Commission announced

that subsidy payments would not be increased to cover

wage increases above 3.2 percent. Subsequently, the

Commission cut some previously scheduled subsidy payments

in cases where wage increases exceeded this standard.

Their action was praised by the Secretary of Commerce

(who had jurisdiction over the Commission) but overruled

by him because of its retroactive effect. The strike

was finally settled in September with a 3.2 percent wage

increase.

20. John Sheahan, The Wage-Price Guideposts (Washington

D.C.: The Brookings Institution, 1967), p. 48.

21. A more detailed discussion of this period may be

found in John Sheahan, op. cit., Chapter V.

19
A 6.3 percent transit settlement in early 1966 was

only one of the settlements that year that exceeded the

guideposts. Government intervention in a construction

worker-contractor agreement in New Jersey probably led

to a brief strike and some ill feelings but it did not

achieve a final settlement substantially different from

the original one allowing 13 to 17 percent increases in

earnings each year of the contract. Following that,

attention focused on scheduled pay increases for federal government employees under the Federal Salary Reform Act of 1962. This bill's purpose was to increase

federal salaries over time so that they would be comparable with private sector salaries. For 1966, however,

the scheduled increases exceeded the amounts suggested

by the guideposts. At one point, Budget Director

Charles Schultze argued that "It [Ihe federal pay increase) isn't really catch-up, it has to do with employees who are grossly underpaid. It is a need basis, not

a comparability exception."23 In the end, a 2.9 percent across-the-board increase that was within the guidepost standard was approved. This broke away from the

comparability principle for federal salaries, however,

by making the percent increase standard for all categories rather than adjusting to the structure of differentials between the public and private sectors.

A strike by airline machinists took place in July

and August, 1966—an event that many viewed as the undoing of the guideposts. The machinists argued that

large wage increases were justifiable, even if above the

guideposts, because of the airlines' favorable profit

positions and their "ability to pay" the wage demands

without requiring increases in airline fares. An August

settlement providing wage increases of 4.9 percent was

22. Sheahan, op. cit., pp. 52-53.

23. "Federal Salaries and Fringe Benefits," Hearings

before the Subcommittee on Compensation of the House

Committee on Post Office and Civil Service, 89th Congress, 2nd session (1966), p. 271, from Sheahan, op.

cit., p. 56.

20
seen by the IAM president as one which "destroyed all

existing wage and price guidelines ...in existence."24

Administration officials suggested that, given industry

productivity growth of about 8 percent, unit labor costs

could continue to decrease, even with the 4.9 percent

wage increase. By saying this, however, they essentially

betrayed the position of the CEA that wage and price behavior should be based on national productivity criteria,

specifically that prices should fall in industries with

above-average productivity growth.

During airline negotiations in May, President

Johnson revived the tripartite Labor-Management Advisory Committee (LMAC) which had been established by

Kennedy in 1961 as an advisory group to "create a mechanism through which the public stake in price stability could be effectively transmitted."25 The LMAC had

become inactive in the fall of 1964 and its revival by

Johnson, for the purpose of having the productivity

principle endorsed during the airlines talks, was too

late for it to be effective.

A wage settlement by General Electric of about 5

percent reinforced the impression from the IAM decision

that there was a new acceptable wage guideline of 5

percent. That is, the trend growth of productivity was

no longer considered to be the standard for setting

wages.

1967-1968. The January 1967 report of the CEA reviewed the experience with guideposts, noting where

they had not been observed, and outlined government

policies to promote observance of the guideposts. The

CEA also foresaw, however, that the unions had valid

reasons for not cooperating since the CPI, often used

as a cost of living measure, had increased 3.0 percent

in 1966 and corporate profits had increased very

24. James L. Cochrane, "The Johnson Administration:

Moral Suasion Goes To War," in Goodwin, op. ci t., p. 262.

25. Barber, op. cit., p. 142.

21
rapidly under the guideposts. It continued, nevertheless

to argue that wage increases be tied to productivity

rather than to profit and cost-of-living increases since

the latter would increase unit labor costs at a rate

that would require living costs to continue increasing

and thus perpetuate the wage-price spiral. The CEA

report also urged producers to absorb cost increases

to the maximum extent feasible and to take advantage of

every opportunity to lower prices.

During 1967, it became obvious that the cost of the

war had been seriously underestimated. It also became

obvious that wage and price guidelines would not effectively restrain inflationary forces while the economy

operated at capacity and excess demand existed. Talk

of whether and how to revive a guidelines policy took

place within the administration and with academic economists. Meanwhile, in August, a tax surcharge bill was

sent to Congress; it was not passed until late in June,

1968.

In February 1968, President Johnson set up a Cabinet

Committee on Price Stability (CCPS), consisting of the

Secretaries of Commerce, Labor, and the Treasury, the

Budget Director, the CEA Chairman, and a supporting

professional staff. This agency was to be removed from

the presidency and was not to become involved in specific wage or price decisions. One action the CCPS

took in July was to send a statement of the guidepost

principle and an appeal for responsible settlements

"in the national interest" to the heads of all major

unions and companies; the statement was given broad

press coverage. Meanwhile, the CEA practiced "jawboning"

or "moral suasion" in some situations, and the government carried out a program of price persuasion during

1967 that involved meetings between government officials and representatives from industries viewed as

potential problems.

While some felt that the guidepost policy had collapsed in 1966 and could not be resurrected, the administration continued its efforts along these lines.

Following the 1968 elections and in anticipation of the

coming change in administrations, however, the efforts

22
of the administration concerning its incomes policy

slowed. With the change of administrations, the dismantling of the CEA-CCPS-LMAC triad took place.

Evaluation

Economic conditions when the guidepost policy began

were favorable to its being effective. The economy was

operating below full employment and supply bottlenecks

and structural imbalances between labor groups or sectors

of the economy were minimal. Absent was an "inflationary psychology"—that is, expectations of rapidly increasing prices—such as aggravated matters in the 1970s.

Some administration officials and advisers originally conceived of the guideposts as an educational device rather than as a system of informal price controls. Their hope that an informed public would voluntarily change its usual price and wage-setting behavior and act as a self-disciplinary force was not

realized, however.

A number of studies suggest that the guideposts

were effective in restraining wage and price increases

relative to their expected behavior without such a

policy.26 Both prices and wages showed greater stability during 1962-66 than they had in the post World War

II period. Comparing 1962-66 with the preceding fouryear period when growth was slower and unemployment

higher, inflation was about the same but the rate of

wage increases less under the guideposts.

Numerical figures from various studies suggest that

the increase in wholesale prices for manufactured goods

was from 0.6 to 1.5 percentage points less per year

26. A fuller description of these studies may be found

in Sheahan, op. cit., Chapter VII; various issues of

the Brookings Papers on Economic' Activity (Washington,

B.C.: The Brookings Institution); and George L. Perry,

"Wage and Price Guideposts," American Economic Review,

September 1967.

23
during 1961-65 than expected from earlier relationships

of relevant economic variables. For manufacturing wage

increases, the actual increase was less than the predicted increase by 0.9 percentage points per year for

1961-66; the difference in total compensation increases

was slightly less.27

After mid-1965, both prices and wages began rising

more rapidly but still went up more slowly than would

be expected from earlier relationships. While the individual studies and figures mentioned above are subject

to reservations, the general conclusion is that the

guideposts did help to restrain price and wage increases

during the period when there was slack in the economy

prior to 1966.

As the economy moved closer to full employment in

1965-66, the voluntary guidepost program became less

effective in restraining wage and price increases.

Statements by prominent economists suggest that this

was not unexpected. Some argued that policies appropriate when an economy has excess capacity and high

unemployment are not likely to still be the appropriate

ones when the economy is near full employment. Guideposts may be useful in preventing inflation from developing as an economy moves toward full employment but

they cannot prevent inflation if there is general excess demand in the system. Should the government depend on guideposts or a similar policy during a period

of excess demand, it could, according to one economist

involved with the guidepost policy, "mainly be to shift

the blame for inflation away from the government policies that permitted total demand to be excessive."28

27. The econometric studies from which these numbers

are taken are reviewed in Sheahan, loc. cl't.

28. Gardner Ackley, "The Contribution of Guidelines,"

in George P. Schultz and Robert Z. Aliber, eds., Guidelines, Informal Controls, and the Market Place,

(Chicago: The University of Chicago Press, 1966) p. 68,

24
Moreover, an incomes policy used when an economy is

near full employment is more likely to cause supply

bottlenecks unless it allows relative prices to rise

when needed.

The voluntary guideposts broke down as the economy

operated near capacity. In contrast, under a system

of mandatory controls, inflationary pressures might well

not have been realized gradually (through noncompliance

with the program) and when needed to reflect the relation of demand and supply; instead, they might have

been constrained but then released all at once when the

program ended.

Another problem encountered with the guideposts is

also applicable to any other program which uses a

similar standard (i.e., productivity trend), whether

the program be voluntary or not. Industrywide or nationwide changes in productivity are hard to measure

and are not directly used in daily decisionmaking.

When making specific wage and price decisions, firms

and unions tend to consider such things as input costs,

recent price or wage decisions by other groups, market

shares, profits, fringe benefits and working conditions

rather than national productivity trends.

Large firms and organized labor received much attention under the guideposts policy. With respect to

prices, there was a feeling that decisions made by

firms in concentrated industries were more likely to

be inflationary than those of competitive firms.29

While the prices of goods produced in concentrated industries are more stable over a business cycle, empirical evidence shows no recognizable long run disparity

in the average rates of price change between concentrated and unconcentrated industries.30 Moreover, while

29. This same idea was also part of the thinking associated with the 1971-74 Economic Stabilization

Program.

30. Ralph Beals, "Concentrated Industries, Administered

Prices and Inflation: A Survey of Recent Empirical Research," report prepared for the Council on Wage and

Price Stability, Washington, B.C., June 1975.

25

8-478 O - 77 - (
firms in concentrated industries might charge higher

prices than they would if they were in a more competitive situation, this price advantage does not continuously increase, as would be required if firms in concentrated industries were a prime cause of inflation.

With respect to wage behavior, different results

come from studying wage behavior in highly organized

industries and in those more subject to market forces.

A study considering such behavior finds that for the

more concentrated and visible industries, the average

annual wage change from 1963 to 1966 was 2.1 percentage

points lower under the guidepost policy than from 1954

to 1957; for the less visible, the slowdown between the

same two periods was 0.5 percentage points.31

The evidence thus suggests that the guideposts slowed

wage increases in markets where concentration exists.

Having the government focus on certain groups' price and

wage decisions may seem discriminatory and perhaps as a

form of harrassment. Nevertheless, to the extent that

such groups are in the public spotlight and either supply goods that are inputs for other firms or negotiate

wage increases that are followed by others, an effort

to regulate their price and wage increases may be more

effective than if a similar effort were aimed at a small

single-profuct firm or a small labor group.

A lesson learned from the 1965 maritime workers'

negotiations is that there may be channels open to the

government for holding down wages or prices other than

direct influence on these or intervention in wage negotiations and price decisionmaking. In situations

where the federal government controls conditions of

entry into a market and prices charged for services

31. George L. Perry, op. cit., as quoted in Sheahan,

op. cit., pp. 88-89.

