Three summers ago, the British economy appeared to be in desperate straits. Inflation was running at a frightening, Latin America rate, above 30 percent and climbing. Unions were demanding and winning wage increases of like amounts to stay in step, and these were fueling further inflation.
Some people here talked of a new Weimar Republic, the inflation-ridden and jobless-ridden German disaster that led to Hitler. American commentators, over a quick look, reported solemnly that Britain looked like Chile in the last throes of Allende.
The talk on both sides of the Atlantic was a measure of the panic.
In these circumstances, a newly elected Labor government, after spending much of its first year in office debating whether to pull out of the Common Market, finally acted. It persuaded the Trades Union Congress, Britain's AFL-CIO, to accept and self-police a policy of wage restraint, to limit pay increases over 12 months to 10 percent.
There was grumbling and dissent from some leaders whose unions all enjoy an autonomy or independence as unshakable as those in the U.S., but it was done and worked wonders.
By the summer of 1976, both inflation and the rate of wage increases had been cut in half. The talk of a collapsing Britain did not cease, but it was more and more confined to some American and British observers.
That summer, the TUC bit the bullet again. Even more remarkable, the leaders agreed to a 5 percent limit, half that of the year before. To sweeten the pill, Denis Healey, the Chancellor of the Exchequer, offered tax cuts concentrated in the lower brackets. This was a crude version of the tax-based income policies proposed in Washington by Henry Wallich of the Federal Reserve Board and Arthur Okun of the Brookings Institution.
By accepting a second round of pay restraint, the union leaders were committing their members to a second successive year of decline in real incomes.
Again, the largely voluntary policy worked. Wage increases fell by another five percentage points. The real incomes of workers, after taxes, had now fallen about 5 percent over the two years.
Inflation in that second year, up to the summer of 1977, went up a few points, however. But this was a temporary affair, due to a peculiar phenomenon, the unreasoning flight from the pound at the end of 1976. The depressed currency increased the price of food and all the raw materials Britain bought, outweighing the restraint in labor costs.
Last summer, the government here sought a third year of union assent to limited increases. No previous incomes policy since the war had lasted so long. Some union leaders, including the "radical" Jack Jones, were willing to swap more tax cuts for pay restraint. But Jones was outvoted during a convention of his own union, the big Transport and General Workers Union. The rest of the TUC followed this lead.
This third year of incomes policy, of wage restraint, had just ended with mixed results. The gap between target and actual pay increases widened some, but there was no explosion. Moreover, the three-year effort finally gave Britain 12 months of inflation below double figures.
Some commentators here, particularly committed monetarists like Sam Brittan of the Financual Times, insist that the whole exercise is a delusion. In this view, wage restraint only postpones the day of reckoning. There is an explosion in a catch-up period that makes up for all the losses.
It is true that, as as election approaches, workers have made up the pay losses of the previous two years, and incomes thus are now about where they were three years ago. But that also means three years averaging zero gains.
In the postwar period, British workers' real pay after taxes has climbed more than 2 percent a year. So today, they are more than 6 percent behind where they normally would have been.
The British experience sheds little light on the importance of sanctions because, for the first two years, it was union assent and not the sanctions that mattered in slowing the rate of pay gains. This past year, however, has been different.
The government has enjoyed muted support from some, but not all, union leaders, so sanctions have played a bigger role. Perhaps the government's most potent demonstration that it meant business, however, came last fall. Then it defeated a national strike of firemen by using troops, forcing the firemen to live with a 10 percent gain for another year.
But even that demonstration of strength was vitiated. The government also promised the firemen, police, high civil servants and soldiers enormous second-year increases.
Only a handful of firms have been penalized for breaching the pay target. They can lose government orders, handouts to build plants in depressed areas, cheap export credit guarantees which assure that orders sent even to Africa will be paid for in pounds, and subsidies to keep on payrolls workers who otherwise would be laid off.
Over the first two and a half hears, officials estimate there have been 32,000 pay contracts, a big and small. Of these, a mere 385 were discovered to break the ceiling. 337 were renegotiated at government urging and only 48 remained in defiance.
But these statistics tell less than they might. Experts in and out of government agree that the most powerful effect of sanctions is deterrent. Firms that do a large share of their business with the government, for example, simply won't risk being blacklisted and so take a tougher line on pay claims.
The critics of sanctions, especially opposition Conservatives, complain that Parliament never authorized them, that they are arbitrary, that there is no right of appeal from a government judgement. Sir Geoffrey Howe, the Tory spokesman for finance, accused the government of "scouring through the garbage can for any device or any power they could lay their hands on, proper or improper."
Chancellor Healey blandly replied that "this is the crux of the issue. The overwhelming majority of the country believes that pay policy is necessary . . ."
Politically, Healey could not admit that the government had never sought parliamentary authority for its sanctions because the trade unions won't have it. For them, it would smack of a statutory, rather than voluntary ceiling, and this affronts their sense of what unions are about.
Now the government is embarking on a fourth year of intended restraint, again without formal TUC backing. The government has set a target limit of 5 percent and hopes at bottom, that politics will keep the unions in line. A national election could come as early as October. At least until then, unions will be reluctant to spoil the prospects of the Labor Party.
If the vote is put off until the spring, wage restraint will be severly tested. But again, the unions will be inhibited by their ties to the Labor Party.
How much of all this can be translated into an American idiom is a question. One important difference is the role of wages in determining prices.
British industry is probably concentrated among even fewer firms than in the U.S. But British executives are placid oligopolists. They follow a policy of "full cost pricing," pricing their products at a more or less constant percentage of costs. So here, wages matter crucially.
In the U.S., however, leading firms like Exxon, General Motors, IBM, General Electric and U.S. Steel are aggressive oligopolists. They follow the Donaldson Brown prescription of target pricing, setting a price for products to yeild a desired rate of return on investment at a predetermined level of capacity operations. Aggressive oligopolists raised their targets from time to time, as Exxon did at the beginning of the 1970s.
This means that wages alone are not the crucial determinant of prices in the U.S., that executives may raise prices without reference to higher costs. So a policy aimed solely at curbing wages, as in Britain, is not likely to have the same restraining effect on price increases.