WAGE and PRICE CONTROLS College Debate Issue·
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WAGE AND PRICE CONTROLS SHOULD THE FEDERAL GOVERNMENT ESTABLISH A PROGRAM OF COMPULSORY WAGE AND PR ICE CONTROLS? College Debate Issue· AMERICAN ENTERPRISE INSTITUTE FOR PUBLIC POL/CY RESEARCH 1200-17THSTREET, N.W. -WASHINGTON. D. C. 20036 THE AMERICAN ENTERPRISE INSTITUTE FOR PUBLIC POLICY RESEARCH, established in 1943, is a nonpartisan research and educational organization which studies national policy problems. Institute p·ublications take two major forms: 1. LEGISLATIVE AND SPECIAL ANALYSES - factual analyses of current legislative proposals and other public policy issues before the Congress prepared with the help of recognized experts in the academic world and in the fields of law and government. A typical analysis features: ( 1) pertinent background, (2) a digest of significant elements, and (3) a discussion, pro and con, of the issues. The r�ports reflect no policy position in favor of or against specific proposals. 2. LONG-RANGE STUDIES - basic studies of major national problems of significance for public policy. The Institute, with the counsel of its Advisory Board, utilizes the services of competent scholars, but the opinions expressed are those of the authors and represent no policy position on the part of the Institute. ADVISORY BOARD Paul W. McCracken, Chairman• Edmund Ezra Day University Professor of Business Administration University of Michigan Karl Brandt Loy W. Henderson Professor of Economic Policy (Emeritus) Professor of Foreign Relations Stanford University American University George Lenczowski R.H. Coase Professor of Political Science Professor of Economics University of California, Berkeley University of Chicago Felix Morley Editor and Author Milton Friedman Paul S. Russell Distinguished Stanley Parry Service Professor of Economics Professor of Politics University of Chicago University of Dallas E. Blythe Stason Gottfried Haberler Dean Emeritus, Law School Galen L. Stone Professor University of Michigan of International Trade George E. Taylor Harvard University Professor of Far Eastern History and Politics C. Lowell Harriss Far Eastern & RussianInstitute Professor of Economics University of Washington Columbia University OFFICERS Chairman Carl N. Jacobs Vice Chairmen Henry T. Bodman H.C. Lumb Herman J. Schmidt President Treasurer William J. Baroody William G. McClintock Thomas F. Johnson Joseph G. Butts Director of Research Director of Legislative Analysis *On leave for governmentservice 1970-71 COLLEGE OCTOBER 23, 1970 DEBATE TOPIC SPECIAL ANALYSIS C O N T E N T S PREFACE...................................... .. .. .. .. .. .. iv HISTORICAL PERSPECTIVES.......................................... 1 I. Introduction. .. .. .. .. .. .. .. .. .. .. .. .. 1 II. World War II............................................ 2 A. The Defense Period.. .. .. .. .. .. .. .. 2 B. The War Period.. .. .. .. .. .. .. .. .. 2 c. Postwar Decontrol and Inflation.................... 10 D. Criticisms of World War II Controls................ 11 III. The Korean War.. .. .. .. .. .. .. .. .. .. 12 A. The First Six Months................... .. .. .. .. 12 B. Korean War Price and Wage Controls................. 14 IV. A Final Note. .. .. .. .. .. .. .. .. .. .. 17 DEFINITIONS. .. .. .. .. .. .. .. .. .. .. 18 I. Introduction. .. .. .. .. .. .. .. .. .. .. 18 II. What Are Wages and Prices?.............................. 18 III. What Are Controls--and Do We Have Them Now?............. 19 IV. Toward Which Institutions Should the Compulsion Be Directed?................................. .. .. .. .. 21 V. What Types of Wage and Price Controls May the Affirmative Propose?........ ;......................... 23 A. Typical Cases Emphasizing Regulation............... 23 B. Typical Cases Emphasizing Reform; ............... ;.. 24 VI. Must the Affirmative Maintain a Rationale for Federal Rather Than State Action?............................. 26 VII. Some Cautionary Notes................................... 27 -i- THE RATIONALE FOR ANTI-INFLATIONARY WAGE-PRICE CONTROLS.......... 28 I. Introduction.. .. .. .. .. .. .. .. .. .. .. 28 II. The State of the Economy................................ 28 A. Unemployment.. .. .. .. .. .. .. .. 28 B. High Interest Rates................................ 31 C. Inflation..................................... .. .. 34 III. Present Economic Tools................................... 36 A. Monetary Policy.. .. .. .. .. .. .. .. 36 B. Fiscal Policy...................................... 40 c. Cost-Push Inflation................................ 42 D. Market Controls for Inflation...................... 47 E. Non-market Controls................................ 48 IV. The Guidepost Experience................................ 48 A. Technical Basis.................................... 