26
(e.g., airlines, trucking, railroads, communications,

banking, and so on), measures exist that would indirectly restrain wage settlements by limiting the ability

of firms to pass on the costs of high settlements in

the form of higher prices. Similarly, import and other

regulations and sales from government stockpiles are

options for limiting wage and price increases in some

cases.

The 1965 guidelines for foreign investment and bank

loans abroad were aimed at the U.S.'s international

position and have received less attention than the wage

and price guideposts. One economist argues that the

international guidelines were more effective in achieving their goals than were the guideposts and that they

also generated less resentment from groups to whom they

were applied.32 In essence, these international guidelines were a selective rather than a comprehensive form

of an incomes policy. Their greater success is attributed to consultation with involved sectors during their

formulation, the fact that they applied to and therefore

inconvenienced or "harmed" a relatively small proportion of the economy, and the possibility that mandatory

controls would replace the informal and voluntary ones

should they not be observed. A similar stick-in-thecloset with respect to wage and price guideposts (i.e.,

mandatory controls on wages and prices), however, was

not considered by the administration to be a viable

policy alternative at the time. The economic distortions generated by controls and their intensification

over time were felt to outweigh the reduction in inflation that might be obtained through their use.33

32. A fuller discussion is in Douglass V. Brown, "Report,"

in Schultz and Aliber, op. cit., pp. 267-269.

33. Cochrane, op. cit., p. 269.

27
THE NEW ECONOMIC POLICY, 1971-1974

Background

As the Nixon administration took office in 1969,

growth of real GNP was falling, unemployment was around

3.5 percent, and the rate of inflation was increasing.

The accelerating inflation of the mid-and later-1960s

had begun to generate an "inflation psychology" in which

expectations of future inflation and "catch-ups" for

past inflation often influenced price and wage decisions,

fringe benefits, and escalator clauses.

A policy of restrictive monetary and fiscal measures

was expected to cause some slack in the economy and

thereby lower the inflation rate. In addition, efforts

to get the public to reduce its expectations of future

inflation were made, with the hope that this would lead

to fewer and smaller price increases as well as smaller

compensation increases. These efforts relied on persuasion—for example, public statements by administration

officials that inflation in the future would decrease

because of the government's monetary and fiscal actions.

A policy of having the CEA make periodic "inflation

alert" statements began in June 1970. These alerts

were to call attention to significant wage and price

increases and to analyze their impact on the general

price level. The basic purpose of these alerts was educational rather than regulatory and only three were

issued (August and December 1970, April 1971). While

alerts publicly analyzed the relations between costs,

productivity, and non-inflationary price changes, they

avoided labelling specific wage or price changes as

inflationary or deflationary. This reluctance to evaluate an increase as desirable or not was due to the

problems inherent in looking at individual price or

wage changes in isolation. It is unclear, moreover,

34. Some feel that the effect of such public statements

was undermined by Nixon's laissez faire attitude and

his philosophical opposition to controls which may

have been seen as an invitation to increase wages and

prices without fear of retribution.

28
how the alerts and a better informed public were supposed to help control inflation. It may be that by

publicizing the wage and price increases the government

increased the public's awareness of inflationary forces

and thus also increased their expectations of price increases, which in turn would aggravate rather than correct an existing inflationary situation.

Large wage settlements in the construction industry

in the summer of 1969 upset government officials who

feared that there would be inflationary secondary effects should other labor groups bargain for similar

terms. In September, a Cabinet Committee on Construction was set up to develop training programs to achieve

a large increase in skilled labor in the industry so

that there might be less pressure for large wage increases. A tripartite Construction Industry Collective

Bargaining Commission (CICBC) was also established. Its

task was to increase the size of the construction work

force, smooth out the seasonal pattern of employment in

construction work, and more actively involve national

labor organizations and contractors' groups in dispute

settlements. In February 1971, after the CICBC failed

to respond to President Nixon's request for a plan to

slow construction wage and price increases, Nixon suspended the Davis-Bacon Act. (This act requires that

laborers working on federal projects be paid at rates

equal to those prevailing in the locality where the

construction takes place.) A month later, this suspension was lifted after labor unions agreed to participate

in a tripartite group whose function was to reduce construction worker wage increases to about the 6 percent

rate they had experienced in 1961-68. This group became the Construction Industry Stabilization Committee

(CISC). CISC was to interact with the craft dispute

boards representing major segments of the industry in

determining acceptable compensation increases. In

effect, the government set up selective and mandatory

controls for the construction industry.

29
The Controls Program

As the restrictive monetary and fiscal actions took

effect, the growth of real output slowed and unemployment grew, but inflation remained strong. See Table 1

for data concerning the CPI, WPI, and unemployment rate.

Real GNP grew at 5.5 percent in the first half of 1968

and 2.9 percent in the second half. In the first half

of 1969, real GNP grew at a 2.8 percent rate and then

was slightly negative for the second half of 1969 and

for all of 1970. In the first half of 1971, however,

real GNP growth increased to 6 percent. A further slowdown in economic activity might have lowered the rate of

inflation but was undesirable because of its effects on

output growth and unemployment.

In an attempt to bring down the inflation rate without further slowing economic activity, President Nixon

announced a comprehensive 90-day freeze on all wages,

prices, and profits beginning August 15, 1971. This

freeze was the beginning of an incomes policy that was

to include a less severe set of controls after the

freeze. In imposing the freeze, the President used

authority granted by Congress in the Economic Stabilization Act of 1970.35

Behind the decision to initiate a comprehensive incomes policy were the recent performance of the economy,

35. The act was originally introduced by Congressional

Democrats. Support of the act was felt to imply a willingness to take steps to control inflation and thus to

contrast with the administration's policy of monetary

and fiscal gradualism and Nixon's philosophical opposition to controls. In amending and renewing the act in

1971, after some administration officials had endorsed

the idea of controls or guideposts, Congress carefully

defined the authority given to the President by the act,

30
TABLE 1. CONSUMER PRICES, WHOLESALE PRICES, AND UNEMPLOYMENT RATE, BY PHASES OF THE STABILIZATION PROGRAM

(SEASONALLY ADJUSTED COMPOUND ANNUAL RATES)

Price Indexes and

Components

(Percent Changes)

CONSUMER PRICE INDEX

All Items

Food

Meat, poultry, fish

Nonfood commodities

Energy products l>/

Services a/

All Items Except Food

WHOLESALE PRICE INDEX

All Commodities

Farm products, processed

foods and feeds

Farm products

Processed foods and

feeds

Industrial commodities

Hides

Fuels

Lumber

Metals

Selected stage-ofprocessing indexes

Crude materials d/

Intermediate materials

Consumer goods d/

Unemployment Rate

(Percent) e_/

DATA SOURCES : From Marvin

1969

12 Months

(12/68-

12/69)a/

6.1

7.2

11.2

4.5

3.1

7.4

5.7

4.8

7.5

8.4

6.8

3.9

3.7

4.0

-8.3

9.8

10.6

d/ 3.8

2.9

3.5

1970

12 Months

(12/69-

12/70)a./

5.5

2.2

-.6

4.8

3.6

8.2

6.5

2.2

-1.4

-4.7

0.8

3.6

.5

11.1

-4.4

2.7

4.7

3.2

3.9

5.0

1971

8 Months

Prior to

Freeze

(12/70-

8/71)

3.6

4.7

2.2

2.6

0.7

4.5

3.4

4.5

5.5

7.0

4.6

3.9

4.6

-.1

29.6

6.1

2.1

5.8

1.9

5.9

Kosters, Controls and Inflection:

Phase I

3 Months

(8/71-

11/71)

2.0

1.3

6.6

1.0

-.7

3.1

2.3

2.0

6.5

6.9

5.0

1.1

3.2

2.5

2.4

1.0

2.6

1.0

1.1

6.0

Phase II

14 Months

(11/71-

1/73)

3.7

6.7

13.0

2.5

2.4

3.5

2.8

6.8

14.9

20.7

11.4

3.6

21.0

5.9

12.0

3.3

10.8

4.0

2.4

5.6

Phase III

5 Months

(1/73-

6/73)

8.3

20.8

39.6

4.6

18.3

4.3

5.0

21.7

50.2

75.5

38.2

10.8

-6.0

19.1

46.4

10.8

23.9

12.9

7.0

4.9

Freeze II

2 Months

(6/73-

8/73)

3.8 c/

0.9 c/

-13.5 c/

3.0

2.5

5.3

3.7

-13.7 c/

-34.0 c/

-35.0 c/

-34.9 c/

4.8

11.6

10.4 '

-9.6

9.5

18.2

4.8

3.6

4.8

Phase IV

8 Months

(8/73-

4/74)

11.5 c/

17.9 c/

5.9 c/

11.1

62.1

9.5

10.4

19.7 c./

13.6 c/

12.4 c./

14.8 c/

24.0

1.2

76.3

14.0

31.4

69.1

25.8

18.6

4.9

PostControls

8 Months

(4/74

12/74)

12.2

11.7

3.6

12.6

3.9

12.5

12.2

19.8

13.8

-1.4

25.9

22.5

0.2

51.9

-17.7

25.2

1.1

25.4

17.6

5.9

The Economic Stablization Program in Retrospect, (Washington, D.C.: American Enterprise Institute for Public Policy Research, 1975), with employment figures

added. U.S. Department of Labor, Bureau of Labor Statistics; Data Resources, Inc. data bank.

a/ Not seasonally adjusted.

b/ Index is calculated as a weighted average of the indexes for gasoline, motor oil, fuel oil, and coal, using December

1972 weights.

c_l For these components, price changes are measured using July 1973 instead of August 1973 to reflect the early

release from the 60-day freeze of food prices on 18 July 1973.

d/ Except food,

e/ Monthly average of seasonally adjusted rates.
political pressures,36 and the hope that such a move

would "break" the inflation psychology that existed.

Some of the inflation experienced was due to people

acting on their expectations that inflation would continue rather than to the existence of excess demand or

supply bottlenecks in the economy. The freeze and following controls were intended as a short-term complement

to other policy changes announced in August.

The New Economic Policy (NEP), as Nixon's program

outlined on August 15 came to be called, also included:

(1) ending of the convertibility between the dollar and

gold in the international monetary system, devaluation

of the dollar, and a 10 percent surcharge on imports,

all aimed at improving the balance of payments; and (2)

requests to the Congress for fiscal changes aimed at increasing employment and output in the United States.37

The freeze of wages and prices was separable from the

international aspects of the program. A crisis on the

international scene, however, demanded attention in

mid-August and Nixon combined changes in domestic policy

with those addressed to the United States' international

situation.

Administrative Organization. The 90-day freeze was

aimed at breaking inflation expectations and also at

providing time to establish the needed administrative

apparatus and to plan for what kind of policy would

follow the freeze. A Cost-of-Living Council (CLC),

established in August, was designated in October as the

head administrative agency for the program.38 The CLC

36. A number of Congressmen, the Chairman of the Federal

Reserve Board, and others were publicly speaking in

favor of the use of controls at the time.

37. For example, restoration of the 7 percent investment

tax credit, removal of the 7 percent federal excise tax

on new automobile sales, and advancement of the effective date of previously legislated tax cuts.

38. CLC members were the secretaries of Treasury, Agriculture, Commerce, Labor, and Housing and Urban Development; heads of OMB and the CEA; director of the Office

of Emergency Preparedness; Special Assistant to the

President for Consumer Affairs; and the Federal Reserve

Board Chairman as adviser.

