Return to Controls?
Bleiberg, Robert M.
"Return to Controls?" Among the spate of bills dropped into the hopper in the waning days of the Ninety-third Congress was one labeled S. 4174, otherwise known as the "Economic Stabilization Act of 1974. "Introduced by...
...Apart from aggravating and creating shortages, controls—as I documented in my Ludwig von Mises Lecture last spring at Hillsdale College—did perhaps their worst damage on the financial scene...
...The Bureau of National Affairs, which interviewed a number of businessmen on an off-the-record basis, uncovered considerable sentiment in favor of such curbs...
...For example, BNA quoted a top official of the Marine Midland Bank as follows: "Controls are like the stopper on a pitching staff...
...Early in December, at the first midterm convention in party history, the Democrats approved an eight-point economic program which included a call for across-the-board control of prices, wages, executive compensation, profits, and rents, as well as a provision for wage catchups and price rollbacks...
...Hence the gap between U.S...
...Peacetime wage and price controls in this country officially expired at midnight on April 30, 1974, but they refuse to rest peacefully in well-deserved limbo...
...On the contrary, late in April perhaps appalled at the looming prospect of a return to free markets, the Senate Democratic Caucus abruptly called for legislation endowing the Nixon Administration with standby controls authority...
...Miss Ward went on to urge a long-term wage-price freeze, as well as an "agreed incomes policy that would represent a consensus of democratic society [and] could serve as a possible model for apermanent feature of a market economy...
...Dividends, of course, reflect corporate profits, which, until business activity began to pick up in 1972, had been depressed...
...By the end of that year, the floating rate of the Bank of England had gone from 6 percent to 8 percent, the Bank of France had increased its discount rate twice, from 5 3/4 percent to 7' percent...
...That was documented at the NAM's annual meeting, where one member after another spoke of raising prices in anticipation of a return to controls...
...Paving the way for the decreases are lower prices of fabrics, reflecting drops at the fiber and yarn level, as well as distress selling by mills...
...When the customers finally balked, accumulation swiftly led to the across-the-board efforts to liquidate which have so savagely begun to depress both production and trade...
...Nonetheless, it may well be the forerunner of an agency with fang and claw...
...Galbraith, himself a veteran of the Office of Price Administration, observed: "the next time we do this we must be serious about it...
...As Mr...
...Even more striking, members of the militant unions which deal with the City of New York, faced by the prospect of widespread layoffs for the first timesince the Great Depression, are weighing the acceptance of pay cuts...
...Under Phase Four of the price control program, 25 cents served as the official ceiling...
...Specifically, it approved creation of the Council on Wage and Price Stability, which, though commanding neither subpoena powers nor the rest of the customary bureaucratic arsenal of weapons, is supposed to monitor wages, prices, profits, dividends, interest rates, and "concentration of business power and antitrust practices...
...According to the Morgan Guaranty Survey, in January-March of 1974, the rise in "real" inventories (as measured in 1958 prices) other than automobiles ran to more thanthree times that of the like-1973 period, far and away an all-time first quarter high...
...There is a second count to the indictment...
...Just a few weeks ago, the Council on Wage and Price Stability held two-day hearings on the unprecedented surge in the price of sugar...
...If so, one can only say, along with Shakespeare, "Sweet are the uses of adversity...
...Not surprisingly, investors reacted badly...
...Even as they were phased out last spring, wage and price controls left behind another ugly and unwanted legacy: a huge inventory buildup, plainly aimed at jumping the gun on the scheduled expiration date...
...The sequence of events began unfolding in the fall of 1972, when Western Europe, beset by mounting inflationary pressures, moved to tighten credit...
...to allow increases in wages and salaries, "based on the application of cost-ofliving and productivity formulas...
...Even the official Wholesale Price Index, artificially ballooned (as noted above) by a wave of list price hikes, in November showed a decline in its rate of annual increase from well over 20 percent to 14 percent...
...Headed by Arthur Burns, chairman of the Federal Reserve Board, CID, as it was known, early on decreed that corporate dividends could increase by no more than 4 percent per year...
...The result, so one candid vice president concedes, is "perhaps the most widespread violation of the Robinson-Patman Act [which forbids such discrimination] in history...
...Such views, we submit, constitute a triumph of despair over experience...
...Yet all is not necessarily lost...
...The Council has been shrugged off by Sen...
...One lawyer, swamped by such queries, observed: "December may be a very bad month for the price indices, partly because of these anticipatory price actions...
...BNA added that executives have been asking their Washington lawyers for weeks now: "What's the latest date that I can raise prices and be grandfathered against a rollback...
