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, Director of Debate, Loyola University of Los Angeles; and Professor James J. Unger, Director of Debate, Georgetown University. A special note of thanks is due Mr. David M. White, of the Harvard Law School, for his substantial contribution to preparation and editing of this analysis and those that have preceded it from 1968.

The Analysis should not be construed as reflecting any policy position on the part of the American Enterprise Institute.

-iv- CHAPTER I

HISTORICAL PERSPECTIVES

I. Introduction

When domestic inflation accelerated after 1965,compulsory price and wage controls as a means of combatting rising prices began to be dis­ cussed in some quarters.1/ The question of whether the federal government should establish a program of compulsory wage and price controls is the current national college debate topic.

In all its major wars the United States has experienced substan­ tial inflation.2/ Wholesale prices rose more than 40 percent during the War of 1812, about 120 percent during the Civil War, about 170 percent during World War I, about 115 percent during World War II (from Septem­ ber 1939 until August 1948 when the inflationary trend finally abated), and to a peak of about 17 percent during the Korean War. Most recently, during the conflict in Vietnam, the wholesale price index has risen ap­ proximately 17 percent from June 1965 to June 1970. As in World War II and the Korean conflict, recent inflationary pressures have led some to propose price and wage controls as a means to combat inflation.

While inflation has been associated with the United States' in­ volvement in wars, evidence suggests that inflation has been a persistent problem during much of relatively peaceful periods. "Two major changes in the economic environment since 1940--both perhaps conducive to infla­ tion--are absence of major depressions and constancy of war or cold war."3/ Traditionally, prices have risen sharply during wartime and often continued immediately thereafter, but then leveled out or receded in postwar periods. Although the price level traditionally declined during major depressions, it has not always increased in periods of prosperity. Both the cost-of­ living and the wholesale price indexes eased during the prosperous periods of the 1920s. Generally, however, price behavior since 1940 differs from earlier experience. Over the past three decades rising prices have be­ come more or less constant in the American economy.

In this chapter, we will not attempt to survey the trends in the economy during the past three decades. Rather we will focus on those two occasions when compulsory price and wage controls were employed. In the process, we will examine the conditions which prompted them, how they were applied, and survey some of their effects.

1/ Compulsory price and wage controls were also an issue when they were adopted during World War II and the Korean conflict.

2/ Lester V. Chandler, Inflation in the United States, 1940-48 (New York: Harper and Brothers, 1951), p. 1.

3/ Harold W. Fox, "Inflation--An Economic Maladjustment," Congressional Record (daily ed.), June 18, 1970, p. S9253.

-1':" II. World War II

A. The Defense Period

Consideration of World War II price and wage controls usually falls into three time periods. First, there is the defense period (May 1940 to December 1941) when in response to a deteriorating international situation, the United States embarked on an expanded program of military preparedness; second, the war period (December 1941 to August 1945) when the United States became fully involved in the fighting and launched an �11-out war effort. Finally, there is the immediate postwar period (Au­ gust 1945 to 1948) when the United States converted from a wartime to peacetime economy and, at the same time, experienced substantial infla­ tion. There is overlap between the second and third periods in the sense that most wartime wage and price controls did not expire until the middle of 1946 so that some wartime policy continued in the conversion period.

The United States official policy was neutral when war broke out in Europe and Asia. However, the government had launched a program of increased military preparedness by the summer of 1940. From that time through the entire war period and the first few months of the postwar period, the government engaged in a huge deficit spending program directed to defense and war needs rather than to the stabilization of economic ac­ tivity and price levels.1/ Actually, when the war began, the United States had experienced a-decade of deflation and substantial unemployment. Large amounts of unused productive capacity served to delay price rises as spending on output rose in 1939 and 1940. With many plants partially idle, with raw materials easily available, and with a large reservoir of unemployed labor (9 million in 1939), business firms enjoying the increas­ ing demand for their products at first responded with relatively large expansions of output and relatively small price increases. By 1941, how­ ever, as full productive capacity was approached, more and more materials were diverted from civilian to military production. As the nation moved toward full employment, further increases in the rate of spending were reflected in increasing prices and, to a decreasing extent, in enhanced real output. Initially, fear or expectation of future depression and de­ flation was a factor in deterring public officials from adopting an early anti-inflationary policy.2/ In 1941, and even in 1942, it was felt that restrictive financial pol1cies should be delayed until productive re­ sources were fully utilized. Later during the war, it was felt that allowing businesses and individuals to accumulate large reserves of money and other liquid assets would act as a cushion against postwar depression.

B. The War Period

1. Emergency Price Control Act of 1942

By 1941, however, months before the declaration of war, leaders in business and government became fully aware that stringent action might

1/ Chandler, op. cit., p. 1. 2/ Ibid.; pp. 4-5. be necessary to prevent inflation. 'There was, however, no general agree­ ment about the method to use. Farmers opposed control of farm prices, labor resisted wage controls in the face of rising living costs, manu­ facturers were alarmed by the prospect of heavier taxes. At the same time, the public wanted the government to hold down the cost of living. After the inauguration of the defense program in May 1940, a Price Stabilization Division was established to watch price trends. The Price Stabilization Division eventually was superseded by the Office of Price Administration (OPA) in 1941. Even when war was declared on Decem­ ber 7, 1941, the government had no real authority to control prices or wages. As prices began to rise by the summer of 1941, OPA informally tried to hold them down by securing the cooperation of businessmen. But the lack of real sanctions served to penalize those businessmen who did comply with OPA requests.

After the declaration of war, the dangers of inflation seemed more real. An even greater increase in military production built up in­ flationary pressures in two ways: First, military goals could be met only by a diversion of materials, labor, and manufacturing facilities from the production of civilian goods and services, which, in turn, would reduce consumer supplies drastically. Second, dollars spent for tanks, ships, and the other instruments of war would flow to the public in the form of wages, salaries, profits, and dividends and these would increase consumer demands for scarce goods and services. For instance, it was estimated that consumer demand in 1942 would exceed available supply by some $17 billion.1/

Against this background, the Emergency Price Control Act of 1942 became law in January 1942. 2/ OPA was established under a single head (the price administrator) to-prevent excessive and speculative price increases. In effecting these purposes, the price administrator was authorized to establish maximum prices which would be generally fair and equitable. In doing so, he was to give consideration to the prices which prevailed between October 1 and October 15, 1941. Special limitations were, however, imposed on the administrator's powers over agricultural commodities. In addition to requiring the secretary of agriculture's approval in fixing the price of an agricultural commodity, three alternate types of maximum price ceilings were written into the law.3/ A technical description of the types of alternate ceilings would serve-little purpose here. Their eventual effect allowed farm commodities to rise above 110

1/ Lester V. Chandler and Donald H. Wallace (ed.), Economic Mobilization and Stabilization (New York: Henry Holt, 1951), p. 274.

2/ Acts January 30, 1942, ch. 26, 5 1, 56, Stat, 23, 3/ Chandler and Wallace, op. cit., p. 287.

-3� percent of parity. Because of fundamentally different attitudes, OPA and Agriculture frequently disagreed about the control of food prices, with the result that stabilization and food production policies required con­ tinuous adjustment throughout the war ..!/

The Price Control Act also authorized the price administrator to establish maximum rents for housing accommodations in areas where de­ fense activities had affected rent levels.

The Price Control Act gave OPA several alternative methods of enforcing its regulations: (1) any person convicted of violating a price or rent order was subject to a maximum penalty of one year's imprisonment and $5,000 fine; (2) federal, district, state, and territorial courts were authorized to issue writs enjoining violations or mandatory writs ordering compliance with the regulations; (3) a person subject to a price or rent regulation could be licensed by OPA; by violating the regulation and on suspension of the license by an authorized court, he would forfeit for as long as one year his right to deal in the regulated commodity; (4) finally, any consumer who had been charged more than the amount allowed by a price or rent regulation could sue the seller for treble damages--three times the amount of the overcharge or $50, whichever was higher.

These provisions of the Price Control Act gave OPA an unusual assortment of enforcement tools. But as its area of regulation broadened, the effectiveness of control depended on the willingness of retailers, landlords, consumers, and tenants to comply voluntarily with prices and regulations, rather than on formal enforcement action.2/

Special provisions were included for the protection of private rights of individuals.· Any person subject to a price or rent regulation could file a protest with the price administrator accompanied by evidence supporting his contention that the regulation was unfair as applied to him. Within a reasonable period of time (generally 30 days), the price administrator was required to act on the protest, and if the protest was denied, the individual had the right of appeal to an Emergency Court of Appeals which was created by the act. This court consisted of three judges appointed by the Chief Justice of the United States Supreme Court from federal district and circuit courts. The Emergency Court of Appeals had exclusive jurisdiction, subject to final review by the Supreme Court, to determine the validity of OPA price and rent regulations. Dissatis­ faction with the appeals procedure was caused by OPA's inability to re­ view quickly the protests which poured in regularly.�

1/ The earlier farm support program which attempted to guarantee parity to the farmer was at the core of the farm commodity program.

2/ Chandler and Wallace, op. cit., p. 288.

3/ Ibid., p. 289.

-4- 2. Wage Control

The Emergency Price Control Act contained a general statement of policy for the guidance of government agencies dealing with wages. The statement read as follows:

It shall be the policy of those departments and agencies of the government dealing with wages (including the Department of Labor and its various bureaus, the War Department, the Navy Department, the War Production Board, the National Mediation Board, the National War Labor Board, and others heretofore or hereafter created), within the limits of their authority and jurisdiction, to work toward a stabilization of prices, fair and equitable wages, and cost of production.]!

While the price control legislation was before Congress, a conference of industry and labor representatives was called by the President. Out of this conference came the "no strike, no lockout pledge"--the promise of organized labor and management that for the duration of the war, labor disputes would be settled without work stoppages. To implement these pledges, the President created a National War Labor Board (WLB), composed of four representatives each from labor, management, and the public, with the function of deciding labor disputes which could not be settled by other means. The board, like other federal agencies dealing with wage matters, was directed by the Price Control Act "to work toward stabiliza­ tion of prices, fair and equitable wages, and the cost of production." Neither the Price Control Act itself nor the creation of the WLB provided any policy standards for wage levels. Early in 1942, cases began to pile up even before the WLB could establish an organization to deal with them. Workers became impatient at the delays which seemed more exasperating as the cost of living rose. Wildcat strikes broke out contrary to the no­ strike pledge and labor leaders who had given the pledge contended that the situation was beyond their control.

While authority existed to control wages and prices by January 1942, no real steps were taken for a few months. Meanwhile, prices were rising.2/ By March 1942, food and clothing prices had risen 20 percent over the previous year. The rapid movement of workers to war production jobs in those months created a rising level of income. Despite the fact that consumer goods production was declining sharply, retail sales con­ tinued at high levels. Pressure on both price and wage fronts finally forced a more definite government policy.

1/ Ibid., p. 337.

2/ Ibid. , p. 293.

-5- 3. General Maximum Price Regulation

On April 28, 1942, OPA issued the General Maximum Price Regula­ tion which set the highest price charged in March 1942 as the ceiling over virtually every commodity purchased by the ordinary consumer. Also, an order was issued designating 323 defense rental housing areas.

Largely because of the newness of the OPA organization, the agency could not effectively administer these s.weeping regulations. Adequate staffing was a serious initial problem.I/ Administration of consumer, commodity, and rent regulations required processing hundreds of price ad­ justment petitions alleging hardship. The national office lacked facili­ ties to assemble and analyze data relevant to these cases and no general policies were laid down to guide personnel in granting adjustments. As a result, the national office found itself swamped with work it was not equipped to handle. This, in turn, interrupted essential development of new price control techniques. One result was to delay for months the an­ ticipated replacement of the "general freeze" with new tailor-made price regulations (for example, dollars and cents regulations) which finally replaced the General Maximum Price Regulation for many commodities.

4. Little Steel Formula

The General Maximum Price Regulation froze prices at already in­ flated levels. Faced with rising prices, union officials presented requests for substantial wage increases. On July 16, 1942, the turbulent labor sit­ uation was eased temporarily by the War Labor Board's decision in the Lit­ tle Steel Wage dispute. While this case was pending, the board was almost destroyed by a labor threat to withdraw its representatives from the board --a crisis prevented by presidential intervention. Public opinion was out­ raged by a series of strikes in February and March which seemed to endanger the conversion to military production. To deal with this situation, the Little Steel Formula proposed to raise hourly rates only where wage in­ creases had not kept pace with the 15 percent rise in the cost of living between January 1941 and May 1942. Exceptions to this rule would be granted only to remove inequities or substandard conditions. OPA was not enthusiastic about the WLB formula for tying wages to the cost of living.2/ Such a scheme would tend to maintain prewar standards of living, an expectation which was arguably not justified in a war for survival. Under the formula, large blocks of workers were entitled to wage adjustments. Such adjustments would complicate the task of OPA in two ways. First, the rising unit labor costs would force revisions of price ceilings which the agency was not equipped to handle. Second, without in­ creased savings or stiff new taxes, the gap between consumer income and the supply of consumer goods would widen.

1/ Ibid., p. 294.

2/ Ibid., p. 303.

-6- 5. Stabilization Act of 1942

During the summer of 1942 inflationary pressures continued to mount despite government efforts to restrain them. War bond sales to in­ dividuals, chosen as an alternative to compulsory savings and higher in­ dividual tax rates, accounted for only a small part of total government borrowing. Excess purchasing power created pressure under price ceilings. As long as the 110 percent-of-parity restriction on the production of many farm corrunodities remained in the Price Control Act, OPA had difficulty con­ trolling the price on basic foodstuffs and the cost of living continued to rise. Under the Little Steel Formula, labor considered any rise in the • cost of living as an invitation to seek further wage increases. OPA began to push for action by the executive branch to ease the stabilization crisis.

These pressures finally led to the Stabilization Act of 1942 which established the Office of Economic Stabilization headed by the Eco­ nomic Stabilization director. An Economic Stabilization Board was set up to advise and consult with the director. It comprised the secretaries of the Treasury, Agriculture, Commerce, and Labor, the chairman of the Board of Governors of the Federal Reserve System, the director of the Bureau of the Budget, the price administrator, the chairman of the War Labor Board, and two representatives each from labor, management, and agriculture ap­ pointed by the President.

The President established the following administrative pattern for management of the stabilization program: The director of the Office of Economic Stabilization would formulate general programs and reconcile conflicting policies and disagreements among agencies whose actions af­ fected stabilization policies. These agencies, such as OPA, WLB, and Ag­ riculture, would retain primary responsibility within their jurisdictions, but would be subject to the policy directives of the Office of Economic Stabilization.

With the objectives of stabilizing the cost of living, the director of the Office of Economic Stabilization was instructed to develop a comprehensive national economic policy relating to control of civilian purchasing power, prices, rents, wages, profits, rationing, subsidies, and all related matters.

The WLB was instructed to prevent any increase in the wage rate prevailing in September 1942 unless such an increase was necessary to cor­ rect maladjustments or inequities. Any wage increase which might require a change in an OPA price ceiling would have to be approved by the director of the Office of Economic Stabilization. Notice of all proposed increases in wage rates were to be filed with the WLB.

The secretary of agriculture and the price administrator con�. tinued to be jointly responsible for the control of agricultural commodity prices and were directed to stabilize these prices so far as practical on the basis of levels which existed on September 15, 1942.

-7- With the passage of the Stabilization Act of 1942, the period of comprehensive control of wages and prices began. It is sufficient for purposes of this chapter to emphasize the fact that both wage and price controls were flexible rather than rigid. The Stabilization Act, as we noted earlier, directed that wages and prices be stabilized, so far as practical, at levels prevailing on September 15, 1942. The act recognized the fact that various types of inequities existed within the structures of wages and prices that should not be frozen.

Despite all these efforts, wages and prices continued to increase significantly following the passage of the Economic Stabilization Act.1/ In the six-month-period between October 1942 and April 1943, the level-of wage rates in the manufacturing industries increased by 3 percent, while the level of consumer prices advanced by more than 4 percent. These cir­ cumstances led the government to issue a "hold-the-line" order directing the price administrator to grant price increases only to the minimum extent possible and to reduce prices which were "excessively high, unfair, or in­ equitable." Generally, during the last 28-month-period of the war (April 1943 to August 1945), the rate of increase in wage and price levels slowed.;t

6. Other Direct Controls

Thus far, we have concentrated on price and wage ceilings. It should be emphasized, however, that price and wage ceilings were only part of a more extensive system of direct stabilization controls. Other direct controls included: (1) Rationing of many consumer goods, such as foodstuffs, tires, gasoline, and shoes; (2) subsidies to limit or prevent price increases while maintaining output; (3) a series of limitations and regulations on the production, use, and distribution of goods and services at the producer and dealer levels. These included limitations on business inventories, produc­ tion directives, limitation orders prohibiting or limiting the use of scarce goods or services for "nonessential" purposes, priorities for the use of materials, and allocations; (4) export and import controls; and (5) govern­ ment purchase and sale of goods which were purchased either in this country or abroad. These controls, along with wage and price ceilings constituted the major effort against inflation during World War II.

This approach to inflation naturally raises a question about the role of monetary and fiscal policy during the war. Direct controls were really the main foundation of what has been called the "disequilibrium sys­ tem." Under this system we supported a growth in money incomes and other liquid assets far in excess of available goods and services. The monetary and fiscal policies that were adopted during the defense and war periods were highly inflationary due to large deficit spending. On the surface,

1/ Ibid., p. 351.

2/ Ibid., pp. 353-54.

-8- the most direct way to eliminate inflationary pressures presumably would have been for the government to absorb excess purchasing power in the form of taxes. Sharp increases in personal and corporate income taxes during the war years did, in fact, reduce the money income available for private expenditures. However, for a variety of reasons, it seems unlikely that in a major war, inflationary pressures can be eliminated through taxation.1/ Some of these reasons are technical--tirne is required, for example, to irn-­ pose and collect new taxes. Of even greater importance is the fact that tax rates to hold down inflation would have to be so high that they would probably reduce the incentive to work and produce.

The pressure of excess purchasing power can also be lessened if individuals can be persuaded to increase their rate of saving. Savings did increase remarkably during World War II.2/ The ratio of individual savings to disposable income of individuals rose from less than 9 percent in 1938-39 to more than 23 percent in 1944. The major portion of these savings went into government bonds with the remainder held in the form of unspent bank balances or currency. It may be argued that there would have been little saving if customers had expected constantly rising prices.

In a limited number of cases, the government.employed subsidy payments to hold down the prices of goods while maintaining their output. The immediate effect did hold down prices because subsidy payments were not included in the price. However, one may argue that the long term ef­ fect of these subsidies was to enhance inflation--that the subsidy payments increased federal deficits, private money incomes, and private spending. What would have happened in the absence of these subsidies? Assuming that wage rates remained the same, one of two things might have resulted. Either the cost of living would have risen to the extent that subsidies offset price increases, thereby shifting money income from consumers to dealers and producers and thus lowering the purchasing power of wages; or no in­ creases in the cost of living would have been allowed and the money incomes of dealers and producers would have been reduced. In either case, govern­ ment spending would have been lessened. Without the aid of subsidies, how­ ever, the delicate balance between wages and prices might have been endan­ gered.3/ Wage ceilings might not have held and many price ceilings would have had to rise. The result would have increased inflationary pressures.

Because the war effort diverted materials and production from many normal areas of consumer goods and services, shortages developed. At established price ceilings the demand for many commodities was far above the available supply. In this situation consumer rationing of scarce items was intended to serve several purposes: first, to reduce the amount of time and effort spent to find and purchase scarce i terns; s econd, to

1/ Chandler, op. cit., pp. 204-05.

2/ Chandler and Wallace, op. cit., p. 320.

3/ Chandler, op. cit., p. 210.

-9- assure a fairer distribution of goods; third, to assist in preventing price increases. It might be argued that price control probably would have been less effective during the war if rationing had not been used to limit demand and to create a feeling that scarce essentials were being fairly distributed,!/

C. Postwar Decontrol and Inflation

The final phase of wage and price controls came with the end of the war. The peak of the war production effort came in 1944. After the victory over Germany in May 1945, industrial reconversion to peacetime pro­ duction began on a limited scale. The level of war production remained high, however, for the date of the defeat of Japan was not easy to predict. Shortly after the defeat of Japan, the Truman Administration made clear its intention to continue price control.2/ In contrast to the wartime policy on price control, the administrat1on permitted employers to make wage increases without governmental approval, provided such increases were not used as a basis for an increase in price ceilings or increases in the cost of goods and services furnished the government. In short, freedom of action was restored to employers and workers with respect to those up­ ward adjustments that could be made within the existing framework of price controls and costs to the government.

The basic assumption in the new wage policy was that many em­ ployers were in a position to grant wage increases within the existing price ceilings and that, in general, these could be negotiated through col­ lective bargaining without work stoppages.3/ Many such increases were, in fact, granted. However, no agreement was reached between employers and unions on the amount of wage increases that could be made under the price policy. There was now no agency for the final determination of these dis­ putes in the absence of a renewal of the "no strike, no lockout" pledge which expired on V-J Day. When collective bargaining broke down and the parties could not agree to submit these issues to mediation, both sides re­ sorted to economic power. In the fall and early winter of 1945-46, a series of strikes (which served to unhinge stabilization policy) broke out in the petroleum refining, automobile, steel, meat packing, and other industries. Eventual settlement of these disputes forced OPA to make upward price ad­ justments.

During the summer of 1946, wage and price controls, for practical purposes, ceased to exist. On June 29, 1946, President Truman vetoed a bill passed by Congress amending and extending the stabilization acts. For more than three weeks there were no legal restraints on wages or prices. An up­ surge in prices produced an extension act which the President signed in

1 I Ibid. , p. 211.

2/ Chandler and Wallace, op. cit., p. 363.

3/ Ibid., p. 364.

-10-:. July. By this time, however, the end was clearly in sight. In the fol­ lowing months the process of decontrol began and, on November 9, 1946, the President announced the removal of virtually all price ceilings except those on rents.

The removal of practically all direct controls in 1946 was accom­ panied by substantial inflation which lasted approximately two years. The manner in which the postwar inflation occurred has led some critics of wage and price controls to argue that price controls did not decrease the total amount of inflation between 1940 and 1948, rather they merely postponed the major part until the postwar period. At this point, we will examine some of the arguments which were raised against the use of wage and price con­ trols during the war.

D. Criticisms of World War II Controls Critics of wartime price and wage controls argue that the price stability claimed for the period between 1942 and 1945 was spurious and re­ flected a suppressed inflation.I/ Furthermore, the controls were accompanied by strong appeals to patriotism: yet price ceilings frequently were evaded either through quality deterioration or by black market operations. It is impossible to deny that these and other conditions existed. Because of the demands of war production on materials and production capacity, some quality deterioration was probably inevitable.31 By late 1943, the emergence of a black market (selling above OPA prices) and a shortage of enforcement investigators were apparent. Many articles of food, clothing, and household items were produced by a number of small or medium-sized producers who had little influence on distributors. In this type of market, effective price control is most difficult. It has been estimated that in the summer of 1944, after most meat had been removed from rationing, the portion of meat sold in black markets may have been as high as 40 percent.3/ Black markets were only one of a series of illegal practices which included tie-in sales, kickbacks, and upgrading.

A further argument against price controls is the cost of such a program. For instance, the number of workers required to administer the price control program was large. By 1944, 325,000 price control volunteers, in addition to 65,000 paid employees, were utilized.±/ In addition to the number of employees required directly by OPA, the program was a burden to other business establishments. For example, the banking system was handling five billion ration coupons per month in 1944.

1/ Darryl R. Francis, "Controlling Inflation," Federal Reserve Bank of St. Louis Bulletin, September 1969, p. 9.

2/ J. Frederic Dewhurst and Associates, America's Needs and Resources (New York: Twentieth Century Fund, 1947), p. 11.

3/ Chandler and Wallace, op. cit., p. 48.

4/ Statistical Abstract of the United States, 1946, p. 207.

-11- Economist Lester V. Chandler, on the other hand, disagrees that free market competition would have worked better than wage and price con­ trols. Chandler states:

We probably would have won the war and the gov­ ernment would have secured the goods and services needed for war purposes, but only at the cost of gallop­ ing inflation that would have reached very high levels by V-J Day .... Government spending would have been much higher, federal deficits would have been much larger, private money incomes and spending would have been much greater, and the money supply would have expanded much more. In short, the degree of inflation would have been greater than that which actually occurred between 1940 and 1948, and it is impossible to estimate how much more inflation would have come after V-J Day.lf

III. The Korean War

A. The First Six Months

The Korean War began on June 25, 1950, In contrast to the situ­ ation in 1939-40, the economy was operating at close to capacity with little leeway for further expansion. It was further apparent that very large hold­ ings of money and other liquid assets by individuals, businesses, banks, and other lending institutions provided a tremendous potential for increase in the volume of private spending and investment. At the start of the war, it also seemed that any increase in the military program taken alone could be met by the economy with little or no reduction in the volume of goods and services available to the civilian sector of the economy. The major problem seemed to be to prevent an undue increase in overall civilian spending relative to the quantities of goods available.

When the President, on July 19, 1950, requested large increases in military appropriations and taxes, he expressed the opinion that require­ ments of the armed forces could be met without any serious disruption of the economy. Although he asked for power to requisition and allocate materials, he made no request to control wages or prices. The types of measures recom­ mended_ for dealing with the problem were stated in the midyear Economic Report of the President, issued late in July 1950:

First of all, for the immediate situation, we should rely in major degree upon fiscal and credit measures. These general measures can be helpful not only in restraining inflationary pressures, but also in reducing the civilian demand for some specific products, such as automobiles and housing, thus making

lf Chandler, op. cit., p. 206.

-12- available for necessary military use a larger pro­ portion of an already short supply of some critical materials. The more prompt and vigorous we are with these general measures, the less need there will be for all of the comprehensive direct controls which involve the consideration of thousands of individual situations and thus involve infinitely greater admin­ istrative difficulties and much greater interference with invididual choice and initiative.

A marked change in congressional opinion, however, set in before the end of July. Prices were beginning to rise sharply. Members were deeply impressed by Bernard Baruch's warning to the Senate Banking and Cur­ rency Committee on July 26 that there was an urgent need for an all-out industrial mobilization and that the situation was "sufficiently grave to warrant an overall ceiling across the entire economy--over prices, wages, rents, fees, and so forth."1/ Growing congressional pressure for vigorous action on rising prices led-the President to state on August 1 that he would not object to price and wage powers on a standby basis. The Defense Produc­ tion Act, which became law on September 8, gave the President standby powers to impose price and wage controls.

The standby powers were not applied until late in January 1951. To some extent this was due to the fact that a slowdown in price rises oc­ curred by early November, reducing the pressure for vigorous action. The Chinese Communist intervention in Korea in late November, however, sent prices surging again. From June 1950 to January 1951, the cost of living increased almost 7 percent. Despite the fact that the President had the authority to impose price and wage controls from September 8 on, he did not apply them until January 26, 1951. To some extent, the delay was a question of timing--was the situation serious enough to apply controls?2/ Some presidential advisers felt that monetary and fiscal policy was suffi­ cient to handle the inflationary pressure. Personal and corporate taxes were raised in September, along with several types of credit controls. But monetary and fiscal actions were not initially effective. It was argued that these restraints did not become operative for several months because of the normal lag between actions and effects. It was not until the follow­ ing year that they took their effect.�

The Chinese intervention at the end of November and the resulting increase in military programs brought a public clamor for more drastic

1/ Buel W. Patch, "The Future of Price and Wage Controls," Editorial Re­ search Reports, December 17, 1952, p. 865.

2/ G. Griffin Johnson, "Reflections on a Year of Price Controls," Ameri­ can Economic Review, May 1952, p. 290.

3/ Bert G. Hickman, Growth and Stability in the Postwar Economy (Wash­ ington: The Brookings Institution, 1960), p. 87.

-13- action.1/ With the renewed upsurge of anticipatory buying and prices at the end-of 1950, the question of timing declined in importance. The im­ mediate issue became the scope of the action to be taken. There was some delay over policy differences within the administration on where to apply direct controls and also concern over staffing difficulties necessary in adopting them.2/ By the latter part of January, the situation reached a point where the administration believed that the inflation could only be halted by a general wage and price freeze.

President Truman issued an Executive Order September 9, 1950, the day after the Defense Production Act became law, providing for the estab­ lishment of an Economic Stabilization Agency and a Wage Stabilization Board. An Office of Price Stabilization (OPS) with a price stabilization director, was established with the Economic Stabilization Agency. It was not until the last week in November, however, that a price st abilization director was appointed.

B. Korean War Price and Wage Controls 1. Price Control

On January 26, 1951, a general freeze order was issued on wages and prices. Within a short time, however, some decontrol action began to remove the distortions and inequities inevitably created by such blanket action. No real consumer goods shortages developed as in World War II so rationing and price subsidies were not used.

By February 1951, when the effects of the price freeze were first reflected in price indexes, consumer prices as a whole were 8 percent higher than in the pre-Korean month of June 1950; retail food prices, considered separately, were approximately 11 percent higher, and wholesale prices ap­ proximately 16 percent higher.3/ After February 1951, despite controls, the consumer price index and its food component continued to rise, though at a much slower rate.4/ Wholesale prices, on the other hand, reached their peak in March 1951 and thereafter began a slow but steady decline. This decline is explained by the fact that retail sales fell sharply in February 1951 causing an abrupt increase in distributors' inventories dur­ ing the next few months.Sf The necessity to work off these excessive in­ ventories led to the wholesale price index decline.

1/ Johnson, op. cit., p. 291.

2/ Patch, op. cit., p. 865.

3/ Ibid., p. 867. 4/ U.S., Congress, House, Hearings Before the Committee on Banking and Currency, To Extend the Defense Production Act of 1950, As Amended, 9lst Cong., 2d Sess. (Washington: Goverriment Printing Office, 1970), p. 43. (Hereinafter cited as Banking and Cu�rency Hearings.) During all of 1951, the consumer price index rose 4 percent and in 1952 it went up approximately 1 percent. 5/ Hickman, op. cit., p. 91. -14- The rise in consumer prices continued, with few interruptions, throughout 1951 and the first eight months of 1952. At their peak in Au­ gust 1952, the consumer price index was 12 percent above the June 1950 figure. By that time wholesale prices had fallen to a comparable level of 12 percent over June 1950.

One reason why price control imposed a less firm check on retail prices than on wholesale prices was that "while almost all primary market prices (excluding farm products and most foods) were subject to controls, many retail commodities and services were not controlled."1/

The temporary general price freeze had hardly been replaced by more permanent regulations when changes in the law permitted increases in retail prices. The Capehart amendment, which went into effect July 31, 1951, directed the Office of Price Stabilization to authorize prices for manufactured goods which would cover all increases in costs from the out­ break of the war in Korea to July 26, 1951.

Dilution of price controls was carried considerably further by the 1952 renewal of the Defense Production Act. The new law somewhat broadened the Capehart amendment on allowance for costs and entirely ex­ empted from price control all fresh and processed fruits and vegetables, and placed restrictions on rent controls.;!

2. Wage Control Policies

The original Defense Production Act provided that price control must be accompanied by wage control and in general forbade increases in wages or other compensation which would induce price increases. In mid­ February 1951, the Wage Stabilization Board adopted a policy of banning wage increases which would raise average wage rates more than 10 percent above January 15, 1950 levels.3/ This formula was designed as a "catch-up" for lagging groups and it made-no arrangement for future cost-of-living ad­ justments or for productivity increases. Labor representatives on the War Labor Board resigned in protest and the board was inactive for over two months. Eventually a reconstituted Wage Stabilization Board adopted a policy of approving wage increases based on the cost of living.

Wage and price controls were put to a severe test in the spring and summer of 1952 as a result of labor's demand for substantial wage in­ creases and other benefits in the steel industry. The Wage Stabilization Board's recommendations on March 20, 1952, had far-reaching repercussions.

1/ Robert Pasternak, "A Review of Prices in a Year of Price Stabiliza­ tion," Monthly Labor Review, April 1952, p. 387.