32
was to establish broad stabilization goals, coordinate

the overall program, and develop and recommend to the

President policies, mechanisms, and procedures for maintaining the stability of rents, wages, and prices.

During the freeze, the Office of Emergency Preparedness (OEP) administered the CLC's policies. Starting

with Phase II, the OEP was replaced with a tripartite

Pay Board, which was to oversee wages and salaries,39

and a Price Commission with authority over prices and

rents. The Internal Revenue Service was to operate

"compliance centers" that would provide information

about the program and investigate complaints about violations. Four advisory groups were also established

to focus on interest and dividends, the construction

industry, rents, and the health services industry.

The policymaking role of the Price Commission was

not clearly specified and led to some disputes with the

CLC concerning their relation to one another, the functions of the Price Commission, and its ability to make

pricing, firm classificiation, and other decisions without CLC intervention. In addition to uncertainty concerning its authority relative to the CLC, the Price

Commission also saw its function quite differently than

did the incoming CEA chairman. He stated that the Price

Commission's role was "routine pass-on of the Pay Board's

actions" and to "define and deal with windfall profits"—

for example, windfalls resulting from the Pay Board's

rollback of a wage contract.40 Others saw different

roles for the Price Commission; its actual role in policy formulation was set more by the position the Price

39. The Pay Board lacked a mechanism for settling collective bargaining disputes except with respect to the

construction industry (under the CISC).

40. Robert L. Lanzillotti, Mary T. Hamilton, R. Blaine

Roberts, Phase II in Review: The Price Commission Experience (Washington, D.C.: The Brookings Institution,

1975), p. 13.

33
Commission asserted for itself than by any clear understanding set out in advance by the CLC.

The Pay Board and the Price Commission differed on

the basic policy question of whether or not the Price

Commission should allow full pass-through of wage increases allowed by the Pay Board. If it did, the potential for its being an independent factor in restraining

inflation was relinquished. If it did not, questions

of equity (as profit margins changed among firms, for

example) and efficiency (as relative prices and resource

allocation changed, for example) arose.

Developing a new organizational structure and recruiting staff in less than three months was only part

of the problem facing the controls program. In addition,

policies and operating procedures also had to be planned and implemented in a short time. No advance notice

was given that Nixon might use his Economic Stabilization Act authority to impose controls and thus little

background preparation had taken place.

The strategy of unexpectedly announcing controls

was used, in part, as a means of avoiding such wage and

price increases in anticipation of controls and associated inequities as had occurred before the imposition

of mandatory controls during the Korean War. The shortness of the freeze reduced potential distortions associated with it.

Unlike the Korean and guidepost experiences, this

program was organized and run so that the President

was removed from direct responsibility for running the

program and working with involved councils, agencies,

and groups in the private sector.

Phase II: November 14, 1971 - January 11, 1973. The

decision to impose the freeze was taken without definite

plans for what would follow, and the stringency and

comprehensiveness of Phase II controls was largely due

to the strong support with which the freeze was received.

34
Phase II regulations resembled those of the guideposts with respect to the consideration of productivitywage-price relations: wage increases were tied to productivity increases relative to trend and price changes

were related to unit labor costs. Phase II was designed

so that there would be heavy reliance on self-administration; this was possible because the standards applied

at the firm level rather than at the industry level.

The Pay Board chose to operate mainly as an agency

for drafting general regulations rather than as a group

for considering individual cases. For compensation increases, it set a general standard of 5.5 percent for

annual wage increases and 0.7 percent for fringe benefits. The 5.5 percent figure was based on the assumption of a 3 percent productivity increase and a 2.5

percent cost-of-living adjustment. Contracts and pay

practices established before November 14 were allowed

to operate but were subject to challenge by Board members or other involved parties. Exceptions were generally made to adjust for deferred wage increases, tandem wage relationships, "catch-ups" to offset relatively

small previous wage increases, and retention of essential employees; other wage increases above the standard

were made after individual case reviews by the Board.

After Congressional action overruled CLC and Pay Board

rulings, retroactive payments for wage increases temporarily foregone during the freeze were allowed.

The 15-member, tripartite Pay Board was changed to

a 7-member public board in late March, 1972 after most

labor representatives withdrew from the Board. The

union representatives were unhappy about such things as

the apparent lack of effectiveness of price controls,

particularly with respect to food prices, CLC actions

setting policy with respect to the wage stabilization

program without the Pay Board's approval, and some internal procedures of the Board. Organized labor,

nevertheless, continued to cooperate during Phase II

although it did not formally participate in the program

again until Phase III. Labor participation at a policy

level instead of an operating level was obtained

through the establishment of a Labor-Management Advisory Committee; the need for a participatory and cooperative role of labor for the control program's success

was acknowledged by all.

35
The Price Commission was divided into three operational units—Offices for Price Policy, Program Operations, and Exceptions Reviews. Its overall goal for

Phase II was to cut inflation in half, to an annual

rate of 2 to 3 percent.41

The Price Commission's strategy resembled that of

the Pay Board—the setting of standards that relied on

self-administration rather than the establishment of itself as a case-hearing agency. Given the small size of

the Commission's staff, it necessarily relied on a policy

of "controls for the bigs and sermons for the smalls."42

Firms were assigned to one of three groups or tiers according to the dollar volume of their sales and the

number of workers in "bargaining units" with which they

negotiated.43 Different regulations and degrees of

supervision applied to the three tiers; by this arrangement, the Price Commission could effect broad coverage

while limiting its administrative involvement. Tier I

firms needed the Commission's approval before wages or

prices could be changed; tier II firms could make adjustments on their own but had to file a report afterwards; and tier III firms had to observe the same

standards as larger firms but supervision took the form

of spot checks by the IRS.

41. It was never explicit whether the CPI, WPI, or GNP

Implicit Price Deflator was to be used to measure the

inflation rate.

42. Lanzillotti et. al., op. cit., p. 29.

43. Tier I firms had sales of $100 million or more and

worked with bargaining units of 5,000 workers or more;

tier II had sales of $50-$100 million and worked with

bargaining units of 1,000-5,000 workers; tier III firms

were those with sales and bargaining units smaller than

tier II's lower limits.

36
The Price Commission controlled prices on a firmby-firm basis by establishing an "allowable cost" rule

that each firm could apply to its situation. The rule

defined allowable cost increases as those in unit labor

costs, unit material costs, unit operating costs, and

unit overhead costs. Increases in input costs were to

be adjusted for changes in the productivity and volume

of output of a firm. At first, firms estimated their

own productivity increases but this was replaced with

the use of industry-wide productivity trends. This

gave firms an incentive to achieve productivity growth

above the industry's average since factor price increases

were adjusted by the industry's average rather than the

individual firm's productivity.

Specific regulations for wholesale and retail trade

firms allowed them to continue the percentage markups

they had used before the freeze but only to reflect increased costs of goods they would resell; increases in

wages or overhead costs were not acceptable as a basis

for higher prices. This rule did not apply to manufacturing firms. To the extent that overhead and wage

costs increased faster than material costs for trade

firms than for manufacturing ones, this regulation had

an uneven impact on the different sectors.

A profit margin rule was used as an indirect means

for controlling prices. This rule allowed cost-justified price increases to take effect only if this did

not result in a firm's exceeding its base-period profit margin. This was to encourage firms to increase

their profits by increasing the volume of sales and productivity rather than by increasing prices. It did

not apply to firms that did not increase prices. As a

result, it benefitted firms with declining costs and

large increases in output; such firms' profits could

increase substantially since the firms did not increase prices and thus were not affected by the policy.

37
Rents were treated separately from other prices and

rent controls were applied to about half the rental

units in the country.44 For units subject to control,

landlords could increase rents 2.5 percent a year to

cover general cost increases and they could pass through

increases in taxes and municipal service charges and

the costs of capital improvements. Measuring the value

of capital improvements, however, was difficult and

landlords sometimes made minor repairs, classed them as

capital improvements, and subsequently increased rents.

Raw food products were initially exempt from controls by a CLC decision. In the spring of 1972, exemptions were also allowed for small firms and employment units, low-wage workers, home-purchase prices,

used products, exports, rental units in small structures,

the life insurance sector, federal pay adjustments, the

U.S. Postal Service, and a few other cases. The reasoning behind most of these exemptions included recognition

that some goods are heavily traded on international markets and their prices are influenced by this factor;

the fear of shortages if food were controlled at all

stages; the fact that prices of some goods and services

were insignificant in the overall inflation problem

(relative to the cost of controlling them) or were subject to direct controls outside the Economic Stabilization Program; and the political appeal of exempting

small units.45

A special arrangment called Term-Limit Pricing (TLP)

was established by the Price Commission as a simplified

approach for determining allowable price increases for

tier I firms.46 The TLP policy was formally adopted in

44. Exempted were industrial, farm, nonresidential commercial, and new or extensively rehabilitated property.

45. Lanzillotti, et. al., op. cit., p. 37.

46. Tier II and III firms were not precluded from TLP

agreements but none were ever negotiated. This is

understandable since exemption from prenotification requirements was a major advantage of a TLP agreement and

prenotification applied only to tier I firms.

38
January 1972 after the Price Commission and several

firms reached agreements concerning the problems of

large multiproduct firms applying separately for (or

giving prenotification of) price increases for a number

of individual goods. In return for holding the weighted

average of its price increases to a level below the

overall goal of the program, a firm was exempted from

having to file separately for individual price increases.

Such agreements were negotiated after a firm's application for one. Approval of an agreement superseded

all previous approvals of price increases and also meant

that the firm gave up the right to file for any additional price increase within a 12-month period. The

base prices over which a TLP weighted average price increase could be calculated was either May 1970 prices

or the highest price charged for at least 10 percent of

transactions during the 1971 freeze. Price increases

up to the base level were not included in the weighted

average price increase calculations and thus firms

which had prices in May 1970 above those during the

freeze were allowed to increase prices first up to the

1970 base and then an additional 2 percent (weighted

average). Later, broad limits were placed on the amount

of price increase for any particular product.

Phase III: January 11 - June 12, 1973. Phase III

was to be the transitional stage between controls and

a period of voluntary wage and price restraint. It

was based on standards similar to those of Phase II.

The CLC took on operational responsibility as the Pay

Board and Price Commission were terminated.

The price standard was modified to reduce the constraining influence of the profit margin rule. The

profit margin limit was removed for firms with costjustified price increases averaging less than 1.5 percent, and the base period for profit-margin computations

was extended forward to the most recent fiscal year.

Tier I firms no longer had to give advance notice of

proposed wage and price increases but they did have to

file quarterly reports. With respect to wages, the CLC

gave more attention to relative wage relationships and

patterns than in earlier phases.

39
The development and introduction of Phase III was

based on a view of the price outlook that was far more

optimistic than the inflation trend that actually emerged,

Factors outside of the government's control in late

1972 and 1973 led to sharp increases in the prices of

food, fuel, and some other commodities. Price increases

in many sectors were supported by increased costs and

most of the largest price increases were within the

limits allowed under Phase II regulations. Nevertheless,

the CPI rose 8.3 percent and the WPI rose 21.7 percent

during the first 5 months of 1973. The inflation during

this phase was due not to lax standards but to the impact

of food shortages and a worldwide economic expansion.