...Perhaps most ominous, spokesmen for private enterprise, many of whom embraced the New Economic Program unveiled by former President Nixon on August 15, 1971, apparently are getting ready to "live with" (as the obscene phrase goes) a revival of controls...
...What that suggests is that some of the shrewdest merchants in the world are convinced that prices are more likely to decline than to rise...
...Some observers see controls as inevitable in 1975, and, in view of the political realities and widespread economic ignorance of the American people (more than half of whom, according to the latest Gallup Poll, favor such curbs), only a bold or foolhardy man would bet heavily against them...
...Used that way, when the timing is right, controls can work...
...Another lawyer put it this way: "My clients," he said, "have little faith in controls, but they are getting to the point where they're saying we can't stand any more of this, let's try the controls way again...
...On the contrary, discounts from list prices—notably to larger users—are widespread...
...On May 1, twelve hours after curbs officially expired, the Senate, while rejecting the Caucus' proposal, voted 44-41 to keep the Cost-of-Living Council in business permanently...
...Hubert Humphrey (D.-Minn...
...In short, by encouraging business to accumulate huge stocks of goods, controls first caused a vast inventory buildup...
...The presence of controls on the books from mid-1971 through early 1974 kept the official price 'indices artificially low...
...From the outset, even in a relatively slack economy, controls led to economic distortions...
...Controls must be administered fairly by an organization seriously set up for the purpose which has to be quite large and organized for enforcement...
...Wage and price controls, in short, have bred one economic disaster after another, and yet the push to revive them presses relentlessly on...
...Burns and the commercial banking system...
...Despite the sharp upward trend of interest rates abroad—one which accelerated in the early months of 1973—the Federal Reserve persistently kept a lid on interest rates at home...
...While S. 4174 (along with hundreds of other bills) died stillborn, so to speak, when Congress adjourned in December, more will surely be heard of it in coming months...
...A few days later, the dollar was devalued for the second time officially, and continued to sink in the world's foreign exchange markets for several months more...
...They were cheered on by such dedicated statists as Barbara Ward, president of the International Institute for Environment and Development in London, and John Kenneth Galbraith, the avowedly socialist professor at Harvard, who, at a seminar for institutional investors (ironically sponsored by a Wall Street brokerage firm) agreed that controls were "absolutely necessary within the next six months to lower the rate of inflation and stabilize the economy...
...And according to Women's Wear Daily, which ought to know, dress houses are trimming prices as much as 20 percent for spring...
...Today, by a not-so-fine irony, the threat that controls may be reimposed at any time is keeping the indices artificially high...
...While the U.S...
...Domestic and foreign demand for the light metal recovered in 1972 and in the following year supplies grew tight...
...From the fall of 1973 through spring, stocks in the hands of business climbed at a rate of more than $3 billion per month, or well over $20 billion all told...
...At the recent annual meeting of the National Association of Manufacturers in New York City, several corporate executives voiced resigned acceptance of the idea...
...When four banks sought to raise the prime rate from 6 percent to 6 1/4 percent, the Committee on Interests and Dividends reacted angrily...
...In order to save the jobs of 100 colleagues or so, editorial and business employees of the Washington Star-News recently voted 347-44 to go on a four-day work week at a 20 percent cut in pay...
...Owing largely to the Committee on Interests and Dividends, the dollar suffered its second official devaluation...
...Three of the four banks promptly yielded to government pressure and rescinded the boost, while the fourth held out a few days longer before surrendering...
...Those who violate any order or regulation under the Act "shall be fined not more than $5,000...
...As business activity began to boom throughout the world, prices of commodities bought and sold on a global basis, like the nonferrous metals, started to rise above domestic ceilings, thereby impelling producers to channel their output abroad and creating artificial shortages at home...
...As to prices, softening is visible across-the-board...
...As Louis Rukeyser, who conducts the well-known television program "Wall Street Week," recently quipped in a speech to the National Press Club: "It was President Nixon who in 1969, 1970, and 1971 kept telling us that wage and price controls would not work, and who then, in 1972, 1973, and 1974, absolutely proved it...
...the measure itself is scheduled to expire at midnight on September 30, 1977...
...This was unfair on the face of it...
...In dismal contrast, dividends on the Standard and Poors' 500 stocks inched ahead by only 5.1 percent, while...
...As a consequence, in the last half of 1973, the U.S...
...became a net exporter of aluminum for the first time since 1970...
...the proposed measure among other things authorizes the President of the United States "to issue such orders and regulations as he may deem appropriate to stabilize prices, rents, wages, salaries, profits, dividends, interest rates, and other comparable economic transfers at levels not less than those prevailing on April 30, 1974...
...For in recent weeks, cries for controls have been raised anew in many quarters, political, academic, and (albeit with a touch of embarrassment) business alike...
