While President-elect Jimmy Carter has disavowed formal wage and price controls (and says he does not want even a standby set), the odds are heavy that within a short time after his Jan. 20 inauguration, Carter will find it politically necessary to criticize, applaud, monitor or otherwise intervene in some wage or price decision made in the private economy.
He will not be the first, nor is he likely to be the last, American president to do so. So long as inflation and unemployment do not yield to conventional spending, taxing and monetary policies, government will continue to go after specific wage or price changes which it feels will be inflationary.
To a society which places a premium on lowering the unemployment rate (8.1 per cent at last count in November), the pressures on a Carter administration to hold down inflation while boosting the economy are likely to be strong. Some economists, including some of those advising Carter, are convinced that much inflation comes about as workers and companies engatge in an endless leapfrog of wages and prices, trying to adjust to an initial, relatively small, inflationary surge.
Since the end of World War II, every administation, whether headed by a Democrat or a Republican, has practiced some form of incomes policy. An incomes policy is any measure "taken by governments that directly influences or controls particular wages and prices for the purposes of limiting the rate of inflation," according to Albert Rees, Princeton University provost and director of the Ford administration's wage and price monitoring agency from October 1974 until August 1975.
Some administrations, such as Ford's, have confined their incomes policies to ad hoc exhortation and "jawboning" - that is, bringing the prestige of the office of the President to bear on a wage or price decision without any threat of sanction beyond adverse public reaction. Other administrations have set down standards against which companies, unions and others can judge their wage and price behavior, but again, these guidelines usually do not contain any penalties if they are abrogated.
Richard M. Nixon, probably the most ardent free-market advocate of all postwar presidents, was also the only peacetime president to impose direct wage and price controls, with a formal apparatus and penalties for misbehaviour.
As Rees noted, "A wide range of measures falls under this general rubric (incomes policy), from the gentlest persuasion to a universal wage and price freeze, and almost all of these measures have been used in the United States at some time in the past decade."
Most administrations have undertaken wage and price policies only reluctantly (with the possible exception of Truman), and their success in seriously reducing inflation over the long term has been mixed at best. All who have set goals any more concrete than the amorphous one of "reducing inflation" have seen their particular incomes policies fail in the end.
Presidnet Johnson's famous guidelines exploded - after several serious strains - in 1966 when airline machinists signed a pact with wage increases twice the government standard. President Nixon's freeze and subsequent wage and price controls seemed to perform all right in 1972 - before inflationary pressures of commodity shortages and an economic boom were felt - but prices skyrocketed in 1973 and 1974 as first foods, then metals and finally oil came in short supply.
In the short run, however, many government ventures into the wage-price arena have had, or at least seemed to have had, a temporary impact in slowing inflation. Brookings Institution economist Barry Bosworth noted before a Senate Banking Committee hearing last month that the Johnson administration guidelines cannot be written off as unsuccessful simply because they eventually had to be abandoned.
Despite mixed success, and the seemingly inevitable alienation of labor and business which ensues, the lure of incomes policies to politicians and some economists is clear. During periods in which traditional fiscal and monetary policies result in either politically intolerable levels of inflation to keep unemployment at a respectable level or require distastefullly high levels of unemployment to keep prices down, "non-market" mechanisms which can bring pressure to bear on wages and prices seem worthwhile.
Some advocates of controls are convinced that wage and price intervention failed not because of the controls themselves but because those responsible for administering them failed.
Theoretically, the free market should make the best wage and price decisions. But those who make the case for incomes policies argue that the free market, if it ever existed, has ceased to exist in many industires and collective bargaining situations. If large steel companies or automobile companies or the unions which bargain for auto workers and steel workers are strong enough to ignore normal competitive pressures (by raising prices or wages or even failing to reduce them during periods of slack demand), then an incomes policy can be a useful substitute for the discipline of the market.
Unfortunately, while the evidence is inconclusive, many studies suggest that concentrated industries raise their prices no faster than more competitive sectors over the course of a business cycle. And by their very nature, incomes policies tend to focus their energies on wage and price increases, ignoring industries or labor markets in which prices or wage fail to go down despite lower costs or failing demand.
Some economists have argued that the formal wage and price controls of the Nixon years so focused business on using cost increases to justify price increases that more companies than ever are concerned with covering their costs rather than meeting market conditions.
When he headed the Council on Wage and Price Stability, Rees tried to refocus the business community's attention on the demand, rather than the cost side. In its latest go-round with steel companies, the council and its acting director, William Lilley Ill, have argued that demand for steel products is too slack to justify a price increase, even though the industry undoubtedly has cost increases it has not yet been able to cover through price increases.
Except for the mandatory Nixon price controls, incomes policies since World War II have relied upon voluntary compliance. And, as the Nixon program discovered, the patience of the American worker and business with controls or guidelines runs thin after a while even when there are formal penalties. When that happens, incomes policies either change their character (a published guideline changes to behind-the-scenes exhortation or a mandatory program becomes a voluntary one) or are totally abandoned for a while by thei practitioners.