In response to this and mounting political pressure, a

second price freeze was announced.

Freeze II (or Phase TII£)' and Phase IV. The second

freeze, announced in mid-June 1973, was for a maximum

length of 60 days. As with the original freeze in

August 1971, this was seen as an hiatus during which

policy standards to follow could be formulated. Phase

IV was to follow and was foreseen as a return to regulations similar to but more stringent than those of

Phase II and as a period for gradual phase-out of

controls .

Market disruptions during this freeze were worse

than during the earlier one, partly because of seasonal

factors in output and prices and partly because of rumored and actual shortages and public reaction to this.

Factors largely external to domestic markets and prices

aggravated the situation: in 1973, there was a decrease

in the world's food supply and thus increased pressure

on food prices, the dollar was devalued a second time

and declined in value relative to other currencies,

there was a strong and coincident economic expansion in

most industrialized countries, and a petroleum embargo

and an increase in petroleum prices took place in the

autumn. The rapidly rising food and fuel prices and

shortages help explain why public support for the controls program weakened significantly.

40
To relieve the situation, especially with respect

to the markets for food products, and to replace the

freeze policy, "Stage A" of Phase IV was introduced

in mid-July. This involved lifting the freeze in the

food sector and allowing dollar-for-dollar pass-throughs

of increased costs of raw agricultural goods. In

general, Phase IV regulations allowed most firms to

pass through their increased costs on a dollar-fordollar basis rather than on a percentage basis, and only

certain cost increases since the last quarter of 1972

could be used.

While situations in which Phase IV price ceilings

held prices below their market-clearing levels were far

more numerous than in earlier phases, this was mainly

attributable to changes in both domestic and world

market conditions, and to specialized sectoral regulations, particularly in the petroleum, health, and food

sectors.47

Phase IV also involved plans for removing sectors

of the economy from controls altogether as the controls

program was phased out. Selective decontrol of industries began in October. Removal of an industry from

regulations was generally based on a pledge by the industry concerning its future price, investment, and/or

industrial relations behavior that would aim at increasing productivity and supply and restraining price

increases. Both prices and wages in an industry were

usually decontrolled at the same time.

Authority for wage, price, and profit controls ended

in late April 1974 when the Economic Stabilization Act

expired. At that time, more than half the industries

controlled when Phase IV began had been decontrolled

and 12 percent of the CPI was under control, compared

with 44 percent when decontrol began.48

47. Marvin Kosters, Controls and Inflation: The Economic

Stabilization Program in Retrospect, (Washington, B.C.:

American Enterprise Institute for Public Policy Research, 1975), p. 25

48. Ibid., p. 27

41
Inflation in Markets for Food and Fuel

During the NEP, rapid and large increases in the

prices of raw agricultural goods and food products, petroleum and other energy sources, timber, minerals, and

metals accounted for much of the overall increases in

the CPI and the WPI.49 This price behavior and associated resource scarcity were atypical of the post-World

War II trend of basic resources' price increases being

less than general price level increases.

Since food and fuel products are necessities that

account for a large share of consumer expenditures and

their purchase is not easily postponed, these price increases were widely recognized and the impact on living

standards strongly felt. Some processors faced profitmargin deterioration because their output prices were

subject to regulations whereas their input prices were

controlled partially or not at all. Discontent with the

controls program grew, especially in 1973 and afterwards,

because groups in the economy increasingly viewed it as

ineffective, counterproductive, and/or unfair. The

sources of many large price increases in these commodity

markets, however, were not subject to control by domestic policymakers. Rather, world shortages of grains

and protein sources, changed relative demands for grain

by countries, actions of the Organization of Petroleum

Exporting Countries (OPEC), devaluation of the dollar

in early 1973, and a coincident rather than sequential

economic expansion in major industrial countries produced inflation in certain commodity markets that had

strong repercussions for overall economic activity and

price level behavior.

The Agricultural and Food Sectors. The food sector

is traditionally a problem area in a controls program.

The industry is highly competitive and because its

49. In 1973, food and energy price increases accounted

for 62.4 percent of the CPI increase; in 1974, they

accounted for 36 percent of the increase. See Table I

also.

42
output is internationally traded, prices respond quickly

to changes in market conditions. About one-fourth of

a consumer's budget50 goes toward food purchases and

the quantity of food demanded is relatively insensitive

to changes in prices. On the supply side, the amount

of food offered in the short run is relatively fixed

because of the production time associated with bringing

crops or animals to maturity. Moreover, weather conditions and agricultural policies of the government influence amounts supplied and their effects cannot be

offset in a short period of time.

The relative position of the agricultural sector in

the economy changed and the volatility of its output

prices increased, starting in the early 1970s. Excess

supply capacity, to which such agricultural programs

as acreage diversion, export subsidies, and government

stockpiling were addressed, no longer existed. Only

with time, however, were these changed positions recognized and policies altered or ended to reflect this.

In addition to the usual seasonal food price fluctuations and this changing role of the agricultural

sector, a number of other events contributed to the

large food price increases experienced in 1973 and 1974.

A corn blight in 1970 reduced crops available as feed

for hogs and other animals and thus influenced meat

prices in the following season. In 1971, a reduction

in acreage diverted from production under the Department

of Agriculture's program and favorable weather led to

an 11 percent increase in crop output; in turn, grain

prices fell because of the relatively abundant supply.

The Department of Agriculture responded by increasing

the amount of diverted acreage by about 60 percent the

next year. World and U.S. grain production then fell in

the 1972 and 1973 crop years, partly due to poor weather

conditions. Meanwhile, a worldwide economic expansion

was increasing real incomes and, in turn, the demand

for food products, especially meat. The devaluation

50. As represented by the CPI.

43
of the dollar in January 1973 changed relative prices

between the United States and the rest of the world so

as to encourage U.S. exports to other countries. The

Soviet Union, China, and India reacted to poor domestic

harvests by buying more grain from the United States

than previously, thus bidding up prices even more. Since

grain is also an input in livestock production, livestock and meat prices eventually rose to reflect higher

input costs. All told, these forces led to large agricultural and food price increases.

Under the controls program, an inequitable situation

arose between tier I and other firms because tier I

firms had to obtain advance Price Commission approval

of price changes and thus were unable to adjust prices

to changing input costs as rapidly as were other firms.

To address this, a "volatile pricing rule" was initiated

in December 1971 and eventually extended to cover 180

firms. Firms permitted to use this rule were released

from the 30-day prenotification clause for price

changes. They were allowed to adjust prices for changes

in new material costs but had to follow a dollar-fordollar pass-through rule and could not change their

profit margins. (Prices were to decrease if input costs

fell, although they did not have to be decreased below

May 1970 levels.)

Initially, all raw agricultural and seafood products

were exempted from controls so that shortages, black

markets and the need for rationing because of fixed

prices could be avoided. In June 1972, the CLC made a

major change in policy by putting all agricultural goods

sold in unprocessed form at the retail and wholesale

levels under controls after the first sale. In effect,

this limited processing and distribution margins rather

than food prices themselves.

Another way the government worked to limit food

price increases was by increasing supplies of agricultural goods. For the most part, this involved weakening or removing a number of programs that had been

established to maintain farm prices and incomes under

conditions of excess supply. Feed grain acreage "set

asides" were reduced and those for wheat suspended;

44
direct subsidies for farm product exports were ended.

Quotas governing the amount of certain foods that could

be imported were increased and grain was sold from government stockpiles. Temporary export restrictions were also

applied to a number of agricultural commodities. By

such measures to increase the supply of raw commodities,

the government worked to slow their price increases and,

in turn, those of foodstuffs bought by consumers.

A large decrease in livestock supply occurred early

in 1973, thus putting further upward pressure on meat

prices. Predicting that an increase in supplies in the

second and third quarters of the year would exert downward pressure on meat prices, the administration imposed

ceiling prices on red meat in March. This was to be a

stop-gap measure to moderate meat price increases until

the larger supplies were available. The response to this

action, however, was different from that expected. Because of the price ceilings on their output and consumer

boycotts of meat, farmers significantly decreased their

marketings.51 The price ceilings also squeezed profit

margins of meat packers and caused some to close or curtail their operations.

The second general freeze (Freeze II) began in June

1973 and food products were put under Stage A of Phase

IV in mid-July. This allowed dollar-for-dollar passthroughs of increased raw product costs and large food

price increases followed its implementation. The removal of beef price ceilings in September was followed

by increased marketings and lower prices.

51. Meat supplies in the second quarter of 1973 were 6

percent less than in the first quarter and 9 percent less

than in the second quarter of 1972. Some livestock producers dramatized their profit deterioration by slaughtering breeder animals and young stock, arguing that it was

unprofitable to raise them to maturity as long as output prices were controlled while input prices were not.

45
The experience highlighted the interrelations among

agricultural markets and how a controls program might

upset these. Price increases originally arose in markets

for grain, for example, but led to a secondary round of

problems and decreased output in livestock markets when

processors found that their increased costs could not

be passed on in the usual way as higher prices. In addition, attempts to control food prices under the conditions experienced led to shortages and the development

of a "shortage mentality" that carried over to other

markets, causing periodic runs on and stockpiling of nonfood products.

Petroleum Products, 1973-74. Petroleum product

prices were not a problem during Phases I and II and

there were no special rules for this industry. From

August 1971 to December 1972, the price increase for refined petroleum products was 4.4 percent.

The administration had moved from Phase II of the

controls program to Phase III, planned as the decontrol

period, when oil exporting countries increased prices52

and actively began to function as an international oil

cartel. In response in the United States, petroleum import quotas were ended, allocation authority for petroleum products was granted under the Economic Stabilization

Act, a voluntary allocation program was begun, and plans

for a mandatory control program were developed. In March

1973, mandatory controls were put on crude oil and petroleum prices for firms with annual sales of $250 million or

more. General price increases were limited to a weighted

average of 1 percent above the base price; price increases between 1 and 1.5 percent were allowed if supported by cost increases after March 6, 1973, and any

increases exceeding 1.5 percent of the base period price

were subject to prenotification and profit-niargin limits.

52. Price increases announced in June averaged 11.9 percent; ones in mid-October increased crude oil prices by

an additional 66 to 70 percent.

46
In October 1973, a six-month embargo on petroleum

shipments to the United States was begun by a group of

Arab countries. This was followed by the passage in

November of the Emergency Petroleum Allocation Act that

authorized a binding allocation program in place of the

voluntary one.

When Phase III began in January 1973, many large

firms had a backlog of increased costs they had not

passed on; in contrast, a number of independent retailers,

wholesalers, and crude oil producers were free from controls under the small business exemption. A similar distinction among firms was made when mandatory controls

were imposed in March 1973: they applied to the 24

largest firms that accounted for about 95 percent of industry gross sales but left uncontrolled about half a

million other firms in the industry.53 It was felt that

overall industry prices could be controlled if the

pricing behavior of the largest firms was. The result

of this ruling, however, was the development of two

classes of sellers at most levels of the industry—i.e.,

a dual market. A large number of firms were subject to

the voluntary standards of Phase III, had a backlog of

costs from Phase II, and found that weak enforcement

during Phase III allowed them to act almost as if there

were no controls. Many of these operations involved resales; since these firms bought products at controlled

prices but could sell them at uncontrolled prices, large

profits were made and the number of such operations increased noticeably. The controlled group of firms was

faced, as a result, with the possibility of a declining

market share because of the controls program. The CLC

also found that major companies did not actually control

industry pricing, especially at the retail level and

under shortage conditions. To alleviate the uneven

treatment of firms in the industry, some relaxation of

rules for the controlled firms was made.

