A proposal by Federal Reserve Board member Henry C. Wallich to place atax penalty on firms granting excessive wage increases ran into strong opposition during a Joint Economic Committee hearing yesterday.
AFL-CIO research director Rudy Oswald denounced the plan, saying it "would put the government on the side of employers against the workers."
Both Oswald and Rep. Henry S. Reuss (D. Wisc.) asserted that Wallich's proposal ignored price pressures emanating from all other sectors at a time when there are no inflationary pressures from wages. And Joseph Kasputys of Data Resources Inc. said the Wallich plan might be useful, but would be unlikely to have a dramatic short-rum impact on inflation.
The Carter administration had considered proposals like Wallich's and rejected them as administratively and politically complicated.But the Economic Council's annual report had said "they should not be dismissed out of hand," and urged a broader public debate on them.
Meanwhile, the hearing demonstrated that the AFL-CIO and Sen. George McGovern (D-S.D.), who used to be at political odds, are now on the same side in bitter opposition to the whole range of President Carter's economic program.
Oswald proposed scrapping of Carter's $25 billion tax-cut proposal, especially the elements aimed at stimulating business investment, and shifting the stimulus towards spending on jobs programs, mass tranit, and railroad development.
McGovern went the AFL-CIO one better, proposing total abandonment of the tax cut. The former Democratic presidential candidate, who is a new member of the joint committee, said he agree with "everything Mr. Oswald has said. It is a much sounder prescription for the economic ills of the country than the one being offered by the administration."
McGovern said he would offer an amendment to the first budget resolution due on the Senate floor by April 15. junking the $25 billion tax cut, and using the savings to eliminate next year's $7.7 billion increase in Social Security taxes, with the balance to go for public-sector spending.
He blasted Carter's proposals "as can administration would propose." He gave the administration "credit for canceling the B-1 bomber," but added that a $10 billion increase in the defense budget "is almost unbelievable."
Wallich's proposal, made jointly with University of Pennsylvania professor Sidney Weintraub, is one of a group of tax-oriented incomes policies designed to avoid some of the pitfalls of formal wage-price controls. One variant is a plan of Brookings Institution economist Arthur M. Okun offering a tax credit instead of a penalty.
Wallich would set a wage guideline for a small number of large corporations equal to long-run productivity gains plus half the current rate of inflation. Corporations taht paid wages higher than the guideline would be required to pay a tax. "In this way, evenhandedness is maintained," Wallice said. If necessary, excess profits could be taxed, but he doubts that this would be necessary.
Wallich said wages, rather than prices, should be restrained because, "With wages and other compensation of labor amounting to 75 per cent of GNP, wages unavoidably are the principal factor in prices."
This was challenged by Oswald, who said these are "ten problems" with the Wallich formula. Oswald said it's wrong to assume that prices or labor costs are primarily wage-related. he asserted, for example, that "there is a wide variety of markups in retail prices that are not sensitive to labor or wages changes."
Oswald also reiterated AFL-CIO opposition to President Carter's voluntary "deceleration" plan to bring wages and prices down by half-point a year from the prior two-years average.
In a general critique of the Carter economic program, Oswald challenged the administration's assumption that there is "an underlying" 6 per cent rate of inflation, saying that administration economists "are playing upon fear of inflation to weaken the nation's commitment to full employment."