Once upon a time you could depend on the "hog cycle." But, like the mail service, the British Navy and the Boston Celtics, it isn't working the way it used to. And the puzzle as to what's gone wrong contains not only a partial explanation of inflation's acceleration but also a deutionary tale about wage-price controls.
Hogs eat almost anything, but mostly, they eat corn. When corn prices go down hog production is supposed to go up. I's cheaper and more profitable to feed hogs. That's the "hog cycle."
Except it's gone berserk. Since 1975, corn prices have remained below their 1974 peaks and according to most conventional calculations, raising hogs has been highly profitable. But hog production hasn't jumped spectacularly. Indeed, in 1978, iw will hardly rise from 1977 levels.
The immediate significance of this departure is self-evident. Lower pork supplies have pushed retail prices up - 15 per cent since the end of last year. The increases could not have come at a worse time. With cattle herds declining, beef prices have also risen rapidly and, together, the increases produced a meat price explosion. That, in turn, helped destroy official hopes for a moderation of inflation in 1978.
More important, the misjudgment of meat prices provides a fresh reminder of a trite truth: the world is a complicated place, and we delude ourselves if we think it can be easily forecast and controlled. people always understand the complexity of their own lives, but, just as often, insist on the simplicity of the other fellow's.
What now makes this truth important is the apparently growing appeal of compulsory wageprice controls. Confronted with inflation's resilience, people prefer a quick solution that promises rapid relief. They forget the "simple fact," as Charles L. Schultze put it, "that no government has, or can acquire, the amount of information required to adjust prices and wages as needed to keep a complex modern economy functioning smoothly."
In recent testimony, Schultze, chairman of the Council of Economic Advisers, recalled some of the problems of the 1971-74 controls. As an illustration of difficulties that arise, his testimony is worth quoting at length:
"When controls were first imposed in 1971, supplies of fuel oil were ample, and prices were low relative to those for gasoline . . . The result was predictable. Producers tended to produce more of the product that was most profitable - gasoline - and so shortages of fuel oil subsequently developed.
"In late 1973 and 1974 we were struggling to increase the output of coal . . . But increasing production of coal was hampered by shortages of mine roof bolts. Production of that small but essential item, it turned out, had become unpredictable.
"During the 60-day price, freeze imposed in mid-73, prices of feed grains, which were exempted, rose substantially. But meat prices were frozen and production of livestock and poultry became unprofitable. Farmers, therefore, slaughtered livestock and poultry that would otherwise have become available for consumption." (If grain prices had been frozen, supplies would have simply flowed into world markets.)
No doubt identical mistakes will be minimized in the future. But no system of controls - including the administration's "voluntary" program of wage-price standards - can avoid new mistakes, because controllers, no matter how well-intentioned, hardworking or well-informed, cannot anticipate all the uncertainties of a complex economy.
To this day, for example, no one is quite sure why the "hog cycle" has gone awry. One popular theory is that big producers - marketing more than 2,500 hogs annually - have become more important and that tight money prevents them from making the substantial investments ($500,000 to $1 million) required to increase production. But a recent survey undercuts the theory; it shows that big producers are expanding more rapidly, meaning small-time producers must be cutting back of dropping out.
Nor can controllers easily deal with the temptation to restrain price increases so that controls appear to be working, even when such restraint creates future problems. Remember the discepancy between gasoline and fuel oil prices.
The paper industry offers an interesting illustration. Until recently, prices for linerboard - the material used for corrugated boxes, representing almost one-third of industry production - had been depressed, reflecting excess production in Europe. The Swedish government cut its subsidies for linerboard inventories in mid-1977, unleashing a flood of low-priced linerboard into the European market. That displaced American exports and, with those shipments forced back to the United States, domestic prices stayed down.
Now linerboard prices are recovering. But the administration's price standards limit price increases to half a percentage point less than average price increases in 1976-77. Clearly, some paper firms won't be able to raise prices much, if at all. That helps inflation initially but poses a long-term risk: keeping prices down today may discourage new investment, causing higher prices or shortages in the 1980s.
"If guidelines are strictly enforced and people get scared away, you're creating a 1974 [a period of shortage] sometime in the future," said George B. Adler, a vice president and paper analyst for the brokerage firm of Loeb Rhoades Hornblower & Co.
The administration could, of course, exempt the paper companies from its rules, but that would diminish the program's impact. A further complication arises from the fact that some paper companies are also large lumber firms and, because lumber prices rose in 1976 and 1977, might have more flexibility to raise proper paper prices. But the more inconsistencies and exemptions there are, the more confusing the program becomes and the less other companies and unions will be inclined to abide by its standards.
The message here is that "guidelines" or "standards" - all diluted forms of controls - can play only a secondary role in reducing inflation and risk doing more harm than good. Until the government creates the conditions for less inflationary growth - more competition, less accomodation of inflationary wage and price settlements - all the rest is fluff.