53. Special Rule No. 1 imposed mandatory controls on the

sale of crude oil and petroleum products for firms with

annual sales of $250 million or more.

Charles R. Owens & Associates, Inc., "History of Petroleum Price Controls," in Historical Working Papers

on the Economic Stabilization Program, prepared by the

Office of Economic Stabilization, Department of the

Treasury, 1974, p. 1242.

47
Freeze II began in June 1973 and allowed for dollarfor-dollar pass-through of higher costs of imported

petroleum products. Many refiners, however, still had

to bear the higher costs and profit squeeze because the

refining process changed the nature of the product and

thus the freeze rather than the pass-through rule applied to their pricing.

In August, mandatory controls were applied to all

stages of production for all petroleum products except

natural gas; they covered all firms in the industry.

A two-tier pricing system for domestic crude oil was

established and incentives for increasing production

were set up, mainly by making increases in production

over some base level and an equal amount of oil within

the base level free of price controls.54

Phase IV controls differed from earlier ones in that

price controls were applied on the basis of products or

sectors (rather than firms) while the profit-margin controls continued to be applied on an individual firm

basis. This was to adapt to the vertical integration

in the oil industry and to allow flexibility in the system

for meeting changing economic conditions.

The petroleum industry during this period was thus

subject to several shocks. The OPEC price increases,

Arab embargo, and domestic price control program interacted to upset the traditional price behavior and market

structure in the industry. Since the controls program

kept prices below market-clearing ones, an allocation

system was needed to help distribute available supplies

among geographical areas and industrial users. Increased

conservation measures were also encouraged.

54. Oil up to the base period level was called "old oil"

while increased production above the base was called

"new oil."

48
Evaluation

In the 1970s, just as in earlier periods of controls

and guidelines, it is hard to distinguish the influence

on wage and price behavior of the ^controls program from

that of cyclical and other economic forces. Strong

cyclical growth in 1972 and 1973 was associated with

real output increases of about 5.5 percent each year,

leading to capacity pressures on the one hand, while

strong cyclical productivity growth helped reduce price

pressures on the other.

In 1970 and 1971 prior to the freeze, both the WPI

and CPI increases were below those experienced in 1969.55

During the 90-day freeze, rates of increase were still

lower. Under Phase II regulations, the CPI increased

at a rate slightly above that for the pre-freeze months

of 1971. The WPI, in contrast, rose to 6.8 percent,

noticeably higher than it had been for a number of years.

Some of the increases in prices are atttributable

to term-limit-pricing arrangements available to firms.

For the most part, large manufacturers but not serviceoriented or labor-intensive firms entered into TLP agreements. This was because firms would generally not ask

for a TLP arrangement when their increased costs could

be used to justify price increases greater than those

which a TLP agreement would allow under its weighted

average price formula. Moreover, since price reductions

could be used to offset price increases, some firms reduced prices for some goods sold under competitive conditions and then increased the prices of other goods

that were not sold in such competitive markets. TLP

cost justification applied to a group of products as

a whole and thus allowed a cost increase associated with

one good to be used to justify a price increase for an

entirely different good. In addition, TLP agreements

early in Phase II could use, as part of their cost

55. See Table I and Figure 3 for supporting details,

49
Figure 3.

Percent Changes in the WPI, CPI, and Unemployment Rate, 1969-1976

Percent change

in WPI

Unemployment Rate

L

Percent change in CPI

0

-10

1969 70 72 73

CALENDAR YEARS

50
justification, cost increases that had not yet been incurred but would be in the future. (This mainly applied

to periodic wage increases that were part of a negotiated

contract.)

The profit margin rule caused distortions in some

industries when it kept some firms from raising their

prices but allowed others to do so. Ford and General

Motors, for example, were not a-llowed to increase their

prices because of the profit margin regulation while

American Motors and Chrysler were. For the smaller

firms to raise their prices while their competitors could

not, however, was not to their advantage in terms of

sales even though it was "justified" in terms of increased

input costs and the maintenance of profit margins. The

smaller firms' profits were thus affected by decisions

made to affect their competitors' profits rather than

their own.

Wage increases56 in 1972 and 1973 were smaller percentages than during the preceding three years and firstyear wage increases under collective bargaining agreements were notably smaller. It is unclear, however, how

much of this slowdown is attributable to the controls

program. Some feel that wage "catch-ups" and structural

developments in labor markets in the period immediately

prior to controls had created conditions favorable to

achieving smaller wage increases by 1972.5

The apparent success of the controls program was reversed in late 1972 and 1973 when large and rapid increases in the prices of food and farm products were

followed by increased prices of petroleum and energy

products. These price increases were permitted under

the conditions of the controls program. In some sectors

56. Measured by total private nonagricultural hourly

earnings, adjusted for overtime (in manufacturing) and

for interindustry employment shifts.

57. Kosters, op. cit., p. 33.

51
of the economy, the prices of major inputs were exempt

from controls and as these input prices rose and increased costs to firms, the firms passed through these

increased costs by raising their prices. Due to these

rapidly rising prices, market disruptions, and shortages,

public support for the controls program eroded rapidly

in 1973.

As decontrol took place during Phases III and IV and

for at least a year after the program ended, there was a

"price explosion" during which inflation was greater than

it had been at any time in the post-World War II period.58

Contributing to this explosion were shortages (or the

withholding of supplies), hoarding, inefficiencies due

to the controls program, and anticipation of its ending.

Little was done by the government to influence supply

and demand in key sectors or to offset the effects of the

food and fuel situations on the level of economic activity and inflation.59 The explosion would have been less

severe had earlier structural and macroeconomic policies

of the government addressed the underlying causes of inflation rather than the accompanying symptoms.

Controls are hard to apply when there is not a uniform product (e.g., apartments for rent) or when a good

or service can change form over time. (Examples are different quality cloth being used to make clothing or

smaller portions or different combinations of food being

served in a restaurant.) In enforcing the NEP regulations,

data on wages, costs, prices, and profits were gathered

and analyzed by the government. Information on the quality of goods and services was not widely used, however,

because the quality of a good or service is very difficult to measure. As a result, some inflation occurred

due to lower quality goods and services being substituted

58. See Figure 3 and Table I. The table also shows the

varying contribution to overall inflation of different

sectors' price changes.

59. In contrast, the Korean War controls were accompanied by such measures as production loans, allocation

priorities, and increased taxes to influence supply and

demand conditions.

52
for higher quality ones without a lower price-tag to reflect this. That is, in such cases, the purchasing power

of a dollar was lessened because the quality of a good or

service was lowered rather than because the explicit

price for the item increased.

The NEP experience may also illustrate that the combination of overly expansionary monetary and fiscal policies and a controls program may be a difficult one to

handle.60 By masking inflationary signals, a controls

program may lead policymakers to follow a more expansionary macroeconomic policy than they would otherwise. Delayed recognition of inflationary pressures and the fact

that some basic industries were operating near capacity

in 1972 and early 1973 may have led to more expansionary

policies than were warranted.

To summarize, the controls program of 1971-74 was

part of a broader program aimed at increasing economic

growth and addressing international economic concerns.

The institution of controls at a time when general economic activity and productivity were improving was favorable to public acceptance of the program and to the

existence of economic forces outside the controls program that would help moderate inflationary tendencies.

Cooperation from labor groups and businesses in following

the controls program was fairly good. Economic forces

outside domestic control, structural imbalances, and

large shifts in relative prices, however, led to further

imbalances under the controls program, to loss of support

for it, and to its eventual termination.

THE COUNCIL ON WAGE AND PRICE STABILITY

The United States does not currently have a formal

incomes policy through which the government sets standards to influence directly wage and price decisions made

in the economy. It does have an agency, the Council on

Wage and Price Stability (CWPS), for monitoring and analyzing inflationary developments in the economy.

60. This applies to the guideposts of the 1960s too

53
Analyzing price and wage changes and making information

surrounding them and their potential inflationary impact

public has been a major activity of CWPS. Persuasion

by the Council, presentation of information at public

hearings, and the mustering of public opinion are the

Council's main channels for influencing prices and wages.

Its mandate does not give it authority to institute a

program of wage and price controls, require price rollbacks, or similarly influence wages and prices through

directives. CWPS could, however, announce wage and price

guideposts and use persuasion as its enforcement

mechanism.

The CWPS has eight members, four adviser-members

and a director, all Presidential appointees, and it

functions as part of the Executive Office of the President.61 Its five organizational sections are the Offices

of Wage and Price Monitoring, Government Operations and

Research, the Director, the General Counsel, and Public

Affairs and Congressional Relations. In June 1976, the

total CWPS staff was 55 people, about 70 percent of them

professionals.

Formation and Activities of CWPS

Early in 1974, the Nixon Administration requested

creation of a Cost of Living Council to function after

the April 1974 expiration of the Economic Stabilization

Act. The proposed function of the Council was to focus

on structural aspects of the economy which impart an inflationary bias to it. Among its activities would be

to monitor firms' compliance with commitments made when

exempted from controls; review government and private

actions that might impede the supply of materials and

61. The eight members currently are the Secretaries of

Agriculture, Commerce, Labor, and Treasury, Assistant to

the President for Economic Affairs, Director of OMB,

Special Representative for Trade Negotiations, and Special Assistant to the President for Consumer Affairs.

The adviser-members also hold positions in various

federal agencies.

54
goods; work with management and labor, especially to

improve collective bargaining in "problem sectors"; conduct public hearings on inflationary situations and problems; stress the need for increased productivity; and

gather data relating to wages and "inflationary factors."

Given public and Congressional dissatisfaction with the

recent controls experience, Congress did not approve

these plans for a continuing CLC even though the Council

would not have had the power to impose controls again.

In August 1974, after Gerald Ford became President,

however, Congress did approve a request to establish a

Council on Wage and Price Stability for one year to monitor inflationary developments in the economy. Its

functions were those proposed earlier for the continued

CLC along with the reviewing and analyzing of the effects on inflation of such things as industrial capacity,

economic concentration, and anti-competitive practices.

The Act establishing the CWPS made it clear that this

action was not to be interpreted as a prelude to another

program of mandatory controls.

In September 1974, CWPS organized several "inflation

summit conferences" in which business, labor, government,

and academic economists participated. It also held

hearings on or undertook studies of such things as the

repricing of shelf inventory, especially in food stores;

high and rising sugar prices; and price increases in a

number of other markets. In response to price increases

announced by three steel firms in late 1974, the CWPS

director "persuaded" the firms to rollback their announced increases by about 20 percent and to not raise prices

until June 1975. CWPS members also gave testimony before a number of regulatory agencies to urge them to

consider the inflationary impact of particular rate or

regulation rulings. In a related action, President

Ford issued an Executive Order requiring "inflation

impact statements" from executive departments initiating

new rules, regulations, or programs that might have a

significant impact on prices. A Conference on Concentration, Administered Prices, and Inflation was sponsored

by the Council in April 1975.