2/ Patch, op. cit., p. 869.

3/ Ibid., p. 869. The consumer price index had risen approximately 10 percent between January 15, 1950, and February 1951.

-15- Controversy over the price increase required bv the proposed settlement led to the resignation of Charles Wilson, the economic stabilization di­ rector. To avert a strike in the steel industry while the war was still in progress, the government took control of the industry; however, this act was declared unconstitutional by the Supreme Court. The resulting steel strike was the longest in the history of the industry up to that point. Finally, before the strike was settled in July, Congress directed the reorganization of the Wage Stabilization Board, depriving it of its authority to make recommendations in labor disputes.

On balance, wage increases in the manufacturing industries more than kept pace with the rise in the cost of living. In August 1952, when the consumer price index peaked at 12 percent over June 1950, wage increases, excluding fringe benefits, had risen approximately 15 percent,.!/

3. Decontrol By mid-1952, an apparent relaxation of inflationary pressures caused diminished support for controls. When Congress renewed the author­ ity in June 1952, it declared that the authority should be used to termi­ nate the general control of prices and wages as rapidly as possible.2/ In the meantime, price and wage regulations were to be suspended on specific materials or services or types of employment, "to the extent that such ac­ tion will be consistent with the avoidance of a cumulative and unstabiliz­ ing effect." Controls could be reinstated if necessary. OPS had already established a policy of suspending price controls on articles or commodi­ ties which continued for some time to sell below ceiling prices. By the fall of 1952 almost two-thirds of the items which had been initially con­ trolled were removed from price control.

During the presidential campaign of 1952, candidate Dwight Eisen­ hower made clear his opposition to wage and price controls.3/ He charac­ terized price controls as "nothing but weak stopgaps" and called controls over money and credit the really effective anti-inflationary weapons. Mr. Eisenhower emphasized that he would rely on monetary rather than price controls to keep inflati'On in check. This position was confirmed the fol­ lowing year in his State of the Union address. Noting that the authority to control wages and prices was due to expire on April 30, 1953, he an­ nounced that he would not seek a renewal of this authority. Rent controls were to continue until the states assumed this authority. Prior to the ex­ piration of controls, he announced that the stabilization machinery which had been established to administer the controls would be dismantled.

The Korean War wage and price controls were terminated after being in operation a little over two years. One striking difference

1/ Patch, op. cit., p. 871. 2/ Defense Production Act Amendments of 1952, Chapter 530, Section 412.

3/ Patch, op. cit., p. 864.

-16- between the end of most direct controls in 1953 and the decontrol of 1946 was that the economy experienced a mild recession in 1953 in contrast to the sharp inflation of 1946. Three factors were responsible for the dif­ ference . ..!/ First, the disequilibrium which existed at the end of World War II was much greater than that in 1953. Korean military and other fed­ eral spending did not produce the huge World War II deficits; thus this factor was far less inflationary. Second, consumer goods shortages during the Korean War never matched those which existed during World War II. Pro­ duction of civilian goods and services caught up to demand well before con­ trols were ended. In the process, much of the inflationary pressure had diminished before decontrol. Finally, the process of decontrolling Korean price and wage controls was far less abrupt than in 1945-46. Some decontrol began almost as soon as the January 1951 freeze was instituted and decontrol became a continuous process, making the transition from control to the end of control much more gradual.

IV A Final Note

This chapter has surveyed wage and price controls during World War II and the Korean War and examined the conditions which lead to their use. The college debate topic has proposed the adoption of wage and price controls. In the following chapter we will proceed to a general introduc­ tion of the proposition, with focus on the meaning and implication of its terms.

1/ Hickman, op. cit., pp. 380-85.

-17- CHAPTER II

DEFINITIONS

I. Introduction

This is perhaps the broadest resolution in the recent history of intercollegiate debate. On the surface, the topic of compulsory price and wage controls seems a response to the contemporary problems and pres­ sures caused by inflation. But beyond the particular economic concerns that may have inspired the resolution, the topic potentially touches every part of the American economic and social condition. In examining the sub­ ject's wide definitional dimension, this chapter wjll depart from the nor­ mal term-by-term parsing characteristic of most definitional analyses. Instead we will attempt to answer a series of questions, each of which may illuminate interesting and critical aspects of the proposition. Specifi­ cally we propose to address the following questions: (1) What are wages and prices?; (2) What are controls--and do we have them now?' (3) Toward which institutions should the compulsion be directed?; (4) What types of wage and price controls may the affirmative propose?; (5) Must the affirm­ ative maintain a rationale for federal rather than state action? We will now examine each of these questions in turn. II. What Are Wages and Prices?

The concept of wages and prices appears simple. A wage is usu­ ally defined as money received for work done; a price is money paid for goods or services delivered. But behind these simple definitions, there are a host of ambiguities. How should one, for example, classify interest on capital? Is it at all related to wages and prices? Can interest be construed as a wage for the capital lender and a price for the capital borrower?

Questions similar to these will arise constantly as this prop­ osition is debated. And the questions may be vital to the outcome of debates. Consider the question of nonmonetary wages. In a very real sense, fringe benefits and working conditions can be classified as wages --a recompense for services performed. Moreover, wages may be thought to include even less tangible parts of the relationship between employer and employee. Provision for a union shop or a dues check-off are often significant features of labor-management agreements. In return for his employee's services, an employer adopts certain specific union procedures. S�ould the affirmative be permitted to construe them as wages?

The answer to such questions may determine the final success or failure of an affirmative plan. If a plan covered only money wages, em­ ployees might be able to circumvent it by altering the composition of their contract demands. Longer vacations, new seniority provisions, or changed working conditions may in effect raise a worker's real wages without increasing his directly identifiable money'wages. An affirmative concerned with inflation may wish to preclude such problems by present­ ing and defending a broader definition of the term "wages."

..,18- Many of the same complications may arise in deciding what a price is. There are sometimes substantial hidden charges in any purchase. For example, how should interest on a time payment plan be treated? If the purchase of one item is conditioned on the purchase of another re­ lated item, what is the real price of the first item? Careful reflection and sophisticated plan mechanisms may be necessary to determine what a price really is.

Of course, the affirmative has the prerogative to employ a narrower definition of the terms wage and price controls. It could refer to both the World War II experience and common usage to justify a more restrictive definitional choice. That should be obvious. But may the negative use the same references to challenge a broad affirmative de­ finition? The critical determinant of the legitimacy of the definition is not whether it is right in some kind of absolute sense, but whether it is reasonable. For the most part, in debate there is no one right definition, though there may be many wrong ones. Given the varied de­ notations and connotations of words in our language, on any topic a large number of definitions are reasonable and therefore right. The af­ firmative has the prerogative to choose among reasonable definitions. As long as its choice is reasonable, the negative cannot successfully suggest an alternative definition. On this topic, the affirmative range of choice in defining wages and prices is apparently very broad.

It should also be noted that, under some circumstances, wages and prices may be the same thing. Thus, whether a specific expenditure is treated as a wage or a price depends on the perspective from which it is assessed. Rent can be seen as both a wage and a price. An individual paying rent surely regards it as a price. The landlord who receives it may look upon it as a wage for his services. When a patient pays a doctor, he is paying the price for medical care, while the doctor is receiving wages for his work. So certain affirmative approaches (for example, those dealing with medical care) may offer the opportunity to deal with wages and prices as a single unit.

III. What Are Controls--and Do We Have Them Now?

Normally, the word "controls," when used in the phrase "wage and price controls," is thought of as a device for restraining wages and prices. As Chapter I makes clear, that was the purpose of controls dur­ ing World War II. They were devised, legislated, and administered to hold down inflation. When the phrase "wage and price controls" is used today, it commonly describes plans for a repetition, in some form, of the World War II or the Korean War experience.

But past usage is not wholly determinative of the meaning of words. To define wage and price controls as an anti-inflationary device that works directly to restrain wages and prices is perfectly proper. Yet two other definitions seem equally proper from a linguistic point of view. Controls can be used to raise wages and prices in areas where in­ creases might be desirable. Or the affirmative may advocate selective

-19- controls (which may result in higher or lower prices or wages) to accom­ plish a purpose not directly related to pricing and wage rates. The fact that certain controls, rather than restraining wages and prices, may raise or vary them, makes them no less controls. Minimum wage legislation is a wage control directly designed to raise wages. It may be argued that in both purpose and effect, tariffs are price controls that raise the prices of imported goods so that domestic manufacturers may compete more successfully.

Subsidies may also be a form of wage and/or price controls. Consider the example of farm subsidies. By restricting agricultural production these subsidies work indirectly, but often quite effectively, to support farm prices. The affirmative may seek to control wages or prices by subsidies, either alone or in combination with more direct con­ trols. For instance, the affirmative might force the price of rental units down through rent control but maintain the landlord's economic viability by providing subsidies. The subsidies can then be seen as an integral element of price control.

The negative may attack the use of subsidies as extra-topical. An affirmative reply that, without them, the plan will not work does not really answer the argument. In a sense, it strengthens the negative con­ tention that the advantages flow from plan provisions that are not part of the resolution. On the other han� the affirmative may reply that a subsidy is an integral part of a wage or price control. There is nothing in the proposition that limits the controls to prescriptive rules. If the subsidy in fact controls a price or a wage, there is no reason why it should no�be defined as a control. Whether the affirmative plan includes a price ceiling or a grant of funds or both, such a plan is arguably within the meaning of the resolution.

Wage and price control to compel adherence to socially bene­ ficial policies represent a different, but no less legitimate approach. Companies or unions that adhere to a designated course could be permitted higher prices and wages. Conversely, those who are resistant to or tardy in applying new policies could be penalized by restrictions on prices and wages. This approach will be discussed at greater length in section V of this chapter and in Chapter V of the analysis.

No matter what definition of controls the affirmative adopts, it is clear that the present system already has a large number of wage and price controls. In the area of prices, for example, the Interstate Commerce Commission regulates railroad rates; the Civil Aeronautics Board sets airline passenger fares; the antitrust laws often operate to control pricing decisions. In the area of wages, we have already cited the control imposed by minimum wage laws. The government controls the wages of its several million employees.

A debate resolution does not advocate the status quo. No af­ firmative team can legitimately use this year's topic as a vehicle for

-2Q- defending present minimum wage laws or present government actions in the area of pricing. The topic calls for a significant change--or something inherently different from the present system. Thus, the word "new" may be an implied term of the resolution. In light of present wage and price controls, the resolution can be taken to read, in effect: "Resolved: That the federal government should establish a program of new compulsory wage and price controls."

Thus, even in an area where some form of wage and price con­ trols already exist, the affirmative can advocate new controls. The only stipulation, it should be emphasized, is that the program must be more than an extension of the present system. It must represent a major de­ parture from the philosophy or the structure of the present system. For example, an affirmative proposal to raise the minimum wage by five cents an hour probably should not be regarded as an inherent change. However, raising it by 25 percent probably should be seen as an inherent change. This proposal probably might assure that every covered worker would be able to earn more than a poverty-level income depending on family size and geographical area. That is neither the purpose nor the effect of present minimum wage legislation. Thus, this type of affirmative pro­ posal marks a significant shift in philosophy from the present system. It should be noted, of course, that the critical factor here is the philo­ sophical shift, not the magnitude of the monetary increase in the mini­ mum wage, though the latter may be revealing evidence of whether or not a philosophical shift has actually taken place. Given a change in philo­ sophy, the imposition of new wage and price controls in an area where they already exist may be defended as legitimate.

IV. Toward Which Institutions Should the Compulsion Be Directed?

There are five possible answers to this question. Each may be a valid interpretation of the resolution.

1. The federal government could compel other governments and/or nongovernmental agencies to adhere to designated wage and price policies. This is the usual interpretation. The compulsion in World War II controls involved federal restraints on the decisions made by nonfederal institu­ tions with respect to wages and prices.

2. One part of the federal government could compel another part of the federal government to issue wage and price controls. In this case, the program would be compulsory, in the first instance, not on those whose pricing and wage decisions it aims to influence, but on those who are supposed to implement the program. For example, Congress could compel the President, by imposing a statutory duty, to update and re­ issue the wage and price guideposts used by the Kennedy and Johnson Ad­ ministrations in the early and mid-1960s. Though this approach surely satisfies the requirements of compulsion, negatives may question whether it satisfies the proposition's requirement that affirmative plans control wages and prices. How much impact--none, some, or universal--would guide­ posts have to have before it was conceded that they were, in a meaningful

-21- sense, controlling wages and prices? The uncertain results of such guide­ posts might not only militate against the effectiveness of the affirmative plan, but could also lead a judge to decide that the plan does not fulfill the resolution. Moreover, the effectiveness of guideposts may depend, in large measure, on vigorous presidential action to assure adherence to them. A reluctant President could reduce them to little more than words and numbers on paper. Given these problems, the guideposts approach, though perhaps legitimate in the context of congressional compulsion of the President, is probably not very promising.

3. One part of the federal government could compel another part of the federal government to take indirect action that, in effect, would constitute wage and price controls. Congress might compel the relevant executive agencies to grant subsidies to certain industries or to certain kinds of activities. These subsidies, the affirmative might claim, would hold prices down or permit wages to be raised without economic harm to individual corporations or companies. As we have already noted, subsidies in combination with more direct controls are certainly within the bounds of the resolution. That is not what we are concerned with here. Subsidies alone may also be seen as a control; the compulsion is not on the recipient of the subsidy, but is intra­ governmental in nature. This interpretation encounters the same problems as the preceding one. The effects of subsidies may be uncertain. How effective must they be before they are regarded as controls? This ques­ tion seems more serious with respect to prices than wages. The govern­ ment could grant a wage subsidy which presumably all covered workers would be happy to accept. But how, with the subsidy alone, can the gov­ ernment guarantee that prices will be lowered? How close to such a guarantee does the resolution require the affirmative to come?

4. One part of the federal government could compel another part of the federal government to raise or lower its prices or wages. For instance, Congress (or a board designated by it) could compel the Department of Defense to pay sufficient wages to attract enough soldiers so that the military draft becomes unnecessary. This would result in the creation of a volunteer army. It would rely on a wage control mechanism similar to the proposal made recently in the Senate by Senator Mark Hatfield (R., Oregon) and Senator Barry Goldwater (R., Ariz.).

The negative may deny the soundness of any interpretation which calls for one part of the federal government to compel certain performance by another part of the federal government. The negative may argue that the term "federal government" refers to the federal government as a uni­ tary whole, not to its disparate parts. But the affirmative can reply that, in common usage, the term "federal government" is often used to refer to one of its constituent parts. For instance, it is often said that the federal government is funding a particular program, when, in fact, the funding may be the result of a decision by the Congress to override an executive veto. In effect, the Congress is compelling the executive to disburse certain sums of money for certain purposes. Yet, we still speak of the federal government acting. So the affirmative

-22- may defend an approach involving compulsion by one part of the federal government on another part of the federal government as consistent with current usage and practice.

5. The affirmative could avoid the preceding difficulty alto­ gether by interpreting the resolution to mean that the federal govern- ment should compel itself to issue or adhere to certain wage and price controls. At first, the concept of the federal government compelling itself may be a bit unsettling. How can that be done? The fact is that it is done all the time. For example, under present legislation, the federal government is compelled to match state welfare expenditures according to a certain formula. It has a host of what budget analysts label "uncontrollable" expenditures each year. The funds for such ex­ penditures are not appropriated as part of the normal appropriations process, but are mandated by statute. The principle of federal self­ compulsion could surely be extended to the area of wage and price controls.

V. What Types of Wage and Price Controls May the Affirmative Propose?

Generally, there will probably be two approaches under this year's resolution. The first leaves the substance of present economic activities unaltered while introducing regulation through wage and price controls. The second type of case aims at reshaping the substance of economic or social activity through reforms effected by wage and price controls. The distinction between the two approaches was noted earlier in this chapter. The most prominent characteristic of the second ap­ proach is its attempt to do something with wage and price controls rather than to wages and prices. The first approach, on the other hand, derives its advantages directly from the impact of the plan on wages and prices.

A. Typical Cases Emphasizing Regulation

1. The most obvious purpose for wage and price controls is to contain the pressures of inflation. Cases intent on effecting this purpose will probably be the stock cases on this year's proposition. For that reason, the analysis will devote a substantial amount of attention to this area. The anti-inflationary uses of wage and price control are discussed extensively in chapters III and IV.

2. The affirmative may advocate price controls on goods, services, and materials sold in the slum areas of major cities. The plan would contain procedures for holding down prices. It would represent a response to the hotly disputed complaints about unfavorable price dif­ ferentials and shoddy merchandise in ghetto stores and supermarkets.

3. The affirmative could advocate a system of rent con­ trols, either in selected cities or across the nation. New York City's continuing experience with rent controls provides a laboratory for both affirmative and negative teams to test the efficacy of such a program. An affirmative arguing for rent control may want to include a provision

-23- for subsidies (discussed earlier in this chapter). It may also have to prove that state and local efforts in this area could not work. That issue will be examined later in this chapter.

4. One final example of wage and price controls is aimed solely at regulation, leaving the substance of an activity substantially unaltered. The affirmative could propose to control the price of medical care and the wages of medical personnel. By an indirect route, the affirmative plan could achieve something quite comparable to universal medical care for all citizens. Or the plan could be confined to a particu­ lar class or category of citizens, such as infants or the indigent. A workable plan in this area would almost certainly have to include sub­ sidies. (See Chapter V for discussion.)

B. Typical Cases Emphasizing Reform

Wage and price controls for the purpose of reform are based upon the assumption that the government can persuade citizens or industry to follow a prescribed course of action by structuring economic incentives in a way that favors that course. An affirmative plan of this type would penalize or reward designated conduct. It might force corporations de­ viating from that conduct to charge higher prices, putting them at an economic disadvantage in the marketplace. Let us turn to some examples.

1. We have already noted the possibility that an affirma­ tive plan might call upon Congress to raise military wages to a sufficient level to attract an all-volunteer army. Here, the affirmative is advocating a fundamental change in the method of military manpower procurement. Such a plan would reward those who enlist in the armed services, while elimin­ ating compulsory service. A typical affirmative plan of this type might provide for financing by dovetailing the wage control with price controls on military goods and weapons procurement. The plan could set up a new system for controlling defense costs. The affirmative might then claim substantial savings--savings which could pay the increased cost of an all-volunteer armed force.

2. The affirmative could argue for wage and price controls in basic industries to avoid crippling strikes, inflationary wage settle­ ments, and cost-push inflation. The latter two objectives are really examples of the traditional approach of wage and price controls to prevent inflation. But wage and price controls as a device to head off strikes would represent a major change in economic relationships. Since the 1930s strikes have been a generally accepted last resort in the col­ lective bargaining process. If government set wages and prices, the affirmative could maintain the reason for strikes would disappear. Note that this case approach would depend on a broad definition of the term "wages." If a plan covered only money wages, countless potential dis­ putes between management and labor would still remain. There would still be numerous occasions for strikes. Note secondly that, though an affirmative plan might provide for setting wages and prices in labor­ management disputes, it could not outlaw strikes. Advantages depending

-24- on a provision outlawing strikes would clearly be extra-topical. How­ ever, the affirmative might achieve the same objective by providing wage penalties for employees who go on strike and price penalties for em­ ployers who lock out their employees. This approach will also be dis­ cussed at length in Chapter V.

3. Another possible case approach examined in Chapter V is the creation of public service jobs through wage and price controls. For years, it has been argued that there are numerable public service jobs in government and outside if the money was available to pay workers. The affirmative could present a proposal under which the federal govern­ ment would fix wages for performing such jobs, set prices by telling local communities and organizations what they must pay for certain ad­ ditional services, and make up the difference between local contribu­ tions and total costs through a subsidy program. The affirmative might contend that this plan would also provide employment opportunities for those presently unemployed and for many who are on welfare.

4. The affirmative could attempt to proscribe or deter certain activities by making them prohibitively expensive. An affirma­ tive plan might make the price of guns so high that no one could afford to purchase them. It could raise the price of ammunition sharply so that those who already own guns would find them :useless. In essence, such an affirmative proposal would constitute gun confiscation. The principle could be applied to other choices normally left up to indi­ vidual citizens. All white private schools could be priced out of busi­ ness. Pornographic literature could be placed beyond the reach of even affluent adults. An affirmative plan that had these or similar results would run into strong negative arguments concerning the constitutionality of such proposals and about the simple nuts and bolts practicality of enforcing its prohibitive prices. Nonetheless, such plans seem legiti­ mate within the meaning of the resolution.

S. If the principle of using wage and price controls to effect a social or political objective is carried to extremes, an af­ firmative team could offer a plan that would make U.S. military inter­ vention abroad so costly that the nation could not afford it. For instance, an affirmative might advocate that Congress compel the De­ fense Department to pay soldiers engaged in intervention an inordinately high wage--a wage so high that no President would even contemplate inter­ vention. In addition to the normal objections to restrictions on U.S. military intervention, this case would probably encounter the feeling that it represented an "unreasonable" interpretation of the topic. Despite that feeling, however, the case appears to fulfill the resolu­ tion's requirement for wage controls. With the addition of price con­ trols, perhaps to raise steeply the price of equipment used in an inter­ vention, the case would probably fulfill all the requirements of the resolution.

But why, a negative might ask, should we prohibit intervention in a fantasti� Rube Goldberg�like way rather than through direct action,

-25- such as congressional appropriations controls? But, as appealing as it might seem, a justification argument is no more correct in this context than in any other. In a debate, the affirmative burden of proof is based on the concept of "presumption." It is assumed that long-standing policies and programs should not be changed for "light and transient causes." There is a presumption, then, in favor of present system structures--and an affirmative that advocates changing them must demonstrate the superi­ ority of its proposal. Only if the negative team is suggesting an alter­ native that is part of the present system can it claim the benefit of presumption. Only then does the affirmative have to justify its proposal as superior to the negative alternative. If the negative is unable to show that a suggested alternative is part and parcel of the present system, there is no affirmative duty to justify. The affirmative team does not have to justify the resolution as opposed to all other possible resolutions, but only as opposed to the status quo and reasonable exten­ sions of it and repairs to it. So, even with an intervention case, the affirmative would be required to justify the use of wage and price con­ trols rather than appropriations controls only if the negative shows that the latter were present system mechanisms.

VI. Must the Affirmative Maintain a Rationale for Federal Rather Than State Action? Despite what we suspect is the almost universal hope that the state issue would not be involved in this year's resolution, it may be of major importance in some debates. This is especially true with res­ pect to cases that deal with social problems or political conditions rather than inflation. For example, the public service employment case discussed in the preceding section is certainly subject to the response that the states and the localities can afford to create and pay for as many public service jobs as the affirmative proposes. Whether or not there is a state issue in a specific debate will be determined by the answers to three questions:

1. Can the states legally act? There are areas where state action is constitutionally impermissible. Obviously, even if a state wanted to, it could not create a volunteer army through financial in­ ducements. States cannot effectively control wages in basic industries which are part of interstate commerce. There are areas where only na­ tional action will suffice.

2. Does past history create a presumption for state action? Unless there is a tradition of state responsibility in a certain area, there is no reason to prefer state rather than federal action. Police salaries are traditionally a state responsibility. Affirmative plans dealing with them would be obliged to explain why state reforms could not do the job. Even if the state can legally act, the affirmative need not justify the use of the federal governmeni unless there is a record of state responsibility and action.

3. Can the states afford it? Some affirmative plans may cost

-26- a large amount of money. If they operate in areas of traditional state responsibility and if the states have the legal authority to act, the affirmative would have to justify federal financing. The relative merits of state and federal financing are by now familiar to most debaters. They have been discussed in several recent special analyses. We will not repeat those discussions here.

VII. Some Cautionary Notes

At several points in this chapter, we have discussed case ideas that relate only to wage controls or only to price controls. Of course, the topic requires that the affirmative present a case for both wage and price controls. The affirmative may present a plan that calls for wage and price controls in the same area of the economy; it may present a plan that calls for wage controls in an area entirely different from the one in which its proposed price controls are to function; or its plan may deal with an area where wages and prices are essentially unitary, for example, medical care. In any case, no affirmative can secure the adop­ tion of the entire resolution if its plan adopts only half the resolution.

But can the affirmative win if its reasons for wage controls carry, while its reasons for price controls fail? Though its plan must encompass both, there is no reason to require that the affirmative sus­ tain its arguments in favor of both. If, at the end of the debate, the affirmative is left with a significant advantage, even if it comes only from wage controls or only from price controls, there is still ample reason to adopt the affirmative proposal in preference to the present system which does not offer the same advantage the affirmative proposal does. A debate presents us with a choice between policy systems. When the affirmative's policy system fulfills the resolution, and its ad­ vantages outweigh its disadvantages, the affirmative has done enough to win the debate.

The range of invention under this topic is wide. The range of judge resistance may be equally wide, even if an affirmative's "unique" approach is perfectly logical and consistent with the resolution. By design or by error, the framers have drafted a proposition which, after definitional analysis, leaves very few major public issues outside the realm of legitimate case making. Judges may be tempted to limit the topic by ad hoc restrictions. But such restrictions seem linguistically unjustified.---The topic says what it says. And this year it says a great deal.

In the following chapters, we will try to touch upon some of the major issues presented by the topic. Chapter III examines the anti­ inflationary rationales for wage and price controls. Chapter IV surveys the problems associated with wage and price controls designed to restrain inflation, and Chapter V, explores selected, nontraditional reasons for some kind of wage and price controls.

-27- CHAPTER III THE RATIONALE FOR ANTI-INFLATIONARY WAGE-PRICE CONTROLS I. Introduction

The issues involved in a discussion of wage and price controls are not all capable of being resolved on a purely economic level. Tt may be necessary to clarify certain social and policy considerations i1, order to unravel the economic technicalities.1/ For example, a long term rela­ tionship between general unemployment levels and wages have been discov­ ered.2/ As unemployment is reduced, wage rates rise, making inflation much more likely. Advocates of controls may argue that this relationship may be altered by holding down prices and wages. On the other hand, oppo­ nents may maintain that the relation between unemployment and wage levels is unalterable--further, that controls are unwise and dangerous. Both positions must, however, go beyond the economic issues. A decision must be reached as to the relative value of reducing the rate of unemployment to the public's interest in the maintenance of a stable price level.

This chapter will examine those issues involved in the use of wage and price controls to combat inflation.

II. The State of the Economy

A. Unemployment

Three major problems may be cited in the present state of the economy--high unemployment, high interest rates, and rising price levels.

The general level of unemployment has been r1s1ng for several months. The official measure in 1969 was a 3.5 percent unemployment rate. In mid-August 1970, the national rate reached was 5.1 percent.3/ During September 1970, unemployment was at a six year high of 5.5 percent.!f

Two major causes are cited for the present employment picture. First, there has been a general economic slowdown in an effort to control

1/ Arthur M. Okun, The Political Economy of Prosperity (Washington: The Brookings Institution, 1970), p. 19.

2/ A.W. Phillips, "The Relation Between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1951-1957," Eco­ nomica, Vol. 25, 1958, pp. 283-99.

3/ The Washington Post, August 17,1970; see also testimony of Leon Keyserling, Hearings before the Joint Economic Committee, 9lst. Cong., 2d Sess., July 24, 1970. Mr. Keyserling stated that if one considered the rate of part-time unemployment the unemployment figure reached 6.1 percent by May 1970.

4/ The Washington Post, October 3, 1970.

-28- inflation. However, prices have not stabilized as quickly as hoped in some quarters. 1be slowdown has been extended, resulting in a protracted rise in the unemployment rate. 1be slowness of the conventional theory in working will be explored below.

1be second explanation offered for the rise in unemployment is related to the recent decrease in defense expenditures. If corrected for inflation, administration spokesmen claim defense spending has declined $12 billion between fiscal 1968 and 1970. 1/ This decrease has resulted in a total displacement effect of upwards-of one million people.2/ Many of these workers may not have had difficulty in securing new employment, but it is noted that while "the rise in unemployment is concentrated among the unskilled, Negroes, teenagers, construction workers and the semi-skilled ... the sharpest percentage increase has been among professional, technical and skilled workers."3/ Presumably, many of these workers were previously employed in defense industries.

Experts have observed several harms from rising unemployment. A high unemployment rate may aggravate social tensions. 1be overall figure of 5 percent fails to reveal the extent of joblessness among the young dur­ ing the summer. For the first time in nine years the number of available summer jobs fell, compounding the effect which the general economic slow­ down had on all teenage workers. The youth unemployment rate rose to 16 percent and to over 30 percent for Negro teenagers.4/ Those who remember the disturbances in major cities in recent years recognize that these fig­ ures mean more than income drops for those youths working for tuition or starting their first permanent job. 1bey may also portend widespread civil disturbance by youths frustrated by a system in which they cannot work even if they choose to. This sense of frustration is not confined to new or temporary job seekers. The prevailing mood among workers has been described as:

A mood of great uncertainty ...a feeling of great frustration, coupled with anger ...a feeling of some helplessness in the face of what has been happening .. . a hesitancy about what lies in store for the future .. . a well-founded feeling that they have been the victims of inflation by shrinking buying power and now layoffs and cuts in working hours ... and this .mood is neither good for the workers nor the Nation.�/

1/ New York Times, August 18, 1970

2/ Ibid.

3/ Testimony of I.W. Abel before the Joint Economic Committee, 9lst Cong., 2d Sess., July 8, 1970.

4/ 1be Washington Post, August 17, 1970,

5/ Abel, op. cit. Not only do the unemployed suffer, say critics, but the general economy is deprived of production and wealth. One economist estimates " ...during the decade from 1959 to 1969, we lost an average of about $40 billion in output per year through not maintaining full employment. "1/ This gap has widened as unemployment has grown. Another estimate concludes: "In the second quarter of 1970 alone, the annual rate of total national production, measured in 1967 dollars, was almost 150 billion dollars below the maximum."'!)

However, others would maintain that unemployment statistics and the harm associated with them are not always comparable from one period of growth to another. Arthur F. Burns has noted:

... the economic significance of any particular figure of unemployment does not stay fixed in a dy­ namic environment. In recent times, the labor market has changed profoundly as the numbers working part­ time or intermittently grew relative to the stable full-time labor force, as voluntary unemployment be­ came a larger factor in the total, and as job oppor­ tunities for the unskilled declined. 3/

Consequently, statements about full-employment gaps may not correctly state the loss to the economy represented by a particular statistic of unemploy­ ment. The figures may also overstate individual economic hardship, because for some, their idleness may be voluntary.

Secondly, the length of unemployment is important when assessing the hardship individual workers experience in losing a job. For example, in December 1969, more than one-half of the unemployed had been out of work for less than five weeks and were presumably "between jobs" and not aimless­ ly unemployed.if One must add that most of the unemployed have access to unemployment compensation.

Finally, harmful as some unemployment may be, it is often neces­ sary to avoid other, more severe economic consequences. If inflation is to be stopped, some unemployment may be inevitable. The alternative to bringing inflation under control may be widespread suffering in the future. The best argument for the present rate is that this unemployment is as

1/ Testimony of Melville J. Ulmer before the Joint Economic Committee, 9lst Cong., 2d Sess., June 4, 1970.

2/ Keyserling, op. cit.

3/ Arthur F. Burns and Paul A. Samuelson, Full Employment, Guideposts and Economic Stability (Washington: American Enterprise Institute, 1967), p. 33.

4/ Roger A. Freeman, "Why Don't They Stop Inflation?", Congressional Record, March 2, 1970, p. El488.

-30- little as is necessary to slow the price rise. Thus, one could argue that the overall economic picture is as bright as it could be.1/

B. High Interest Rates

A second problem in the economy is high interest rates--the highest this country has seen in 100 years.2/ Interest rates present one of the most interesting riddles of the present economy.

