The seductive charm of wage and price controls can lead to love, a torrid courtship and, eventually, marriage. But as in most marriages, the test of love will come only with the inevitable strains of constant togetherness, divergent ideas, piles of dirty diapers and arguments over money.
For now, most people, like the men buying Bo Derek's best-selling poster, are still eyeing the appeal of controls from afar. Some, however, like Derek's hapless admirer in the movie "10", seem prepared to plunge headlong into pursuit of what to many economists is only a fantasy.
The fantasy is that controls in and of themselves can reduce inflation. In the opinion of the vast majority of analysts who have studied controls, if the fundamental economic and political conditions that generated an inflation in the first place are not changed, there will be a quick surge in prices once they are lifted.
Most of the economists who have begun to call for controls, such as the Brookings Institution's Barry Bosworth, however, aren't acting out any fantasy. They are advocating controls only as part of a comprehensive attack on inflation that starts with a tight federal budget, includes an equally tight monetary policy, and goes on to hit price-boosting policies such as limiting crop acreage, restricting imports or imposing unnecessarily costly regulatory burdens.
Moreover, in their view the role for controls is limited: At most, controls can break the momentum of inflation and speed adjustment to the less inflationary economic environment that the basic policy changes are intended to produce. But even most of their ardent admirers admit that controls cannot keep inflation low in the face of excessive demand pressure either for labor or goods. Nor can they do much about certain prices, those for imported oil, for most agricultural products traded in true auction markets, or for existing privately owned houses.
In addition, under comprehensive controls, thousands of bureaucrats are needed to administer the complex rules for the millions upon millions of daily economic transactions.
And the rigidities of controls can lead directly to significant distortions in the economy, particularly if they are in effect for very long. Shortages of a host of products ranging from fertilizer to coal to mine roof bolts either were caused by or made worse by controls imposed under the Nixon administration.
But a number of Bosworth's colleagues at Brookings, including economists Arthur Okun, Joseph Pechman, George Perry and Lawrence Krause, generally oppose the use of controls because they fear the other parts of the economic package Bosworth has in mind would not be put in place along with controls. Organized labor, in Perry's view, is not about to accept the breaking of existing contracts, including perhaps elimination of cost-of-living adjustment clauses.
Furthermore, many economists -- liberal and conservative alike, at Brookings and elsewhere -- don't fear just that the other tight-fisted policies would not be used along with controls, but that by reducing the reported inflation rate controls would give the illusion that the other necessary but painful policies no longer are needed.
For instance, Sen. Edward Kennedy (D-Mass.), who is seeking the Democratic nomination for president, recently asserted that through the use of controls "we can cut inflation by half within a year without inducing serious unemployment."
Although Kennedy also proposed a set of longer-term efforts to reduce the inflationary biases in the economy such as boosting productivity, there was the strong suggestion that with controls there would be no need to create any slack in the economy to help unwind inflation.
"A freeze and controls are likely to succeed today because of their strong psychological impact, because the president would personally intervene to insure effective and fair principles governing wage and price increases, and because the American people are ready individually to accept some temporary economic sacrifice to restore real economic growth," Kennedy argued.
Defining those "fair principles governing wage and price increases," of course, is the central problem of any set of wage and price controls. And this time around, as in each of the last three episodes of controls, the problem would be different.
How comprehensive should controls be? Should low-wage workers be exempt? What about existing labor contracts? Should automatic cost-of-living adjustments be allowed? How do you count the higher cost to employers of maintaining existing fringe benefits such as medical care? Should workers be able to get a larger increase if they are willing to agree to changes in work rules that could mean higher productivity? What is the proper base period against which to judge wage and price changes? Should there be special rules for allowing landlords to pass on higher energy costs?
The list of questions -- like the pile of dirty diapers -- is long, and every time controls have been used the list has in fact proved to be virtually endless.
What constitutes fairness in these cases? Suppose, for example, the steelworkers win a big pay hike in their negotiations with Big Steel this spring. That settlement could come as early as April. Suppose further that wage and price controls were slapped on a few days later. Will it be fair if members of the same union negotiating in May with the aluminum industry -- in which wages historically have closely paralleled those in steel -- are not allowed the same sort of increase? Will employes in the aluminum industry be willing to accept a "sacrifice" now in hopes it will lead to a faster growth of their real incomes later?The history of controls does not suggest they will, no matter what kind of leader is in the White House.