55
Renewal of the CWPS and possible changes in its form

and powers were discussed during Congressional hearings

in the summer of 1975. Congress extended the Council's

life through September 1977 and slightly broadened its

powers. It was given subpoena power to compel testimony at hearings or the production of business records,

and the authority to require from firms information on

wages, costs, sales, productivity, profits and the like.

The original mandate to review and appraise various programs, policies, and activities of federal government

departments and agencies was clarified to say that CWPS

has explicit authority to intervene and otherwise participate in federal agencies' proceedings. Senate approval

of any future director was also part of the renewal

legislation.

During the Congressional hearings, several proposals

for significantly changing the Council's functions and

power were discussed but none was adopted. Much discussion concerned whether firms in concentrated industries

should be subject to a set of rules different from those

for firms in more competitive industries.62 The suggestion that CWPS be given the power to delay price and

wage increases for whatever period of time it deemed appropriate was rejected since such power would be the

equivalent of mandatory control authority. Prenotification of wage and price increases by large firms, perhaps on a selective basis, was discussed but not included in the final legislation. A proposal to let the

Council expire because the government should stop

"playing" an interventionist role with respect to wages

and prices in the private sector" also was not adopted.

The proposal for making CWPS an independent agency

was not accepted either. It was argued in testimony

that if the advisory, informational, and persuasive

62. H.R. 4212, for example, proposed mandatory price controls for concentrated industries if their price index

increased by 6 percent or more for 3 months and the power

to delay proposed price increases if the industry's price

index increased 3 to 6 percent over 3 months.

56
powers of the CWPS were not changed, then there was no

reason for removing it from the Executive Office of the

President and making it independent.63 To do so would

put the CWPS outside the mainstream of executive and administration decisionmaking and could make the Council

ineffective because of its bipartisan makeup and lack

of authority. Moreover, should a policy of price and

wage controls or guidelines exist, it should be formulated and administered as an integral part of national

policy rather than by an independent agency.

The activities of the Council since its extension

are very similar to those of its first year. Testimony

has been given and CWPS comments filed with federal agencies, Congressional committees, and other groups; reports

have been issued or conferences held to consider such

issues as health care costs, metal prices, cost-ofliving escalator clauses, price behavior during the 1973-

75 recession; and the CWPS has continued to gather wage

and price data and monitor changes in these variables.

Recently the CWPS has been in the public eye in conjunction with a 6 percent increase in the prices of sheet

and strip steel by major steel producers, effective

December 1, 1976. Steel firms had previously withdrawn

an announced price increase of 4.5 percent, scheduled

for October 1, because of "soft demand." The December 1

date for a larger price increase thus surprised many and

led them to question whether it was a cost-justified

action or whether it was taken in anticipation of the

incoming administration's possible use of guidelines or

controls for prices.64

63. Charles L. Schultze, Testimony before the House Subcommittee on Economic Stabilization of the Committee on

Banking, Currency, and Housing, June 20, 1975.

64. Shortly after the steel price increases, Presidentelect Carter dropped his support of standby price controls as a desirable policy tool because he feared a

number of firms might initiate price increases in anticipation of guidelines or controls after the new administration took office. Price increases by the aluminum

and synthetic textile industries were also announced

recently.

57
Steel producers argued that the December price increases were needed to cover cost increases, to improve

profits, and to facilitate huge investment requirements.

In addition, prices on sheet steel were said to lag behind those of other steel products and the firms felt

they could not absorb further cost increases.

CWPS stressed that the demand for steel was weak,

that some steel firms had employees on layoff, and that

the industry was only using about 70 percent of its capacity. The Council also expressed concern that higher

steel prices might weaken the economic recovery.65 CWPS

did not call for a price rollback, however, saying that

the marketplace would decide if one were appropriate and

that CWPS's function is to make information known to the

marketplace. Acting upon a request from the President,

the Council requested information from steel firms on

production, profits, costs, and expected sales in order

to further study the situation. To date, the price increases appear to be effective since large-scale discounting of posted prices has not occurred.

Evaluation

The inflation rates for 1975 and 1976 were below

those of 1973 and 1974. The Council's contribution to

lower rates of inflation since late 1974, however, is

very difficult to evaluate.

As the economy adjusted to the ending of controls

in 1974 and to the developments in markets for food and

energy products, increases and decreases in the rate of

change of the CPI in 1973-75 were due largely to increases and decreases in food and energy prices, prices

65. Car producers, for example, estimated that the steel

price increases might cause prices of 1977 models to

increase by $25.00 a car. Sheet steel is also an important material for household appliance production.

58
over which the Council had little influence.66 To the

extent that these markets have been free of dramatic and

unsettling shocks since 1974, their contribution to inflation and its variability is reduced.

The deep recession in the United States from late

1973 to early 1975 and recession abroad helped moderate

inflationary pressures in the system. In addition, appreciation of the value of the dollar relative to an

average of 10 other major currencies since early 1975 has

reduced demand and thus inflationary pressures from the

foreign sector.

One assessment of CWPS's influence on inflation was

given by CWPS Director Albert Rees during Congressional

testimony in June 1975. The Council had made a contribution to controlling inflation, he felt, citing as an

example the rollback of announced steel price increases

in December 1974 which was estimated to "save" steel consumers $100 million. Public hearings by CWPS and the

encouragement of conservation of sugar were credited

with helping achieve a decrease in sugar prices and, indirectly, the prices of goods containing sugar. By

heightening federal agency awareness of costs associated

with their rules and regulations, CWPS also worked to

reduce inflationary actions.

Some contend that the benefits from CWPS actions

are offset by the impact of its existence—that is,

the existence of a monitoring and jawboning agency increases uncertainty in the private sector, generates

expectations that controls may again be imposed, and

thus prompts price increases that are not economically

justified. Others, however, feel that CWPS has opposite and more positive effects because it represents

a shift of government attitude away from the application

of wage and price rules and standards toward a focus

on structural features and the supply side of the economy

66. Edward Knight, "The Council on Wage and Price Stability: A Background Analysis," Congressional Research

Service, HD2954USE, September 1975, pp. 30-31.

59

CHAPTER II ISSUES AND PROBLEMS WITH INCOMES

POLICIES

This chapter analyzes past applications of incomes

policies to identify successes and problems encountered

and, thereby, to determine the circumstances under which

such policies are most likely to work. The overriding

purpose of incomes policies in the United States has

been to reduce inflation or to reduce the risk of inflation. The principal drawbacks have been: costs of

administration and compliance; some inefficiencies and

inequities; and questionable contributions toward reducing inflation in the long run. Moreover, by temporarily suppressing underlying inflationary forces, incomes policies may have exacerbated these problems in

the longer run. Thus, the success of such efforts might

be viewed in terms of how much they reduced inflation

and how well they avoided or minimized the negative

aspects.

A complete analysis of incomes policies would include a detailed consideration of both the potential

benefits of the policies and their drawbacks. For example, potential benefits might include a reduction in

inflation, higher levels of employment and output, and

more widespread opportunities for employment. The

focus in this section, however, is on the problems that

have occurred rather than a discussion of the more

positive aspects of the policies.

REVIEW OF ISSUES AND PROBLEMS

The issues and problems encountered with incomes

policies in the United States can be classified as

follows:

• Determination of the standards—What are the

rules? What types of income and how much of

the economy should be covered?

61
• Gaining and maintaining consensus.

• Achieving effectiveness and compliance.

• Administration.

• Coordination with fiscal and monetary policies.

• Exogenous price increases—price increases from

sudden and unpredictable causes, such as poor

harvests or changes in pricing practices of petroleum exporters.

• Inequities, inefficiencies, and distortions.

Determination of the Standards

The Principle Behind the Policy. A basic difficulty

with the incomes policies that have been used in the

United States is that there seems to be no rational,

fair set of standards that is both specific and can be

readily applied to a broad range of situations. If the

standards are formulated in general terms, as was the

case with the guideposts, it may be difficult to apply

the rules to particular situations, and enforcement and

compliance may be quite uneven. If the rules are highly

specific, as they were during the controls of the Korean

War period and the 1971-74 period, they lack flexibility

and may lead to inequities and inefficiencies, particularly if they are used over a long period of time.

Moreover, due to the size and complexity of a modern industrial economy, problems of administration and enforcement are formidable for comprehensive controls.

General standards based on national trends in productivity have been criticized on a number of counts.

For one thing, it is argued that trends in productivity

have little practical relevance in decisionmaking in

collective bargaining over wages or in price determination. For another, the strict adherence to a particular wage standard is sometimes criticized for

denying a basic purpose of unions—to gain large wage

62
increases and to redistribute income shares.1 In addition, such standards do not take account of wage and

price changes that result from changes in demand.

Under a system of comprehensive economic controls,

as used during the Korean War and again from 1971-74,

the rules were quite specific. However, rules governing

acceptable price changes were based on cost-price relations during a base period, and economic changes (such

as changes in costs and changes in demand) were incorporated in a simplistic and mechanical way. Such a

procedure might work reasonably well for a short, but

not for a long period of time. For example, rules sometimes result in considerable differences in prices for

the same product at the same time. In addition, the

rules disproportionately hold in check prices in industries with rapidly increasing costs compared with industries with stable or falling costs, thus distorting

relative prices. If used over a period of time, price

controls can lead to erosions in the quality of goods

and services for which prices are held in check.

Moreover, by limiting profits in particular areas of

the economy, controls may eventually discourage investment in those areas.

A recurrent issue in designing a standard for acceptable wage increases has been whether or not to

specify a single number or to express the standard in

more general terms, such as a range. A single number

has the advantage of being simple and direct. However,

as a practical matter, all wages do not go up at the

same rate under usual market conditions, and wage settlements reached in collective bargaining typically have a

considerable dispersion. Particular wage settlements

result from many forces, and some analysts feel that attempts to apply a single number as a standard distorts

this process.

1. J.T. Dunlop, "Guideposts, Wages and Collective Bargaining," in G. Shultz and R. Aliber, Guidelines, Informal Controls and the Market Place (Chicago: University

of Chicago Press, 1966), pp. 81-96.

63
A related problem with wage standards is that they

can be viewed as a floor rather than as an average or a

ceiling.2 If the standard is viewed as a floor, actual

wage changes may be higher than they would have been in

the absence of the policy.

Coverage. Difficult problems occur in determining

which types of income and how much of the economy should

be included under an incomes policy. For reasons of equity, some persons feel that an incomes policy should apply to all forms of income (including profits, interest

income, and rents) and to all sectors of the economy

(including small as well as large firms, and unorganized

as well as organized labor). However, the complexity and

sheer magnitude of such a task present major obstacles.

The development of standards for profits, rents,

and dividends is especially difficult. For example,

changes in relative profits are important to the process

of shifting resource use, and profits generally fluctuate more than other forms of income. In addition, profits are a residual type of income resulting after other

costs are met. Thus, rules that attempt to limit profits are especially subject to avoidance and to possible

inefficiencies.

How much of the economy should be included under

an incomes policy? The economic controls of the 1970s

were relatively comprehensive, yet major sectors of

the economy were excluded (for example, agriculture) or

received much less attention (for example, small and

medium sized firms) than others. For equity reasons,

workers with low wages were exempted from the wage policy; the determination of "low wage," however, proved

to be a controversial issue.