Money is a scarce commodity and as such is bid for in open mar­ kets by sellers with money to lend and buyers with investment opportunities they consider will yield sufficient returns after the lender is paid for the use of his money. Money is thus distributed in a normal supply and demand market. As the demand for money �ncreases, its price--interest-­ also goes up. The most obvious cause of high interest rates is a high de­ mand for money which usually occurs in a booming economy where the pros­ pects for profit are great and in inflationary periods where continued in­ flation is anticipated. Yet gradually, as the bidding proceeds, more and more bidders cannot afford the interest rates and their plans for credit purchases or debt financed industrial expansion are shelved. The overall demand in the economy declines as still more bidders find money too expen­ sive or unattainable. This lessens overall demand and thus puts pressures on prices. And since interest rates are the price of money, lessened de­ mand for money will gradually reduce its price. But depending upon the expectations of the public about future prices and inflation, there can be considerable lags in time before interest rates begin to soften. There is some evidence interest rates are finally beginning to respond in the cur­ rent situation.

The present combination of high interest rates and continuing high demand for money may be explained by the fact that inflationary ex­ pectations are strong. In this situation the interest rates reflect lenders' fears of constant inflation. They realize the dollars they receive in re­ payment of their loan will be worth less than the ones originally lent. Thus, "when the price level is going up fast and constantly, lenders will in the end seek to be compensated for the depreciation of money during the period of the loan ...."3/ Interest rates should therefore be viewed as two major costs. Taking thfs approach, "... one sees an interest rate of 10 percent, 6 or 7 percent of that is for the expected increase in prices y See Presiderit Richard M. Nixon, "Radio and Television Address by the President on Economic Policy and Productivity," June 17, 1970 reprinted in To Extend the Defense Production Act of 1950 as Amended, Hearings before the Committee on Banking and Currency, 9lst Cong., 2d Sess., June 18, 1970, pp. 146-51.

2/ Abel, op. cit.

3/ Burns and Samuelson, op. cit., p. 29.

-31- during the coming year, only 3 or 4 percent is for interest as we commonly think of it. "1/ If the borrower has the same perception of the economic future, he will carry interest loads that would be unbearable if inflation were to stop. Thus some would argue that other action must be taken to stop people's inflationary expectations before high interest rates may be relied upon to do their part in dampening down an overheated economy.

Others claim that the present high interest rates result from lack of money and thus can be relied upon to slow inflation if allowed to continue long enough. The Federal Reserve has followed this theory by con­ tracting the money supply which tends to raise interest rates in the short run. The effectiveness and consequences of this policy will be explored more fully when we examine monetary policy in a later section.

A second explanation for high interest rates, closely connected with the first, is that the decision not to borrow is a more expensive al­ ternative for many production firms. They note that labor has pressed for higher wage settlements in an effort to protect their members' income from erosion inflicted by price increases. In many firms, executives conclude it is less expensive to borrow funds at high interest rates, install mechan­ ical equipment and automation, and forestall larger cost increases for labor and equipment in the future.l(

High interest rates have adversely affected the construction in­ dustry, especially homebuilding. Faced with a growing population, the coun­ try has felt an acute need for rapid expansion of its housing facilities. But because a house is the most expensive item most families ever purchase, the cost and availability of money is critical in the decision to build or buy a house. Under present circumstances, many feel the decision is so often negative that construction has fallen far beyond targets set to solve the housing shortage. The situation is graphically illustrated when the cost of a $20,000 mortgage for 30 years is computed. It is startling to realize that a "$20,000 mortgage costs the homeowner a total of $55,362 in principal and interest before he can call his home his own. "3/ Some claim this compu­ tation actually is an exaggeration of the cost of mortgages, since there are normally acceleration clauses in any mortgage which allow a borrower to pay off the original mortgage with a new one drawn at lower interest rates when the money market eases.4/ On the other hand, if inflation is expected to continue,even the existence of an acceleration clause may not be an in­ ducement to take out a mortgage.

1/ Testimony of John K. Galbraith before the Committee on Banking and Currency, 9lst Cong., 2d Sess., June 16, 1970, p. 9.

2/ Representative Henry S. Reuss, (D-Wis.), testifying in Price-Wage Guideposts, H.earings before the Committee on Government Operations, 90th Cong., 2d Sess., Sept. 23, 1969, p. 19.

3/ Testimony of Andrew J. Biemiller before the Committee on Banking and Currency, 9lst Cong., 2d Sess., June 18, 1970, p. 74.

4/ Representative Albert W. Johnson (R-Pa.), testifying before the Commit­ tee on Banking and Currency, 9lst Cong., 2d Sess., June 18, 1970, p. 298.

-32- The second area affected by the present high interest rates is state and local government construction.I/ Because of limitations on in­ terest that may be legally paid on state-and local bonds in some areas, the market rate is too high for any new offerings regardless of the expec­ tations about inflation which government officials may have. Moreover, the borrowing costs may be prohibitive in an economic or political sense and such construction may be halted.

The negative may argue that President Nixon has already asked states to reduce their construction outlays until the inflationary problem has been dealt with,2/ so that the particular impact of interest rates is not the sole reason for construction slowdowns, nor is it necessarily harm­ ful. Secondly, the negative can point to the fact that municipal financing has increased significantly;3/ what construction is really necessary is being financed within legally permissible interest rates under economically and politically justifiable circumstances.

Another complaint is that high interest rates have become a source of inflationary pressure. Whenever a business borrows money as part of its normal operations or to expand its output capacity, the interest on that loan becomes a cost which is usually passed on to the consumer in the form of higher prices.4/ This phenomenon is most acute when an industry relies heavily upon borrowing for finances. For example, the cost of fuel has risen rapidly largely because of the increasing interest charges which utilities have borne.5/ Equally disturbing is the claim that this problem will con­ tinue after-the present money market improves. If the loans are long-term, present conditions may have "built-in high costs and prices for years to come."6/ This statement assumes that business can pass on higher interest costs through higher prices. If it cannot due to decreased demand, business must absorb the costs. Only when demand will support higher prices can the interest costs be used as an excuse for increased prices.

1/ Abel, op. cit.

2/ New York Times, September 5, 1969.

3/ Testimony of Henry Kaufman before Joint Economic Committee, 9lst Cong., 2d Sess., July 9, 1970.

4/ Testimony of Michael V. DiSalle before the Committee on Banking and Currency, 9lst Cong., 2d Sess., June 17, 1970, p. 43.

5/ Keyserling, op. cit.

6/ Abel, op. cit.

-33- C. Inflation

The third major national economic ill is inflation. From the preceding discussion it should be clear that all three problems of unem­ ployment, interest rates, and inflation are interrelated, but inflation or generally rising prices is the problem most widely recognized and dis­ cussed. It seems all-encompassing, irrational, and perhaps inevitable and unstoppable. Those prone to generalizations may talk of "perpetual infla­ tion."!/ In fact, "since 1932 the price level has never gone down."2/ Yet a small rate of inflation may be tolerable if unemployment is reduced and, as a by-product, poverty is alleviated to some degree. Some inflation may be inevitable in the sense that the Consumer Price Index cannot hope to compensate accurately for all the improvements in quality that make price listings seem to go up in an inflationary manner.1f

Tolerable inflation is not the situation today. Inflation is running far above what economists, politicians or housewives find acceptable. In fact, the technicians now claim that far from overestimating inflation, the Consumer Price Index may well understate the case because of the in­ efficiencies and quality deteriorations which creep into the economy when it operates close to full capacity.4/ There is no serious dispute about the existence of inflation to­ day. There is a dispute, however, over the definition of inflation--a dis­ pute which has policy implications for government action. The popular mea­ sure of inflation is reported in a number of indexes which reflect the price level of goods and services. This system dovetails with one definition of inflation which is simply a condition of rising price levels. Yet another economic school identifies inflation with an expansion of the money supply. This expansion can occur either because there is more money made available (increase in money stock) or because the money in circulation is respent so much more quickly than usual that the total amount of money actually spent for goods and services is enlarged (increase in velocity).5/ It is considered normal for the velocity of money to remain relatively constant over reason­ able periods of time and for changes to occur primarily in the amount of money in circulation in the short run.

-1/ Arthur M. Okun notes such a trend in The Political Economy of Prosper­ ity, op. cit . , p . 36 . 2/ Gottfried M. Haberler, Inflation: Its Causes and Cures (Washington: American Enterprise Institute, 1966), p. 3.

3/ Burns and Samuelson, op. cit., p. 35. 4/ Haberler, op. cit., p. 2-3, 5/ Ibid., p. 47.

-34- The first possible dispute precipitated by these two definitions focuses on the goal of an anti-inflationary policy. Those interested in price levels would allow the supply of money to increase fast enough to permit growth in output matched by stable price levels. On the other hand, those concerned with the supply of money would seek to stabilize the money supply and force prices to remain stable or to fall while produc­ tivity improves. Both groups now consider the only politically feasible approach is one which seeks relatively constant prices and attempts to keep incomes abreast of improved production output. Yet many feel social justice could be served by opting for the alternative approach. For under the present system, the poor and retired workers who live on fixed incomes are forced to fight an uphill battle to maintain parity with jobholders whose wages increase with increases in productivity for which they are only partially responsible. If the price level declines, these people may receive some of the benefit of their own productivity input in the form of lower prices.� Although there is almost universal agreement that inflation is bad, it is surp_risingly difficult to pinpoint in debate terms the specific harm it creates. Perhaps the most universally felt evil is the sense that inflation raises money incomes in a haphazard, arbitrary way and thus is fundamentally unfair.2/ Inflation is frustrating to a society which sees money incomes as a reflection of industry and perseverance. Inflation dis­ torts the pattern of reward and deprivation which a work ethic promotes. Perhaps a more accurate characterization of the anti-inflationary sentiment is to say it is a dislike of the inflation that helps the other guy.

When the man of the house brings home an 8 per­ cent wage increase, he and his wife are confident that he earned and deserved that raise. If prices subsequent­ ly go up by 4 percent, the family is not happy with the 4 percent gain in real income; rather, it feels cheated that the wage gain was cut in half by inflation. In point of fact, of course, the husband's 8 percent wage increase may have occurred only because of inflation.3/

Similarly, a seller feels benefited by inflation, yet this same individual feels cheated by price hikes when he acts as a buyer. This dichotomy makes it difficult to halt inflation for virtually no one is willing to give up his share of inflation to persuade others to follow suit.4/ As policy dis­ cussions evolve, the concept of universal treatment is usually given great weight. Programs that might halt inflation in the long run are severely criticized because they do so in an uneven fashion.

1/ Ibid., p. 49.

2/ Okun, 0£. cit., p. 107. 3/ Ibid. , pp. 107-8.

4/ Freeman, op. cit., p. El485.

-35- Some observers claim that many have a stake in inflation and are able to keep up, but that those in the worse economic situation initially are hurt most by inflation--the elderly and the poor. Yet some studies have shown that it is not true that inflation hurts the poor as a group.1/ The negative can maintain that the impact of inflation on the elderly is­ already recognized--that social security benefits are raised periodically to reflect increases in the cost of living. In fact, President Nixon has urged Congress to tie social security benefits to the cost of living._;/

Finally, the argument may be made that sophisticated economic arguments mean little to the man on the street. He always feels inflation leaves him on the short end of the stick. I.W. Abel described earlier the unrest which workers feel when they view the present inflation. The divi­ sive and disruptive nature of inflation cannot be ignored. Many feel that when an administration is incapable of dealing with inflation its capacity to govern in other areas is weakened as the nation's confidence in its judgment and power declines.

III. Present Economic Tools It should be clear from these discussions that inflation is the primary villain while unemployment and high interest rates are either a con­ sequence of inflation or of efforts to combat price rises. Thus, strategies to combat inflation are central to the economic dilemma the country now faces. If inflation can be stopped, unemployment and interest rates should become less troublesome. Discussion of anti-inflation policies has led some authorities to advocate the necessity of a wage and price control approach. To understand the rationale for controls, it is first necessary to examine present monetary and fiscal policies relied upon to control inflation.

A. Monetary Policy

The Federal Reserve directs monetary policy by a number of mech­ anisms geared to control the money supply through central banking operations. Certainly the easiest explanation of monetary policy rests on the definition of inflation which focuses on the supply of money. If that supply can be limited by central banking operations, price rises may be averted. A con­ stant money supply will result in more or less constant demand, or at least one which cannot rise above a certain level regardless of how consumers decide to divide their income between spending and saving. Here the money supply becomes the sine qua non of restraining price inflation. If prices rise in one area, demand must respond in one of two ways: by either paying the increased price in that area and withdrawing demand from another area

1/ Robinson G. Hollister and John L. Palmer, The Impact of Inflation on the Poor (Madison, Wisc.: Institute for Research on Poverty, Univer­ sity of Wisconsin, 1969).

2/ Nixon, op. cit., p. 150.

-36- which will cause the latter to experience price declines; or by refusing to pay higher prices because other goods and services are more attractive at stable prices, in which case the price increases will soon be repealed.I/ In a consumer economy where across the counter sales are made for cash,­ the reaction in demand described above is probably the way the economy re­ acts to shifts in the money supply.

However, this description is not the nature of the American economy. The first important distinction between this model and the real world is the existence of credit. A large part of the economy is financed by borrowing. If credit is available, the economy can expand its demand for houses, durable goods and capital investment. However, as we pointed out earlier, interest rates may choke off the demand for loans and slow the pace of credit expansion of demand. Several criticisms are noted with this approach.

1. Incompleteness

First, the control which the Federal Reserve System has over mon­ ey and credit is less than complete. For example, when the Federal Reserve Board attempts to limit credit expansion, member banks who want to lend at the prevailing high interest rates look for new sources of funds. For a period, the supply of surplus dollars which Europe had as a result of our continuing balance of payments deficit was one such source. Dollars were either borrowed from European banks or transferred from U.S. subsidiaries abroad to the U.S. where interest rates were much higher. Outstanding loans were sold to corporations and the banks themselves issued commercial paper backed by subsidiaries and affiliates, such as one-bank holding companies.2/ The Federal Reserve has tried to forestall these alternatives, but the bat-=­ tle to stem the tide of loans has been protracted.

Second, credit facilities which are not regulated by the Federal Reserve System, such as credit unions, savings and loan associations and industrial-based credit mechanisms, can escape direct interference in their activities and continue to finance the credit boom to the extent their re­ serves permit.ii

Third, large business with good credit ratings may avoid using credit institutions and issue their own commercial paper to finance a boom continuation.4/

1/ John Sheahan, The Wage-Price Guideposts (Washington: The Brookings Institution, 1967), p. 138.

2/ Annual Report of the Council of Economic Advisers, January 1970, (Washington: Government Printing Office, 1970), p. 34.

3/ Testimony of A.W. Clausen before the Joint Economic Committee, 9lst Cong., 2d Sess., July 9, 1970.

4/ Testimony of Robert V. Roosa before the Committee on Banking and Cur­ rency, 9lst Cong., 2d Sess., June 17, 1970, p. 54.

�37- Because of these alternative credit sources control by the Fed­ eral Reserve over the supply of credit is diminished.!/ Nevertheless, the Federal Reserve can still have an awesome impact on the economy through control of bank reserves and the money stock. This it does through open market operations, changes in the discount rate, and changes in revenue requirements. As one economist noted: "Even on conservative assumptions, tight money had a remarkably impressive total effect. As the Council re­ ported its assessment, the impact was as large as one would have expected from a 10 percent surcharge on corporate and individual income tax lia­ bilities."2/

2. Unequal Impact

While the Federal Reserve exercises tremendous influence over the money supply, it traditionally has been unable to ration credit among potential buyers. This task falls either to the market in the form of in­ terest rates, or to the lender when the market is inconclusive or when other considerations outweigh the interest rate. In fact, the interest rate never plays a conclusive role in determining lending patterns because therP- is no single interest rate. Major banks charge their best customers the prime interest rate. Other less familiar or less credit worthy borrowers are forced to pay higher rates. When the interest rate no longer seems to determine who obtains scarce loanable funds, the banks are charged with ra­ tioning credit according to their own policies_.� Charges have been made that "While available funds dried up for home construction, state and local gov­ ernments and small business, bank loans increased to the huge corporations and the rich to bankroll the capital goods boom, business mergers and con­ glomerate take-overs, gambling casinos and investments in foreign subsidi­ aries. "4/ Whether or not these charges of irresponsible behavior· are accu­ rate, they do highlight the fact that the credit crunch does have an uneven impact.

Because the interest rates which accompany a tight money policy dissuade many a family ·from building a new home, the housing market is one of the first and often hardest hit by a credit shortage. In 1966, housing funds dropped nearly $6 billion and housing starts fell from an annual rate of 1.5 million units in the fourth quarter of 1965 to 0.9 million a year later.5/ Some will argue that this impact can be softened considerably under present arrangements. Savings and loan associations are more involved in the mortgage market than most Federal Reserve member banks. They are not directly affected by Reserve operations and they are able to offer y Clausen, op. cit. y Okun, op . cit.

3/ Testimony of Nathaniel Goldfinger before the Committee on Banking and Currency, 9lst Cong., 2d Sess., June 18, 1970, p. 160.

4/ Abe 1 , op. cit . 5/ Okun, op. cit., p. 80.

-38- higher interest returns to savings accounts than member banks. Higher interest should encourage many individuals to forego present consumption for future gains through increased savings. 1/. In the past year, through a combination of market forces and governmental suasion, mortgage funds have increased 2/ and housing starts have accelerated.3/ Of course, mitigating factors in the housing crisis do not mean there is no housing crisis or that monetary policy is uniform in its impact.

3. Interest Rates

The level of interest rates was once thought to be enough to determine the level of borrowing in the economy. As the level rose, it was assumed more and more borrowers would drop out of the bidding until the market cleared at an equilibrium level of interest. Thus, it was also assumed that the interest rate could be relied upon to stop a credit boom. If there was a runaway boom, the rates were too low. Once they went up, all that was necessary was patience as the rates performed their task in the market.

But this present boom has shown the fallacy of relying only on interest rates as a means of curbing credit expansion. Interest rates soared; borrowing did not abate sufficiently. Interest rates reflected not only tight money but the inflation they were expected to thwart. As indicated earlier, borrower and lender both saw the rates as partially a cost of money and partially a hedge against inflation. In addition, the inflationary psychology made tomorrow's money seem even more expensive than today's. Thus, "everyone in a position to make a decision with respect to the use of capital is forced to ask himself whether he shouldn't borrow money at a high cost because the cost may soon be higher."4/ Others argue that inflationary expectations did not play a major role 1n fueling the borrow­ ing boom. Rather they trace the situation to a fear of high labor costs due to union demands or tight labor markets.�

4. Lags

Many point to two other problems with monetary policy as a macro­ economic tool. First, the economy moves relatively quickly from one situa­ tion to another. These shifts may take several months to recognize. Mone­ tary policy, on the other hand, works more slowly for it affects the actions

1/ Testimony of Richard S. Landry before the Committee on Banking and Currency, 9lst Cong., 2d Sess., June 18, 1970, p. 144.

2/ Testimony of Charls E. Walker before the Committee on Banking and Currency, 9lst Cong., 2d Sess., June 22, 1970, p. 300.

3/ The Washington Post, August 18, 1970.

4/ Roosa, op. cit., p. 51.

5/ Okun, op. cit., p. 94.

-39- of thousands of participants in the economy and cannot affect decisions which have already been made.1/ If the Federal Reserve is merely slow, its action may still be effective, but if the economy has shifted its course between the time the initial signals were recognized and acted upon, monetary policy may accentuate a shift in the economy and accelerate a boom or a contraction. Thus many have advocated that monetary authorities should seek to remain a stabilizing influence in the economy (perhaps settling for some more or less steady growth rate in the money stock) rather than trying to be a corrective one.

5. Goals for a Neutral Policy

Some argue that the interest rate is extremely indicative of mon­ ey's behavior and that the Federal Reserve should peg rates by using mone­ tary policy to keep the rate at a specific level. Yet in 1965, when rates rose because of inflationary expectations, pegging would have increased the supply of credit and financed an even bigger boom.� Others argue that the rate of increase in the money supply is most important and that a constant rise would be stabilizing. But if the Federal Reserve misses the money growth mark and then returns to it with only an eye to rates, the quantity of money may be stabilized at levels too high or too low for balanced growth.3/ Focus on quantity alone may result in a monetary policy equally as uncertain as the present.

In opting for an activist monetary policy another difficulty arises. Recall that the supply of money is a result both of the quantity of money in circulation and of the frequency of money's circulation. Mone­ tary policy deals only with the quantity of money. Yet in an inflationary boom the demand for consumption may be heightened by the fact that money saved will be worth less later. This fear may induce people to dip into savings, incur debt, and live with less cash on hand to maximize the util­ ity of their financial resources. As a result, the velocity of money will be increased, raising overall purchasing power and making the Federal Re­ serve's job that much harder.

B. Fiscal Policy

Besides monetary policy, fiscal policy is the other major weapon against inflation. Ideally, its methods complement monetary policy.

The basic tools of fiscal policy are taxation and expenditure at the federal level. These tools should be coordinated in order to work ef­ fectively. Taxes are decreased when demand is low and the economy sluggish. The tax cut of 1964 and the investment tax credit of 1962 are the two best

1/ Annual Report of the Council of Economic Advisers, January, 1970, op. cit., p. 68.

2/ Burns and Samuelson, op. cit., pp. 28-29.

� Okun, op. cit., p. 116.

-40- known examples of this technique. When demand is excessive, taxes are raised, as they were when the 10 percent surtax was passed. On the expen­ diture side, federal outlays may be increased during slowdowns. At times expenditure rises do not require congressional action and can be initiated quickly. For example, highway funds have been released three times to fore­ stall a recession.I/ Similarly, expenditures can be cut to combat inflation. One line of thought on fiscal policy is that the budget should be balanced at full employment and the level of expenditures so set. This would mean a deficit at less than full employment.

1. Forecasting

There must be an accurate picture of the private aggregate economy before policy can be wisely formulated. However, forecasting techniques are probably not precise enough to guarantee the effectiveness of fiscal policy. "According to a study by the National Bureau of Economic Research, profes­ sional forecasters erred, on the average, by $10 billion in estimating the year-to-year change in the gross national product between 1952 and 1963."2/ In the worst possible situation, forecasts may predict a boom or slack pe-=:­ riod when the opposite is actually about to occur. The lack of accurate forecasting is the main criticism of the use of fiscal measures to fight inflation.

2. Congressional Impasse

While certain expenditures can be regulated by the executive, as highways have been, all tax policy and major expenditure decisions must first pass Congress. Even politically attractive phases of the adjustment process are not assured speedy, favorable treatment by a skeptical Congress. The tax cut first suggested by President Kennedy in 1962 did not become law until 1964. Little wonder that the tax increase suggested by President Johnson in 1966 did not receive instant approval. Expenditure policy is more complex since appropriations are generally not approved with an eye to the overall budget, but rather in response to the needs of a particular program or agency.

Tax legislation is a classic case of the axiom "not to decide is to decide." If tax rates are left unchanged, the existing tax rate remains. If the effect of the existing rate on the economy is not the one prescribed by fiscal planners, congressional inaction is tantamount to an outright rejection of their arguments and represents a conscious decision to decide on a tax rate equal to that imposed last year. In the eyes of economists, tax policy is formulated anew each year. Either new rates or old ones are set, but they are a result of judgments about the needs of the economy.

1/ Burns and Samuelson, op. cit., p. 99.

2/ Ibid., p. 77.

-41- In Congress there is a strong presumption for present laws. A change in those laws typically requires positive ju:,tification. For exam­ ple, the surtax proposal of 1967 failed because the necessity for immediate "economic restraint had not been proved.".!/

The eventual passage of the surtax a year later was primarily a response to other economic pressures more unfamiliar to Congress and less capable of accurate measurement--the balance of payments deficit. "The threat of international financial crisis [rather than inflation at home] may well have been the single most decisive factor in getting Congress to move on fiscal restraint."2/

These political difficulties may mean that fiscal policy is con­ signed to an after the fact role. It may only be useful in counteracting economic swings already in progress. By the time evidence of the need for change satisfies Congress, even accurate fiscal measures may not be able to restore balance in the economy.

3. Danger of Overuse

Some critics claim that fiscal policy is doomed, especially when tax shifts are heavily relied on. At best, "frequent revisions of basic tax policies can be needlessly disturbing to private decision makers and they should be avoided as far as possible. 11 3/ Eventually people will expect tax shifts and will conduct their business according to their normal tax bill figuring that the rate changes will even out over time.4/ If this happens, the use of tax shifts in fiscal policy will fail and a valuable tool for extraordinary economic circumstances may be lost.

C. Cost-Push Inflation

Although there are significant difficulties with both monetary and fiscal policy, they are nevertheless the most important of our tools for attack on inflation. Their success has been sufficiently effective for many experts to conclude that wage and price controls are not needed. Why do some experts advocate controls? The reasons fall into categories relating to economic analysis as well as value choices.

Thus far, inflation has been considered a demand phenomenon. If demand is reduced,it is assumed inflation will subside. Yet inflation has

1/ Okun, op. cit., p. 86; see also, President's 1967 Surtax Proposal: Continuation of Hearings to Receive Further Administration Proposals Concerning Expenditure Cuts--November 1967, Hearings before the House Committee on Ways and Means, 90th Cong., 1st Sess. (1967), p. 200.

2/ Okun, op. cit., pp. 88-89.

3/ Burns and Samuelson, op. cit., p. 81. jj Ibid.

-42- shown a persistence which suggests to many that demand is not the total cause of inflation. Another cause is known variously as cost-push or wage­ push. The term chosen usually suggests a political as well as an economic viewpoint about this type of inflation. Labor unions claim that profit increases precede wage increases and suggest that profit-push inflation is the appropriate term.1/ Others claim that current price hikes are neces­ sitated by the upward-pressure of costs, particularly labor costs.2/ I�: deed, even labor spokesmen admit that wage and fringe benefit increases­ have accelerated since 1965, with 1969 settlements higher even than those in 1967 and 1968.�/ Although an accurate description of this inflation is no doubt useful, the common term is cost-push. It will be used in this analysis without implying a conclusion as to the actual initiator of the inflation.

1. Administered Pricing

This type of inflation is supposedly made possible because our economy is not a pure market economy--prices in many areas are not set by competitive bidding. Rather our economy, like most industrialized nations, is a mixed one. Some prices are competitively set in response to market forces while others are relatively stable (i.e. demand may rise or fall for a product, but the price remains reiatively constant over time).

Many of the industries which do not change prices in response to demand have highly organized labor forces with strong bargaining power. This process of power accumulation in industry or a labor union is circular. Experts argue that the main limit to union power is the ability of its em­ ployer to set prices without losing sales.4/ Other observers note that industries are more likely to raise prices-arbitrarily when there is a strong union pressing for higher wages.�

Experts disagree about the ability of unions to raise wages. Some claim that the supply of labor in general is irrelevant to the wages specific unions can demand from specific industries.6/ Others maintain that the overall labor picture does affect a union's-bargaining position.ZJ

.!J Biemiller, op.cit., p. 70. 2/ Walker, op. cit., p. 281.

3/ Abel, op. cit.

4/ Haberler, op. cit., p. 74.

5/ Sheahan, op. cit., p. 131.

6/ Robert E. Lucas, Jr., and Leonard A. Rapping, "Real Wages, Employment, and Inflation,'' in the Journal of Political Economy, Vol. 77, No. s, September-October 1969, p. 725. 7/ Haberler, op. cit., p. 13.

�43- The resolution of this dispute is important, since the vulnerability of union power to general labor market conditions determines the impact of a general slowdown or stimulation program will have on collective bar­ gaining agreements.

A similar dispute exists in pricing policies. Some claim prices can and have been raised by oligopolies when overall demand did not warrant it, citing the experience of the 1950s.l/ Recently, the auto industry fore­ saw a sales decline and yet increased prices.2/ Cigarette prices also rose recently despite poor sales performance.3/ Yet the Council of Economic Ad­ visers argues that a weak demand market does make price increases difficult to hold and will force business to concentrate on cost reduction rather than price increases to improve their market position.if 2. Non-market Wage Determinants

If wages and prices in oligopolies are not completely controlled by market forces, there may be other identifiable forces which can be regu­ lated to control increases. The reasons unions ask for wage increases may be instructive. Spokesmen claim "when unions bargain, they try to offset previous increases in living costs and ... gain some improvement in buying power and living standards."5/ Consequently, it is argued if inflation is slowed, wage demands may also be curbed. Of course, this does not solve the chicken and the egg problem with wage increases and inflation, but it does offer some hope that anti-inflationary policy may have a cumulative impact. If market inflation is checked so that wages will be stabilized, price hikes reflective of cost increases may eventually stop. However, if labor is interested in improving its buying power without regard to other circumstances, no amount of influence short of direct intervention will keep a strong union from getting what it can. What other circumstances should be considered in measuring a justified wage increase will be dis­ cussed in a later section. Labor sets other specific demands for negotiation. Often the gains of another union are used as goals for an upcoming settlement. Gen­ eral Electric officials claim their 1966 wage negotiations were affected by the results of the airlines settlement, which forced them to offer com­ parable increases.6/ Secondly, the ability of employers to pay higher wages often fuels union demands for them. For example, unions frequently

1/ Sheahan, op. cit., p. 134. 2/ Keyserling, op. cit. 3/ Testimony of John M. Blair before the Joint Economic Committee, 9lst Cong., 2d Sess., July 14, 1970. 4/ Annual Report of the Council of Economic Advisers, 1970, op. cit., p. 26. 5/ Abel, op. cit. 6/ Testimony of John Sheahan before the Joint Economic Committee, 90th Cong., 2d Sess., January 31, 1968, pp. 44-45.

-44- cite high profits in response to industry claims that increased wages will necessitate price increases. If the industry makes this claim, any time it is not clearly true is considered the appropriate time to ask for a larger wage increase.!/

If unions are interested in how well their fellows are faring, a policy which allows them all to progress together should satisfy them. If the ability to pay is important, wage decreases should be justified when management demonstrates it does not even have the ability to pay current wages. While there are some notable exceptions, unions have generally re­ sisted any attempt to lower previous wages. A solution to this asymmetri­ cal behavior has been tried in some industries by utilizing profit sharing plans. These permit labor to benefit from prosperity without allowing a temporary boom to force labor costs up indefinitely.

One final criterion in present wage demands is particularly trou­ blesome. While it is natural to expect unions to request compensation for buying power eroded by past inflation, present wage claims in addition now provide for "the expected increase in inflation" and "a safety margin for unexpected inflation."2/ Here the widely discussed inflationary psychology plays an important part in wage determination and, eventually, future infla­ tion. For if wage increases are an important cost element that force busi­ ness to set prices above the levels pure market forces set, then wage in­ creases which anticipate future inflation may also create that inflation. Unions may spark the price rises they fear. When the rationale of parity between unions is coupled with this phenomenon, the general wage rate may advance in ways which will stimulate inflation in oligopolies. If other costs also rise, as they almost surely will since the products of one oli­ gopoly are often the basic materials of another, inflation will proceed at an even faster rate than unions had prepared for. On the next round of wage bargaining, labor will ask for compensation for past inflation-­ despite the irony that it probably was labor's very demands which initiated that inflation.

The solution to this unhappy spiral perhaps is rooted in changing expectations rather than facts. Labor must be convinced that prices will be stable. Perhaps the best proof would be stable prices in the past, but if wage hikes have been a major factor in past inflationary trends, it seems fruitless to expect inflation to stop long enough to break the inflationary psychology.

3. Non-market Price Determinants Price increases are equally complex. If market forces were not important constraints on oligopoly pricing, there would be no reason for

1/ See analysis of UAW position on such claims by the auto industry in the testimony of Leonard Woodcock before the Joint Economic Committee, 9lst Cong., 2d Sess., June 18, 1970, p. 90.

2/ Galbraith, op.cit., p. 8.

-45- prices not to rise continually in these industries. Those who see the money supply as determinative of all inflationary behavior reply that pric­ ing policy decisions must eventually reflect the state of markets and monetary policy. If money is constant, price rises in some areas will be counter­ balanced by prices going down in other market-responsive industries. But price reductions in these industries are limited by a cost barrier. Corpora­ tions cannot afford ,to sell at less than cost and hope to survive (except for a limited period). When demand is slack, even oligopolistic industries are likely to restrain price increases in order to bolster sales.