...Indeed, with a speed that has shocked most observers, notably those in Washington, D.C., who are usually the last to know, the decline in business activity has begun to leave its mark on wages and prices alike...
...In a not-so-veiled threat of retaliation, it demanded cost and profit data to "justify" the move...
...In February of 1973, a great confrontation occurred between Dr...
...Here the harm was inflicted not by the Price Commission, Pay Board, or Cost-ofLiving Council, but by a little-known, if highly strategic, part of the controls structure known as the Committee on Interest and Dividends...
...Rukeyser so aptly put it the other day: "Imposing wage and price controls is one of the few vices in life that is nearly as damaging when you talk about it as when you actually do it...
...since then, sugar has declined sharply at the commodity,, wholesale, and retail levels alike...
...Incidentally, the mere threat of controls—by impelling businessmen to raise and keep list prices as high as possible—is doing considerable mischief right now...
...To make matters worse, it aggravated a distortion of several years' standing...
...Introduced by Sen...
...Official statistics aside, quotations for copper, waste paper, steel scrap, and a host of other industrial commodities have declined lately...
...That doesn't mean they're successfully defying the law of supply and demand...
...In Buffalo, for example, Plasterers and Lathers locals have agreed to a one-year wage freeze...
...Nor did they die without a struggle...
...Even as academics and politicos keep up the hue and cry against the ravages of inflation, the spiral is perceptibly weakening...
...In contrast, wages and salaries were allowed to rise by 51/2 percent per year...
...Such action is interpreted by foreign holders of dollars as being unresponsive to the needs of controlling inflation...
...Department of Agriculture predicts further rises in food prices next year, it's significant that a number of leading supermarket chains, including Kroger and Great Atlantic & Pacific, have decreed price freezes of their own in coming months...
...The workings of the marketplace, in sum, may write finis to demands for wage and price controls...
...From mid-1967 to mid-1972, the Consumer Price Index advanced by 25.4 percent, wages of production workers, by 35 percent...
...Layoffs, of course, are mounting apace, and the rise in unemployment already has begun to blunt labor's demands...
...In the spring of 1973, the selling price for ingot aluminum finally reached the published price of 25 cents per pound, thereby ending more than three years in which producers sold at discounts below list...
...Nor is there much reason to doubt, so the Survey suggested, that the heavy accumulation was "voluntary—the product of a deliberate ,,effort by businessmen to add depth to their supplies, and, perhaps, also to beat the rash of price increases expected because of the dismantling of controls...
...and foreign interest rates gradually widened to an alarming 300 basis points, or three full percentage points...
...as a "toothless tiger in an economic jungle of commodity speculators, oil country wheeler-dealers, and Latin American sugar barons...
...Yet, in the last half of 1973, quotations for the light metal abroad climbed to 42 cents per pound...
...From a peak of 430 in mid-November, the Dow Jones Commodity Futures Index by year-end had plunged to 350...
...In a bitter statement, First National City Bank of New York charged that CID high-handedness had aggravated the sinking spell in the dollar...
...By placing a lid for more than two years on what shareholders could hope to receive in the way of returns, the Committee on Interest and Dividends must shoulder much of the blame for the sorry showing staged by the stock market since late 1972, the slow disintegration of Wall Street, and, perhaps Most significant, the clogging of the customary channels by which corporate enterprise taps the nation's savings...
...Aluminum is a case in point...
...Even farm products and foods, where inflation has run rampant, have begun to ease...
...Seven days later it reversed its position...
...You bring them in to stop a losing streak...
...The Chief Executive is also empowered to make "such adjustments as may be necessary to prevent gross inequities...
...Again, here is what "a partner with an extensive stabilization-related practice at one of Washington's largest law firms" remarked: "Contrary to what they're saying publicly, my clients' business planning is being done on the assumption that we're going to have controls...
...payments on the Dow Jones Industrials actually declined by 4.5 percent...
...Pilots working for troubled Pan American World Airways have accepted an 11 percent, one-year reduction in wages...
...Consequently, artificially holding down interest rates is contributing to the weakness of the dollar overseas...
...and to grant increases in prices, rents, interest rates, profits, or dividends "attributable to higher productivity, efficiency, or sales or revenues...
...In August, however, Congress made yet another 180-degree turn in policy...
...What the CID decreed, in effect, was that for the first time in history, stockholders should no longer have the privilege of sharing in the fruits of business recovery...
...Just before Election Day, according to the Bureau of National Affairs, several big Washington law firms received calls from out-of-town clients checking on rumors that President Ford was about to announce a pre-Election Day freeze...
...Mike Mansfield (D.-Mont...
...All it has done so far is to hold inconclusive hearings on sugar...
Vol. 8 • February 1975 • No. 5
