A VIEW OF WAGE-PRICE CONTROLS
Brand, H.
Wage-price controls are not currently on the political agenda—partly because of a widespread ideological abhorrence of direct government intervention, but mostly because wages and, to an extent,...
...23, 1975...
...Interest on the federal debt, for example, rose 130 percent between 1963 and 1973, while the debt itself rose by less than half that rate...
...Among these events were the successive devaluations of the dollar, beginning in late 1971, which depressed the dollar by as much as 17 percent over the next 18 months in terms of other major currencies— thus leading in time to an enormous rise of exports not only in agricultural commodities but in finished goods as well...
...For many years prior to 1972, the costs of business and households were driven up by factors the Phillips curve argument cannot account for...
...Aid for Utilities," Wall Street Journal, Jan...
...Policy was reversed...
...Capital, on the other hand, is relatively mobile...
...At present it is a program that enjoys broad political support, but in time it is bound to lose a good part of that support, since it requires enormous amounts 19 "The Economics of the Current Anxiety," New York Times, Dec...
...but with the reversal (although not exactly coinciding with it), a wage-price freeze was imposed, followed by formal controls...
...1 ° Furthermore, the process of capitalization of government subsidy benefits—as in farm land, research and development, and business equipment on which investment tax credits are allowed—greatly raises costs and prices.'' These aspects of the evolution of costs have found little attention and have been ignored by the theorists of the "unemploymentinflation" dilemma...
...Again, however, labor costs represent but one component of prices, and prices will often rise at a higher rate than labor costs, even when labor costs remain stable...
...It was meant to maintain the existing income distribution...
...And this happened mostly prior to the petroleum price increase imposed by the OPEC cartel...
...NO CONCLUSIVE EVIDENCE exists for what the Phillips curve suggests: namely, that full (or high) employment generates inflation because wages rise faster than the long-term trend in productivity...
...This decline in demand, however, will eventually halt and reverse...
...9 The Comptroller General of the U.S., Economic and Foreign Policy Effects of Voluntary Restraint Agreements on Textiles and Steel, March 21, 1974, p. 23...
...A discussion of it therefore remains in order...
...Senate Committee on Banking, Housing and Urban Affairs, Oversight on Economic Stabilization, Hearings, Jan...
...This might apply even if some fundamental approaches in manpower training not now in sight were tried...
...Reprinted in Inflation: Selected Readings, eds...
...And the converse tends to be the case for a low unemployment rate...
...THE UNIONS CLAIM that the wage-price program was unfair to labor cannot be assessed in detail here...
...the question of controls will then reassert itself...
...According to Robert Hall, "Some economic policy-makers within the federal government are reluctant to ratify 8 percent wage inflation...
...This has been true for the United States since controls were first introduced in 1971, and has been documented as well for earlier periods for socially more highly organized countries...
...Whether this attempt can succeed is another question, not at issue here...
...6U.S...
...108 COMMENTS AND OPINIONS of capital and therefore restrictions on consumption...
...7 High costs of construction are usually blamed on the big wage settlements enjoyed by the construction unions...
...we will return to this aspect of the discussion shortly...
...The Wholesale Price 7 Based on the pertinent tables of the national accounts...
...1 and 6, 1974, pp...
...Thus, while prices rose 74 percent between 1953 and 1973, the interest yield on corporate bonds climbed 133 percent, and on long-term Treasury securities, 146 percent...
...The so-called economic assumptions presented as part of the long-range fiscal outlook detailed in the budget spell the following unemployment-inflation trade off: CONSUMER PRICE UNEMPLOYMENT INDEX RATE (percent change) (percent of labor force) 1975 11.3 8.1 1976 7.8 7.9 1977 6.6 7.5 1978 5.2 6.9 1979 4.1 6.2 1980 4.0 5.5 Source: Budget of the U.S...
...The pricing practices of the administered price industries, such as steel and autos, have been innocuous compared with those now being imposed by the alliance of government and oil, government and the public utilities, government and agrobusiness...
...Robert C. Joiner, "Trends in Homeownership and Rental Costs," Monthly Labor Review, July 1970, p. 26 ff...
...But this controls 12 U.S...
...An unprofitable plant will be closed down...
...At present, the government promotes price increases in the energy and agrobusiness sectors, which represents a kind of forced savings imposed on consumers so as to provide the profits and hence the capital for the expansion of those sectors...
...19 Galbraith believes that consumption is excessive, and that it should be reduced because it causes inflation...
...A rise in the price level may, to an extent, be caused by higher labor costs, which—in the form of the higher income they spell—will validate the price rise when translated into additional purchases of goods and services...
...There is bound to be, for example, increasing government control of the allocation of capital...
...The graphed relation between supply, measured by the unemployment rate, and changes in the average wage rate, has become known as the Phillips curve...