There is another clear deterrent to excessive price increases-­ antitrust legislation. If one company or a group of firms in a single indus­ try exhibit an ability and an inclination to make unilateral price decisions, their activities are suspect. The deterrent value of the antitrust statutes may be a significant restraint on extraordinary price .rises. The antitrust laws cannot be readily invoked, however, when prices rise in oligopolies coincident with a general market inflation. In such periods, oligopolies may camouflage administered price increases. This possibility prompts some observers to conclude that cost-push inflation is really only demand-pull inflation. Only when the latter is present, some economists argue, do companies feel safe enough to engage in the pricing practices typically labeled "cos_t push" inflation. Another explanation has been offered for the correlation between general inflation and administered price increases. Even those who maintain that prices can be raised without regard to the overall economy admit:

In conditions approaching full employment, with wages and competitively set prices moving upward, firms which are not highly competitive industries find it easier to move up toward the levels they would prefer because each can be more confident that the others' costs are increasing, and that business is not so poor as to provoke price shadings to capture market shares from each other.!/

This analysis suggests that competition is substantially determinative of pricing policies and that the state of the economy does play a role. But the role is one in which prices are raised by one firm when the state of the economy makes it easier to go along with than to buck a price advance by another firm in the same industry. Presumably this threshold of com­ pliance is significantly below that which would force prices up as a pure­ ly demand response.

This threshold may be even lower when an additional factor is considered. Certain industries are characterized by the existence of one particularly large corporation surrounded by several other smaller firms. The largest firm is often seen as a leader in pricing policy for the

1/ Sheahan, The Wage-Price Guideposts, op. cit., p. 130.

-46- industry. For example, some claim "General Motors is the undisputed price leader in the industry."1/ If this is true, other automobile manufacturers can be expected to duplicate any General Motors decision to raise prices. This pattern of behavior makes it easier to explain why companies may raise prices when the economy is already significantly depressed.

More puzzling are studies which claim to note a pattern of price increases when the economy is only beginning to slacken.2/ Leon Keyserling contends that oligopolies watch profit levels carefully.- When sales begin to fall off, the reaction of firms who feel capable is to raise prices.3/ Competition is no deterrent if all firms in the industry are experiencing similar downturns and each realizes that the others in the industry will abide by a price increase to maintain profits, so the argument runs.

The disturbing implication of this view, some contend, is that a policy of general deflation may be counterproductive in concentrated sectors. For as overall demand is reduced to ease pressure on market de­ termined prices, prices will rise further in oligopolies to preserve prof­ its. Of course, no one suggests that this perverse behavior can continue very long. Eventually enough slack will stop all price increases.

Evidence for this proposition seems available. In 1957 and 1958 a recession was coupled with an increase in wholesale prices.4/ This be­ havior can perhaps only be explained as cost-push inflation. -Indeed, it is difficult to argue that there were demand pressures in some areas which kept those prices up, since the National Association of Purchasing Agents announced at the end of 1957 that "for the first time since the first days of the Second World War no goods were in short supply."5/ Yet fiscal and monetary policy did brake the rise in wholesale prices In this period. Few will disagree that in the present economy similar fiscal and monetary pol­ icy can achieve price stability if pursued long enough.§_/

D. Market Controls for Inflation

At this point goals become important. Monetary authorities, and fiscal planners as well, are faced with a dilemma. They can either allow

1/ Woodcock, op. cit., p. 90.

2/ Blair, op. cit.

3/ Keyserling, op. cit.

4/ Burns and Samuelson, op. cit., p. 8.

5/ Mentor Bounitian, "Causes of the Rise in Prices Since the War," Journal of Political Economy, Vol. 76, No. 4, July-August, 1968 p. 654.

6/ Walker, op. cit., p. 281.

-47- inflation to continue unchecked, or they can impose a certain amount of unemployment on the nation.1/ However, the resulting magnitude of unem­ ployment may be too great. -One expert believes "stopping inflation en­ tirely would require an unemployment rate of at least eight percent, or about seven million idle workers. "2/ Even if complete price stability is not the goal, many feel the present level of unemployment is too high. Administration economists are ca:efu� t? �arn that un�mployment mar rise further·before the economy is significantly stab1l1zed. 3 / This prompts some observers to call for some form of more direct controls.

E. Non-market Controls

Many of those who consider the social and economic costs of re­ lying solely on fiscal and monetary policy too high prefer to add a third major tool aimed specifically at what they regard as the blind spot of present policy--wages and prices in concentrated industries. There are two clearly different times when wage and price controls could be initiated --at the beginning of a boom or at its conclusion. If controls are a perma­ nent policy, the difference is meaningless, but for short-term solutions, it is crucial.

Some see cost-push inflation as an aftermath of normal demand­ pull inflation. As the market economy cools down the cost-push pressures become dominant and prolong inflation. The postwar experience suggests that this was the case in the 1950s.4/ Many of the pressures contributing to cost-push inflation apparently do-stern from previous inflation. However, some of these pressures are also aroused by an expectation of future con­ sumer price increases. Consequently, many fear that the beginning of an upturn is likely to cause cost-push inflation before the process of demand stimulation would provoke classical inflation. They cite the steel price increases of 1962 as an example of just such an administered pricing de­ cision unjustified by rising demand pressures. At that time the steel in­ dustry was only operating at two-thirds capacity.� IV. The Guidepost Experience

As cost-push was recognized as a major cause of inflation, it wa:; not unusual to hear presidential appeals for restraint in wage and pricing decisions. President Eisenhower often asked for responsible be­ havior on the part of business and labor. President Kennedy acted in a similar fashion when he asked the steel industry and steelworkers' unions to avoid price increases or wage requests which were not justified by

1/ Haberler, op. cit., p. 12.

2/ Ulmer, op. cit.

3/ The Washington Post, September 5, 1970. ±! Adrtan W. Throop, nthe Union-Nonunion \_yage Differential and Cost-Push Inflation," American Economic Review, Vol LVIII, No. 1, March,1968, p.97. 5/ Sheahan, The Wage-Price Guideposts, op. ,:cit., pp. 34-35.

-48- productivity advances. While the letters sent to these parties were more specific than the general pleas characteristic of the previous administra­ tion, they were not regarded as terribly unusual.1/

A. Technical Basis

The guideposts first appeared in January 1962 as a statement of the Council of Economic Advisers.2/ Their most important point was that wage rates (including fringe benefits) in each industry should be equal to the trend rate of overall productivity increase in the economy. Since this meant that unit labor costs would remain relatively constant, pricing pol­ icy should permit increases if productivity in the industry fell below the national norm and price decreases when productivity exceeded that of the nation as a whole.3/ In the end, the implicit goal of the document was to make wages and prices in concentrated industries behave similarly to those in the market-determined sector. Government appealed to industry and labor to substitute economic principles for the use of their power in the market.

In 1964, the guidelines became guideposts when a specific target was set for wage settlements. Since the national average productivity gain over the past five years had been 3.2 percent, the Council set .this figure as a guidepost for wage settlements during 1964.4/ It again outlined modi­ fications of this general rule, but the ultimate-tmpact of the Report was to make the guideposts a stiffer suggestion than before.

The year 1965 proved to be a major stumbling block for the Coun­ cil. It had chosen to determine the average productivity gain by using an average derived from the five previous years. Because of the frequency of economic shifts in the past, it was felt that a complete business cycle would be represented in each five year period. In fact the five years be­ tween 1956 and 1960 included two recessions.� Yet the economy between 1961 and 1965 had been more successful than the Council had expected. When they compiled their figure for 1966 they did not have any downturn years and their overall productivity figure rose to 3.6 percent.� The Council probably was justified in thinking that such prolonged expansion was un­ likely. On the basis of past experience the odds of an expansion of 68 continuous months were about one in 32. 7/ Because continued productivity

1/ Ibid., p. 14.

2/ Annual Report of the Council of Economic Advisers, 1962, pp. 185-90.

3/ Ibid., p. 189.

4/ Annual Report of the Council of Economic Advisers, 1964, pp. 114-15.

5/ Sheahan, The Wage-Price Guideposts, op. cit., p. 22.

6/ Ibid.

7/ Okun, op. cit., p. 32.

-49- gains of 3.6 percent were considered highly unlikely, they rejected the figure and returned to 3.2 percent as more indicative of the future course of the economy.

In 1967 the Council abandoned a specific wage figure and returned to the more general exhortations of the past. When the Nixon Administration took office it did not re-establish the guidelines, President Nixon ex­ pressing distaste for "jawboning" on private economic matters.!/

B. Enforcement

Because the guideposts did not have the force of law, specific en­ forcement had to be decided upon for each major variance with the standards. No single application of government influence caused as much public notice as the steel confrontation in 1962. President Johnson publicly intervened in the airlines dispute in 1966 and was forced to settle for a wage increase of 4.3 percent to avoid prolonging the strike.2/ When the aluminum industry attempted to raise prices in 1965 the administration was able to roll back the price increase by using its aluminum stockpiles to keep the market price at previous levels until the major producers acceded to the pres­ sure.3/

Private negotiations apparently also resulted in many applications of the guideposts with some successes in restraining prices.4/ Private meetings were not immediately successful in restraining wages, however, partly because wages are determined by an agreement between labor and man­ agement, whereas prices are raised by management alone.

C. Success Evaluation

Because of the Council of Economic Advisers' limited staff, the difficulty with monitoring hundreds of individual wage and price decisions, and the generally inflationary behavior of the economy as the 1960s pro­ gressed, the success of the guidelines is not readily apparent.

The best approach to determine the value of the guidelines is to guess what the early sixties would have been like by predicting its be­ havior on the basis of past experience without the guideposts. When this approach is taken in the area of prices, one relatively simple and sugges­ tive review brought out the fact that "for any given level of unemployment, wholesale prices were more nearly stable in 1961-65 than they had been in

1/ Banking and Currency Hearings, op. cit., p. 149.

2/ Sheahan, The Wage-Price Guideposts, op. cit., p. 59.

3/ Ibid., p. 64.

4/ Annual Report of the Council of Economic Adv�sers, 1967, p. 126.

-SO- preceding years."1/ Two other studies came to similar conclusions after using different statistical methods.� But this evidence is inconclusive.

Wage patterns have received more attention from economists and the results are more disputed. This interest is predictable since there was more specificity in the Council's 3.2 percent target figure for wage rises and thus more emphasis on stopping inflation through labor costs. William Sheahan reviews the major studies and concludes the individual studies may be unconvincing, but "they add up to a convincing case that wage behavior in manufacturing became more restrained in the four years following presentation of the guideposts than it had been in the preceding decade."3/

For an example of the controversy than can surround such con­ clusions, the study of George Perry on wage levels during the guidepost period is instructive. By comparing data related to unemployment levels and price indices between 1947-1960 and 1962-1966, he concluded that the expected wage increases in the second period were significantly lower than previous experience would have led economists to expect. In a second test used to corroborate his conclusions, Perry assumed that the guideposts were more effective in restraining wages in industries which were "visible" to the Council of Economic Advisers and subject to the spotty enforcement the Council provided. When he divided manufacturing industries into visible and invisible on the basis of their practical position in the economy, he found that the visible industries did indeed have slower wage rate in­ creases during the guidepost periods.±_/

This study had a number of technical critics. One took the wage prediction formulas developed by Perry and showed that their underprediction was greater for the period 1956-60 than they were for the first two years of the guidepost experience. He concluded that since the statistics do not fit the argument for the guideposts in all years, the contribution of the guideposts to restraint was not proven. The same critic claimed the distinction between visible and invisible was arbitrary and divided the industries according to the unionization present in each. He assumed that those with more unionization had more opportunity to come to the Council's attention and would, therefore, experience relatively greater wage restraint under the guidelines. When he did not discover this correlation, he

1/ Sheahan, The Wage-Price Guideposts, op. cit., p.80, summarizing the study by the Federal Reserve Bank of Cleveland, "Prices: Patterns and Expectations," Economic Review, April 1966.

2/ Ibid., pp. 81-83, review of studies by Frank Brechling and Robert Solow.

3/ Ibid., p. 90.

4/ Testimony of George L. Perry before the Joint Economic Committee, 90th Cong., 2d Sess., January 31, 1968, pp. 12-16.

-51- concluded Perry's second test again failed to pass muster.l_/

Another critic claims that the visible-invisible comparison is a bad base for wage predictions since the war had forced high wage indus­ tries to restrain their rates more than low wage sectors. The 1950s were a period of readjustment of wage differentials among the industries--one where rapid wage increases in high wage industries were abnormally high. He also criticizes the wage predicting formula because it provided unstable results before the guideposts began and did not show restraint as soon as they were issued.2/

In responding to such criticism, Perry argued that the union­ nonunion distinction was not as reliable as the more informed judgment of the experts he had consulted and that the results of his two analyses con­ firmed their judgments. In addition, he noted that the analysis focusing on high and low wage industries would tend to support the union-nonunion rationale, but the results of the two studies were not compatible and thus not trustworthy alternatives to his own. In defending his wage prediction formula, he admitted the guideposts did not have immediate effect, espe­ cially since many multi-year collective bargaining agreements had been reached before the 1962 Report was issued. The more important point, how­ ever, is the predictive nature of the tests. If a magician predicts the next five cards will be black, the audience concludes he must know something when they are. Similarly, if the guideposts are offered as an explanation for wage behavior and that behavior does indeed take place, with more and more predictability as the guideposts take hold, there is strong reason to believe the guideposts had something to do with the outcome.ii

Yet these discussions are unlikely to resolve the issue for policymakers. Those who feel controls--even voluntary ones--will not work or are socially unacceptable are more likely to feel the case is not proven. After explaining why he felt controls were undesirable and unworkable, Paul W. McCracken, chairman of the Council of Economic Advisers, reviewed the guidepost experience and efforts to credit them with anti-inflationary success and claimed: "My own verdict would have to be the Scottish one of 'not proven' ."4/ Before his appointment to the Council, McCracken had argued thEt the weak economy of the late 1950s made labor during the early sixties

1/ Paul S. Anderson, "Wages and the Guideposts: Comment," American Economic Review, Vol. LIX, No. 3, June 1969, pp. 351-54.

2/ Michael L. Wachter, "Wages and the Guideposts: -comment," American Economic Review, Vol. LIX, No. 3, June 1969, pp. 354-58.

3/ George L. Perry, "Wages and the Guideposts: Reply," American Eco­ nomic Review, Vol. LIX, No. 3, June 1969, pp. 365-70.

4/ Testimony of Paul W. McCracken before the Committee on Government Operations, 9lst Cong., 1st Sess., September 23, 1969, p. 29.

-52- wary of a little prosperity and, therefore, their wage demands were rela­ tively low. In addition, he contended management saw little prospect of price increases that would stick and thus resisted wage demands which would cut sharply into their profits.!./

On the other hand, Paul Samuelson has reviewed the pros and cons only to conclude "when all is said and done, I think that there is some influence discernible from the guidepost philosophy."2/ This dispute merely illustrates Arthur Okun's claim that even technical d:1sputes divide along ideological lines.

Yet the decision on whether to re-establish some kind of wage­ price controls requires fundamental choices. If the decision is made to deal with wages and prices directly, critics must offer an alternative to the guideposts. Some would accept amendments to the voluntary system, while others feel compulsion is necessary for a time or as a permanent posture.

V. An Improved Program of Voluntarism

A. Initial Consultation

The first improvement suggested to the guidepost approach is in the method of formulation. The original concept was promulgated by the Council of Economic Advisers. Some argue that if new standards are desired, "the standards should be developed only after the fullest consultation with business and labor. Private groups should have every opportunity to express their views and to identify problems that might not otherwise be recognized. Persuasion can be most effective when it is coupled with rep­ resentation."3/ Indeed, much of the difficulty with the guidepost program stemmed from the fact that the Council alone determined the measures of noninflationary activity. When the Council discarded the 3.6 productivity figure for the previously applicable 3.2 percent, it lost the confidence of organized labor. The unilateral character of the move had a great deal to do with the furor aroused.4/

Yet others defend the isolated context within which the guidepost figures were determined. They argue that if labor and management were

1/ Paul W. McCracken, "Price-Cost Behavior and Employment Act Objectives," Hearings before the Joint Economic Committee, 89th Cong., 2d Sess., February 1966, p. 68.

2/ Burns and Samuelson, op. cit., p. 60.

3/ Okun, op. cit., p. 105. 4/ Report of the Economic Policy Committee to the AFL-CIO Executive Coun­ cil on the Wage Guideline Policy, February 26, 1966, Bal Harbour, Florida. Reprinted in Hearings before the Committee on Banking and Currency, 9lst Cong., 2d Sess., June 18, 1970, pp. 77-79.

-53- asked to consult on a figure, they would bargain over it, as they do when­ ever they do not agree initially on an issue. When the figure was reached, it would not be an objective guide for noninflationary behavior. The tigure would also lose credibility because it would be seen as just another bargain, capable of change when the relative strength of the parties was altered.!/

It is also argued that business and labor may never agree on a figure. If any consideration is given to the problem of wage adjustments to compensate for inflation in market determined prices, the solutions of­ fered lack inherent logic. As such, they could not be expected to command the joint support of labor and management.2/ Secondly, because any decision reached will me.an dollars and cents to both parties for an indefinite period, business and labor may decide not to decide and determine wages and prices on a short-term basis through contract negotiations where the outcome is easier to predict.ii

In response, advocates answer that both England and Holland have had programs similar to the guideposts.4/ Business and labor are more will­ ing to accept restraints on wages and prices after being consulted. Al­ though general inflation created a problem with the acceptability of the Council's original guideposts, agreement can be reached if total compensation for consumer price increases is included. Partial compensation admittedly has no logic and little acceptability, but complete adjustment has both. Evidence that this solution will be acceptable to business can be drawn from the existence of cost-of-living adjustments in many labor contracts in the past, advocates say.

B. Wage Criteria

If a system of unilateral guidepost setting is chosen, the gov­ ernment agency must resolve questions regarding how wages should be set. Originally the Council decided that wages should rise in accord with the average national productivity gain for the past five years. When the Council deviated from this formula it inspired political criticism, but the formula itself also brought political disapproval because it did not compensate for inflation.

1. Inflation Adjustment

Inflation adjustment is not justified on economic grounds if stable prices are sought, but if acceptability is the goal, the experience

1/ Robert Solow, "The Case Against the Case Against the Guideposts," in George P. Shultz and Robert Z. Aliber, eds., Guidelines, Informal Controls and the Market Place (Chicago: University of Chicago Press, 1966), p. 53.

2/ Testimony of Paul W. McCracken, op. cit., p. 33.

3/ Sheahan, The Wage-Price Issue, The Need for Guideposts, p. 22.

4/ Sheahan, The Wage-Price Guideposts, op. cit., p. 18.

-54- in 1966 and 1967 demonstrates that it is essential. Likewise, social justice may dictate that organized labor should not be penalized for in­ flation it did not cause by a government which may have allowed inflation through unwise fiscal or monetary policy. The Council was aware of the problem in 1967, but did little more than argue that compensation for in­ flation in wage settlements would be inflationary and should be avoided. .!_/

While it is agreed that inflation compensation is inflationary, exception has been taken to the Council's conclusion that such a policy would mean "price stability could never be restored."2/ Assuming that ad­ ministered prices constitute only about one-half of the price structure and that labor costs are only part of costs to business, an initial in­ crease in market determined prices would mean that only half of that in­ crease would show up in the general price index. Labor would get that increase which in turn would raise only part of industry's costs, which in turn would raise prices that only partially affect the index. Thus, the spiral of inflation is a downward one rather than a self-perpetuating one. The cost to the economy would not be significantly more than that of the original inflation caused by inaccurate economic planning.3/ Some have argued that a partial compensation would be preferable and-socially jus­ tifiable. One expert suggests that labor should take only two-thirds of price index rises in higher wages and that management should pass on only two-thirds of this additional wage burden in the form of higher prices.4/ This would make the downturn in adjustments even quicker than a full- - compensation approach.

Finally, while an inflation escalator clause may be inflationary, uni�ss organized labor is to bear the full burden ot price increases, the escalator may be the best solution. Under the present system, as pre­ viously noted, wages are often set with an eye to anticipated inflation. ·These wages tend to verify the fears that bred them by causing inflation. Consequently, many argue that a system which waits for inflation to happen is preferable.�

Thus far, we have discussed the impact of wage settlement formu­ las on wage earners. These same formulas have no less an impact on man­ agement. For a system of controls to be acceptable to both sides, or ad­ vantageous to society in general, the impact on capital must also be care­ fully assessed.

1/ Annual Report of the Council of Economic Advisers, 1967, pp. 128-29.

2/ Ibid., p. 128.

3/ Testimony of Gardiner C. Means before the Joint Economic Committe, 91st Cong., 2d Sess., July 14, 1970.

4/ George F. Perry, in The Wage-Price Issue: The Need for Guideposts, p. 19.

5/ Joseph W. Garbarino, Wage Policy and Long-Term Contracts (Washington: The Brookings Institution, 1962), p. 67.

-SS- 2. The Productivity Criteria

Manufacturing income does not divide itself only into wages and profits. Other cost factors such as utilities, raw materials and financing charges also enter into a firm's cost analysis and affect the relative dis­ tribution of income between labor and management. Yet both sides are still wary of proposals which threaten to alter permanently the shares which each now claims. Labor is quick to point out that a program which limits wage increases to a productivity norm will cause labor to fall behind other groups when the price index rises.1/ This means that profits bulge during a.boom. The corollary of this is that only profits (not wages) will suffer during recession. Labor, however, feels that management still does not suffer significantly. In preparation for this year's negotiations, the autoworkers have already noted that the sales drop major automakers have suffered recently is more than compensated for by their previous earnings during expansion.lf Whether this is true or not makes little difference if a proposal geared to productivity must be acceptable to organized labor. Labor thinks it has been short changed in its share of prosperity and will probably resist any attempt to institutionalize the situation.

Profit sharing has already been suggested as an antidote to this problem. This solution would be appropriate if labor's complaints are seen as focused on profits during upswings. Consumer price escalator clauses would be a more appropriate response if the complaints focus on the rela­ tive shares of labor and other consumers. However, if it is accepted that there may always be some inflation, even during downturns in the economy, an escalator clause may place a burden on management and capital that is unacceptable. Under this solution, the relative share of labor in the national income would not necessarily be constant. Instead, a bias toward labor and away from capital may be written into the guidelines. This bias could be particularly harmful if capital investment to increase overall supply and employ a growing work force is stifled because the returns on capital necessary to make such investment attractive are held down by the guidelines.3/ If such capital requires returns greater than national pro­ ductivity improvements in the past, future investment may be deterred re­ sulting in long-run harm to industry and the economy. Some may respond that capital is only worth the productivity it produces and should be put on an equal footing with labor. Studies indicate that the productivity gains of capital have historically been less than labor ;.!f therefore.

1/ Woodcock, op. cit., p. 82.

2/ lbid. , p . 91.

3/ Sheahan, The Wage-Price Guideposts, op. cit., p. 151. John W. Kendrick, "Trends in Product Prices, Factor Prices and Productivity," Compendium: The Relation of Prices to Economic Sta­ bility and Growth, Joint Economic Cammi ttee (Washington: Government Printing Office, 1958), pp. 225-35.

-56- a program which shifts more income toward labor does not necessarily harm capital shares or investment which is economically justified. Proponents of the escalator scheme also point to the historical evidence that the relative shares of national income have not been constant, but have shifted slowly from property to wages.1/ While this may not be indicative of the future, opponents of an escalator clause may have difficulty demonstrating that the same amount of inflation would not otherwise occur. 3. Industry Productivity Standards

A third possible improvement in the guideposts seeks to correct one of the major flaws in their past performance. Because productivity cannot be expected to increase uniformly throughout the economy, the gen­ eral price level can only be maintained if prices are reduced in those in­ dustries which experienced exceptional productivity gains and consequent reductions in unit costs. The automobile industry experienced these cost reductions in the early 1960s 2/ as did aluminum producers.3/ Yet in both cases the government was unable to reduce prices by referrTng to the guide­ post formula. Since these reductions would be a departure from the normal industry practice of rarely reducing prices and since they would also be considered exceptions to the general guideline approach, compliance could probably be obtained only by significant exertions of economic and politi­ cal pressure. Perhaps a simpler approach would be to formulate the guidelines so that each industry adjusts its wages according to its own productivity. Workers might feel more satisfied when they saw their production efficiency rewarded. The plan would also mean that firms with low productivity in­ creases would pay lower wage increases and charge prices at a relatively stable rate. The plan may provide a more stable price formula, but oppo­ nents argue that it may also prove to be unworkable and undesirable. First, they say it is a perverse approach to distributing gains in productivity. By this approach, labor would gain, the consumer would lose by not obtain­ ing lower prices in cases where he might, and management might not receive higher returns for its innovations to improve productivity. Second, de­ termination of industry productivity is a difficult task which requires in­ formation not readily available. Under the old formula, ''the industry pro­ ductivity figures which were supposed to guide price decisions were non­ existent for many important industries and were known only to the experts where they did exist."Y The Council admitted that it could not evaluate price increases in the light of its own criteria 'if and even congressional .U Sheahan, The Wage-Price Guideposts, op. cit., p. 152.

2/ Ibid., pp. 41 and 64.

3/ Ibid., p. 64. 4/ Woodcock, op. cit., p. 88.

5/ Annual Report of the Council of Economic Advisers, 1967, p. 126.

-57- corrunittees have been unable to elicit information bearing upon the pricing decisions of large corporations.1/ While it is equally necessary and dif­ ficult to have accurate cost information under the original guideline scheme, it is easier to expect a rise in productivity and wages of 3.2 percent and question exceptions, than to treat each case individually and endure the difficulties previously confined to exceptional circumstances.

This approach might also invite labor's disapproval if the pro­ duction norms were determined on a short-term basis. Since the goal of the program is partially to associate wage rates more closely with actual pro­ duction by the wage earner, this short-term approach seems consistent wit�the overall concept. However, productivity at the end of an expansion goes down significantly. For example, in 1969, output per man-hour showed almost no growth.2/ Yet the end of a cycle is also characterized by rela­ tively low unemployment and tight labor markets where wages can be expected to increase due to demand. If the government were to ask for wage settle­ ments in line with inconsequential productivity gains,the pressures of past. inflation and present labor shortages would combine to invite violation of the guidelines.lf

4. New Enforcement Arrangements

A fourth widely suggested improvement is to shift responsibility from the Council of Economic Advisers and establish a new agency to oversee the guideposts. The Council of Economic Advisers assumed this role when it published the original guidelines in its 1962 Annual Report to the Presi­ dent. Several reasons are given for a new agency. First, the Council's original mandate was to advise the President on ways to fulfill the na­ tional commitment embodied in the Employment Act of 1946. This act did not state price stability as a prime national goal. But more importantly, advice, not action, is the Council's most important product. Its job should be an advisory one; the President and Congress should decide what course to follow. Although the guidelines were no doubt approved by the President, when the Council rather than the President announced and en­ forced them, its role seemed more political and less objective than pre­ vi0usly. If its objective status is to be maintained, it may be wiser to relieve it of an action-oriented responsibility.

Second, because the Council is seen by many as a politically oriented presidential advisor, it may not be objective enough for business and labor's purposes. Although this criticism may seem to contradict the previous objection, the Council may be objective when it merely advocates a policy based on sound economic rationales and not objective enough when pressuring a labor union or corporation. In addition, the Council's prox­ imity to the President often creates the impression that the President,

1/ Two such examples are cited by Woodcock, op. cit., p. 120.

2/ Testimony of Arthur F. Burns before the Joint E�onomic Committee, 9lst Cong., 2d Sess., July 23, 1970.

3/ Burns and Samuelson, op. cit., p. 53.

-58- rather than a group of economists, is displeased with a wage or pricing decision, especially when presidential appeals follow up a determination by the Council that an action is inflationary. A board which is more than an arm's length from the President would seem more objective and its de­ terminations might be significantly more acceptable to the parties involved.

Third, the Council does not have subpoena power to obtain informa­ tion necessary to evaluate price increases. Such power is necessary if a more thorough enforcement or evaluative system is to be effective. How­ ever, it may be politically unwise to entrust a body so close to the execu­ tive with powers associated more with judicial proceedings and safeguards.

5. Equity Considerations

Equity should be the basis of any determination of the overall impact of an income policy. Such considerations are particularly necessary if labor is to be persuaded that it ought to follow the program's mandates. Consumer price adjustments are aimed at this problem, as are suggestions for different approaches to the wage-productivity nexus. Yet once equity is accepted as a goal, the program may be destroyed by attempts to achieve it.

Unions constantly vie with each other for wage settlements. While there is some disappointment when one union falls behind another, there is even more reaction when unorganized labor seems to advance beyond the orga­ nized sector. This situation occurs often for while unions agree to wages two or three years in advance, nonunion workers command wages determined much more often and are, therefore, more immediately responsive to market forces. Thus, during a sudden surge in employment due to general expansion or increased demand in particular sectors, unorganized workers will see their earnings jump while their union counterparts must fall behind in­ flation until the next round of bargaining.1/ This differential may be more permanent if a specific figure is adopted as the guideline. Besides being unpleasant to unions, there may be unhealthy intrusions into the normal market mechanism of labor allocation if only unorganized sectors are permitted to bid for scarce labor. Yet respondents may argue that these defects are less serious than a system which permits unions to point to a temporary rise in labor earnings as justification for a permanent increase in their wage structure.

The basic concept of "catching up" is a debilitating one for a system of income controls. Within wage-earning groups, there always seem to be some who are behind. This situation may only be because contract negotiations occur at different times. Yet it may also be the result of weak bargaining power or complete disorganization in some labor markets. For example, the rise in medical costs due to subprofessional earning gains is seen as justifiable.y The plight of the migratory farm workers

Y Sheahan, The Wage-Price Guideposts, op. cit., p. 61.

y Galbraith, op. cit., p. 12.

-59- has instilled the same sense of injustice in many who feel large wage in­ creases are in order to repair the damage done in the past. Laudable as these goals may be, one soon finds that there is no logical stopping point. One expert concludes that:

Catching up between unions is a murderous weapon. It has been one of the major plagues hampering stabiliza­ tion efforts in the United Kingdom. Any group in any field can always find some other people earning higher incomes for reasons that do not seem to involve greater skills or to merit greater recognition. There is always someone to whom it is only right and just to catch up.lf

Equity between wage earners is not the only measure of comparison. Laborers can point to the ability of the American Association of University Professors to establish a specific goal of raising salaries and compensation at the rate of 7. 2 percent per year without government interference. 2/ Union spokesmen may compare the relative economic position of workers and stockholders in the same corporation with obvious disfavor.3/ Rentals and executive compensation also avoid traditional guidepost strTctures. Whether the affirmative can include these income categories in its plan was dis­ cussed in chapter II. If it chooses to, it may choose an unworkable one for an inequitable one. In any case, voluntary approaches under either rationale offer doubtful prospects for success over a long period of appli­ cation.

Government actions may also violate the spirit of the guideposts and make adherence to them seem more burdensome. When it calls upon in­ dustries to reduce prices \I/hen they experience abnormally high productivity gains, its position is weakened by the fact that at the same time it sup­ ports farm prices despite the relatively high rise in yields agriculture has continued to enjoy.4/ Likewise, appeals for restraint in wage demands are undermined when minTmum wage adjustments are approved which exceed levels consistent with the guidepost philosophy.Sf Although decisions to change these policies would depend upon factors unrelated to the guideposts, failure to change them may mean little success in restraining powerful unions or independent pricing decisions.

1/ Sheahan, The Wage-Price Guideposts, op. cit., p. 27. '!:/ Ibid., p. 166.

� Woodcock, op.cit., pp. 92-93. 4/ Haber1 er, op . cit. , p . 7 6. 'ii Testimony of John W. Kendrick before.the Joint Economic Committee 90th Cong., 2d Sess., January 31, 1968, p. 10.