49 B. Enforcement .. .. .. .. .. .. .. .. 50 c. Success Evaluation................................. 50 V. An Improved Program of Voluntarism...................... 53 A. Initial Consultation. .. .. .. .. .. .. .. .. 53 B. Wage Criteria............................. .. .. .. 54 VI. The Case for Compulsion................................. 61 A. Clear Legal Standards. .. .. .. .. .. .. .. 62 B. Improved Business Climate.......................... 63 c. The Issue of Union Security........... .. .. .. .. 64 D. Improved Economic Effectiveness.................... 64 E. The Dangerous Palliative........................... 65 F. The Standby Approach............................... 65 G. A Note on the Balance-of-Payments Case............. 67 VII. Conclusion.............................................. 68 PRICE-WAGE CONTROLS: MECHANICS AND PROBLEMS..................... 69 I. The Possible Approaches................................. 69 II. Mechanical Problems..................................... 70 III. Disadvantages........................................... 74 A. Suppressed Inflation............................... 74 -ii- B. Bottled-up Pressures............................... 75 C.. Lack of Flexibility in Price Markets............... 76 D. 'The Scapegoat Theory. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 76 E. Where Do Selective Controls End?................... 78 F. Infringement of Freedom.. .. .. .. .. .. .. .. .. .. .. .. .. 80 IV. A Final Note. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 80 NONTRADITIONAL RATIONALES FOR WAGE AND PRICE CONTROLS............ 81 I. Introduction.. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 81 II. Setting Wages and Prices to Avoid Strikes............... 81 A. How Would the Plan Operate?........................ 81 B. Possible Advantages................................ 82 C. Present System Mechanisms.. .. .. .. .. .. 89 D. Plan Problems.... .. .. .. .. .. .. .. .. .. .. .. .. 93 III. Setting Wages and Prices to Improve the Quality of Heal th Care. .. .. .. .. .. .. .. .. .. .. .. .. 96 A. How Would the Plan Operate?........................ 97 B. Possible Advantages.. .. .. .. .. .. .. .. .. .. 97 C. Plan Problems.. .. .. .. .. .. .. .. .. .. 104 IV. Setting Wages and Prices to Create Public Service Employment.. .. .. .. .. .. .. .. .. .. .. 107 A. How Would the Plan Operate?........................ 107 B. Possible Advantages................................ 108 C. Present System Mechanisms.......................... 112 D. Plan Problems .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 115 V. Conclusion................................ ............... 117 BIBLIOGRAPHY..................................................... 119 -iii- PREFACE This Special Analysis is concerned exclusively with the issues presented by the 1970-71 intercollegiate debate proposition: "Resolved: THAT THE FEDERAL GOVERNMENT SHOULD ESTABLISH A PROGRAM OF COMPULSORY WAGE AND PRICE CONTROLS." It is published by the American Enterprise Institute in response to many requests from college debaters and coaches for background materials and references on the subject of the debate proposition. It was prepared by Professor John A. Lynch, Director of Debate at St. Anselm's College, Manchester, New Hampshire, and Mr. Robert M. Shrum, formerly Director of Debate at Boston College, Chestnut Hill, Massa chusetts, and now Assistant to the Mayor of New York City. Both authors come to the project with extensive backgrounds as intercollegiate debaters and debate coaches. The authors wish to stress at the outset that they are not writing as experts in the subject matter of the resolution. They have, however, tried to assemble, organize, and present authoritative material in such a way as to assist debaters seeking to delineate and explore the central issues raised by the national debate proposition. This Analysis is not intended to provide a complete review or an end to the debater's research, but is designed rather to serve as a guide to the start of research and a stimulus to its continuation. To this end a bibliography has been included listing many more references than those quoted in the text and cited in the footnotes. Due to the breadth of the proposition, the bibliography could be kept to a manageable size only by concentrating on materials related to more conventional interpretations of the resolution. The American Enterprise Institute and the authors wish to express their appreciation to the following persons who have read the Analysis and offered useful suggestions during its final preparation: Mr. Paul Dowd, Director of Public Relations, St. Anselm's College; Professor Robert M. O'Neil, Associate Professor of Law, University of California at Berkeley; Dr. William M. Reynolds, Department of Speech, The George Washington University; Professor George Schell,