...he presents calculations showing that a 6 percent unemployment rate would drive wage "inflation" down to 3 percent a year by 1979...
...Beyond question, dollar devaluation was a major inflationary force, one beyond the control of national institutions and policies, the end result of a worldwide credit and investment expansion whose dimensions and destabilizing dangers were magnified by the uninhibited power of the banks and nonfinancial corporations that carried it...
...There has been no excess demand for years, and its contribution to inflation, when it did occur, was of brief duration...
...April 1 and 7, 1971, p. 87...
...Yet the argument implied by the Phillips curve remains plausible: where the level of final demand for goods and services permits it, higher labor costs will be passed on in the form of higher prices...
...Economy: Projections through 1985, New York Stock Exchange, Sept...
...These booms absorbed the unemployed fairly rapidly, although the Vietnam War and the manpower needs it generated may have concealed the growing difficulties of such absorption...
...its simplicity has had and continues to have a strong appeal to the leading decision-makers...
...John Dunlop, chairman of the Cost of Living Council, stated in early 1974 that "two-thirds of this inflation was concentrated in food and energy, and at a time when we had more stringent price controls than in phase II''—and this he found ``particularly perplexing...
...Resistance to such a decline will be condemned to futility unless accompanied by programs urging rational alternatives: public ownership and management of all resource industries and banks, and the construction of an international economy based on the mutually agreed-upon distribution of raw materials, fuels, manufactured goods, services, and capital...
...For all these reasons, price controls cannot be expected to be "fair"—at best, given favorable political circumstances, they may be devised so as not to make an unfair situation still worse...
...The Capital Needs and Savings Potential of the U.S...
...ASIDE from such questions as "fairness," it follows from what has been said here that structural and cyclical factors have defeated wage-price control efforts...
...Ibid...
...20 Murray L. Weidenbaum, "Dangers in U.S...
...Barry Bosworth, "Phase II: The U.S...
...The reimposition of wageprice controls will then be "rationalized" not on the basis of the Phillips curve, but as a means to curtail "inflationary" consumption...
...There are no markets for aircraft carriers, space rockets, supersonic jets—only costs that forever outrun original estimates...
...but the 4 percent unemployment rate remained a target of economic policy for many years after it was first pronounced as an "interim" objective on the way to a lower rate in the 1962 Economic Report of the President...
...There are many other kinds of costs for which the Phillips curve cannot account, but which are at the root of inflationary price trends...
...Therefore they are unlikely to be tolerated for very long and are likely to be replaced, at least in part, by formal capital controls...
...Interest rates, for example, have risen much more rapidly than the price level...
...But from the outset the top union leadership was under pressure to raise the level of wages below which controls should not apply...
...The rationale for wage-price controls is deceptively simple: they are meant to stop or retard wageprice "spirals" so as to facilitate expansionary fiscal and monetary policies...
...According to Burns, foreign orders of durable goods other than motor vehicles soared 25 percent in the year ending in the fall quarter of 1973, while domestic orders rose 17 percent over the same period...
...L'periment with an Incomes Policy," Brookings Papers on Economic Activity, 2/1972, p. 355...
...Government, Fiscal Year 1976, p. 41...
...20 The New York Stock Exchange, projecting an enormous "savings gap" over the coming decade, advocates, like Galbraith, a cutback in current consumption so that the "gap" may be closed...
...Yet much of the increase in final demand that pulls up prices during certain phases of the business cycle are caused by expanded employment and the additional income it generates...
...The costs of land rose from 11 to 21 percent, and the costs of financing from 5 to 10 percent...
...Whatever unfairness there may have been in the operation of the wage-price control program derived "Distribution of Income: Economic Report of the President, February 1974...
...Moreover, large sectors of the economy do not operate within conventional markets where prices can be presumably controlled...
...Investments can be shifted to low-wage areas at home or abroad...
...consumer outlays for textiles...
...See relevant passages relating to capitalization of farm subsidies in Charles L. Schultze, The Distribution of Farm Subsidies: Who Gets The Benefits?, staff paper, Brookings Institution (Washington, D.C.: 1971...
...12 Arthur Burns, chairman of the Federal Reserve's Board of Governors, after analyzing the major elements of the inflation, stated that "When an economy is beset by inflationary forces of such exceptional character, governmental intervention in pricing decisions or wage bargaining can hardly be expected to be very effective...
...The difficulties experienced in administering the wage-price control program appear- to have reaffirmed the conviction of high officials that the Phillips curve portrays no mere statistical correlation, but suggests a cause-effect nexus...
...there] is probably universal agreement [among economists]," Robert Hall has written in the Brookings Papers on Economic Activity, "that low unemployment rates imply high rates of wage and price inflation, or, equivalently, wage and price stability requires a high rate of unemployment...