-60- 6, Avoidance of Specific Guideposts Although the major changes suggested thus far might result in a clearer, more objective, and consistent guideline policy, telling a:g�ments have been made for a less definite policy. Some argue that the decision for flexibility has already been made by our recent experience with a single num­ ber approach to cost-push inflation. The single number approach is dead. .:!) If it is not, many hope for an early funeral. During the administration of the guidepost figure, some observers felt that there were a multitude of ex­ ceptions to the,general rule which would allow for increases greater than_ 3.2 percent, but none which could effectively force increases below the fig­ ure. Consequently, it was feared that 3.2 would become a minimum rather than a national average.2/ There is some evidence that this was the case. "Some employer representatives have complained that governmental emphasis on the sufficiency and justice of a 3,2 percent annual wage rise tended to prod unions into rejecting lower offers."lJ As usual, the point is disputed. Architects of the guideposts claim that the figure acted more as a ceiling than a floor. "Be cause of the wage standards, businessmen offered greater resistance to inflationary wage demands." 4/ While this may not disprove the former charge, the guide­ posts, according to some, do not seem to have added to inflation in light of the statistical analysis conducted during the guidepost period. Studies show that wages did not rise as rapidly as previous experience would have warranted.Sf In fact, although the guideposts would have allowed wages to increase fast enough to keep unit labor costs constant throughout the econ­ omy, unit labor costs actually fell the first year the 3.2 figure was pub­ licized.6/

VI. The Case for Compulsion It may be possible to design a program creating a new agency with strong fact-finding powers and wisdom enough to placate all involved parties as it sets guidelines. It might be efficient enough to be at least as suc­ cessful as the older attempts at restraining arbitrary inflationary pres­ sures. But some believe that the slippage such a voluntary program allows is too great. Too much unemployment will still occur as fiscal and monetary

1/ Burns and Samuelson, op .. cit., pp. 121-22.

2/ Haberler, op. cit., p. 16.

3/ Anderson, op. cit., p. 354.

4/ Testimony of Arthur M. Okun before Committee on Government Operations, 9lst Cong., 1st Sess., Sept. 25, 1969, p. 52.

5/ Burns and Samuelson, op. cit., p. 58.

6/ Okun, The Political Economy of Prosperity, op. cit., p. 49.

-61- policy do the major part of restraining inflation. Tilese critics may con­ clude that only a system of compulsory wage and price controls will be ef­ fective enough to stop inflation without exacting unnecessarily high social and economic costs.

A. Clear Legal Standards

Aside from any advantages which a compulsory program might have in controlling cost-push inflation, other benefits may result from this ap­ proach, advocates argue. Tile first distinctive characteristic of a compul­ sory program, they say, would be a reasonably clear standard for noninfla­ tionary wage and price behavior. Tile enforcement tools used in the guide­ line approach could have been used without reliance on guidelines as such.I/- Indeed, the guideposts can be seen as a coherent background for actions which could have been taken, but otherwise might have been less firm and less frequent.II

A compulsory program would improve this image of even-handedness and objectivity. A simple urge for orderly government can evoke support for a legal system of controls. Professor Galbraith has concluded:

I don't think the President of the United States should have to go on television and denounce a corpora­ tion for defying the law, defying the rules, or to turn to the anti-trust laws which were meant for other pur­ poses and threaten to use these as an enforcement device. I think it is more adult and better government to have a prescribed legal procedure and a prescribed legal system of penalties and have violation handled in the traditional legal fashion.3/

To some, the urge for a published legal system of prohibitions and punishments goes beyond an urge for presidential decorum. When in­ formal tactics are relied upon to beat back price increases or forge ac­ ceptable wage pacts, it may be argued that corporations or wage earners are denied property and wealth without the benefit of the protection afforded by constitutional due process. When reports were circulated that the Federal Bureau of Investigation had been called in to verify statements during the steel confrontation in 1962, some felt that strong-arm tactics were being substituted for orderly discussion.±f

1/ See, for example, the actions the Nixon Administration has taken to slow price rises in the construction industry reported in the Annual Report of the Council of Economic Advisers, 1970, pp. 42-43.

2/ Sheahan, The Wage-Price Guideposts, op. cit., p. 33.

3/ Galbraith, op. cit., p. 24.

4/ Sheahan, The Wage-Price Guideposts, op. cit., p. 38.

-62- Not only may individual rights be protected, it is stated, but under a compulsory system the government may also avoid compromising its own stated legal position of opposition to monopoly practices. Existing antitrust legislation presumes collusive or consciously parallel pricing action to be contrary to the public interest. Yet the theory behind the guideposts recognizes that there are informal non-competition pacts within most concentrated industries which operate to set a common price structure. In combatting price increases government officials have often negotiated with all major firms about a common pricing problem in the same industry. The decision reached is probably the result of agreement between the major producers and an unwitting accomplice in this price-fixing scheme--the U.S. government.I/ While this may have only the appearance of illegality, when the government agrees to modification of its own import policy or stockpile disposal schedule, the problem becomes more focused. Here again, a compul­ sory program would avoid the problem by establishing penalties for violation of standards rather than by relying on inducements to follow them, propo­ nents say.

B. Improved Business Climate

Of course, compulsory controls would no longer rely on presiden­ tial pronouncements and persuasion as a major method of enforcement. To many, this appears highly desirable. Businessmen make more decisions than just those involving pricing. They decide to increase production, to bor­ row money, to invest in tomorrow. If they fear that the President will follow policies that are not good for business, their decisions will tend to be conservative and conditions may be bad for business regardless of the President's actions. Business confidence is important to the success of any economic policy. For example, confidence is most uncertain in the early days of an administration. To illustrate this point, some experts note that when President Kennedy was forced to take a hard line in the steel confron­ tation to prove his point about noninflationary behavior, business confi­ dence was severely damaged.2/ If prices were controlled by a separate body, business confidence could be nurtured.

Others maintain that business makes its decisions on the basis of hard economic facts and is not swayed by the posture a President takes in­ dependent of those facts.3/ Instead, they see the steel maneuvering as suc­ cessful because it demonstrated that the government really intended to do something about inflation.4/ Once inflation was stemmed, business conditions could naturally improve.

1/ Ibid., p. 77.

2/ Burns and Samuelson, op. cit., pp. 13-15.

3/ Ibid., p. 94.

4/ Sheahan, The Wage-Price Guideposts, op. cit., p. 93.

-63- C. The Issue of Union Security

When the issue is wages, some maintain the President should be cast in an adversary role vis-a-vis labor leaders. Although this position seems counterproductive, its value rests in understanding the role unions play in their members' eyes. Perhaps the first and clearest benefits which unions claim to have provided their membership are wage increases. When unions agree to multi-ye.ar contracts, they sacrifice advantages which more frequent negotiations would afford them. The unions must make a real im­ pression at each contract time or their value will diminish among the rank and file. In some industries there is the danger that unions will be voted out in favor of another bargaining agent or an unorganized arrangement. To avoid this possibility, companies have offered "union security" arrangements in return for contracts which set wages according to a formula instead of an individual bargaining session.I/ Yet even these secure unions elect a leadership which knows it must produce to be re-elected, for their opponents will seize upon a weak bargaining record as a major campaign issue. For example, under the guidelines, when the leader of the steelworkers, David McDonald, chose to comply readily with pleas for restraint rather than pub­ licly argue with the administration, his re-election prospects were hurt. In the election that followed, I.W. Abel's tough bargaining pledge probably hurt McDonald and contributed to his defeat.2/

If the affirmative establishes a compulsory wage and price control program, it cannot at the same time provide for union security arrangements where they do not exist. A system of controls may mean the demise of unions where they could do significant good for the workers in non-wage matters when their major selling point is wage increases. Where unions themselves are secure, their leadership may be particularly vulnerable unless they are willing to break the law in wage bargaining. Their opponents within the union can claim that better wages may be had if only the leadership has courage enough to demand them. Although the charges may be unfounded, they may decide union elections.

D. Improved Economic Effectiveness

1. Price Reduction Authority

A compulsory program adds two elements to the guidelines which are likely to make it more effective in combatting cost-push inflation. The first appears in situations where productivity is exceptionally high in an industry. The theory of noninflationary behavior enunciated by the Council required that prices fall when unit labor costs did. Yet there was no muscle behind this language and the government was unable to persuade firms to reduce prices when the Council determined it was appropriate. Under a

1/ Garbarino, op. cit., p. 62.

3J Sheahan, The Wage-Price Guideposts, op. cit., pp. 49-50.

-64- compulsory program, the asymmetrical behavior of firms that raised prices when labor costs rose but maintained price levels when costs fell would be eliminated. Force of law would replace persuasion.

2. Deterrence

The second element which a compulsory program adds to a control system is deterrence. Under an ad hoc approach to wage and price decisions, each instance of enforcement has as its goal the reinstatement of responsi­ ble behavior for inflationary actions. No penalty is attached to a conclu­ sion that the original decision was wrong. Under these circumstances, there is no reason for business or labor to decide beforehand to abide by the guideposts. In contrast, a compulsory approach seems more likely to promote voluntary behavior to avoid inflation. For if a wage or price is found to be unjustified by the law, penalties as well as redress are in order. The effect of a wage and price law may be expected to be far greater than the number of violators it deals with.

E. The Dangerous Palliative

Opponents believe that the more effective a wage and price policy is, the less desirable it beGomes. Although proponents of controls invari­ ably speak of them.as additions to our present fiscal and monetary tools, there is the constant danger that they will become substitutes--and in­ ferior ones at that. Indeed, the original guideposts were intended to pro­ vide freedom to expand under a permissive fiscal policy. There is a con­ stant threat that these controls will be relied upon to permit too much ex­ pansion in the economy while causing eventual inflation 1/ or imperfect re­ source allocation which is discussed in the following chapter. This may have been the case in late 1965 and 1966, but Arthur Okun states that those within the administration recognized that fiscal policy and not arbitrary price hikes was responsible for the economy overheating.2/ And overheat it did. Perhaps the guideposts performed a cosmetic function when Congress was approached with a tax increase measure. Perhaps if the guideposts had not been in effect the case would have been clearer and the tax measure might have been passed. Such speculation is inconclusive, but the danger of a cosmetic approach to inflation is present when mandatory controls are discussed.

F. The Standby Approach

The discussion to this point has dealt with systems of continuous guidelines and continuous compulsory controls. While there may be sound reasons for advocating both of them, the most widely discussed compulsory programs are temporary. Some experts have suggested that a freeze be im­ posed on all or some prices for several months. After this time, the ad­ ministration could return to voluntary restraints or the present approach

1/ Burns and Samuelson, op. cit., p. 70.

2/ Okun, The Political Economy of Prosperity, op. cit., p. 78.

-65- of complete detachment. Others see merit in a system of standby controls. Here the affirmative must make a tactical decision. In light of recent legislation empowering the President to impose controls, an affirmative which advocated a similar program would have to confront the controversial issue which a "willingness" inherency presents in many judges' views. If the President is willing to use wage and price controls, he can do so under the status quo. If he is unwilling now, presumably he will remain unwilling despite the affirmative plan. A plan of permanent controls could compel him to act; but stand-by controls, by their very nature, would have to rely on the same presidential discretion the present system does. The affirmative may try to avoid the problem by settling on a more automatic triggering mechanism for its stand-by controls.

The nature of these controls is important for the prediction of the plan's results. If a specific inflation figure is decided upon, the affirmative cannot assure listeners that the inflation being combatted will be cost-push. It could as easily be demand-pull. There have been lively disputes after the fact about the character of inflationary periods. Cer­ tainly prediction is equally disputable. If controls are imposed in a de­ mand situation, there may be a false hope that this cosmetic approach will solve more fundamental ills in the economy. In addition, demand pressures will invite widespread violations which are discussed in detail in the following chapter. If violations do not occur, resources may shift in un­ economic patterns in reaction to the suppression of demand which the con­ trols represent. These shifts are also discussed in chapter IV.

Regardless of the type of inflation actually occurring at the beginning of an upswing, the negative may argue that the affirmative plan makes cost-push more,rather than less,likely. Because the figures which would trigger the controls would be widely publicized, all major unions and corporations would watch the indices creep toward the magic number. As they did, the companies could anticipate the imposition of controls by raising prices or renegotiating wages to make up for their impending inability to do so. If this occurred, the affirmative plan might not only fail to achieve an advantage unless the inflationary pressures persisted long after controls were triggered--an unlikely claim--it might also be responsible for inflation by stimulating administered price and wage in­ creases. The affirmative can attempt to avoid this difficulty by making prices set by the controls equal, not to prices at the time controls are triggered, but to prices at some predetermined time. For example, prices could be set at the levels in effect six months before the imposition of controls. This, too, runs the danger of stimulating cost-push inflation. Parties may attempt to avoid the impact of controls by raising prices at earlier points in time as they expect inflation to approach the level that would result in controls. If the affirmative chooses to avoid these difficulties, it may settle for an approach geared to the level of wage or price increases in certain key industries, such as steel. While it is still possible that wage and price increases could be caused by excess.demand for labor or products, this is not the most formidable problem the affirmative will face.

-66- One problem is the possibility of administered inflation by ac­ cretion. Constant wage and price increases just below the level that would trigger controls could undo the claimed advantages of the affirmative plan. An average wage or price increase per year could be established as an alter­ native trigger mechanism, but such a plan has more characteristics of a con­ tinuous control system than of a stand-by plan. It also lacks the punitive aspects of a permanent plan, which perhaps enhances the effectiveness of the broader plan.

If the affirmative relies on the expert opinion of a board of economists charged with deciding when controls should be imposed, little guarantee can be offered that the plan will be advantageous. Because eco­ nomics is not an exact science, there is a chance that acting under one set of criteria may deter wage and price increases justified by other, perhaps equally justified criteria. If on the other hand, the Board scrutinizes each and every wage and price decision on an individual basis, the plan again becomes a continuous arrangement of controls with many of the ad hoc features of the guideline approach. In this case, for example, the controls are probably unlikely to be invoked. Instead the advantages flow not from the imposition of controls, but from the threat of their imposition.

G. A Note on the Balance-of-Payments Case

Among the reasons the affirmative may offer to justify a control program to halt inflation is the U.S. balance-of-payments deficit. While the issues surrounding the appropriateness of controls to deal with infla­ tion remain unchanged, consideration of the balance-of-payments deficit shifts the balance of goals in important respects.

On a factual level, the balance-of-payments issue is relatively easy to deal with. For a number of years, the United States has experienced a payments deficit in its dealings with other nations. This deficit per­ sists despite the fact that we recently have enjoyed a growing trade sur­ plus sustained by a strong growth of exports.1/ The deficit could be low­ ered by further improving the trade surplus. -If domestic inflation were checked and foreign countries continued to experience price rises, foreign goods would become relatively more expensive. United States imports could be expected to fall while exports increased. The continuing deficits have made the dollar more plentiful abroad and aroused fears for the dollar's future. Discussion of the payments problem revolves around these issues.

It is difficult to gauge at what point the balance is struck on our payments ledger because so many other factors, domestic and foreign, can affect the outcome of a purely inflation-oriented solution in the United States. Moreover, the affirmative will be able to claim advantage only from the payments improvement specifically traceable to the impact of controls. It cannot claim credit for price stability and resulting payments improve­ ment brought about by the wise use of present fiscal and monetary tools.

1/ Testimony of Secretary of the Treasury David M. Kennedy before the Joint Economic Committee, 9lst Cong., 2d Sess., July 21, 1970.

-67- Since controls are characteristically offered as additions to our present policy tools, only a part of the inflation victory can be claimed as the affirmative's doing. While the human and social costs of a certain amount of inflation can probably be measured as the affirmative quantifies its ad­ vantages, the psychological effects on world bankers of halting a certain amount of inflation are more difficult to gauge. If the affirmative admits that fiscal and monetary policy can solve some inflation, it may not be able to disprove the claim that it was this anti-inflation effort which soothed the nerves of dollar holders abroad. On the other hand, if fiscal and monetary policy are not expected to stop all inflation, the affirmative may not be able to show that its controls will effect a sufficient incremental restraint to avoid a dollar crisis. It is the imponderable nature of a balance-of-payments advantage which makes it difficult to counter any harms demonstrated by a negative. The affirmative may attempt to demonstrate the sufficiency of its anti-inflationary measure by noting that several major international financial institutions have recently called for direct attacks by the United States against wage and price inflation.!/ By arguing that the plan specifically meets the requests of interested world bankers and therefore provides a unique approach to the inflation flight, the affirma­ tive may be able to claim a significant advantage.

VII. Conclusion

This chapter has attempted to outline the variety of technical and social judgments which teams will face in discussing a positive rationale for general wage and price controls to solve inflation and related problems. But to make the final decision whether to initiate controls one must consider another set of questions. Even if the present system is deficient, will a system of controls work effectively? Will they cause such significant dis­ advantages that the present system is better left untouched? The analysis of these issues forms the body of chapter IV.

1/ Testimony of Representative Wright Patman before the Committee on Banking and Currency, 9lst Cong�_, 2d Sess ., June 16, 1970, p. 5.

-68- CHAPTER IV

PRICE-WAGE CONTROLS: MECHANICS AND PROBLEMS

This chapter explains and explores various price and wage con­ trol p,roposals concerned with inflation. We will begin by outlining pos­ sible approaches to compulsory price and wage controls and will then turn to a discussion of the mechanical problems involved in these approaches. The balance of the chapter will survey a number of questions on which the affirmative must make decisions in framing a solution to the problem and to which the negative must be alert: How extensive will the affirmative plan be--how many wages and prices are covered? Will the plan work? And finally, will the disadvantages outweigh the advantages?

I. The Possible Approaches

The first approach to a plan of price and wage controls is a general freeze for a specified period of time on all prices and wages. Such a proposal was recently advanced by Robert V. Roosa, former Under Secretary of the Treasury for Monetary Affairs. In testimony before the House Banking and Currency Committee Roosa suggested a temporary price­ wage freeze through congressionally authorized presidential action. .!_/ As with other current plans advocating direct controls, the Roosa plan is offered as a complement rather than a substitute for appropriate fis­ cal and monetary policy. Roosa also ties his temporary freeze proposal to an incomes policy and the creation of a National Economic Commission which he envisions as more important in the long-range battle against inflation. The price-wage freeze would be lifted by the President as soon as a satisfactory incomes policy could be worked out. While the President would not have to invoke full legal powers, including crimi­ nal penalties, to enforce the freeze, his hand could be strengthened if the power to invoke such legal penalties was residually available.3_/

1/ U.S.,Congress, House, Committee on Banking and Currency, Hearings, To Extend the Defense Production Act of 1950, As Amended, 9lst Cong., 2d Sess., 1970, p. 38. Hereafter cited as Banking and Cur­ rency Hearings. 2/ The Economic Stabilization Act of 1970, a plan similar to Roosa's, gives the President standby powers to fix prices, rents, wages, and salaries at levels not less than those prevailing on May 25, 1970. Authority to issue and enforce orders and regulations under this act expires February 28, 1971. Even though President Nixon signed this legislation, he has stated on several occasions that he will not use price and wage controls. Despite presidential opposition, this legislation presents formidable inherency problems for af­ firmatives who opt only for temporary or standby powers. --Ibid., pp. 2-3.

-69- A second approach is a program of selective price and wage controls. The affirmative may seek to achieve an incomes policy (loosely defined as any government policy to influence private price and wage decisions). Such a policy was recently proposed by Professor John Ken­ neth Galbraith in hearings before the House Banking and Currency Com­ mittee.1/ Galbraith proposes to apply price and wage controls in those instances where large corporations and unions have "market power" (the power to shove up prices and wages without all the normal competitive restraints). Galbraith contends that it will be necessary to deal with only "a few hundred unions and a few thousand firms" who exercise arbi­ trary market power.2/ Galbraith would exempt from controls the prices and wages connected-with farm products, most services, and the products of small manufacturers. These, he argues, are still subject to market influences--one does not need to interfere where the market still gov­ erns. Galbraith would allow price and wage increases to correct in­ equities, or wage increases that can be justified in cases of increased productivity.

One important point should be made here. The Galbraith pro­ posal calls for compulsory controls and thus is different from guide­ posts or "jawboning." Guideposts as employed earlier by the Kennedy and Johnson Administrations sought to obtain price and wage solutions through voluntary compliance rather than compulsory methods. Several observers have urged the Nixon Administration to reinstate this policy.

As we will see in the next chapter, selective price and wage controls may be aimed at different targets than those suggested by Gal­ braith. For instance, they might be employed to control health costs or to stabilize the housing and construction industries. In this chap­ ter we will consider those price and wage controls which have been pro­ posed to cure overall inflation. We will defer specific solutions such as health care unti 1 the final chapter.

Finally, the affirmative may choose to apply price and wage controls across the board as the United States did during World War II and the Korean conflict. Admittedly, there is little current support for across-the-board controls, but this does not preclude the affirma­ tive from using this approach. Some observers believe that selective controls will fail because they attack inflation on a piecemeal basis and create inequities between controlled and uncontrolled sectors. Many of the same spokesmen, however, object to all price and wage controls, either in principle or as impracticable.

II. Me ch anical Problems

In theory, methods employed to impose compulsory price and wage controls are not difficult to understand. Our purpose in this

1/ Ibid., pp. 8-9. 2/ John Kenneth Galbraith, "Wage-Price Controls--The Cure for Runaway Inflation," New York Times Magazine, June 7, 1970. p. 105.

-70- section is to enumerate the problems resulting from the application of controls and suggest how a plan might be constructed to deal with them. The first set of problems we will consider apply to temporary or standby controls.

(1) What if the President will not use the authority? The recently enacted price and wage program, The Economic Stabilization Act of 1970, depends on presidential initiative before it can be applied. However, President Nixon expressed his opposition to such controls in a nationwide radio and television address on "Economic Policy and Produc­ tivity" on June 17, 1970:

Now, here is what I will not do:

I will not take this nation down the road of wage and price controls, however politically expedient they may seem.

Controls and rationing may seem like an easy way out, but they are really an easy way into more trouble--to the explosion that follows when you try to clamp a lid on a rising head of steam without turning down the fire under the pot.

Wage and price controls only postpone a day of reckoning, and in so doing they rob every American of an important part of his freedom ..!J

Since there is nothing in the present law which compels the President to act, it seems very likely that he will not use the delegated authority. The only feasible way to avoid presidential inaction might be to place the authority to initiate elsewhere. Congress might assume this author­ ity, although it never has in the past. Or Congress might delegate this power to an independent agency or board. Such a plan was advanced by Baylor University in the 1952 final West Point debate on permanent wage and price controls. 2/ In this debate, the affirmative placed the stand­ by authority in a fTve-man board.

(2) Timing. Timing presents a problem in initiating price and wage controls. If such controls are made retroactive, as is the case in the present law, they are bound to create inequities-. On the other hand, if the price and wage levels are not made retroactive, they could set off defensive price and wage increases. Labor and management

1/ Banking and Currency Hearings, op. cit., p. 149.

'!:} Russel R. Windes and Arthur N. Kruger (eds.), Championship Debat­ ing (Portland, Maine: J. Weston Walch, 1961), p. 214

-71- might seek increases in anticipation of controls. Economist Roger A. Freeman, until recently a Special Assistant to President Nixon, states:

Even the mere discussion of a pending wage and price freeze would cause labor unions and companies to hasten to get their adjustment in before controls are imposed. It would, therefore, accelerate and intensify the pressure of the up­ ward movement. .!/

The obvious way to avoid defensive price and wage controls is to make them retroactive as the current law has done.

(3) Regardless of how price and wage controls are enacted, there are always inequities when they are imposed. In any given year, major negotiations are scheduled for millions of American workers. For instance, in 1970 negotiations are scheduled for about five million workers (teamsters, autoworkers, rubber workers, etc.) with union de­ mands calling for wage increases. Nor is management likely to be more compliant on prices in view of the current profit squeeze (see Chapter III). Government intervention in wage negotiations might appear to thwart labor's aims. In any case, rank and file workers obviously view these negotiations as a way to catch up with rising living costs. All this p:1ts pressure on labor leaders. If workers are dissatisfied, they will veto bargaining arrangements between union and management repre­ sentatives. They may either replace labor leaders who are willing to settle for less than the rank and file, or the situation may touch off a rash of wildcat strikes. The latter was true in 1942 when the govern­ ment was instituting price and wage controls. Wildcat strikes occurred despite pledges by labor leaders that there would be no strikes until the war had ended. It may be that not all the potential wage demands or re­ sulting price increases are justified, but it also might be difficult to deny that some workers and firms will be caught in a position that creates wage or price inequities.

The affirmative might approach the inequity issue as Robert Roosa did in recent House Banking and Currency Committee hearings:

... And at any moment when you try to break this kind of spiral there is inevitably some injustice. In this case I think if the freeze is effective--and I would hope it would be--the prospect is only that the instant injustice remains for the period of the freeze, and as soon as the incomes policy itself takes over, the first claim to be presented might be in this instance the UAW, if the freeze went on before those contract negotiations are opened.

.!/ Roger A. Freeman, "Why Don't They Stop Inflation?", Congressional Record, March 2, 1970, p. El485. (Daily edition)

- 72- And an important part of the determination of any board would have to be not merely the applica- tion of tho old 3.2-percent guideline, but much more, the problem of recommendations which take into account inequities already built in the relation among indus­ tries, because some have already just shot ahead in ways that are so far out of line with their own productivity that they have introduced a distortion in the economy that you can only correct by permitting some others to adjust to them . .!_I

(4) How can a temporary freeze be administered? Another prob­ lem confronting a temporary freeze is how it will be administered. It would not be practical to create large enforcement machinery to enforce a six month freeze. Thus, many approaches envision little or no enforce­ ment machinery. Yale economist Henry C. Wallich indicates the following condition would result:

The typical recommendation, it seems, is for some kind of unpoliced freeze; in essence this would be a voluntary operation, more slush than freeze. How would it work? On the business side, compliance would be proportional to visibility. Big corpora­ tions with standardized products, prices and wage contracts would be exposed to public censure if they did not go along. Smaller firms, or firms with com­ plex products, dealing with unorganized labor, could turn these circumstances into the makings of a reliable anti-freeze. So the good guys among them would be penalized, the bad guys would clean up._;/

On the other hand, Robert Roosa believes such a freeze can be effective if it is related to other restraining policies. Roosa stated:

Over the short run, a freeze can be largely self­ enforcing, so long as there is respect for the power of a Presidential appeal and everyone realizes that the stand-still will not continue long. It would fail, how­ ever, if there were any implication that a freeze, or an ensuing incomes policy, could be a substitute for, instead of a modest complement to, an appropriate fis­ cal and monetary policy.lf

'}) Banking and Currency Hearings, op. cit., p. 46. Y Henry C. Wallich, "On Controls," Newsweek, March 9, 1970, p. 81. lf Banking and Currency Hearings, op. cit., p. 38.

-73- (5) Enforcement Problems. The magnitude of the enforcement problem depends on the duration or the extent of the affirmative plan. As we have just indicated, some believe that a temporary freeze could be largely self-policing. However, if price and wage controls were es­ tablished on a permanent basis or over any period beyond a few months, enforcement machinery is in order. Its size would depend on the number of prices and wages to be controlled. For instance, when controls were at their peak, the Office of Price Administration (OPA), in addition to 65,000 paid employees, required some 325,000 price control volunteers,.!/ On the other hand, if the affirmative program is selective, the size of the enforcement organization probably would not need to be so large. Professor Galbraith suggests that two or three hundred people could handle his plan which encompasses a few hundred unions and a few thou­ sand corporations.If

On the surface, selective controls seem to obviate such wastes as mountains of paperwork and multitudes of policemen. Regardless of what machinery is used, some observers argue that price controls are virtually impossible to enforce. Even when citizens were united in a common cause (as they were during World War II) or when violators were subject to strong penalties, price controls have always been accompanied by evasion and black markets. During World War II when OPA had an un­ usual assortment of enforcement tools, the effectiveness of controls in the final analysis depended on the willingness of retailers, landlords, consumers, and tenants to comply voluntarily with price regulations rather than on formal enforcement action.3/ In any case, enforcement orders would need to observe judicial safeguards. These procedures might well make enforcement action cumbersome, especially when flexi­ bility or promptness might be required to prevent a price or wage in­ crease. The need to consider hardship in any given industry might lead to findings so cautious as to be ineffective in preventing inflationary increases. 4/

III. Disadvantages A. Suppressed Inflation

1. Black Markets. Perhaps the most serious objection to price and wage controls is that they do not control inflation. Direct con­ trols, it is argued, suppress inflation in a number of ways. First,

1/ Darryl R. Francis, "Controlling Inflation, " St. Louis Federal Re­ serve Bulletin, September 1969, p. 9.

2/ Banking and Currency Hearings, op. cit., p. 11. 3/ Chandler and Wallace, op. cit., p. 288. if John M. Clark, The Wage-Price Problem (New York: American Bankers Association, 1960), p. 59.

-74- price controls create black markets. For instance, during World War II, a host of country slaughterhouses sprang up in the meat industry.1/ The flow of animals to the regular meat packers (where prices were more visible) at times almost dried up. Black market dealers channeled the meat into black market restaurants and butcher shops while the meat sup­ plies of legitimate dealers were constricted. A frequent complaint was that although the price of a particular cut of beef was fixed at thirty­ five cents per pound, it could only be purchased in an under-the-counter sale at $1.15 per pound. Former Korean War Price Administrator, Michael DiSalle, however, does not see the black market as a threat now.2/ DiSalle argues that black markets exist only in periods of shortages and, as during the Korean War, no shortages exist at this time.

2. Quality Deterioration and Reallocation of Resources. Some critics of control are convinced that ft is impossible to do more than suppress inflationary pressures in certain areas of the economy. Price increases will show up in the form of quality deterioration of products. In other words, low profit items will disappear from stores while lower quality goods will appear at higher prices. Assuming that the price controls are selective, i.e., applied to the 500 largest corporations, it is contended that such controls may lead to a reallocation of re­ sources away from the controlled areas. The larger firms will shift re­ sources to smaller companies who, it is assumed, will raise prices on their products. It is also argued that capital is even more mobile.1f If the expected profit in an industry such as steel is low, investors will not supply funds to expand capacity. On the contrary, established steel companies will diversify into uncontrolled activities that offer a greater return on investment. B. Bottled-up Pressures

It is argued that price and wage controls only bottle up in­ flationary pressures which eventually explode as soon as controls are removed. The collapse of price controls in 1946-48 and the resulting price and wage rises in the same period are often cited as the classic example. Economist Alvin Hansen refused, however, to blame the 1946-48 inflation on OPA.4/ He argues that a major cause of the inunediate post­ war inflation was-due to the large holdings of liquid assets that con­ sumers and businesses had built up during the war. He believes that

1/ Donald H. Wallace, "Price Control and Rationing," American Economic Review, March 1951, p. 60.

2/ Banking and Currency Hearings, op. cit., p. 64.

3/ Howard W. Fox, "Inflation--An Economic Maladjustment," Congres­ sional Record, June 18, 1970, p. S9256. (Daily edition)

4/ Alvin H. Hansen, Economic Policy and Full Employment (New York: McGraw-Hill, 1947), pp. 3-4.

-75- this problem could have been remedied by imposing heavier taxes during the war, for less than half of World War II outlays were financed from taxation. Thus, when prices were decontrolled at the war's end, buying sprees by consumers and businesses alike sent prices up. Michael DiSalle also argues that the Korean War experience did not create a similar price or wage explosion. DiSalle !3tates:

...I do not think you have to keep the economy frozen for a long period of time. And many, many items could be de-controlled immediately. In fact, we did that during OPS. (Office of Price Stabiliza­ tion] We de-controlled many items almost immediately. And over a period of 2 years we kept de-controlling. And the reason we did not have a sharp price rise in 1953 was because of the gradual de-control that had taken place over the periods of 1951, 1952, and 1953.1/

C. Lack of Flexibility in Price Markets

Critics of price and wage controls argue that what is sorely missing from this approach is full appreciation of the role flexible wages and prices play in a competitive, free market economy. Economic efficiency depends on flexible prices for individual products--prices that move up and down not only in response to changing costs, but in response to changing patterns of competition and in response to ever­ changing consumer wants and needs.2/ To tie the prices of specific products to costs alone, as direct-controls do, removes the buyer from the driver's seat. It hinders the free-market forces that channel both men and machines in the direction that the market dictates. Further, since price and wage controls largely paralyze the market mechanism whereby output and investment shift in accord with demand, these con­ trols may lead to government intrusion in production and investment decisions--a solution which none considers desirable.