Some analysts feel that incomes policies, if they

are to be used, should be applied selectively to only

certain "problem" sectors of the economy. According

2. For this viewpoint, see, for example, Goodwin (ed.),

Exhortation and Controls, p. 393.

64
to this view, the controls program of the 1970s was too

broad and too ambitious—the U.S. economy is simply too

large and too complex to bring entirely under a set of

comprehensive controls.3

However, others have argued that a selective approach to incomes policies is inequitable, discriminatory, and may not be feasible over a significant period

of time. The latter thinking was reflected in the Economic Stabilization Act of 1971 which prohibited a selective approach unless "prices or wages in that industry

or segment of the economy have increased at a rate which

is grossly disproportionate to the rate at which prices

and wages have increased generally."4

While the guidelines policy of the 1960s was presented as applying to the economy generally, it was

actively enforced for only some of the largest and most

visible economic units. That approach has been criticized for not being even-handed.^

Consensus

For an incomes policy to be effective, broad support for the policy is essential. Achieving and maintaining a consensus for incomes policies, however, has

proved to be a recurrent problem in their use in the

United States.

3. Arnold R. Weber, "The Continuing Courtship: WagePrice Policy Through Five Administrations," in Exhortation and Controls, pp. 380-383.

4. Historical Working Papers on the Economic Stabilization Program (Washington, D.C.: U.S. Government Printing Office, 1974), pp. 110-115, and p. 200. For a discussion of some of the feasibility problems associated

with partial coverage in the controls program of the

1970s, see D.Q. Mills, Government, Labor and Inflation,

pp. 126-131.

5. John Sheahan, The Wage-Price Guideposts (Washington,

B.C.: The Brookings Institution, 1967).

65
Although difficult to measure, a significant degree

of consensus or acquiescence characterized the initial

phases of past incomes policies in the United States.

For one thing, the perception of an emergency, such as

a war or a balance of payments problem, tends to produce a consensus or a willingness to subordinate private

objectives for a general goal. For another, frustration

with prolonged high unemployment together with inflation

or the threat of inflation may have produced a feeling

of emergency or at least a willingness to try something

more than the traditional monetary and fiscal policies.

Finally, with the guideposts and the controls of the

1970s, a substantial period of time had elasped since

people had experienced the frustrations of mandatory

controls. As the policies wore on, however, the consensus tended to erode for a variety of reasons.

At least three factors are crucial for maintaining

consensus: first, a confidence that the policy works;

second, a feeling by major economic groups of participation in the formulation and implementation of the policy;

and third, a feeling that the policy is even-handed and

fair. Consensus for past policies eroded because the

feeling grew that one or more of these conditions was

not present. In addition, as some people experienced

the inconvenience and constraining effects of the policies, they lowered their opinions of the desirability of

the policies.

The degree of harmony in labor-management relations

has proved to be an important factor for consensus in

incomes policies. Labor-management strife during the

Korean War period exacerbated problems with the economic

controls of that period. On the other hand, labormanagement relations were relatively harmonious during

the experience with incomes policies during the 1960s

and 1970s.

Organized labor has frequently opposed incomes policies on the grounds that they have not been enforced

even-handedly. For one thing, management has a direct

stake in enforcing wage standards, and while consumers

have a stake in price stability, their influence in the

enforcement of economic controls is diffuse.

66
In some instances the incomes policies themselves

may have become divisive by shifting conflict over income determination from the market place to the political sphere., For example, groups that have not liked

the decisions resulting from the incomes policies have

sometimes sought relief by exerting political pressure

to have the rules changed or exceptions granted. Also,

some groups have sought to have controls extended to

other sectors of the economy.

Sharp changes in public attitudes toward controls

may have resulted in part from exaggerated views about

what such policies can, or cannot, be expected to accomplish. For example, according to one view, during

some phases of the 1970s experience, people may have

expected the controls to prevent prices from increasing,

while under the rules of the program certain costs were

permitted to be passed through in higher prices. The

price increases in themselves may have been taken as

evidence that the policy was not working even though the

program may have been contributing slightly to reducing

inflation. Public reaction to the acceleration in inflation was to call for tighter controls, a policy which

was eventually followed but which did not stem the

inflation.6 When the tighter controls contributed to

such adverse effects as shortages, the public reacted

by becoming very negative about the controls program.

Effectiveness and Compliance

The big but unanswered question with incomes policies is: "Did they permanently reduce inflation?" This

question has not been satisfactorily answered because

of the difficulty in knowing what would have happened to

prices in the absence of the policies.

The empirical studies of the effects of the three

post-World War II episodes with incomes policies indicate that they probably produced at least a temporary

6. Marvin H. Kosters, Controls and Inflation, pp. 15-

29.

67
reduction in the rate of inflation. But it is less certain whether or not the incomes policies produced anything but a temporary slowdown in inflation. Moreover,

some persons would argue that the longer-term effects

have caused inflation to be worse than would have been

the case without the policies.

Incomes policies might be ineffective in lowering

inflation for several reasons. First, economic decisionmakers might rush to increase wages and prices in anticipation of the policy. Secondly, the standards might

be so loose that they have little if any binding effect.

Third, the policy might be ineffective because of noncompliance and avoidance. Fourth, even if the above

conditions were favorable, the relaxing of the wage and

price standards may be followed by a wage-price explosion,

In the U.S. experience with incomes policies, compliance with the standards has generally been good, at

least initially. In the case of mandatory controls,

there were penalties for noncompliance. But as a

practical matter it would have been extremely difficult

to enforce the controls in the face of general or conspicuous noncompliance. In the case of the general

guidelines, it is more difficult to gauge compliance.

During the early phases of the policy there was general

compliance with the wage standards, but it is difficult

to sort out how much of this was due to underlying economic conditions. Some analysts feel that the wage

standard eventually became viewed as a floor rather than

a ceiling. On the price side, some feel that the guidelines were not followed when they called for price

reductions.

The effectiveness of an incomes policy may erode

the longer it is in effect. For one thing, people

learn how to evade the policy even while conforming to

the letter of the standards. For another, people as

consumers may feel that the policy is a good thing, but

68
as time passes they may feel constrained by the policy

in their roles as workers and producers.?

In some ways, the incomes policies may have exacerbated the longer-run problem of inflation. For one

thing, if the policies suppressed inflationary signals,

monetary and fiscal policies that were adopted may have

been more expansive than would otherwise have been the

case. For another, the incomes policies in certain situations prevented market responses to bottleneck situations with the result that the eventual increases in

prices may have been larger than would otherwise have

occurred. To the extent that controls prevented prices

from rising in bottleneck situations, they may have delayed increases in supplies and prevented higher prices

from allocating scarce commodities to their most

important uses.

Administration

Broad Issues. Some of the issues of administration

relate to organizational structure and to the manner in

which the agency administering the incomes policy fits

into the general economic policymaking framework. The

degree of autonomy of the wage or pay board from the

rest of the program was an issue of contention during

both post World War II experiences with mandatory controls. Organized labor insisted that the agency administering the pay standards should be independent of

the rest of the policymaking groups administering the

incomes policy, while officials responsible for the

overall program felt that too much autonomy on the wage

side compromised the effectiveness of the overall policy,

A second issue involves the relationship of the

President to the agency administering the incomes policy. Some persons feel that the agency administering

the incomes policy should be relatively independent

7. D.Q. Mills, Government, Labor and Inflation, pp. 272-

273.

69
from the rest of the Executive branch, while others

feel that it should not be isolated in such a fashion

from the main channels of economic policymaking.

A third issue pertains to the relationship of the

Congress to the agency administering the incomes policy.

The working out of an effective partnership between the

Congress and the agency administering the incomes policy

has sometimes proved difficult in the past.8

Problems of Implementation. Administrative difficulties are an important constraint on the type and

complexity of the incomes policy adopted. For example,

it is very difficult for both the firm and the administrators of an incomes policy to relate costs incurred

by the firm to particular product lines sold. In part

this is due to accounting problems and lack of appropriate data, and in part it is due to the large number

of different products and services sold by the typical

large firm. Some problems of administration relate to

the sheer volume of cases that arise from specific,

mandatory controls. The economy is extremely complex,

and administrative difficulties that sometimes arise

with economic controls—for example, delayed decisionmaking and shortages—provide a dramatic illustration

of this complexity.

Staffing also has been a problem in the controls

periods. For one thing, the stabilization agencies have

had to begin their operations quickly, and have had to

rely heavily on staff borrowed from other agencies.

For another, it was sometimes hard to find staff with

the detailed knowledge of particular sectors of the economy that is needed when the program involves intervention in specific markets.

8. See, for example, "Congress and Controls," in

Historical Working Papers, Part I, pp. 184-185; and D.

Q. Mills, Government, Labor and Inflation, pp. 144-148.

70
Costs of Administration. The costs of administering

incomes policies include costs to the private sector

as well as budget costs to the federal government. Although the administrative costs of incomes policies to

the private sector are especially difficult to measure

or quantify, they have not been insignificant. For

example, according to one published estimate, the costs

of administering the Phase II controls program of the

1970s may have approximated $800 million annually—$700

million in the private sector and $100 million in the

public sector.9

The public administrative costs of incomes policies

have varied widely depending on the size of the program

and the degree to which the program was "self administered." The administrative cost of the guidelines

policy in terms of its impact on the federal budget, was

insignificant. Most of the administration of that policy was carried out by a few people on the Council of

Economic Advisers and in the Department of Labor. (The

administrative cost of compliance to the private sector

is unknown.) By contrast, the administration of the

controls of the Korean period involved a bureaucracy of

approximately 15,000. One of the reasons that the

controls of that period involved such a large staff

was that a major purpose was to assist in the reallocation of critical materials for the war effort. The

controls program of the 1970s was administered by a

substantially smaller bureaucracy of approximately 4,000,

even though the economy had essentially doubled in size

since the Korean War period. With the 1970s controls,

it was decided to keep the size of the bureaucracy

administering the controls as small as possible by relying on participants in the program to follow the rules.

Checking on prices was largely limited to auditing the

books of the largest companies.

9. Lanzillotti, Phase II in Review, pp. 191-192.

71
Some analysts feel that the emphasis on selfadministration was carried too far with the 1970s controls and that not enough resources were devoted to the

administration of the program. According to this view,

the lack of staff caused undue delays in processing and

contributed to frustration with the program by people

who sought assistance in interpreting the rules.10

Coordination with Fiscal and Monetary Policies

Both the wage-price guidepost policy of the 1960s

and the comprehensive, mandatory controls policy of the

early 1970s were introduced when substantial slack existed

in the economy. In both cases, however, inflationary

pressures developed and tended to undermine the policies.

Highly expansive monetary and fiscal policies of

the Vietnam War period created demand pressures that

made the established guideposts extremely difficult to

enforce. Eventually, the guideposts were violated on

a significant scale, and they were no longer actively

enforced.

In addition, highly expansive monetary and fiscal

policies were adopted during the early 1970s not only

in the United States but in most other industrialized

market economies as well. During the early 1970s, the

economies of the major industrial countries were simultaneously expanding rapidly, and this factor eventually

contributed to strong inflationary pressures in commodity

markets. The devaluation of the dollar further exacerbated commodity inflation in the United States.