...COMMENTS AND OPINIONS 105 fiscal policies meant to control them are that a high, if gradually declining unemployment rate will also gradually cut the rate of inflation...
...1 e The present' world economic crisis, however, forces or will force certain structural changes...
...15, 16, and 17, 1972, p. 325...
...Voices clamoring for limitations on consumption have recently included that of John Galbraith...
...Notwithstanding these settlements, however, on-site labor costs have declined drastically relative to the total costs of construction during the postwar period...
...In sum, the "trade-off" point between unemployment and inflation was to be reduced by the controls...
...The share of the costs of materials increased somewhat, while the share of profits and overhead fell...
...As the rate of price advance rose and accelerated 'March 1970, p. 369...
...Congress, Joint Economic Committee, The 1972 Economic Report of the President, Hearings, Feb...
...6 The government's budget for the fiscal year 1976 shows these calculations to be "optimistic...
...Senate Committee on Banking, Housing and Urban Affairs, Selective Credit Policies and Wage-Price Stabilization, Hearings, March 31...
...Wage-price controls and the question of their effectiveness became virtually irrelevant in the face of the worldwide inflationary tidal wave that began in 1972...
...Changes in the composition of the unemployed (relatively more women and youths came to make up their ranks) supposedly shifted the Phillips curve upward, meaning that "acceptable" price advances now required substantially higher unemployment rates than earlier—with estimates ranging from 5 to 6 percent of the labor force...
...President Nixon, planning to build an electoral alliance with blue-collar groups, rejected the "game plan" of his economic advisers, according to which restrictive policies were to engender unemployment levels sufficiently high to limit, or nearly limit, wage claims to the longer-term rise in productivity...
...Thus, most of the rise in the cost of shelter, an important item in the Consumer Price Index, has been unrelated to labor costs...
...R. J. Ball and Peter Doyle (Baltimore: Penguin Books, 1969...
...15 No matter how "fairly" administered, it was bound to perpetuate unfair results...
...2 A historical study by A. W. Phillips, titled "The Relationship Between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957"3—although dealing with an era noted for the mildness of most of its cyclical price uptrends as well as for the severity of its deflationary phases—has provided Americans with a simple conceptual scheme for examining the "tradeoff...
...Let us say this much: a wage-price program may conceivably be part of a broadly rooted political tendency that promotes the redistribution of income and wealth toward greater equality...
...Wage-price spirals characterized the booms of the mid-'50s and the middle and late '60s...
...Consumer goods and service industries are subject to severe overcapacity problems, even in times better than the present...
...their rise has by far exceeded the inflationary "premium" demanded by creditors as reimbursement for the declining purchasing power of the return on the debt instrument they hold...
...See Survey of Current Business, July 1974...
...This means that the standards of living of large groups of wage- and salary-earners will decline...
...That is why it supported the controls program at its inception, with the proviso that it encompass all factor incomes—rents, profits, dividends, interest, executive compensation, as well as wages and salaries.' s Moreover, the unions agreed that the,trend in overall wage increases should run parallel with the longterm trend in the productivity of the private economy, plus a moderate allowance for changes in the cost of living...
...COMMENTS AND OPINIONS 107 largely from a setting that exalted the rights of private property and resisted the disturbance of market relations...
...8, 1974...
...106 COMMENTS AND OPINIONS Index rose 14 percent in 1973 alone, with its crude materials component soaring 36 percent...
...Hence no matter how strong their union, their bargaining power is limited...
...I believe this to be a thoroughly mistaken view...
...This setting was most favorable to middle-income wage earners, whose interests were perhaps safeguarded, or at least not hurt, by the stabilization the controls program promised...
...For example, after import quotas were imposed on foreign steel beginning in January 1969, the average annual rate of increase in steel prices rose to 6.7 from 4.1 percent during the nine years preceding the quotas.' The textile quota agreements with Far Eastern countries made in 1972 are estimated to have added up to $2.5 billion to U.S...
...Total monetary interest payments increased from 2 percent of the national income in elbid., p. 378...
...The AFL—CIO has been traditionally concerned with stabilizing the economy so as to secure full employment and high wages...
...For these reasons alone, increases in labor costs cannot be regarded as determinate factors in price trends...
...In such a setting, control of wages is bound to be more effective than control of prices...
...21 The conservative proponents of consumption limitations are of course opposed to controls, preferring to rely on high prices to generate additional capital...
...104 COMMENTS AND OPINIONS THE IDEA that there is a "tradeoff' between unemployment and inflation pervades the economic literature of the past 15 years...
...Therefore it would be fatuous to relate the rampant, worldwide inflation of the past two or three years to rising labor costs...