D. The Scapegoat Theory

Opponents of selective price and wage controls object to them because they seem to be based on the "scapegoat" theory of inflation.3/

Rather than improving cooperation and understanding between11 business, labor�and government, confrontations over price-wage violations" tend to identify an industry as for or against the President or the govern­ ment. Rational analysis of the issues becomes difficult and the whole affair becomes a "spectator sport" which strains relations of all those involved.

!f Banking and Currency Hearings, loc. cit. y Reuben Slesinger, "Price-Wage Guideposts Revisited," Banking, July 1970, p. 53.

3/ Fox, loc. cit. - 76- It is further argued that once government looks to trade unions and business firms to stave off inflation, there is danger that government will not adequately discharge its own monetary and fiscal responsibilities. The World War II experience might be cited as an example. It could be alleged that the government relied too heavily on price and wage controls to combat inflation and not heavily enough on taxation to reduce excess purchasing power. It is also contended that in the past government has often found it convenient to blame profiteers, corporations, or trade unions for a rising price level. At the same time, its own policy may be at fault by flooding the economy with newly created currency or bank deposits.

On the other hand, Professor Galbraith, who advocates selec­ tive price and wage controls, states:

Wages do shove up prices and prices do pull up wages in the modern highly organized economy. Monetary restraint, while it works rather ruthlessly for the smaller businessman' works very well for the larger businessman, and especially as I have noted for the home construction industry, does not so directly af­ fect General Motors, General Electric, United States Steel or the other very large corporations. These firms have large cash flows, are favored visitors at the banks and can pass their higher interest rates on to the public. This is precisely the part of the economy which gives leadership on the wage-price spiral. As Dr. McCracken pointed out yesterday in Europe, farm prices, prices of services generally at the moment are stable or even coming down, but prices in the organized sector of the economy--prices in the sector of the economy where large corporations bargain with strong unions--are still going up.

.. . If the economic problem is serious, and it is, the responding action must be serious. Wage claims now in prospect provide for the present inflation, the ex­ pected increase in inflation, a safety margin for un­ expected inflation and beyond that for a hoped-for in­ crease in real wages. These wage claims will be dis­ inflated only if there is a firm promise to the unions ·Of price stability. Nothing can now be accomplished by the most massive deployment of public oratory, what­ ever the added component of mild jawboning, strong jaw­ boning, billingsgate or old-fashioned competitive hog calling. Nor are these dignified devices for conducting the affairs of the modern State. Nor do they become either useful or effective by calling them incomes policy, which is the present fashion.l_/

lf Banking and Currency Hearings, op. cit., pp. 7-8.

-77- E. Where Do Selective Controls End?

Critics of selective controls remain unconvinced that they can be limited to unionized and corporate manufacturing sectors of the economy. For instance, Galbraith would exempt from controls the prices, and presumably wages, of farm products, most services ..and products of small manufacturers. This thesis overlooks the fact that approximately 60 percent of the working population in nonagricultural industries is now employed in services and only 30 percent in manufacturing and min­ ing.!/ The concern of many analysts focuses, therefore, on recent rises in the cost of services. In June 1970, the Consumer Price Index showed that the cost of services is rising at a faster rate than that of com­ modities.2/ The controls suggested by Galbraith would not directly con­ trol these costs. Thus, it might be concluded that such controls, may muzzle the wrong dog.

The late Bernard M. Baruch, an adviser to seven presidents, was not convinced that selective controls were workable. Just prior to the outbreak of World War II, he said:

I do not believe in piecemeal price fixing, I think you have first to put a ceiling over the whole structure, including wages, rents and farm prices up to the parity level,and no higher--then to adjust price schedules up separately, if neces­ sary, where justice or governmental policy so re- quire.... Piecemeal price fixing will not halt in- flation.... It is like commanding a moving regiment, "Regiment halt!" but all soldiers except that fellow--No. 4 in the first rank--keep marching ....

In contrast, piecemeal, partial price controls invite every pressure group, politician, lobbyist, trade association, and interest, to descend upon Washington and seek exemption.... The little fellows who cannot make themselves felt will be forgotten.lf

The objection, however, does not directly answer Galbraith's point. Galbraith calls for fiscal and monetary policy to work in areas where the market determines wages and prices. In the sensitive areas of rising medical and food costs, he states:

1/ U.S. Bureau of the Census, Statistical Abstract of the United States, 1969. (Eighty-fourth edition.) Washington, D.C., 1963, p. 215. The remaining 10 percent work in utilities and contract construction.

Wall Street Journal, "Consumer Prices Continued Climb During June," July 22, 1970.

The Washington Post, "Baruch and the Fight on Inflation," August 21, 1970, p. A-23.

- 78- The higher hospital costs are not part of the general pattern of inflation in my view. They are related to two other factors. The first has been a catching-up going in this area, which has been going on a long time. I am not talking about doctors. I am talking about nurses, technicians, custodial personnel, janitors, and so on. It has been long a supposition that because those people were doing such good work, such fine compassionate work, they would be paid handsomely in the next world. So they would be paid low rates in this world. This doctrine no longer holds--perhaps not surprisingly.

So those wages, what we pay in the hospitals, what we pay for people who do the very important job of looking after the sick, have been catching up. It is time they did. There is also the very special prob­ lem arising from the shortage of medical personnel. This has led to a certain amount of profiteering under medicare and medicaid in regular practices and that has also affected medical costs. These are all causes of higher prices and of higher index levels. These prices would not be reached by anything I have suggested here this morning. You correctly put your finger on that.

One other factor, of course, is more expensive types of hospital care, better diagnosis and so forth. The remedy for the high cost of medical care is a bet­ ter system of helping people pay their medical costs and better administration of medicare and medicaid. I think there would be wide agreement on the need for this. And one takes care of the problem of shortage of nurses and the shortage of technicians and particu­ larly the shortage of doctors, by spending a lot more money on medical education....

Prices of farm products are set in the market. No individual farmer can fix the prices at which he sells his products. The Department of Agriculture has somewhat more authority in these matters but it isn't necessary to have price control authority to control the Department of Agriculture--or it shouldn't be necessary.

There being no market power this is not part of the area where one needs to intervene. Farmers have always gone to some length to insure that they don't have to deal with unions, either, as we know.

MRS. SULLIVAN. I think one of the first things that people would want to see controls put on would

- 79- be food. For instance, a box of cereal about 15 months ago cost 31 cents; today it is 45.

DR. GALBRAITH. I would urge that in this part of the economy the proper action is fiscal and monetary restraint. Where the market works as it does generally for agricultural products, one should act through general measures....

As I say, again, there are those temporary effects, but I do not regard this as the initiat­ ing force in inflation!_!/

F. Infringement on Freedom

Some critics allege that controls infringe freedom--direct wage and price controls are not compatible with freedom. Our economy is essentially a free market economy which maximizes private rather than government decision-making. Wage and price controls inevitably lead to centralized or government decision-making. Under direct controls, personal income, living costs, and the very necessities of life may be determined arbitrarily by government.

On the other hand, Galbraith argues that public control should be substituted where private enterprise controls those prices which are not subject to normal free market restraints.2/ No freedom is infringed. One is really changing from one form of control to another.

IV. A Final Note

The questions we have raised are particularly important in formulating a debate plan. In this chapter, we have considered three different alternatives as a means to control the overall problem of in­ flation. In choosing among these alternatives, the affirmative must be aware of the implications of each choice. For example, the recent stand­ by or temporary controls granted President Nixon raise serious questions as to whether the affirmative can now employ them in debating the topic. The current controversy over price-wage guideposts has meaning if the affirmative makes them compulsory. This analysis has concerned itself mainly with the broader concepts of wage and price controls aimed at the general problem of inflation. The next chapter examines controls aimed at more specific targets.

_!/ Banking and Currency Hearings, op. cit., pp. 12-13. y lbid. , p. 21.

-80- CHAPTER V

NONTRADITIONAL RATIONALES FOR WAGE AND PRICE CONTROLS

I. Introduction

In the last two chapters, we have reviewed the anti-inflationary rationale for wage and price controls and the problems associated with wage and price controls plans designed to halt inflation. But, as chapter II indicated, the topic is far broader than that. It would be impossible for use to examine every facet of the resolution. Therefore, in this chapter we have chosen for discussion three possible case approaches. None of them is typical of the usual arguments for wage and price con­ trols, and each of them is likely to be heard again and again this year. Specifically, we will concern ourselves with the following possibilities: (1) Setting wages and prices to avoid strikes; (2) setting wages and prices to improve the quality of medical care; (3) setting wages and prices to create public service employment. We will now examine each of these in turn.

II. Setting Wages and Prices to Avoid Strikes

A. How Would the Plan Operate?

The introduction of wage and price controls to avoid strikes could involve a regular process of fixing wages and prices. Or the plan could rely on such a device only as a last resort to be used when collec­ tive bargaining failed to reach an agreement. It could be confined to basic industries or it could be extended to all labor-management conflicts. At the heart of the process would be the power to set wages, monetary, and perhaps non-monetary, in a process akin to compulsory arbitration. The question of what kind of non-monetary wages the government might set would be critical. For example, if the establishment of a union shop is at issue in a particular labor-management negotiation, the affirmative plan could provide for settlement only if wages were defined so as to include all working conditions. As we noted before, the affirmative can defend this definition by arguing that wages are ·rewards for work, and a union shop is one reward a worker may ask in return for his services. Absent a broad definition of wages, ari affirmative program of wage and price controls to avoid strikes may confront some unpalatable alternatives. A plan plank to decide issues like a union shop would be extra-topical and the affirmative could not claim advantages from it. Or such issues would not be resolved and strikes would occur anyway. Or, if the affirmative could find a legitimate way to prevent strikes, unions would be deprived of their right to bargain on non-monetary wages. Thus, a wage and price control case aimed at avoiding strikes must pay very careful attention to its definition of the term wages.

The negative may contend that, although the object of avoiding strikes may justify wage controls, it does not justify the inclusion of price controls in the affirmative plan. The affirmative can reply that

-81- there are good reasons for fixing prices as well as wages. The aim of fixing prices is to assure that management gets a fair rate of return on its investment while at the same time preventing management from using the wage settlement as an excuse for steep price increases. Under the present system, it is claimed, wage settlements are used in that way. Judge Samuel I. Rosenman, the New York jurist and former special counsel to President Franklin D. Roosevelt, argues:

Almost every settlement of a major dispute, and especially of an emergency dispute, has been announced by the appropriate government official with the ex­ pression of a pious hope that prices would remain static. But they seldom have. lf

To avoid a repetition of this experience, an affirmative plan may very well include the power to set prices. That inclusion also permits the affirmative plan to fulfill the requirements of the resolution.

The negative may also argue that merely setting wages and prices will not prevent strikes. Unhappy unions may still choose to strike. Employers dissatisfied with the terms of an agreement may still engage in walkouts. And, the negative would continue, the affirmative plan can­ not directly forbid such strikes; such -a prohibition would be extra-topical. On the other hand, there is a relatively simple way in which the affir­ mative plan might accomplish the purpose of outlawing strikes within the limits of the resolution. The plan could provide that, if a union strikes, workers will be penalized by a scheduled reduction in wages. If manage­ ment engages in a lockout, it will be similarly penalized by a scheduled reduction in prices. Both penalties are wage and price controls. The affirmative may prevent strikes by using the mechanism called for in the resolution. The negative may reply that unions will strike anyway. Des­ pite the penalties provided by law, New York City has been plagued by public employees' strikes. The affirmative could respond that the pen­ alties under New York law have never been vigorously enforced. Vigorous enforcement of wage and price penalties under the affirmative plan might yield a very different result. In any case, the affirmative will seek to use wage and price controls to make certain strikes do not occur. If the plan does not prevent strikes, all the wage and price setting it pro­ vides for will have very few benefits.

B. Possible Advantages

1. Background

Strikes seem to be unavoidable in the American economy. For in­ stance, in 1968, the number of strikes was 4,950, an increase of 7 percent

1/ Washington Star, July 16, 1967.

-82- over the 1967 total and the largest number since 1953. The work stop­ pages involved 2.6 million workers.I/ There is every reason to believe there will be no substantial diminution in the number of strikes in the near future. At the beginning of this year, the ����������Wall Street Journal re- ported:

Union officials around the country report that their followers are in no mood to back down on com­ ing wage demands. Anger over inflation has made many members more militant than in the past. 'l:_/

Present and past statistics and immediate prospects are the background against which an affirmative plan will be operative. The affirmative will attempt to convert the statistics and prospects into arguments in favor of wage and price controls to end strikes. To do so, the affirmative will have to point to and prove specific advantages. We will review briefly five possibilities in the next few pages.

2. Savings to Workers

It can be argued that setting wages and prices to avoid strikes will relieve workers of the very heavy economic hardships they must en­ dure during a work stoppage. This problem may become particularly acute when workers strike for a very long period of time. During recent strikes, there have been reports that workers have lost their lifetime savings, that their families have been forced to turn to welfare, that whatever wage increases they ultimately achieve never make up for wage losses during the strike. None of these problems, the affirmative could claim would happen under its plan. There are three readily apparent negative re­ sponses. First, the negative can point out that whatever harm the work­ ers are suffering is theirs by choice. They opted for an economic con­ test between themselves and management. They could end the contest simply by returning to work. But the choice may not lie with the individual worker. There is no general requirement in federal law for a pre-strike vote by all affected employees. 3/ The negative may also contend that workers experience no serious economic harm during a strike. They can take part-time jobs--and many do. Most major unions maintain strike funds. Finally, it is also claimed that much of the money lost during a strike can be made up in overtime pay as the industry attempts to make up for lost production after the strike is over.

1/ News, USDL, 10-180, Bureau of Labor Statistics, January 13, 1969, p. 1.

2/ Wall Street Journal, January 27, 1970.

3/ American Enterprise Institute, Proposals to Deal with National Emer­ gency Strikes (Washington: American Enterprise Institute, 1969), p. 71.

-83- 3. A Strong Balance-of-Payments Position

Certain types of strikes may harm the balance of payments by constricting American foreign trade. The last three longshoremen's strikes cost over $1.1 billion.1/ The 1967-68 copper strike in Montana, Utah, Nevada, Arizona, and New Mexico--as well as in fabricating plants through­ out the country--added more than $100 million to the balance-of-payments deficit.2/ The negative will challenge any affirmative argument that cites a balance-of-payments problem resulting from strikes. But that may be difficult. There are controversies over whether or not an Ameri­ can deficit is really significant, over the definition of the deficit, and over its real implications for the American position in the inter­ national financial conununity.3/ Moreover, there is substantial evidence that the U.S. balance-of-payments position will steadily improve over the long term. Thus, the negative can maintain, strikes have not done the kind of serious damage to America's payments position that would justify the substitution of wage and price controls for collective bar­ gaining.

4. The Protection of Related Industries

The affirmative could argue that strikes may seriously hurt re­ lated industries. When a transportation union, for example, goes on strike, products do not get delivered. When there is a strike at General Electric, those who need a new electric generator may face critical power shortages. If New York City's newspapers are shut down, lost advertising will hurt business. In 1967, Senator Wayne Morse estimated the long-term impact of a rail shutdown on other industries. He told the Senate his predicted results:4/

At the beginning of the shutdown: Coal; coal exports; rayon manufactures; several chemical in­ dustries; refrigerator car traffic; large parts of animals for slaughter; movement of grains and sugar beet being harvested; conunuter and long­ distance rail passenger service.

Beginning one week after shutdown and cumu­ lating quickly: Auto manufacture; construction; chemicals.

1/ Wall Street Journal, January 12, 1970, y Proposals to Deal WitlLNational Emergency Strikes,�· cit., p. 5.

3/ Raymond F. Mikesell, Ibe JI S Ba J ance of Payments and tbe Jnternatioua J Role of the Dollar (Washington: American Enterprise Institute), pp. 3- 20. y Congressional Record, September 18, 1957, p. Sl3078. (Daily edition).

-84- Two weeks after shutdown: Periodicals--es­ pecially weeklies--could not be published.

Three weeks after shutdown: Non-cellulose fibers; boiler products; large transformers; motors, generators.

One month after shutdown: Machinery products; mattresses and bedding, and a host of other com­ modities of that nature.

At the end of one month, additional unemploy­ ment is estimated at over 6,500,000 persons. To­ tal unemployment is estimated at 15 percent or more. This is as great as the great depression of the 1930s.

The negative may challenge the affirmative to demonstrate in­ stances where such dire impact on related industries has actually occurred. Lost production may be made up after a strike. Moreover, where the strike is an imminent possibility, related industries may stockpile needed prod­ ucts in advance. For example, this is apparently a common practice by corporations and companies dependent on the products of the steel in­ dustry.

5. Protection Against Inflationary Strike Settlements

The affirmative may demand wage and price controls to head off inflationary wage settlements. It may claim that the final product of collective bargaining is often nothing more than steep wage increases which are turned into steep price increases for the American consumer. Union and management are not hurt. The public interest is. The effec­ tiveness of wage and price controls as a substitute for this process is discussed at greater length in Chapters III and IV. Here we would only like to note that an affirmative plan can be effective against cost-push inflation if it is implemented before a collective bargaining agreement is reached. If wage and price controls are a last resort, labor, and man­ agement may already have agreed to an inflationary settlement. (Unless otherwise stated, our discussion of strikes assumes that the affirmative plan would invoke wage and price controls only as a last resort.)

6. Protection of the National Interest

Ever since the late 1940s, politicians and labor economists have debated the appropriate response to what some have labeled national emer­ gency strikes. Presumably, there is a national emergency strike when a strike threatens the "national health or safety." At some point, an adverse impact on related industries could begin to inflict very real damage on the entire economy or a balance-of-payments drain could make the strike causing it a matter of urgent national concern. Between 1947

-85- and 1969, presidents have chosen to invoke the national emergency ma­ chinery granted them by the Taft-Hartley Act in 29 labor disputes. Pres­ ident Truman invoked the act's emergency strike provisions ten times; President Eisenhower seven times; President Kennedy six times; and Pres­ ident Johnson six times.I/

The Taft-Hartley provisions have been applied to the following industries: stevedoring, aerospace, bituminous coal, maritime meatpack­ ing, fabricated steel, communication, nonferrous metals, aircraft manu­ facturing, and basic steel. The stevedoring, aerospace, bituminous coal, and maritime industries have been involved in two or more disputes to which the provisions were applied.

As the Department of Labor has pointed out, "the emergency pro­ cedures have been used more often to halt work stoppages already in pro­ gress than to avert threatened strikes."2/ Strikes had begun in 18 of the 29 disputes in which Taft-Hartley procedures were involved. In four instances, a board of inquiry was appointed on the day the strike began. At the other extreme, the basic steel industry strike in 1959 continued almost three months before the appointment of a board of inquiry was deemed necessary.

The statistics make clear that, at one time or another, vir­ tually every national administration has been convinced that a labor­ management dispute was creating a national emergency. But what are the constituent elements of such an emergency? What are its serious harms? An examination of several specific strikes may prove more useful than a rendition of general statistics.

We have already indicated what could have happened if the 1967 rail strike had been permitted to continue.3/ But even in its first 12 hours the strike had a substantial impact. -Turn again to Senator Morse.±_/

1/ Synopsis of Presidential Boards of Inquiry Created under Nati�nal Emergency Provisions of the Labor-Management Act, 1947 (Washington: Federal Mediation and Conciliation Service, 1967), updated by tele­ phone through February 15, 1969.

2/ National Emergency Disputes under the Labor-Management Relations Act: 1947-65, U.S. Department of Labor, Bulletin No. 1482, p. 1.

3/ Railway and airline strikes are not subject to the emergency pro­ visions of Taft-Hartley. They are covered by Section 10 of the Railway Labor Act.

4/ Congressional Record,�· cit.

-86- Eighty-six percent of the rail miles were shut down.

Only six major railroads could operate.

Defense shipments: Ten ammunition vessels were scheduled to load; however, most of the 1,500 rail cars required to load these ships were tied up and could not get to the ports. Hundreds of missiles in movement were stopped. Dozens of tanks and ar­ mored personnel carriers between depots and ports for movement to Vietnam were stopped. Several Polaris missiles and other classified shipments were tied up.

Passengers: Over 400,000 commuters were stranded in New York, Chicago, Philadelphia, Boston, and San Francisco alone. All long haul passengers were stopped.

Mail: First class mail coutd move only on a pri­ ority basis by the end of the day. An embargo was in effect on all second, third and fourth class mail over 150 miles.

Perishables: Ten thousand cars of refrigerated shipments--fruit, vegetables, eggs, etc.--stopped. Two hundred cars--livestock on the hoof--stopped.

The 1966 airlines strike had a similarly broad and more prolonged impact. Eighteen days after the strike began, Secretary of Labor Willard Wirtz reported that in addition to 35,000 striking employees, between 36,000 and 37,000 other airline employees had been put out of work; that 150,000 passengers per day had been grounded; that the airlines were losing gross revenues estimated to be $7 million per day; that the loss of gross revenues to the transportation industry as a whole amounted to $1 million per day; that the country was losing $1 million per week in its balance of payments; that mail was delayed from 24 hours to 4-5 days; that drugs and pharmaceuticals were not being delivered; that the situation was ex­ tremely serious and threatened to get worse. .!/

Even a strike that does not affect the whole nation may present a serious threat. In 1967, there was an independent steel haulers' strike. It "spread violence and vandalism across eight states and tied up an es­ timated half million tons of steel in mill warehouses. "2/

1/ Testimony of W. Willard Wirtz in Senate Committee on Labor and Public Welfare, Settlement of the Airline Labor Dispute, 89th Cong., 2d Sess., August 1, 1966. '!:_/ Washington Post, October 24, 1967.

-87- Strikes clearly do some substantial damage--to workers, to in­ dustry, to the general public, to the national economy. However, it is questionable whether the damage is necessarily permanent. Indeed, a 1952 Senate Committee on Labor and Public Welfare report argued that there was no such thing as a national emergency strike. While agreeing that where the ·unational security" is "imperiled" the usual prerogatives of labor and management just yield to overriding public need, the report states that "in peacetime, absent severe economic dislocation such as a depression, there are practically no work stoppages which would create hardship so extreme as to constitute a national emergency."1/ In accord with this view is a study by Professors Irving Bernstein and U.C. Lovell of the three most serious coal strikes of the post-World War II period: 1946, 1949, and 1950. After setting forth the visible effects of these disputes, the authors conclude that they could not be classified as "national emergencies" even though they "inconvenienced millions of people and caused small num­ bers to suffer genuine hardship."'!)

Of course, it is probably too easy to reduce the strike prob­ lem to a semantic dispute over the meaning of the term national emergency. Instead of worrying about that, the affirmative may wish to focus on types of strikes for which it can cite serious and specific harm. For example, the area of public employee strikes may provide some excellent opportun­ ities for affirmative casing. The 1968 teachers' strike in New York City all but closed down the schools in the nation's largest metropolis for 16 days. It is contended that in addition to exacerbating racial tension, the strike did serious damage to educational opportunities and attainments. Police strikes, sanitation strikes, strikes in public utilities--any or all of these may justify some form of effective wage and price controls.

7. Conclusion

No matter what possible advantages it cites from a plan of wage and price controls to stop strikes, the affirmative should keep in mind several vital considerations in plan construction. First, the most ef­ fective plan will probably permit the government to set non-monetary as well as monetary wages. Second, the plan will use wage and price controls as penalties against unions which strike and managements which engage in lockouts. Finally, the affirmative's plan should be carefully drawn to focus on specific areas where advantages may be gained from subsituting wage and price controls for collective bargaining.

Senate Committee on Labor and Public Welfare, National Emergency Labor Dispute Act, 82d Cong., 2d Sess., 1952.

Irving Bernstein and U.C. Lovell, "Are Coal Strikes National Emergen­ cies?" Industrial and Labor Relations Review, April 1953, pp. 352, 366.

-88- C. Present System Mechanisms

1. Collective Bargaining

The negative may argue that collective bargaining is generally a successful device for the resolution of labor-management disputes. Wage and price controls are an unnecessary addition. In 1959, only one-half of 1 percent of all working time was lost through strikes; in 1967, only one-quarter of 1 percent was lost through strikes; and in 1968, the per­ centage was only slightly higher than the preceding year. Most of the time, collective bargaining results in a settlement without a strike. The affirmative may reply that this begs the question. The percentages favoring collective bargaining may sound impressive; but they do not ne­ gate the fact that damaging strikes nonetheless occur. The advantage of the affirmative's proposal does not depend on the ratio between settle­ ments before strikes and settlements after strikes. If the plan is ex­ pected to yield a significant social or economic good, there is reason to propose its adoption despite the percentage of success attained by collective bargaining.

2. The Taft-Hartley Act

The Taft-Hartley Act permits the president to seek a federal court injunction for stalling a national emergency strike for 80 days. It has been criticized on a number of grounds.

First, at the end of the 80-day cooling-off period, the union is again free to strike. If it does and the strike becomes a national emergency, the president's only recourse is a report to Congress and a request for appropriate new legislation. That has happened on four oc­ casions. It occurred in the atomic energy strike of 1948, the bituminous coal strike in 1949-50, the nonferrous metals strike in 1951, and the maritime strike 0£ 1961.1/ What is included in the phrase "appropriate new legislation"? What· are the limits of the status quo? What measures may the negative cite as part of the present system?

The second major criticism of the Taft-Hartley Act's emergency machinery is that it "weakens the collective bargaining position of a labor organization only. The net effect of this is to encourage an em­ ployer not to bargain to the same extent that he would if he were faced with the normal sanction of the strike.".Y But the late Senator Taft

1/ Proposals to Deal with National Emergency Strikes,�· cit., p. 11.

2/ Senate Committee on Labor and Public Welfare, National Emergency Labor Dispute Act,�· cit., p. 4.

-89- argued that the present law "offers a perfectly reasonable procedure"-­ that the injunction does no more than maintain the status quo for a limited bargaining period without weakening a union's ultimate weapon: the threat of a strike.1/ Since the employers are fully aware that the union is free to shut-down the industry in 80 days, it is argued that there is no basis for assuming that the injuction weakens the bargaining position of the union. In fact, those who would retain the present procedure assert that the demands won by unions in national emergency strike cases belie the claim that the injunction substantially weakens their bargaining power.

The third criticism of the Taft-Hartley Act is that it operates unfairly toward employees during the period of the injuction. One source contends that it is unjust "to compel workers to continue at work solely for the public good and at the same time visit upon them the sole burden of continuation."'!:) To this contention Senator Taft replied:

The Taft-Hartley Act provides for an 80-day delay. It is said that the men are suffering or would suffer under that delay. Of course that is not so ... because all settlements in cases of this sort are retroactive settlements.... The men are deprived only temporarily of the pay to which they may finally be entitled. So there is no question of the doing of an injustice to them under that particular provision.lf

Others argue that where national emergency injunctions have been issued "the striking employees already were relatively well paid and struck for still higher wages."Y

The Taft-Hartley Act is also attacked by those who believe that its procedural delays discourage bargaining. In 1952, the Senate Committee on Labor and Public Welfare observed:�

The fixity of the present emergency procedure

1/ Congressional Record, June 10, 1952, p. 6913.

2/ Senate Committee on Labor and Public Welfare, National Emergency Labor Dispute Act, �· cit., p. 6.

3/ Congressional Record, June 10, 1952, p. 6914.

4/ Theodore R. Iserman, Changes to Make in Taft-Hartley (New York: The Dealer's Digest Publishing Co., 1953), p. 139. 5/ Senate Committee on Labor and Public Welfare, National Emergency Labor Dispute Act,�· cit,

-90- makes government action so predictable as to en­ able the part to gauge the advantages of precipi­ tating the statutory procedure. Moreover, the end point of the Taft-Hartley injunction procedure is the employee ballot on the employer last offer. It has been observed that employers tend to make that last offer lower than the real offer which it would finally take to procure settlement .... Bargain­ ing is certainly not encouraged by the present law and probably is discouraged by it.

Of course, the negative can reply that the affirmative plan, by promising an imposed settlement if the parties cannot agree, is subject to the same defense. It too will discourage collective bargaining. Indeed, it may aggravate the problem. A representative for the Airline Pilots Association told the Senate Subcommittee on Improvements in Judicial Machinery:

The plain fact is that it is difficult to develop or continue constructive private collective bargain­ ing relationships where the true locus of power is outside the relationship. In such cases, both parties are under constant pressure to make a record--to shape their entire strategy and policy with an eye on the outside agency which may finally settle the dispute. Neither party thus is forced to face up to the reality and necessity of solving the actual problems at hand. .!_/

To all of this, the affirmative can make two replies. First, it is clear that the Taft-Hartley Act does not assure the solution of national emergency disputes. The affirmative plan would. And, depending on the jurisdiction the plan would give the government, the affirmative could claim that it would operate in areas where Taft-Hartley cannot-­ areas where there is no national emergency, merely substantial harm to individuals and institutions. In that context, the affirmative may ask why it is so important to preserve collective bargaining. Under the present system, it must be preserved; in most cases, it is the only hope for a final solution. Under the affirmative plan, alternative mechanisms for final settlement are available. However, the affirmative may not wish to see its plan invoked in virtually every labor-management dispute. To­ day, most such disputes are settled by collective bargaining. If an affirmative plan had to supplant all or most of that bargaining, federal resources to act effectively could be severely strained. So the affirma­ tive may wish to contend that the incentive to bargain collectively will remain under its plan. Judge Rosenman comments:

This [incentive to bargain] is not what happens in other kinds of civil litigation. It is true

1/ Statement of Henry Weiss before the Senate Subcommittee on Improvements in Judicial Machinery, October 17, 1967 (mimeograph), p. 40.

-91- that neither side makes its best offer at first. But as negotiation proceeds and as a judicial determination draws near with the possibility presented to each side that it might lose much more than a reasonable offer or demand would give it, they come down to rock-bottom settle­ ment terms. There is no reason why a different course should follow in labor negotiations. The experience in Australia with labor courts has been that bargaining often continues right down to trial.1/

3. The Railway Labor Act

Critics of the Railway Labor Act point out that it, like the Taft-Hartley Act, has no provision for final settlement of disputes. The recommendations of Mediation Boards appointed under it "constitute only advice; they are not binding on either party. It is assumed that public opinion will compel their acceptance. "2/ But does this mean that crippling transportation strikes actually occur?- Professor Sylvester Petro has noted:

More and more in the railway labor field, for ex­ ample, disputes have been settled by government fiat. Collective bargaining there has become a mere formal­ ity, designed to set the stage for real settlements, which are made more and more frequently by government agencies or ad hoc presidential appointees ....�

So, the negative may reply, whatever the formal procedures may be, the fact is that the government intervenes on an ad hoc basis to head off transportation strikes. It could do so in the future. The affirmative must indict not only the statutory provisions of the Railway Labor Act, but the consistent practice of the federal government.

As Professor Petra's statement indicates, Railway Labor Act provisions are also subject to attack because they supposedly discourage collective bargaining, the same charge raised against the Taft-Hartley Act. Former Labor Secretary and now Budget Director George Shultz claims: "On the whole, parties have waited until after the procedures of the y Newsday, July 15, 1967.

2/ Harold W. Metz and Meyer Jacobstein, A National Labor Policy (Wash­ ington: The Brookings Institution, 1947), p. 140.

3/ Sylvester Petro, "The Government and National Emergency Strikes" (Committee for Public Affairs, June 1961), p. 2.