Perhaps the most serious difficulty in implementing a controls program in 1980 is that there is no legal authority for it. New legislation would be needed, and if a president sought it, everyone affected who could do so would have his or her representative on Capitol Hill lobbying Congress to make sure the rules were "fair" to him or her.
One all but certain outcome of this process would be restrictions on changing existing contracts, particularly collective bargaining agreements. When Congress had a shot at precisely this issue in 1951 and in again in 1971, it did exactly that.
During the 90-day wage-price freeze in the fall of 1971, for instance, virtually no deferred wage increases could be paid. School teachers were one large group hard hit by this ruling. Congress in its wisdom directed that the deferred increases could take effect unless they were "unreasonably inconsistent" with the pay standards. This had the effect of allowing most deferred increases to be paid, and most were paid retroactively for the freeze period as well.
Similarly Congress undermined the initial intent of some Pay Board members that deferred increases in union contracts meet the same standard as new settlements. In practice, only a few deferred increases ever were trimmed.
As the controls period wore on, the Pay Board consistently found ways to allow union settlements in excess of the board's basic 6.2 percent guideline, according to a history of the board written economist Arnold Weber, who served on it and who now is chancellor of the University of Colorado. Even so, average union settlements probably were less than they would have been without controls, Weber concluded.
It is far from clear that the Nixon controls reduced inflation over their entire life. A number of economists have addressed that question using a variety of techniques of assessment, and there is little agreement on an answer.
The latest study, done for the National Bureau of Economic Research, used two different approaches to isolate the effect of controls from all other factors affecting inflation. One approach showed that over the whole period 1971-75, controls raised the average inflation rate by 0.3 percentage point a year. The same economists using a different approach got an opposite result, that the controls cut the inflation rate by 0.45 percentage point a year.
If either estimate is correct, the impact of all the effort by the 4,000 persons operating the controls -- 3,000 of them dealt solely with rents -- was modest indeed.
But some of today's advocates of controls dismiss the Nixon years as an indication of the efficacy of controls on the twin grounds that fiscal and monetary policies were too stimulative, especially in election year 1972, and that the controllers did not have their hearts in their work.
In the Korean War, on the other hand, controls worked well, say some of the advocates.
Economists are sharply divided over the value of controls in that period. If what happened to prices is the only criterion, then controls worked wonders. They worked so well that during most of the two years controls were in effect, prices were below their allowed ceilings except for metals and a handful of other products.
But the picture is more complex than that. In the fall of 1950, after the Dunited States intervened in Korea, consumers and businessmen alike went on buying sprees. With the memory of World War II, rationing and genuine scarcity of many products fresh in their minds, consumers stocked up on just about everything in sight. Businessmen bought heavily to build up inventories.
Prices, not yet controlled, naturally shot up. Controls were imposed in early 1951, but not just on prices. There also was a host of production and allocation controls for business, and the Federal Reserve Board hit lenders with Regulation X and W.
Regulation X set minimum down payments for homes. Getting mortgage money for more expensive houses took 50 percent down.Regulation W did the same thing for consumer durables such as washing machines and cars, and dictated the maximum period over which they could be financed. Both new and used cars took a one-third down payment, with the balance due within 18 months.
Wages rose faster than prices under controls, but labor representatives nevertheless walked off the Wage Stabilization Board. The wage hikes did not spur a new burst of inflation in large part because the huge price runups in 1950 had so boosted profits that the wage increases in effect constituted a return to a more normal distribution of national income between profits and wages.
According to some of the economists running the controls of that day, the controls worked most of all because everyone had miscalculated the effect the Korean war would have on the economy, and because of restrictions such as Regs X and W. Great shortages did not develop, consumers and businesses began to use up the products they had stockpiled so hastily in 1950, and price pressures stayed within bounds.
Would controls work today? Opinion obviously is divided sharply on this point, though a growing number of economists think they have a role to play.
As the controls debate progresses, however, the most important questions to be answered are not about the controls themselves but about the other economic policies that will accompany them.