Because of the ephemeral nature of particular incomes policies, there has been no permanent agency like the Federal Reserve Board (for monetary policy) or the Treasury (for fiscal policy) with permanent responsibility for carrying out incom policies. As a result, ideas and organizations for devising incomes policies, formulationg their theoretical underpinnings and carrying them out appear and reappear in similar guises in postwar economic America. As Arnold R. Weber, dean of the graduate school of business at Carnegie-Melaon University and director of the 1971 wage-price freeze, has noted, "The organizational arrangements for the implementation of wage-price policies have had all the continuity of a pickup volleyball team."
Nearly every U.S. president has tried some form of labor-management body to mold the consensus and proclaim the broad outlines of wage-price restraint necessary to keep inflation under control. And nearly every time, the labor-management body has failed to develop a consensus among its members, let alone draw in the rest of the country. Presidnet Nixon's labor-management advosory group was able to come to complet agreement on one item: Wage and price controls should be abolished. That was hardly a helpful admonishment to an administration still trying to maintain a broad set of controls on the American economy.
The wage treaties that Kennedy and Johnson sought to form to encourage "responsible" union demands are surprisingly similar to the social contracts that some economists talk about establishing today. The notion of tying wage increases to productivity increases (output per hour worked) dates back to Truman, was resurrected in the guidelines of the Kennedy-Johnson administrations and formed the basis for the basis for the famous 5.5 per cent wage standard set during the Nixon controls.
Economists call into serious question the relevance of using the productivity of the economy as a guideline in setting specific wages. And because the Nixon standard overstated the actual gains in productivity being realized in the economy, the pay standard itself (3 per cent productivity and 2.5 per cent inflation protection) actually may have been inflationary.
Even though the initial technical and ultimate economic and political problems of wage and price policies may be severe, they usually do not appear as overwhelming to most politicians as the dangers of doing nothing while inflation and unemployment threaten.
Arnold Packer, chief economist of the Senate Budget Committee, pointed out in a recent interview that nearly 80 per cent of the rise in the consumer price index since 1969 represents the attempt by workers and companies to catch up with earlier inflation, and shocks the system such as the oil-producer price increase or worldwide food shortages.
If this analysis is correct, and an incomes policy could be devised which would let all past inflation bye a bygone, concentrating on only the current adjustmen process, much of the rise in the general price level could be eliminated.
But, as Packer also says, devising an incomes policy which works is probably the most difficult problem a new administration would face. Packer worries that any set of formal guidelines will lead to a confrontation with the president each time they are breached. And a fledging Carter administration cannot afford any defeats.
Labor unions resist formal guidelines (nearly as much as formal controls) because they erode the function of collective bargaining. Labor leaders are convinced that formal controls or standards come down harder on workers than on companies (AFL-CIO president George Meany used to argue during the Nixon controls that there were a handful of Internal Revenue Service agents enforcing price controls, but 5 million employers enforcing the wage controls).
Controls also are devoid of equity notions that are so important to collective bargaining - such as the need for one union to catch up with another where contracts in one industry are tied closely to those in another. When an incomes policy tries to take account of interindustry relationships or needs for catchups, it creates the impression that the standard it seeks to enforce is a loose one. That makes it extremely difficult to gain general compliance with a standard.
An attempt to rigidly enforce a wage standard, however, creates a set of hostilities of its own that can sow the seeds of eventual breakdown.
Informal controls permit the governmetn more flexibility in dealing with a particular settlement, but have troubles developing general consensus because of the lack of a formal standard agaisnt which settlements or price increases can be judged. If an administration wants to informally affect a wide range of price increases and labor settlements, it may require more energy and expertise than the fledgling administration can afford.
Packer suggests a middle-road solution which allows labor unions or firms to keep certain government protections - such as import quotas or Davis-Bacon Act protection of wage rates on government construction - provided they remain within a guideline. "The auto companies and the unions could be required to choose between the guidelines and receiving government orders of autos in that year," he says.
He adds that giving up the protection of licensing, quotas or the government order would be outlined in advance and would not be considered a punishment.
But there are many areas where such quid pro quos could not be developed - and others where Congress is hardly likely to act, such as in the Davis-Bacon area.
Some economists and politicians are concerned only with wage and price decisions in the big, concentrated sectors and are not in favor of more specific government interference in the wage-price process than public exposure of increases. Sen. Wiliam Proxmire (D-Wis.), chairman of the Senate Banking Committee, and Arthur F. Burns, chairman of the Federal Reserve Board, would like to require big firms and unions to publicize price increases in advance. Such "prenotification" could create strong pressures to roll back inflationary wage and price increases and would permit the government to hold public hearings on the wage or price increases if it chooses.
But like any other form of informal or formal exhortation, prenotification is unfari (not all economic units are subject to it), may hold down price or wage increases where they are needed simply because they are visible (steel price increases may be needed to make it more likely that steel companies will invest in newer, pollution-free plants, or coal mining wages may need to rise sharply to attract persons to the industry), and may continue to emphasize cost rather than to demand justification for price increases.
President-elect Carter has his economic transition team outlining incomes policies that the administration might consider.