-92- Railway Labor Act have been used before they engaged in really deep col­ lective bargaining. The result is that meaningful bargaining has been meager in amount."1/ In debating this charge, the affirmative and the negative will argue substantially along the lines outlined in our dis­ cussion of the Taft-Hartley Act.

4. Mediation and Arbitration Agreements

The affirmative can attack the efficacy of mediation and arbi­ tration agreements on a number of grounds. First, they are far from universal. Few unions and corporations have agreed to submit basic contract issues to mediationpr arbitration panels. Secondly, mediation procedures are advisory rather than compulsory. In the case of the Rail­ way Labor Act, for example, one side or the other usually ignores the mediator's recommendations. Third, it has been charged that there is no guarantee that a mediation procedure will take adequate account of the public interest.

The overriding aim of any outside group, whether designated factfinders or arbitrators, obviously must be peace--a just peace if possible, but peace at any necessary price. In that sort of circumstance, a panel could not be expected to attach much weight, as any corporation must, to the interests of stockholders and customers, to the harsh realities of domestic and ever-increasing foreign competition, or to the fact that any major settlement (like the G.E. strike of 1970) is likely to set the pattern for dozens of other negotiations in the current year.'!)

D. Plan Problems

In this section, we will briefly review a few of the major ob­ jections to the use of wage and price controls as a mechanism for com­ pulsory arbitration. At various points in our discussion, we have noted some of the plan problems the affirmative will encounter, such as how will the affirmative define wages? Here, we go beyond those questions which are related to the linguistic problems presented by the proposition, to questions about the mechanics and the substance of wage and price controls to avoid strikes.

1. How Will the Government Set Wages and Prices to Avoid Strikes?

An affirmative plan may call for either the use of ad hoc boards or a permanent quasi-judicial body to set wages and prices when management and labor cannot themselves arrive at a collective bargaining agreement.

1/ New York Times, January 11, 1970. 2/ Wall Street Journal, January 14, 1970.

-93- One authority, Judge Rosenman, argues strongly for a permanent quasi­ judicial body. He explains his reasons:

There is naturally a great reluctance by both sides to have their economic future, and possibly their survival, placed in the hands of three men haphazardly appointed for one specific case. This reluctance is sometimes even greater with manage­ ment than with labor, although labor protests more loudly.

The men ususally appointed under the statutes or otherwise are necessarily part-time people. They all have their main economic interests elsewhere. Many of them are lawyers with busy practices; many are college professors whose main concern is not the disputes before them. Many of them (including myself) know practically nothing about the industry involved in the dispute, or the history of labor relations in that industry. They have to begin from scratch, and learn the necessary background. While they are willing to serve as a matter of pub­ lic duty, they still have their normal vocations to which they will return--hopefully as soon as possible. Some serve without pay on a job which may consume many weeks of seven 12-hour days. Those who are paid receive a small fraction of their normal earn­ ings. It is a particularly thankless job because neither side, except in rare instances, is satis- fied with the recommendations or findings, and they both publicly abuse the board.lf

Essentially, Judge Rosenman is arguing that a quasi-judj_cial body would command greater respect from both management and labor. It would be more expert. It would be able to work on a full-time basis. It would be familiar with conditions in the industry it was dealing with, which is perhaps a critical qualification for a group that must fix both wages and prices. If the affirmative takes Judge Rosenman's advice, its plan will establish a permanent court-like system with procedures for the appointment and conduct of labor judges. It may have to be a highly detailed plan; but the affirmative is dealing with a very com­ plex area.

2. Are Imposed Labor-Management Agreements Effective?

One authority contends:

Contrary to the views expressed by its ,advocates

1/ Newsday, �· cit.

-94- compulsory arbitration has not been successful in establishing mature labor-management relationships or in preventing disputes. The imposition of con­ tract terms, however disguised, generates resentment. On labor's side, one may expect slowdowns, wildcat strikes, and inattentiveness to the terms of the imposed agreement. On the part of management, dis­ taste for an imposed agreement inevitably leads to dilution and maladministration of its terms. The cost to both sides of living with such attitudes over the term of an agreement may well be greater than those of a labor dispute, particularly in terms of their relationship for the next contract negotiations. .!_/

The affirmative may design its plan to prevent labor or manage­ ment sabotage of an imposed agreement. As we suggested earlier, an affirmative might impose a wage penalty for union noncompliance and a price penalty for management noncompliance. The affirmative could de­ fine noncompliance to include more than the act of striking or locking out. Any failure to live up to the agreement could be punished. Of course, plan provisions to do this will necessarily complicate the affirm­ ative proposal. How would the government check on compliance? By what standards would penalties be assessed? How will the government distin­ guish between inadvertence and noncompliance? The affirmative plan must address itself to these questions.

3. Is the Affirmative Plan Contrary to American Traditions and Values?

One of the arguments most consistently heard against any form of compulsory arbitration is that it is contrary to the traditions and values of the American free enterprise system. Turn to Lester P. Schoene, of the Railway Labor Executives Association. He warns:

... To invest any governmental institution with the power to determine the wages and conditions of em­ ployment under which some people must work for others is less justifiable than to determine the terms under which people must buy and sell. Any system under which this kind of power is exercised by government is totalitarian.�

1/ Statement of Henry Weiss,�· cit., p. 40.

2/ Summary of statement of Lester P. Schoene before the Senate Subcom­ mittee on Improvements in Judicial Machinery, October 17, 1967 (mimeo­ graph), p. 2.

-95- If the negative chooses to make this objection, the affirmative will challenge the negative to prove more than Mr. Schoene has. The affirmative will want to know why its plan is totalitarian. It will ask what specific threats to liberty the plan presents. Clearly, individual liberty in American society is not and should not be absolute; as long as fundamental rights are not threatened, the affirmative may assert, the restrictions imposed by its plan are justified by the advantages it accrues.

4. Will the Plan Discourage Innovative Labor-Management Solu­ tions?

Many questions resolved in collective bargaining are difficult and complex, but the process of bargaining often yields innovative solu­ tions. Observers cite the cost-of-living increases negotiated by the United Auto Workers as an example. Some of these observers believe that compulsory arbitration would stifle such innovation. One of them remarks: "The very existence of a permanent judicial body to determine disputes will discourage the substantive and procedural innovation and experimenta­ tion which sometimes leads to strikes, but more often results in imagina­ tive and constructive solutions to difficult problems.".!/

The affirmative can reply on two levels. First, it can argue that as long as the pressures for collective bargaining remain, imagina­ tive and constructive solutions will still result. Under an affirmative plan, management, for example, will feel strong pressures to bargain col­ lectively. If the government steps in, it will be fixing management's prices. If a collective bargaining agreement is reached, management re­ tains price control. Secondly, the affirmative may question whether in­ novations and experimentations in collective bargaining solutions are exclusively the province of labor and management. There is no reason to believe that government wage and price controls could not reach the same result, the affirmative could maintain.

III. Setting Wages and Prices to Improve the Quality of Health Care

Recent proposals by the late Walter Reuther and by a group of Democratic senators have once again moved the issue of naticnal health insurance or government-sponsored health care into the forefront of American public debate. Some sources claim there is rising public pres­ sure for a comprehensive federal health program. Some officials, including AFL-CIO president George Meany, are confident that Congress will ultimately respond to the pressure.� Under this year's resolution, the affirmative

1/ Statement of Henry Weiss,�· cit.

2/ Washington Post, February 18, 1970.

-96- could propose wage and price controls that would, in effect, create a national health care program. The affirmative could control the price of drugs--or the wages received by certain types of medical personnel. Narrower cases like that are, of course, legitimate. But, in this sec­ tion, we will consider, for illustrative purposes, the use of wage and price controls to establish comprehensive medical care for all citizens.

A. How Would the Plan Operate?

An affirmative plan could set the wages and prices for all health services. As part of the price and wage setting mechanism, it could also assume the cost for such services. It could control wages to set up incentives for medical practice in rural and poor city areas, for group practice, and for the training of additional medical personnel. The government could also pay incentive wages at a predetermined level for research and the development of innovative treatment methods. Finally, any affirmative plan in the area of health services will function effec� tively only if it provides for consolidation of current federal agencies. The administrative concomitants of a government effort to create compre­ hensive health care through wage and price controls would probably be quite complex. Present duplicative and uncoordinated federal structures would have to be reorganized. Such a reorganization is not extra-topical. The term "program" implies that there will be an agency of control; the affirmative is free to construct and design such an agency as it wishes.

B. Possible Advantages

1. More Comprehensive Medical Care for All Citizens

It is argued that many Americans, particularly among the middle income group, are deprived of adequate medical care. Medicaid does not cover them. Private plans are attacked as inadequate for three reasons. First, it has traditionally been charged that they are characterized by flagrant gaps in coverage.

Thus far... the system offers no protection of any sort to 28 percent of the civilian population, some 49 million people. In the main these are the aged, the disabled, the low-income workers, and the un­ employed--those who need protection most but are un­ able to meet premium costs. Since insurance covers, on average, only about one-fourth of total health and medical expenses even of insured families, the demand for comprehensive coverage is growing rapidly ....y

y A. Somers and H. Somers, Doctors, Patients and Health Insurance (Wash­ ington: The Brookings Institution, 1961), p. 114.

-97- Even those who already have insurance are finding it increasingly difficult, according to some authorities to maintain it as premiums go up to pay for constantly rising medical care prices.I/ Moreover, private insurance is attacked because it supposedly refuses to extend coverage to high-risk applicants, to those whose "medical conditions make high expenditures predictable. "2/ And, when high-risk applicants are accepted, the usual result is to raise premiums for everyone, thus depriving some of medical insurance who could otherwise afford it.3/

Over the years various claims have been made that as a result of the failures in public and private financing of health care, citizens do not receive health care because they cannot afford it. This conten- tion is subject to at least two counter claims. First, the negative can argue that ignorance rather than money is the real barrier preventing people from seeing a doctor. In many cases, they simply do not know that they are sick. Moreover, the negative may argue that many people are afraid to consult a physician. They do not want to find out that they are sick. A sensible negative will also demand that the affirmative produce some concrete evidence that significant numbers of people are denied medical care because they cannot afford it.

The negative can also present some strong defenses of present system mechanisms. One of the reasons for the gaps in medical insurance coverage may be that some people do not want it. Some years ago, one­ quarter of the aged responded in a survey that they did not want medical insurance.4/ Moreover, it is argued that voluntary health insurance is capable of-covering between 75 and 85 percent of the population.5/ Medi­ caid for the indigent and medicare for the elderly should be able to take care of the rest of our citizens. Finally, the negative may deny that present problems are a reason for the extension of government paid health care to all citizens. The present system has extended such help only in

1/ Rashi Fein, Saturday Review, August 22, 1970, p. 27. 2/ Ibid.

3/ Ibid.

4/ Heal th Information Foundation, "Voluntary Health Insurance Among the Aged, Progress In Health Services," January, 1959.

5/ See, for example, Oscar N. Surbein, Jr., Paying for Medical Care in the United States (New York, 1953), p. 392.; Eli Ginzberg, Paying for Hospital Care in New York, 1959 (New York, 1959), pp. 289-90; and Anderson and Feldman, Family Medical Costs and Voluntary Health Insurance (New York, 1956), p. 82.

-98- cases of demonstrated need. The negative might suggest that the same thing could be done in new areas of need simply by changing the income limits of the medicaid program. In the face of rising costs, those limits have been lowered in the past. If there is a rising need for health care, they could be lowered now.

2. More Comprehensive Medical for the Poor'

Some believe that health care for the poor, though it is not in fact necessarily unavailable, goes unused because the poor are unaware of the services to which they are entitled. Medicaid, for example, has a host of rules and regulations which may vary from state to state. The consequence, in the view of some, is that the poor are confused and do not seek medical attention when they need it. Senator Abraham Ribicoff, former secretary of health, education, and welfare claims: "All that keeps the medical care system afloat is the fact that millions literally have no knowledge of their medical needs."1/ An affirmative plan that made medical care extremely inexpensive or-virtually free, the affirma­ tive could maintain, would end this problem. The poor would no longer have to understand complex rules and exceptions to rules. They would know that they could obtain medical care.

There are several available negative responses to all of this. The negative can point that, by the logic of the affirmative's own analysis, a substantial increase in the number of those seeking health care would overload the system. Of course, the affirmative could respond that fi­ nancial ability is a poor way to determine who will receive available health services. Nonetheless, the fact remains that, if the medical system could not handle additional millions of cases, the affirmative will have to develop new criteria for the distribution of care. The negative can also contend that health services for the poor are now so widespread that there is little or no excuse for the failure of any poor person to know that they are available. Professor John B. Parish, of the University of Illinois, writes: Almost every urban community has free or very low cost medical services for very low income fam­ ilies. In fact, surveys show that in some communi­ ties the low-income families have more medical check-ups, vaccinations, chest x-rays, eye exam­ inations, than some higher income groups.;;

1/ Saturday Review,�· cit., p. 20.

;I U.S. News and World Report, September 4, 1967.

�99- The services, the negative could conclude, are there. The poor are using them. The Council of Economic Advisers reported in 1968:

...the indigent sick person in most States can go to a free public clinic for medical attention, and many poor persons receive free or low cost care in physicians' offices. As a result, the number of physician visits per year is not much lower for poor adults than for other adults.1/

To the extent that it is, the negative could finally conclude we just need a massive informational campaign about available medical services.

3. Better Preventive Medicine

Dr. John Knowles, General Director of Massachusetts General Hospital, wrote r�cently:

Our preventive and rehabilitative services ... are dismal.... The system must be changed from the pres­ ent last line of defense, acute care, essentially passive approach to one that stresses early detec­ tion of disease and keeping people out of hospitals.y

According to some authorities, the lack of preventive care is principally attributable to the fact that people do not want to spend money on health services when they are not sick. Annual or semi-annual checkups seem too expensive. So many citizens, particularly in the lower and lower­ middle income groups, simply forgo them. The affirmative could contend that their plan would aid the situation by taking the dollar sign out of preventive care. By fixing prices at a very low level, the plan would encourage citizens to seek preventive medical attention.

The negative can reply on several levels. First, it can question whether there really are financial barriers to preventive health care. As we have already noted, there are a large number of medical services available to the poor. They can seek preventive care. Middle and upper income groups, the negative could continue, certainly can afford the cost of annual and semi-annual checkups, the constant health attention that constitutes effective preventive medicine. The negative can point to other barriers to preventive care--theories the affirmative plan cannot remove. We have already mentioned the argument that adequate health care is impeded by large numbers of citizens who are afraid to see a doctor. y Council of Economic Advisers, The Annual Report of the Council of Economic Advisers (Washington: U.S. Government Printing Office, 1968), p. 158. y Saturday Review, �· cit., p. 21.

-100- Furthermore, some believe that our current medical system "is geared pri­ marily for action in the least productive field of medicine--treatment of illness."Y How, the negative might challenge, can the affirmative's wage and price controls cope with this situation? An affirmative team might respond by including in its plan wage and price incentives for those health institutions that emphasize preventive care.

Finally, by changing the way medical care is paid for, the affirmative can claim it will alter the penchant of our citizens not to seek preventive care. Edmund Faltermayer writes:

About 85 percent of Americans under 65 have at least some hospitalization insurance, and 78 per­ cent are covered to some degree for surgeons' fees, but only 51 percent have any insurance whatever for x-rays and laboratory tests outside the hospi­ tal, and only 40 percent for visits to doctors' offices. As a result of this uneven pattern of coverage, says Walter J. McNerney, president of the Blue Cross Association, "use tends to follow pre­ payment." The whole pattern of medical care is warped in favor of providing treatment in those expensive hospitals. Summing up all these influ­ ences, McNerney declares that U.S. medical care is suffering from "a serious discombobulation of the principles of the free market with no invisible hand to move resources about efficiently."'!)

The affirmative proposal, by making preventive care readily available and comparatively no more expensive than curative care, may substantially alter this situation.

4. Better Health Care Personnel Distribution

The affirmative may argue that its plan will result in better health care personnel distribution. The plan could include wage incen­ tives for personnel who choose practice in rural areas or in the inner city. The need to channel more medical personnel into those areas may be critical. The Council of Economic Advisers indicated in 1968:

Rural residents obtain fewer medical services than metropolitan residents, regardless of race.

1/ Senate Special Committee on Aging, Report of the Senate Special Committee on Aging, 90th Cong., 2d Sess., April 29, 1968.

2/ Fortune magazine, January 1970, p.81.

-101- The ratio of doctors to population is substantially lower in isolated rural counties than in counties located in or near metropolitan areas. The reluc­ tance of doctors to practice in rural areas is un­ derstandable. Because the population is dispersed doctors have less opportunity to specialize and to employ advanced medical techniques. They enjoy fewer cultural attractions and they may earn less. The result is that many rural comniunities have too few doctors ..!f

The consequence, not only in rural areas, but in inner cities, may be to deprive substantial numbers of citizens of access to health care. Even if they have the money, there are no personnel to serve them.

There are two obvious negative responses. The negative can question whether financial incentives will induce medical and health care personnel to relocate. As the statement from the CEA indicates, the reasons for an aversion to rural practice are not wholly financial. They also relate to cultural and professional considerations. The affirmative may find it difficult to prove that any reasonable financial incentive--setting higher wages for those who practice in rural or inner-city areas--will actually accomplish its purpose. Moreover, the negative might argue that incentives could be provided under present programs like medicaid. Fee schedules could be altered to reward certain types of practice in certain locations. Though medicaid is of course limited in scope, this could have a real impact.

5. Better Patterns of Medical Practice

The affirmative could similarly structure wage and price policies to encourage changes in the ways doctors practice medicine. It could encourage group practice which is supposedly much more efficient. One authority states: "A well organized group practice with physicians of different specialties, and each in sufficient numbers to fill in for each other, can provide more care for more patients than the same number in solo practice."2/ It is argued that group practice will also raise the quality of care-: "The conclusion appears inescapable that the more highly organized forms of medical care--especially hospital and group practice-­ are conducive to higher quality care."3/ Wage incentives could also be designed to encourage more graduating medical students to go into general practice. Few are doing so today. Boston Globe medical writer Karl Cobb reports that not one graduate of Boston's three medical schools in 1968

1/ Council of Economic Advisers, The Annual Report of the Council of Eco­ nomic Advisers, 1968, op. cit., p. 159.

'}__! Saturday Review,�· cit., p. 25.

3/ A. Somers and H. Somers,�· cit., p. 119.

-102- planned to go into general practice.I/ The consequence of such attitudes is that between 1950 and 1965, "the doctor-patient ratio of those providing family care (general practitioners, internists, and pediatricians) fell by one-third--to 50 per 100,000.... In the 1930s... a ration of 135 per 100,000 was regarded as desirable .... "Y

In proving that this advantage would actually accrue from its plan, the affirmative may encounter some of the same difficulties we outlined with the preceding advantages. Some doctors may want to practice individually; reasonable financial incentives may be unable to change their minds. For professional reasons, many doctors probably would not become general practitioners in any case; they "have turned away from patient care to work in research laboratories, industry, public health, and other institutions, to teach, or to serve as hospital administrators-­ all functions of great importance for the future. One-third of all doc­ tors now devote themselves to such activities."3/ New doctors will prob­ ably continue to find these areas the most attractive fields for pro­ fessional activity. They are also critical fields for the quality of health care. Cannibalizing them to increase the number of general prac­ titioners might do more harm than good.

6. Better Control on Costs

The current cost of American health care is astronomically high. Medical care in the United States now costs $63 billion annually. Experts estimate that between 10 and 40 percent of the money is wasted. Edmund Faltermayer concludes: " ... If an efficient system existed right now, some 10 billion to 20 billion dollars a year might be available in the form of savings to provide better coverage for disadvantaged groups."4/ The affirmative could claim that its proposal, by a judicious structuring of wage and price controls, to create incentives for efficiency, could make medical services more economical. In so doing, it would save large sums of money. Though government-sponsored medical care would sharply raise the amount of money the federal government devoted to health, it might substantially lower total sums paid for health care in the United States.

Some experts claim that the present system cannot achieve a more efficient, less expensive health system. Professor Rashi Fein, of

1/ Saturday Review,� cit., p. 24.

2/ Fortune magazine, January 1970, p. 86.

3/ Ibid., p. 85-86.

4/ Ibid., p. 130.

-103- the Harvard Medical School corrunents:

Voluntary private insurance offers little in­ centive toward economy in the provision of health services.... Private insurers have tended to be nothing more than bill payers, watching costs rise, as medical care is a field often controlled by professionals and one in which the consumer lacks knowledge. ..!)

However, the negative can argue that other present system mechanisms can be used to force economy in health care. The federal government spent $5 billion on medicaid in 1969. By the mid-1970s, it is estimated that the expenditure could reach $24 billion. The federal government could surely use the leverage that expenditure gives to hold down costs. There are signs that it is already doing so. Under Secretary of Health, Educa­ tion, and Welfare John Veneman recently reported that medicaid fee levels have been frozen at those of January 1, 1969.2/ Even if such freezes do make the health care system more efficient, they are subject to two ob­ jections. The first is that they freeze fees at a very high level.3/ But that is probably not inherent; the level at which fees are frozen could surely be altered. However, there is a second objection to the ad hoc use of the medicaid program to control health care costs. Senator John Williams points out: "Those doctors who have been taking advantage ...and raising their charges substantially are frozen at a high level, whereas the ones who have not raised charges are being penalized."4/ Here too, the level of freezes might be changed. The real objection the negative must answer in defending the ability of the present system to effect economy is the argument that a universal wage and price control system in medical care would be a much more certain way of doing so. It is difficult to determine precisely what savings the present system can make.

C. Plan Problems

1. Cost

The cost to the federal government of a wage and price control

1/ Saturday R�view, �· cit., p. 27. 2/ John Veneman, Hearings before the Senate Finance Corrunittee, 9lst Cong., 1st Sess., July 1, 1969.

3/ Statement of Senator John Williams in Ibid.

4/ Ibid.

-104- plan over medical care in the United States would be quite substantial. There undoubtedly would be concomitant reductions in the amount spent by private institutions and individuals and other governments on medical care. However, the affirmative still must decide how to finance the costs of its plan, which may require an initial expenditure of $60 billion or $70 billion. Given current economic conditions, the affirmative's decision may be a difficult one. Additional deficit spending might feed a disas­ trous inflation. It may be difficult to reduce other areas of governmen­ tal expenditure. Raising taxes creates its own special problems. Before deciding how to finance its plan, an affirmative would be well advised to review chapter III, which discusses the present state of the economy.

2. Personnel Problems

The negative can contend that one of the most serious barriers to the effectiveness of comprehensive national health care that reaches all citizens is the shortage of professional and technical personnel in the health care area. The National Committee on America's Goals and Resources warns:

Enlarging the financial resources available in the field of health care is unlikely to lead to a comparable growth in actual medical care unless there are corresponding increases in the supply of persons who .are needed to provide the health ser­ vices. Yet current studies already project serious shortages at all levels of health manpower._!)

The dimensions of the shortage are really quite serious. Between 1967 and 1975, the United States will need another million people in health occupations. "To reach this level, the present output of health workers should be doubled.... "2/

The affirmative can attempt to solve this difficulty at two levels. First, it can attempt to structure its wage and price controls to encourage the training and education of national medical personnel. Second, it can argue for more efficient use of the resources we now have. "Increasing productivity requires delegating selected tasks to persons with briefer, less expensive training. A notable current example of that is in military medicine. The range of tasks performed by corpsmen, nurses,

1/ The National Committee on America's Goals and Resources, The Report of the National Committee on America's Goals and Resources (Washing­ ton: U.S. Government Printing Office, 1970).

2/ Department of Health, Education, and Welfare, Health Manpower Per­ spective (Washington: U.S. Government Printing Office, 1967).

-105- and technicians is indeed remarkable.111/

3. The Dangers in the Destruction of Private Medical Care

An affirmative case that uses wage and price controls to create universal medical care will encounter a number of other practical objections closely related to the particular mechanism of its specific plan. We will not review those objections here. Instead, we will briefly outline the two major substan.tive objections to the substi tution of government for private health care.

Opponents of government health care contend that it will lower the quality of medical services. They offer two reasons. The first re­ lates to a loss of incentive and professionalism on the part of medical personnel. During a report on the Canadian health insurance system, a Canadian physician told the conference of county medical society officers:

The almost universal opinion of the medical pro­ fession is that the hospitals operate much less efficiently under this system. It is becoming more and more difficult all the time to find a pulse and temperature record in a patient's documents. The paperwork is tremendous. Administration per­ sonnel have multiplied. The morale of the house staff seems to have deteriorated. This also goes for the nursing staff, and an increasing number of technicians are being employed in place of nur­ ses. Nursing is deteriorating from the professional standard toward technical standards, and devotion and dedication are old-fashioned words, Some- where along the way we have lost much of our human: itarianism and we have largely lost sight of the pursuit of excellence for its own sake.�

The second reason assigned for the diminution in quality under government health care systems is citizen overuse of such systems. If it is inex­ pensive to see a doctor, it is argued, citizens will, even if there is no good reason. One observer of the English system writes: "The patients' complaints fit mainly under the heading 'We wait, wait, wait.' If fewer people went to the doctor with 'frivolous calls,' waiting time would be cut.... "3/

1/ Saturday Review,�· cit., p. 25.

2/ 1961 Conference of County Medical Society Officers, Los Angeles, Feb­ ruary 11-12, 1961, "Canadian Experiences," p. 1·

3/ Harper's Magazine, May 1959, p. 36.

-106- Critics of government medical care cite another more serious harm. They maintain that it results in the destruction or a substantial reduction in innovation and experimentation, both critical to long-term improvement in health care. A British economist writes:

The NHS (the British National Health Service) has a virtual monopoly of medical care and the absence of substitutes means that there are no strong exter­ nal forces making for improvements in quality and efficiency. Within NHS, insistence on a single standard of service for all eliminates the internal forces making for improvement that would be generated by emulation between diverse standards.

Rapid advances in medical knowledge demand adapta­ tion to change and freedom to experiment. The con­ centration of decision-making power in the hands of the minister is thus inimical to progress.lf

Of course, the affirmative may attempt to structure its plan to avoid this problem. For instance, it might provide for wage incentives for research and experimentation.

IV. Setting Wages and Prices to Create Public Service Employment

A. How Would the Plan Operate?

An affirmative plan could use wage and price controls to create public service employment in the following ways. First, the federal govern­ ment would set wages for available public service jobs to aid the un.:o.. .. employed, underemployed, or those on welfare. The wage need not be solely monetary; the government could also offer fringe benefits for those newly employed in public service jobs. Second, the federal government would obligate itself to pay a specific price to purchase the services of those hired under the affirmative plan. Thus, although the plan would in effect set up a new system of public work none of its advantages would derive simply from a federal expenditure of funds. That expenditure can be seen as the federal response to a compulsory price control--to the requirement that the federal government pay the indicated prices. Alternatively, the topicality of the federal expenditure could be defended as a subsidy which is an integral part of a scheme of wage and price controls.

The public service employment approach and cases similar to it imposes a burden on the affirmative that is not present with most other cases. Because many of the available public service jobs are at the state and local levels--because the states have alsways had substantial responsibilities in the public service area--and because there is a similar location of responsibility with respect to the poor and the unemployed, lJ D.S. Lees, Health Through Choice (London: Institute of Economic Affairs, 1961), pp. 59-60.

-107- the affirmative will have to demonstrate positive reasons for relying on federal rather than state and local action. As we indicated in chapter II, college debaters are for the most part, so familiar with this issue that we do not think it necessary to discuss it at any length in this analysis.

B. Possible Advantages

1. The Completion of Socially Useful Work

It has been argued that the nation has major needs for additional public service personnel. Proponents of federally financed public ser­ vice employment point to the benefits of past efforts. Marion K. Saunders, senior editor of Harper's Magazine, contends:

In this country we have only one prototype for a broadly democratic civilian service corps--the depression­ era civilian conservation corps...• In all, 2,5 million young men passed through the camps, most staying for six months, to plant trees, build reservoirs and fish ponds, and check dams. They dug diversion ditches, raised bridges and fire towers, fought blister rust and pine tree blight and Dutch elm disease, restored historic battlefields, cleared beaches and camping grounds.]! The utility of public service employment may be much higher now. Former Poverty Program Director R. Sargent Shriver writes of the need for 4,300,- 000 public service jobs, including 1,400,000 in hospitals, 2,000,000 in education, 136,000 in recreation and beautification, and 150,000 in pub­ lic works.2/

These jobs are usually regarded as socially beneficial. Most of them could be filled by persons with a minimum of education, skill, and training. The President's Commission on Income Maintenance Programs reported in 1969:

This country has experienced a rapid growth in the demand for public services which has caused a shortage of trained professionals to dispense these services. This in turn is creating a rich source of future employment opportunity for sub-professional workers at all levels of government. Many of these positions could be filled by training persons who are presently untrained and unskilled.if y The New York Times Magazine, August 7, 1966, pp. 74-75. 2/ R. Sargent Shriver, quoted in George H. Walton, Let's End the Draft Mess (New York: D. McKay Co., 1967). The President's Commission on Income Maintenance Programs, Poverty Amid Plenty: The American Paradox (Washington: U.S. Government Printing Office, 1969, p. 67.

-108- !So the affirmative can argue that wage and price controls that generate 'public service employment would be practical--because high skill levels would not be required--and the country--needs public service workers.

The affirmative can exemplify the benefits of public service employment by examining specific areas. For example, it has often been pointed out that the ravages of an industrial society have imperiled our environment. Our land has been blighted; our water contaminated; our atmosphere fouled, Former Secretary of the Interior Stewart L. Udall has portrayed the conservation situation that faces America:

We can produce a wide range of goods and machines but our manipulations have multiplied waste products that befoul the land, and introduced frightening new forms of erosion that diminish the quality of indis­ pensable resources and even imperil human health. The hazards appear on every hand; many new machines and processes corrupt the very air and water; in what Rachel Carson has called "an age of poisons" an indiscriminate use of pesticides threatens both man and wild life, and the omnipresent symbol of the age, the auto, in satisfying our incessant demand for greater mobility, has added to the congestion and unpleasantness of both cities and countrysides. .!_/

Under the direction of trained scientists and administrators, public ser­ vice employment might aid in restoring the spoiled resources and preventing future damage. Much of the work that must be done in the natural resource area could be accomplished by employing large numbers of unskilled and relatively uneducated citizens.lf

Urban renewal is another area where public service employees might make a substantial contribution. As wealthier families have migrated from the cities to the suburbs, the cores of our great cities have in­ creasingly deteriorated. A massive program of renewal requires the deploy­ ment of highly skilled and experienced manpower; such a task could not be undertaken solely by public service employees. But such employees might provide substantial assistance in the repair and maintenance of present urban structures. Professor Roger A. Freeman, of Stanford University, has pointed out: "Construction, repair, and maintenance offer many oppor­ tunities that are well suited for low-skilled or unskilled workers."3/

1/ Stewart L. Udall, The Quiet Crisis (New York: Holt, Rinehart and Winston, 1963), p. 175.

lf New Republic, September 10, 1966.

lf Roger A. Freeman, "Public Works and Work Relief," in Joseph Becker (ed.), In Aid of the Unemployed, (Baltimore: Johns Hopkins Press, 1965), p. 192.

-109- 2. Public Service Employment as an Automatic Stabilizer

.Automatic stabilizers are parts of the economic structure that react automatically, without the intervention of any public officials, at the onset of recession or inflation. Thus, federal income tax collections fall sharply as the economy goes into decline. Because tax revenue falls faster than the fall in income individuals have more disposable income, the expenditure of which helps move the economy toward recovery. Unem­ ployment compensation is another automatic stabilizer. If the affirma­ tive's wage and price controls resulted in a public service employment program where jobs were available whenever an individual wanted one, it might function as an additional automatic stabilizer. When a worker lost his job, there would be a job available in the public sector. Its plan, the affirmative could argue, would help not only those presently unemployed or on welfare, but those who will be unemployed in the future due to eco­ nomic conditions or technological change.l_/

There are at least two negative responses. First, the negative can challenge the affirmative to demonstrate the superiority of its plan over the present system of unemployment compensation. When it is argued that "unemployment insurance programs are hampered by major gaps in worker coverage and by low benefit levels in many states,''2/ the negative is likely to propose minor repairs to the present system. Coverage could simply be extended to more workers and benefit levels could be raised. Second, the negative can suggest that a constantly expanding and contracting public service employment program can hardly be expected to accomplish effectively socially useful work. As the economy fluctuates, so will the services provided by the affirmative plan. To the extent that this second advantage accrues, it may be difficult for the affirmative to sustain the first advantage outlined above. Public service employment designed as an automatic stabilizer may be able to do little except stabilize.