To some degree, incomes policies may have suppressed

underlying inflationary forces temporarily and prevented

the early signals of inflationary problems that might

10. A.B. Askin, "Wage-Price Controls in Administrative

and Political Perspective: The Case of the Price Commission During Phase II," in J. Kraft and B. Roberts

(eds.), Wage and Price Controls—The U.S. Experiment

(New York: Praeger, 1975), pp. 22-35.

72
otherwise have occurred. This, in turn, may have contributed to the use of overly expansive monetary and

fiscal policies.

Exogenous Price Increases

Exogenous price increases for important commodities

have proved to be a recurrent problem encountered with

incomes policies. These increases have stemmed in part

from interruptions in supply, such as a series of bad

harvests, or the cartelization among major oil producers.

Sometimes, the shortages that developed were exacerbated

by public policies, for example farm policies that

limited food production in the early 1970s. Moreover,

in the 1970s experience, the devaluation of the dollar

added to the demand for commodities produced in the

United States.

In particular, increases in food prices have occurred at critical times during each of the three post

World War II experiences with incomes policies. However,

increases in food prices were far more pronounced during

the 1970s controls, and to a lesser degree during the

Korean War period, than was the case during the guidepost period of the 1960s.

Exogenous price increases have presented special

problems for incomes policies for several reasons:

first, these increases have tended to set off or to

exacerbate a price-wage spiral; second, this type of

inflation is relatively insensitive to control by aggregate demand measures; and third, these increases

have eroded the real wages implicit in the incomes

policies. As a result, such price increases have undermined support for the incomes policies.

Inequities, Inefficiencies, and Distortions

Some forms of inequities and inefficiencies have

occurred as results of incomes policies. A full consideration of the advantages and disadvantages of incomes policies would involve a weighing of these against

73
inefficiencies and inequities that would have occurred

without the incomes policies. For example, during certain periods the use of incomes policies may have resulted

in a lower inflation rate and/or an increase in output

and employment opportunities; and these changes may

have reduced inequities and inefficiencies. Moreover,

inflation itself causes many inequities; and if an incomes policy can reduce inflation, avoiding such inequities needs to be weighed in an overall appraisal.

Inequities. One type of inequity occurs when an

incomes policy is not applied even handedly, for example,

as between labor and management or among different sectors of the economy. The guidelines policy of the 1960s

in particular has been criticized on the grounds that it

was enforced against only the largest and most visible

companies and unions, and then only on a selective basis.

Moreover, some analysts believe that the guidelines

were applied to wages more effectively than to prices,

while other analysts hold the opposite view. Some persons

feel that a voluntary incomes policy is by its very

nature unfair, since those who choose to cooperate may

fall behind economically in comparison with those who

do not cooperate. In addition, it is questioned whether

or not it is fair and reasonable to ask the management

of large corporations and the elected officials of large

unions to place the general goal of fighting inflation

above their immediate goals of maximizing benefits for

their respective constituents.

In the application of wage standards, the problem

of determining equity has proved very difficult. For

example, if workers are prevented from getting wage increases under existing agreements by a wage freeze, is

that fair or legal? Is it fair that large wage settlements be allowed on the grounds of catching up with

past inflation and/or wage increases achieved by other

groups of workers?

Difficult problems involving equity also occur

with employers. Is it fair when the wage or pay board

approves exceptionally large wage increases and the price

board does not permit these costs to be passed through

in higher prices?

74
Inefficiencies and Distortions. Inefficiencies in

the use of resources and distortions in markets and

market institutions have sometimes resulted from the incomes policies. However, it is especially difficult

to measure these or to offer any overall quantitative

assessment of their importance.

Shortages have been symptomatic of inefficiencies

resulting from some forms of incomes policies. The instances in which incomes policies have caused or exacerbated shortages have been more prevalent in product

markets than in labor markets. Moreover, shortages

were far more prevalent during the latter phases of the

1970s controls than during either the Korean War period

or the largely voluntary guidelines of the 1960s. -

1-

There were some shortages during the Korean War period.

This type of problem was mitigated, however, because

prices rose substantially before controls were imposed

and because subsidies were used to encourage increases

in the supplies of critical materials.

Shortages did not occur on a significant scale as

a result of the guidelines policy of the 1960s. For

one thing, the policy was largely voluntary and not

that binding. For another, excess demand in commodity

markets was less prevalent during the 1960s period

compared with the other two periods in which there were

incomes policies. However, there may have been more

subtle forms of allocative effects from the guidelines

policy. For example, the targeting of the guidelines

policy on the basic industries may have had some adverse

effect on their ability to raise capital and/or appraisals

of the profit potentials from investments in plant and

equipment in those industries.

Even for the 1970s experience, it is difficult to

assess the role of the controls program in specific

11. For an analysis of the effects of the 1970s controls on product markets and business practices, see

Marvin Kosters, Controls and Inflation, especially

Chapters 4 and 5.

75
shortage situations. In one of the most detailed accounts

of shortages, controls are frequently listed as one of

the contributing factors along with other causes.12

In the case of competitive auction markets, situations of shortage would not prevail for a very long

period of time in the absence of controls that limit

price responses. In this sense the term "shortage" refers to a situation in which the quantity demanded exceeds the quantity supplied for a significant period

of time so that willing buyers are unable to purchase

all they wish to purchase at existing prices. However,

in other markets more removed from these competitive

conditions, prices may not adjust rapidly to shifts in

supply and demand. Thus, even in the absence of controls,

buyers in some markets encounter delays in obtaining

delivery during boom conditions in the economy.

Nevertheless, controls played a role in causing

or exacerbating commodity shortages during the 1973-74

period. For one thing, in specific instances the controls caused reductions in supply by encouraging hoarding,

by making it unprofitable to produce certain products,

by stimulating exports, and by generally discouraging

measures to increase supply such as investments in new

capacity. When shortages occurred, sellers had to decide which customers to satisfy and to what extent.

Often this meant satisfying the "best" or largest customers, and ignoring new or small customers; these conditions sometimes gave rise to black markets and to

barter. Shortages of key commodities occasionally disrupted production, which resulted in economic waste.

As economic controls become binding, businesses

sometimes react in a variety of ways in their attempts

to avoid the impact of the controls. One of these ways

12. National Commission on Supplies and Shortages,

The Commodity Shortages of 1973-74—Case Studies (Washington, B.C.: U.S. Government Printing Office, 1976).

76
involves reductions in the quality of the good or service

provided. Other ways include additional buying and

selling and even transportation or alteration of goods

for the sole purpose of avoiding the full impact of the

controls program.

Although difficult to evaluate, some analysts feel

that controls lessen competition in some circumstances

by stimulating collusive practices,13 or by making it

more difficult for small firms to compete. For example,

in dealing with the administrators of a controls program, unions and producers in an industry may be encouraged to act more as a group than they otherwise would;

and this could lead to collusive practices in pricing

and output decisions. On the other hand, it could be

argued that a controls program is immaterial to collusionthat if the principals are going to collude they would

do so, with or without controls.

Some analysts fear that incomes policies, especially

the mandatory variety, may be damaging to collective

bargaining as a viable institution. Unless care is exercised, these observers feel that government decisionmaking may supplant private collective bargaining and

private settlements of disputes.14

DESIRABLE CONDITIONS FOR AN INCOMES POLICY

The analysis of problems encountered with past incomes policies leads to conclusions about the conditions

under which an incomes policy might be most likely to

succeed and about measures for consideration that might

prevent or mitigate past problems with incomes policies.

("Success" in this instance refers to reducing inflation

below what would otherwise be the case, without producing

serious inequities, distortions and inefficiencies.)

An incomes policy would be most likely to succeed

when there are substantial unused resources in the

13. H.S. Houthakker, "Are Controls the Answer?," Review

of Economics and Statistics, August 1972, p. 232.

14. D.Q. Mills, Government, Labor and Inflation, pp.

218-228.

77
economy, widespread support for the policy (particularly

on the part of major labor unions), coordination with

other economic policies (particularly monetary and fiscal

policies), and the absence of major exogenous increases

in commodity prices.

In the past, problems have arisen with incomes policies when inflationary pressures have resulted in increases in the cost of living that were not provided for

in the wage standard. To address this, fiscal measures

could be taken to at least partially offset the initial

impact of such increases on real wages. For example, reductions in income taxes or payroll taxes might be used

to offset some of the effects of higher food and fuel

prices on wage earners. There are difficulties with this

approach, however, since there is no "good" way to determine an appropriate adjustment to compensate for such

shortcomings in the wage standard.

With past incomes policies in the United States, the

federal government has adopted the role of proposing,

promulgating and administering the policies. However,

under a "social compact" arrangement the government provides more explicit and positive incentives for labor

and management to reach noninflationary wage agreements.

One type of social compact which has been used in the

Netherlands has involved enhanced benefits from the

government in such areas as social security, unemployment

insurance, or education, in exchange for moderation in

wage settlements.15 Another type of social compact that

has been proposed for consideration involves a guarantee

by the government that workers will receive a. specified

increase in real wages in exchange for moderation in

nominal wage settlements. For example, if prices rise

more than anticipated, the impact on wage earners might

be softened through lower taxes or other means.16 This

would amount to a type of real wage insurance.

15. OECD, Wage Policies. 1975.

16. Arthur Okun, "Incomes Inflation and the Policy Alternatives," presented at the Summit Conference on Inflation, September 23, 1974.

78
Such social compacts (if they could be agreed upon)

might help to overcome one of the difficulties encountered

with incomes policies in the United States in which increases in the cost of living undermined labor support

for the policies; in addition, if workers were guaranteed

a certain increase in real wages, this might help to

develop a consensus for an incomes policy.

Another difficulty encountered with past policies

has been failure to include labor, management, and other

groups adequately in the process of policy formulation.

In some countries, for example, West Germany, discussions

are held among government officials and representatives

of management and labor over wage standards for the next

year. While this approach may have some promise in the

United States, decisionmaking over wages is much more

decentralized in the United States than in Western

Europe. Moreover, there is no assurance that discussions

among representatives of labor, management, and policymakers will lead to consensus in this area; just the

opposite might occur.

Another proposal which might avoid some of the administrative difficulties with past incomes policies involves the use of the tax system to reward or to penalize behavior with respect to the standards established

by the policy. According to one version of this approach, a surcharge might be added to the income tax of

employers who grant wage increases in excess of the wage

standard.17 This approach would provide an incentive

to comply with the policy without entailing the disadvantages of a large bureaucracy. It has been criticized

however, for focusing too much on wages and not pricing

behavior. Inequities among workers could also arise

under such a scheme. For example, it could disproportionately affect workers who would otherwise obtain

catch-up wage increases, or workers who had bargained

for larger wage increases in exchange for labor-saving

changes in work rules.

17. Henry Wallach and Sidney Weintraub, "A Tax Based

Incomes Policy," Journal of Economic Issues, June 1971.

79
Structural measures for increasing supplies and reducing inflationary biases in the economy might also be

emphasized as an integral part of an incomes policy.

Some analysts believe that the major contribution of

past incomes policies has been an associated effort to

reduce bottlenecks, improve dispute settlement machinery,

and strengthen competition in the economy.18 Although

this policy emphasis might be justified independent of

an incomes policy, these policies might be complementary.

18. See for example, Sidney L. Jones, "The Lessons of

Wage and Price Controls," in J. Kraft and B. Roberts

(eds.), Wage and Price Controls (New York: Praeger,

1975), pp. 1-10.

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