...For the 1950s and early '60s, the "acceptable" tradeoff between price increases and unemployment has been calculated to have been 2 percent for the former, and 4 percent (of the labor force) for the latter...
...More to the point, Galbraith helps set the tone for those who wish "to encourage the creation of an economic climate which will increase the total flow of savings and hence the funds for productive investment...
...These in turn will very probably be part of a broader program including wage-price controls as one of the politically more acceptable means to limit consumption in favor of investment...
...The "theory" implicit in these projections and the 'U.S...
...30 and 31...
...13Ibid., p. 670...
...Brookings Papers on Economic Activity, 2/1974, p. 377...
...George Perry, also an economist associated with the Brookings Institution, has stated that, "with many variations and refinements, the concept of a tradeoff between wage changes and the aggregate unemployment rate has been the framework for most discussions of inflation during the past decade...
...Workers are by and large linked to their jobs by family responsibilities and community ties, and by their stake in acquired skills and experience, which with time become almost nontransferable...
...But the sensitivity of wage and price levels to such countercyclical measures, as well as to declining employment and demand, evidently lessened in the late '60s and early '70s (the reasons remain obscure...
...Phillips presented evidence showing that the price of labor tended to vary inversely with the supply of labor...
...416, 417...
...It will be said that these are abstractions: unions, working people in general, are less concerned with "unfairness" as such than they are with changes for the worse...
...But, for the reasons indicated, while prices are indeed likely to rise, capital controls are probably inescapable...
...Thus, unemployment could presumably be cut further by an expansionary federal budget and easier credit, without serious inflationary consequences...
...In actuality, this condition of tradeoff was not attained...
...The tendencies I have outlined here assume a historical context in which the United States seeks to reverse the trend toward its own integration in the world economy and strives to become self-sufficient in the major critical fuels and materials on which its industrial power is based...
...Rising interest rates have spelled soaring interest costs...
...in time Congress and the courts compelled the Pay Board to remove wages of $3.50 an hour or less from the controls, involving roughly half the total work force...
...New technologies or processes, changes in product quality, discontinuance of low-margin products—all can vitiate- the desired effects of price controls...
...5 Hall has no doubts about the effectiveness of this "prescription...
...their concern with job security will be at least as great as their concern with income...
...from 1965 onward, that target came to be increasingly questioned, and in time virtually abandoned...
...According to a study by the Bureau of Labor Statistics, 8 on-site labor costs in residential construction dropped from 33 percent of total costs in 1949 to 18 percent 20 years later...
...1974...
...These government-endorsed and government-promoted pricing practices will "Lloyd Ulman and Robert J. Flanagan, Wage Restraint: A Study of Incomes Policies in Western Europe (Berkeley: University of California Press, 1971...
...Rather, it was motivated in part by a desire to retard redistributional trends that presumably favored labor, especially unionized labor...
...13 Progressive loss of control over the levers of national economic policy marks the course of developments since the mid-'60s, and especially during the 1972-74 boom and inflation—thus leading to events that justify allusion to natural disasters...
...What is more, they threaten large segments of American industry with ruination...
...The leading policy-makers alluded to this event in terms of helplessness...
...prove far more inflationary...
...Since labor costs constitute a major component of most prices, a high unemployment rate, being associated with small upward as well as downward movements in wage rates, tends to make for stable to moderately declining prices...
...1°Ibid., p. 25...
...Even if there were a sound empirical basis in support of the Phillips curve argument, it would fail to explain a large part of the reasons for inflation— and would possibly explain none of them...
...2lbid., p. 411...
...A staff study made in the Treasury Department, cited by Senator Proxmire in early 1972, noted that "over the next few years, a 4 percent unemployment rate as a national goal is not feasible without significant inflation...
...Increasingly, their unhappy experience with price and wage controls has convinced them that the `old time religion' of contraction in the aggregate economy is the only way out...
...At any rate, with the unemployment problem diminishing, fiscal and monetary policies could be used to dampen inflationary pressures...
...and fiscal and monetary measures, rather than feed inflation, would stimulate employment...
...The agreement was undertaken as part of a "rapprochement" between the AFL—CIO leadership and President Nixon, a development that proved transient...
...Wage-price controls are not currently on the political agenda—partly because of a widespread ideological abhorrence of direct government intervention, but mostly because wages and, to an extent, prices as well are now being restrained by the rapid decline in the demand for goods and services— and much more effectively than by administrative controls...
...program was not...
...The union leadership's effort to share in the stabilization effort came to naught—if only because the "unfairness" of the income structure (including the pattern of relative wages) proved unacceptable to a substantial if largely unorganized segment of labor, whose interests the leadership could not, and could not have wished to, ignore...
...1953 to 12 percent in 1963 and to 19 percent in 1973...
Vol. 22 • April 1975 • No. 2