3. A Better Way to Assist the Poor

The affirmative could advocate public service employment as a better way to assist the poor and the chronically unemployed. The two categories, of course, are overlapping. In both, there may be a real need for publicly supported work. University of Maryland economist Mel­ ville J. Ulmer recently predicted:

... If overall unemployment reaches 6 percent by the end of this year, which seems quite likely, we may expect rates of from 10 to 12 percent for blacks and the unskilled.... The prospects for late 1970 and early 1971, if the Administration's game plan keeps l_l The President's Commission on Income Maintenance Programs,�· cit., p. 66.

2/ Ibid., p. 69.

-110- reasonably close to course, are for some 5,000,000 unemployed, most of whom would remain without work through much of 1972. A miscalculation could con­ ceivably double the rate of unemployment, hitting one way or another a wider segment of the population and make recovery far more difficult.lf

Rather than concentrating on the temporarily unemployed, as was suggested in the last advantage, an affirmative plan might provide a specific number of jobs for those who are likely to suffer long-term unemployment.

The state of the economy may not be the sole reason for long­ term unemployment. A large portion of America's long-term unemployment is structural in nature. It is characteristic of individuals who lack skills or education to obtain even a relatively simple job. The Council of Economic Advisers pointed out in 1970:

Many... workers undoubtedly have handicaps impair­ ing their ability to get and hold jobs. There were 133,000 reported as unemployed for six months or more in 1969 monthly statistics; 42,000 of these were married males with wives present. Although they rep­ resent a small group in a labor force of over 80 million, the costs unemployment imposes on them just­ ify stronger manpower policies to improve their em­ ployment prospects and further reduce the number in this group.3/

The affirmative could argue that public service employment is the best way to aid such individuals.

Beyond those classified as long-term unemployed by government statistics, there are millions of poor people who are not even counted as members of the labor force. The July 1967 Monthly Labor Review reported that 10 percent of those not counted in the labor force claim to want a regular full-time or part-time job. But many of the 5.3 million in this category were reluctant to look for work. The affirmative can contend that such individuals have been discouraged by repeated failure to find a job. Available jobs in the public sector might enable society to make use of their talents. Moreover, such a program might cover millions who are underemployed (they want but lack a full-time job), those whose work does not earn them a sufficient income to rise above the poverty level, and many who are on welfare.

1/ New Republic, July 4, 1970, pp. 14-15.

2/ Council of Economic Advisers, The Annual Report of the Council of Economic Advisers, 1970, �· cit., p. 152.

-111- Authorities who advocate such efforts are convinced of two things--that society must do a better job of helping its poorer citizens and that it must make them productive, self-sufficient workers. The af­ firmative can cite the conclusions of Michael Harrington, who first focused national attention on the problems of poverty in the early 1960s. He recently wrote:

For all the rhetoric of recent years about the war on poverty, the poor in America are almost as numerous as ever. Half of them are young, and unless the government makes immensely greater commitments of resources and planning, the country is doomed to a social explosion in the seven­ ties that will make the turbulent sixties seem tranquil by comparison .... If the private economy does not provide jobs for the people, then the public economy must. If the promises of the Housing Acts of 1949 and 1968 were carried out, there would be a labor shortage and the country would discover that it really needs the unused work potential of the poor and the near poor. The effect of such a program would not be inflationary because workers would be pro­ ducing valuable goods and services for their wages. .!_I

C. Present System Mechanisms

1. Income Maintenance Programs

The negative can argue that public service employment opportuni­ ties are unnecessary because of the panoply of income maintenance devices available to the unemployed and the poor under the present system. There are many specific objections that can be raised to each of these devices. Perhaps the soundest strategy for the affirmative is to argue that work is better than income maintenance, that public service employment is clearly preferable from a societal point of view. The President's Com­ mission on Income Maintenance Programs concluded: "Jobs in the public sector program simultaneously might satisfy projected demands for sub­ professionals and provide socially productive jobs for many persons other­ wise lacking opportunities for self-improvement." 2/ So, while welfare and other similar programs may help the deprived, they-do not provide society with the benefits of a system keyed to the accomplishment of socially use­ ful tasks. Moreover, income maintenance may not serve the interests of the poor as well as public service employment opportunities would. Unem­ ployment insurance is designed only "to meet the needs of short-term un­ employed workers." 3/ Welfare may discourage efforts at self-help,

_!/ The Atlantic, January 1970, pp. 71, 74.

2/ The President's Commission on Income Maintenance Programs, op. cit., p. 67.

3/ Ibid., p. 69.

-112- encourage dependency, and perpetuate poverty. And many argue that those who are on welfare would much rather have a job than a handout; they pre­ fer to make their own way if given the chance.

The negative can certainly argue that income maintenance is superior in the case of underemployed workers and the. working poor. With­ out removing them from their current jobs which may be highly useful to society, income supplements can increase their incomes and better their economic situation. The administration's proposed Family Assistance Plan contains provisions for income supplements for the working poor.

2. The Private Sector

Some argue that the unemployed and the poor cannot expect much help from the private sector. They point out that industry is organized to make a profit. It cannot be expected to employ less able and less skilled workers simply for the sake of providing them with a job. In reply to this, the negative can cite the joint federal-private sector efforts in the late 1960s to find jobs for poverty-stricken and minority workers. The efforts were responsible for some "highly publicized" gains. However, they have recently been criticized by those who contend that the profit motive remains dominant. For instance, Michael Harrington writes:

The main reason for the hirings ... was the tight labor market, and any increase in unemployment--which is inevitable given the Nixon strategy against in­ flation--would turn these people back out on the streets. Yet when the automobile workers' union proposed to the Ford Corporation that its older members be permitted to take a voluntary layoff so that the new men could stay on, the company refused. The reason was simple: The supplementary unemployment compensation for a veteran is costlier than for a new worker. The profit motive was stronger than social conscience . .!_!

3. Training Programs

The negative can maintain that training programs under the present system are a major answer to the prublems of unemployment and poverty. In reviewing the situation in New York City, one source reports:

There is a whole spectrum of job training programs open to both men and women. Some are run directly by the city and its neighborhood centers. Others are op­ erated by business concerns and labor unions under con­ tract with the city or the federal government. Train­ ing is offered in such skills as truck driving, ware-

1/ The Atlantic, op. cit., p. 74.

-113- housing, retail trade, dental laboratory work, office practice, building maintenance, animal laboratory work, sewing machine operation. Many of the programs offer a stipend of $20 a week for car fares and other ex­ penses.!/

The affirmative can attack such programs on a number of grounds. Some authorities have denounced them as "token operations" or decried the limits they place on the number of trainees and the size of stipends How­ ever, those problems do not seem inherent. The programs could be expanded under the present system. What the affirmative can argue with perhaps more success is that such programs do not create suitable jobs. Too often, they may train an individual who cannot find the employment he so desperately wants. The record of certain training programs tends to support that con­ clusion. According to one report, of the 17,000 young people who applied to Mobilization for Youth for training, only roughly one in four eventually achieved competitive employment as a direct result, and these were marginal jobs paying marginal salaries.2/ Senator Charles Goodell of New York found similar results with the Job Corps program. While a Congressman, he told the House Committee on Education and Labor in 1967:

Fifty-three percent of Job Corps graduates had jobs after training centers. Fifty-three sounds im­ pressive. But it is my understanding that the Louis Harris poll of Job Corps graduates indicated that be­ fore they went in, 58 percent of them had jobs. Fifty­ three percent sounds considerably less impressive when you look at 58 percent who had jobs before they went into the Job Corps.�

In early 1967, the Labor Department launched a training program called the New Careers Program. It provided work training "in activities of benefit to the community--for example in the fields of health, education, welfare and neighborhood development."4/ Despite that program, millions still lack work and millions of public service jobs remain unfilled. Perhaps the only solution is a federally-funded public service employment program. The af­ firmative plan could propose to effect that through a program of wage and price controls.

1/ New York Times, January 28, 1968.

2/ Transaction, September 1967.

3/ Testimony of 01.arles Goodell in House Committee on Education and Labor, Hearings, 90th Cong., 1st Sess., July 1967.

4/ U.S. Department of Labor, Report on Manpower Requirements, Resources, Utilization and Training, April 1967, p. 4.

-114- D. Plan Problems

1. The Employability of the Poor

It is arguable whether the poor are really employable. It would do little good to create jobs they could not take. It would neither help them nor benefit society. Yet one source estimates that 15 to 20 percent of the chronically jobless are unemployable by any standards. No matter what type of job they were offered, they could not perform it.I/ Further­ more, some believe that most of those on welfare should not work. For ex­ ample, they argue that mothers should remain at home with their children rather than taking a job. New York has found only 7 percent of its welfare recipients appropriate for referral to a job, Utah only 9 percent, and Cal­ ifornia only 35 percent.2/ On the other hand, there is now substantial support for the propositTon that most of the poor are not only capable of working, but should work. In a recent article on "Welfare in New York City," Dr. Blanche Bernstein cites a recent study on AFDC in that city which indicates that "as the AFDC grant approaches what the women can ac­ tually receive as a wage, more and more of them tend to choose AFDC." Stating that the poor, "by family splitting and refusal to take unskilled and semiskilled jobs, are utilizing welfare excessively," she concluded that progress with this problem will require a change in atmosphere:

As part of this new ambiance, the Department of Social Services ought to follow a stricter policy in requiring welfare recipients to accept available jobs and indeed to question the need for relief in many cases unless there is a satisfactory explanation of why work could not be obtained.�

Of course, the affirmative does not face the problem of justifying a work requirement. Its plan can offer job opportunity rather than compelling an individual to take a job. Nonetheless, the affirmative must still dem­ onstrate that it is both possible and wise for the unemployed and the poor to work in a public service employment program.

2. Vocational Problems

Many of the poor and the unemployed are located in rural areas. It may be difficult to create public service employment opportunities for them. The National Advisory Commission on Rural Poverty reported in Sep­ tember 1967:

1/ U.S. News and World Report, March 18, 1968.

2/ "The Bill to Revamp the Welfare System," Legislative Analysis No. 4, (Washington: American Enterprise Institute, 1970), p. 39.

3/ Blanche Bernstein, "Welfare in New York City," City Almanac (New York: Center for New York City Affairs, The New School for Social Research, February 1970), p. 11.

-115- One of the most difficult obstacles to expansion of public service employment projects in rural areas is lack of transportation. Many of the rural poor, particularly those in isolated areas, find it very difficult to commute daily from their homes to these jobs.y

The difficulty in creating job opportun1t1es for the rural poor is com­ pounded by the reluctance many of them feel to relocate in areas where job creation would be more practical. "Relocation," the National Commission on Technology, Automation, and Economic Progress concluded, "will make a marginal, though worthwhile contribution to adjustment."�/

On the other hand, the affirmative can reply that in many ways depressed rural areas have a greater need for public service employment than virtually any other part of the country. Basic services are often inferior in rural areas. Much of what must be done in conservation is lo­ cated there. Surely the residents of such areas, the affirmative can con­ clude, could be usefully put to work in public service employment.

3. The Question of Cost

Like proposals to use wage and price controls to create govern­ ment-sponsored medical care, affirmative plans in the area of public service employment could be very costly. One source asks: "How would all the extra millions on the government payroll be financed? This is an especially alarm­ ing thought when one discovers the training costs alone for a single Peace Corps volunteer average $7,800."lf Thus, the costs of a public service em­ ployment program could mount into the billions of dollars. As we indicated in the section on medical care, the affirmative must be very careful in de­ ciding how the federal government should raise the money to finance such a proposal.

4. The Supervision Problem

The affirmative must not only show how to provide financial sup­ port for the public service employment program, but also for supervisors and even instructors for the workers. Almost all the workers would require su­ pervision and some would require training before they could function well at any useful task.

At present the United States is faced with a shortage of super­ visory personnel. More specifically, Professor Charles C. Killingsworth

1/ National Advisory Commission on Rural Poverty, Report of the National Advisory Commission on Rural Poverty (Washington: Government Printing Offi ce , 196 7) .

2/ National Commission on Technology, Automation, and Economic Progress, Technology in the American Economy, Vol. 1 (Washington: Government Printing Office, February 1966), p. 52. 3/ The Reporter, June 16, 1966, p. 17.

-116- of Michigan State University, has contended that the most serious limita­ tion on present training and rehabilitation programs is the lack of quali­ fied instructors and• administrators.

1he real shortage in most areas, I believe, is trained manpower--specifically qualified instructors and program administrators.... Here we have an example of a present shortage of highly trained manpower, a shortage that limits the possibility of investment to remedy... the deficiencies of the past.lf

Unless the affirmative can provide for adequate administration and educa­ tion it is likely that a public service employment program would be deluged with a vast number of workers who could not be effectively employed in any capacity.

In response, the affirmative could argue that many individuals could be absorbed in jobs that required little entry skill and already had the supervisory capacity to employ additional workers. Many public service jobs are of this type.

5. 1he Problem of Make Work

1he negative may argue that public service employment of the poor will not really generate substantial social benefits. Some would label it "make work." That charge was leveled against many of the New Deal programs which extended jobs to the unemployed. However, in the case of public service employment, there already is a demonstrable need. 1he real question may be whether the poor and the unemployed are capable of effectively filling the need. In any case, the affirmative must be pre­ pared to defend the worth of the work its plan includes in public service employment.

V. Conclusion

In this chapter, we have attempted to explore some non­ traditional rationales for wage and price controls. In a sense, the pro­ cess seems futile. How controls might be applied and would work will re­ quire careful thought. We suspect, however, that the areas discussed here may frequently appear as affirmative cases. 1here are so many other areas no introductory analysis could hope to cover. 1he medical care area alone offers potential for innumerable cases. For example, there is now a pro­ posal in Congress to impose cost controls on federal expenditures for pre­ scription drugs. A staff report of the Senate Committee on Finance out­ lined the proposal:

1/ Charles C. Killingsworth, "Dimensions and Consequences of the Man­ power Revolution," in Garth L. Mangum. (ed.), 1he Manpower Revolution (New York: Doubleday & Company, 1965), p. 102.

-117- Require that drugs be provided on substantially the same basis which would have been established under the provisions of the medicaid amendment adopted by the Senate in 1967. That provision, sponsored by Senator Russell B. Long, would establish a formulary of the United States, with drugs deemed appropriate for inclusion determined by a high-level qualified formu­ lary committee. Federal matching would be limited to the amounts charged for lower-cost products of each drug in the formulary which were determined to meet all official standards and to be of proper quality. Ex­ ceptions to the limitations could be made upon a satis­ factory showing that a particular higher-cost product had "distinct, demonstrated therapeutic advantages" over the lower-cost product of the same drug or where a physician prescribed a drug product by its official or established name and the name of its manufacturer.

In accordance with the section of the Social Security Amendments of 1967 which called for a study of the proposal by the Department of Health, Education, and Welfare, a report was submitted to Congress in Jan­ uary 1969 by the Department's Task Force on Drugs recom­ mending adoption of the basic provisions of the "Long Amendment." If that recommendation is followed, many millions of dollars in prospective medicaid drug ex­ penditures should be saved.l)

Thus, even in what seems like a relatively limited area for discussion under this resolution, there are many complex issues and potentially com­ plex plans.

Under this year's resolution, the permutations of affirmative needs, advantages, and plans are almost unlimited. Negative research must be thorough and comprehensive. Perhaps even more essential will be the ability to think and analyze in a debate. Despite its problems, a topic like this one presents a real challenge--to the coaches who must teach it, to the debaters who must argue it, and to the judges who must resist the temptation to narrow it by fiat for purposes of convenience.

]:j Staff Report of the Senate Committee on Finance, Medicare and Medi­ caid, Problems, Issues and Alternatives, 9lst Cong., 2d Sess., February 9, 1970, p. 127.

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Latane, Henry A. "Cash Balances and the Interest Rate--A Pragmatic Approach," Review of Economics and Statistics, November 1954, pp. 456-60.

"Income Velocity and Interest Rates: A Pragmatic Approach," Review of Economics and Statistics, November 1960, pp. 445-49.

Leach, Ralph F. "How to Get Interest Rates Down," Morgan Guaranty Survey, January 1970, pp. 5-11.

Lee, Tong Hun. "Alternative Interest Rates and the Demand for Money: The Empirical Evidence," American Economic Review, December 1967, pp. 1168-81.

"Substitutability of Non-Bank Intermediary Liabilities for Money: The Empirical Evidence," Journal of Finance, September 1966, pp. 441-57.

Lekachman, Robert. "The Nixon Economics: Hard Times," New Leader, Jan­ uary 5, 1970, pp. 5-7.

Linden, Fabian. "Prices at Retail: A Review of Inflation on the Family Front," Conference Board Record, May 1970, pp. 27-30.

Lipsey, Richard. "The Relation Between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1862-1957: A Further Analysis," Economica, Vol. 27, 1960, pp. 1-31.

Lucas, Robert E., Jr. and Leonard A. Rapping. "Real Wages, Employment, and Inflation," Journal of Politi cal Economy, September/October 1969.

Machlop, Fritz. "Another View of Cost-Push and Demand-Pull Inflation," Review of Economics and Statistics, May 1960, p. 138.

Mark, Jerome A., and Kahn, Elizabeth. "Unit Labor Costs in Nine Countries," Monthly Labor Review, September 1965, pp. 1056-68.

Mark, Jerome A., and Ziegler, Martin. "Recent Developments in Productivity and Unit Labor Costs," Monthly Labor Review, May 1967, pp. 26-29.

Mason, Edward S. Economic Concentration and the Monopoly Problem. Cam­ bridge: Harvard University Press, 1957, 411 pp.

Maynard, Geoffrey, and Van Rijckeghem, Willy, "Stabilization Policy in an Inflationary Economy: Argentina," Harvard Development Advisory Service, Bellagio Conference, June 1966. (Mimeo.)

-127- McCracken, Paul W. "The Transition to Economic Stability," Michigan Business Review, November 1969, pp. 1-5. "Why Recession Will be Avoided," U.S. News & World Report, January 12, 1970, pp. 52-55.

McGuire, Timothy W. and Rapping, Leonard A. "The Role of Market Variables and Key Bargains in the Manufacturing Wage Determination Process," Journal of Political Economy, September/October 1968.

James E. Meade. "The Case for Variable Exchange Rates," in Warren L. Smith and Ronald L. Teigen (eds.), Readings in Money, National In­ come and Stabilization Policy, (Richard D. Irwin, 1965), pp. 505-17.

Meltzer, Allan H. "The Demand for Money: The Evidence from the Time Series," Journal of Political Economy, June 1963, pp. 219-46.

Minsky, H.P. "Employment, Growth and Price Levels: A Review Article," in The Review of Economics and Statistics, February 1961, pp. 3-6.

Motley, Brian. "A Demand-for-Money Function for the Household Sector-­ Some Prelimj_nary Findings," Journal of Finance, Vol. 22, Septem­ ber 1967, pp. 405-18.

Mulvey, Charles. "A Critical Examination of Prices and Incomes Policy in the United Kingdom," Irish Banking Review, September 1969, pp. 10-16.

Myers, Phyllis. "Inflation: The Administration's Campaign Against it Threatens Those Who Can Least Afford to Pay the Price," ��City Vol. 5, December 1969, pp. 27-31.

Neil, Herbert E., Jr. "Moderating Inflation in 1969 ," Financial Analysts Journal, Vol. 25, May-June 1969, pp. 21-28.

Nelson, James R. "Prices, Costs, and Conservation in Petroleum," American Economic Review, Vol. 48, May 1958, pp. 502-15.

Organization for Economic Cooperation and Development (OECD), "The Out­ look for Economic Growth," Annual, May 1970. [cf. Section IV "Income Policies in Selected Countries"]

Palyi, Melchior. "' Pull or Push' --Their Distinction Belongs in the Realm of Poetry," Commercial and Financial Chronicle, Vol. 211, Apri 1 16, 19 70, pp. 3, 9.

Perry, George L. "Wages and the Guideposts,," American Economic Review, Vol. 57, September 1967, pp. 897-904;comments by Paul S. Anderson, Michael L. Wachter, and Adrian W. Throop, and reply by Perry, American Economic Review, Vol. 59, June 1969, pp. 351-70.

-128- 'Peterson, W. H. "Investment Credit Repeal Will Be Self-defeating," Com­ mercial and Financial Chronicle, Vol. 210, July 3, 1969, pp. 18-19.

Phelps, Edmund S. "The New Microeconomics in Inflation and Employment Theory," in American Economic Association, Papers and Proceedings of the Eighty-first Annual Meeting, 1968, American Economic Review, Vol. 59, May 1969, pp. 147-60.

Phillips, A.W. "The Relation Between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957, " Economica, Vol. 2� 1958, pp. 283-99.

Power, John. "The Economic Framework of a Theory of Growth," Economic Journal, Vol. 68, 1959, pp. 34-52.

"Laborsaving in Economic Growth," American Economic Review, Vol. 52, May 1962 pp. 39-45.

"The Price of Ending Inflation Stays High," Business Week, January 31, 1970, pp. 92-95.

"Productivity's Role in Price Behavior," Morgan Guaranty Survey, April 1970, pp. 8-11.

Purcell, Joseph C. "Price Inflation and Its Impact," Atlanta Economic Review, Vol. 20, January 1970, pp. 22-26.

Reeder, Charles B. "Business Economists and National Economic Policy," Business Economics, Vol. 3, Fall, 1967.

Rees, Albert, and Hamilton, Mary T. "Postwar Movements of Wage Levels and Unit Labor Costs," Journal of Law and Economics, Vol. 6, 1963, pp. 41-68.

Reierson, Roy L. Restraint or Relaxation? New York: Bankers Trust Company, 1969.

Rinfret, Pierre A. "Economic Stabilization: The Problem and a Program," in remarks of Senator Vance Hartke, Congressional Record (daily ed.) Vol. 116, March 12, 1970, pp. S3641-46.

Ripley, Frank C. "An Analysis of the Eckstein-Wilson Wage Determination Model," Quarterly Journal of Economics, Vol. 80, February 1966, pp. 121-36.

Roosa, Robert V. "Controlling Inflation and the Inflationary Mentality," Journal of Finance, Vol. 25, May 1970, pp. 233-41.

Samuelson, Paul A. "Money, Interest Rates and Economic Activity: Their Interrelationship in a Market Economy," in American Bankers Associa­ tion, Proceedings of a Symposium on Money, Interest Rates and Econ.Omic Activity (ABA, 1967), p. 44.

-129- Samuelson, Paul A., and Solow, Robert M. "Analytical Aspects of Anti­ Inflation Policy," American Economic Review, Vol. 50, May 1960, pp. 177-94.

Saulnier, Raymond J. "How to Combat Inflation," Tax.Review, Vol. 30, February 1969. New York: Tax Foundation, Inc., 1969, pp. 5-8.

Schultze, Charles. "Recent Inflation in the United States," Study Paper No. 1, Joint Economic Committee, Employment, Growth, and Price Levels. Washington: Government Printing Office, 1959.

Shapiro, Max. "Recession Can't Cure Inflation," Dun's Review, Vol. 96, July 1970, pp. 54-56.

Simkin, William E. "The Role of the Government in Collective Bargaining," University of California Annual Labor-Management Conference, San Francis co, May 25, 1962.

Slesinger, Reuben. "Price Wage Guideposts Revisited," Banking, July 1970.

Smith, Paul E. "Money Supply and Demand: A Cobweb?" International Economic Review, Vol. 8, February 1967, pp. 1-12.

Solow, Robert E. "The Wage-Price Issue and the Guideposts," in Frederick H. Harbison and Joseph D. Mooney (eds.), Critical Issues in Employ­ ment Policy, A Report of the Princeton Manpower Symposium, May 12-i3, 1966. New Jersey: Princeton University, 1966, pp. 57-73.

Sprinkel, Beryl W. "The Cost of Restoring Stability," Journal of Business, Vol. 43, January 1970, pp. 1-5.

"Stabilization Actions in 1969--How Much Restraint?" Federal Reserve Bank of St. Louis Review, Vol. 51, September 1969, pp. 4-7.

Stahl, Sheldon W. "Outlook '70--The Pause That Refreshes?" Federal Reserve Bank of Kansas City Monthly Review, January 1970, pp. 3-12.

Starleaf, Dennis R., and Reimer, Richard. "The Keynesian Demand Function for Money: Some Statistical Tests," Journal of Finance, Vol. 22, March 1967, pp. 71-76.

Stedry, Andrew C. "A Note on Interest Rates and the Demand for Money," Review of Economics and Statistics, Vol. 41, August 1959, pp. 303-07.

Stigler, George J. "The Kinky Oligopoly Demand Curve and Rigid Prices," Journal of Political Economy, Vol. 55, 1947, pp. 432-49.

Suri, Surinder, K. "Canada's Uneasy Consensus: Success of Anti-inflation Measures," Conference Board record, May 1970, pp. 56-60.

... 130- Sweezy, Paul M. "Demand Under Conditions of Oligopoly," Journal of Political Economy, Vol. 47, 1939, pp. 568-73.

Teigen, Ronald L. "Demand and Supply Functions for Money in the United States: Some Structural Estimates," Econometrica, Vol. 32 October 1964, pp. 476-509.

Thorne, W.J. "Prices and Incomes Board: A Study in Unpopularity," Institute of Bankers Journal (Great Britain), Vol. 90, part 5, October 1969, pp. 317-27.

Throop, Adrian, W. "The Union-Nonunion Wage Differential and Cost-Push Inflation," American Economic Review, March 1968.

Tobin, James. "Liquidity Preference and Monetary Policy," Review of Economic Statistics, Vol. 29, May 1947, pp. 124-31.

"Monetary Velocity and Monetary Policy: A Rejoinder, 11 Review of Economic Statistics, Vol. 30, November 1948, pp. 314-17.

Ulmer, Mel ville, J. "Controlling Inflation: Is 'Jawboning' a Joke?" New Republic, Vol. 162, May 30, 1970, pp. 21-23.

"Stabilizing the Economy, 11 New Republic, Vol. 162, Jan­ uary 31, 1970, pp. 13-16.

Van den Beld, C.A. "Short-Term Planning Experience in The Netherlands , 1 1 in Hickman, Bert G., (ed.), Quantitative Planning of Economic Policy, Washington: Brookings Institution, 1965.

Walker, Charls. "Cost-push Inflation: What it is and What Not to Do About it, 1 1 Conference Board record, Vol. 7, April 1970, pp. 24-27.

Wallis, W. Allen. "Guidelines as Instruments of Economic Policy, 11 in Proceedings of a Symposium on Business-Government Relations. New York: American Bankers' Association, 1966.

1 Wessel, Robert H. "Institutionalized Inflation in a Cooling Economy, 1 Commercial and Financial Chronicle, Vol. 210, November 27, 1969, pp. 18-19.

"Whither the Economy: Inflation, Recession or Both ?11 Congressional Quarterly Weekly Report, Vol. 28, May 1970, pp. 1179-82.

1 "Why Inflation Goes On and On, 1 U.S. News & World Report, Vol. 68, February 2, 1970, pp. 20-21.

Wiegand, G.C. "Solving the Crime of Price Inflation," Commercial and Financial Chronicle, Vol. 210, September 11, 1969, pp. 1, 13.

-131- III. GOVERNMENT PUBLICATIONS

Eckstein, Otto, and Fromm, Gary. "Steel,and the Postwar Inflation," Study Paper No. 2, Joint Economic Committee, Employment, Growth, and Price Levels. Washington: Government Printing Office, 1959. /I Levinson, Harold M. "Postwar Movement of Prices and Wages in Manufac- turing Industries," Study,Paper No. 21, Joint Economic Committee, Employment Growth, and Price Levels. Washington: Government Printing Office, 1960. McCracken, Paul W. "Price-Cost Behavior and Employment Act Objectives," Twentieth Anniversary of the Employment Act of 1946: An Economic Symposium, Joint Economic Committee, Washington: Government Print­ ing Office, 1966.

Moore, Geoffrey H. "The Anatomy of Inflation," Rev. ed. , Report No. 37 3. Washington: U.S. Department of Labor, 1969.

U.S. Cabinet Committee on Price Stability. Industrial Structure and Competitive Policy. Mergers & Acquisitions, Vol. 4, May-June 1969.

U.S. Congress, House. To Extend the Defense Production Act of 1950, as Amended, Hearings before Committee on Banking and Currency, 9lst Cong., 2d Sess., June 16, 17, 18, 19, 20, 22; and July 7, 1970.

U.S. Congress, House. Committee on Government Operations. Executive and Legislative Reorganization Subcommittee. Price-Wage Guideposts, Hearings, 9lst Cong., 1st Sess., on H.R. 13278. September 23 and 25, 1969. Washington: Government Printing Office, 1970.

U.S. Congress, Senate. Committee on Banking and Currency. §tate of the National Economy. Hearings, 9lst Cong., 2d Sess., March 18, 1970. Washington: Government Printing Office, 1970.

Sub committee on Production and Stabilization. Inflation: The Need for a More Balanced Policy Mix. Hearings, 9lst Cong., 2d Sess., on S. Res. 357. March 10-12, 1970. Washington: Government Printing Office, 1970.

Subcommittee on Antitrust and Monopoly of the Committee on the Judiciary, Administered Prices, Hearings 85th Cong., 1st Sess., Washington: Government Printing Office, 1957. Joint Economic Committee. January 1964 Economic Report of the President, Hearings, 88th Cong., 2d Sess., Washington: Govern­ ment Printing Office, 1964.

-132- Joint Economic Committee. Studies prepared for the Sub­ committee on International Exchange and Payments. Factors Affecting the United States Balance of Payments. Washington: Government Printing Office, 1962.

U.S. Congress. Joint Economic Committee. 1970 Joint Economic Report; Report on the January 1970 Economic Report of the President Together With Statement of Committee Agreement, Minority, Supplementary, and Dissenting Views. Washington: Government Printing Office, 1970.

The 1970 Economic Report of the President. Hearings, 9lst Cong., 2d Sess., Part 1, February 16-19, 1970. Washington: Government Printing Office, 1970. 1he 1970 Economic Report of the President. Hearings, 9lst Cong., 2d Sess., Part 2, February 23, 25, 1970. Washington: Government Printing Office, 1970. Subcommittee on Fiscal Policy. 1he Federal Budget, Inflation, and Full Employment. Hearings, 9lst Cong., 1st Sess., October 7 ... 23, 1969. Washington: Government Printing Office, 1969.

The Federal Budget, Inflation,and Full Employment; Report ... and Supplementary Views. 9lst Cong., 1st Sess., Joint committee print. Washington: Government Printing Office, 1969.

The Relationship of Prices to Economic Stability and Growth, Compendium, Joint Economic Committee Print, 85th Cong., 2d Sess., Washington: Government Printing Office, 1958.

Joint Economic Committee. Steel Prices, Unit Costs, and Foreign Competition, Hearings, April-May 1963, 85th Cong., 1st Sess., Washington: Government Printing Office, 1963.

Twentieth Anniversary of the Employment Act of 1946, Supple­ ment to Hearings before the Joint Economic Committee, 89th Cong., 2d Sess., 1966, Washington: Government Printing Office, 1966.

The Wage-Price Issue: The Need for Guideposts, Hearings before the Joint Economic Committee, 90th Cong., 2d Sess., Jan­ uary 31, 1968, Washington: Government Printing Office, 1968. U.S. Department of Labor. Manpower Administration. Manpower Report· of the President. Washington: Government Printing Office, 1970.

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