WITH THE CURRENT surge of inflation, the question of wage and price controls keeps bobbing up. Prices rose at an annual rate of 7.1 percent in the first three months of this year. But in the next three months, through June, it was up to 10.1 percent. Once again, food prices have been leading the way. Why not invoke controls again?
The answer is that they did serious damage the last time the country tried them, in 1971-73, and the effects are still visible. President Carter has flatly ruled out controls, and he's right. One reason is the adamant opposition of the labor unions, who learned that it is easier to control wages than prices. But the controls also conveyed other lessons that are worth recalling now.
In any competitive industry, price controls tend to favor the biggest corporations with the broadest financial resources. Take the example of automobiles. Under the Nixon administration's controls, a company could usually pass through rising costs of production - unless that raised its profits above a certain margin. The biggest auto makers, General Motors and Ford, were denied price increases because their profits were in good shape. Chrysler and American Motors, with lower profits, were granted price increases. But that left those two smaller companies with an excruciating dilemma. If they raised prices, they damaged their ability to compete with GM and Ford. If they did not raise prices, they had to absorb their steadily rising production costs. Either way, they were weakened in relation to the bigger and richer companies. Moral: Controls are bad for competition.
Controls do queer things to investment and production. Throughout the 1960s, oil and gas drilling slowly declined in this country. The turnaround came in 1972 when controls were in effect. The steel companies had regarded drilling pipe as a minor product. They made it on aging equipment, and profit margins were low. When orders for new pipe began to pick up, the steel companies had little incentive to make more of it. The result was a wild scramble among drillers for pipe, and something very much like a black market appeared. Drilling costs shot upward much faster than the general inflation rate, and kept going even after controls expired. Moral: Price controls can sometimes be, paradoxically, more inflationary than no controls.
For consumers, it's the inflation in food prices that is the most immediately painful. But food prices are the hardest for a government to control. Housewives' demonstrations against the high cost of beef, in early 1973, induced the White House to put ceilings on meat prices. Some stock raisers held their animals off the market to wait out the controls. Others exported their cattle, mainly to Canada.
Two morals here: First, a country can't maintain price controls unless it is also prepared to curb exports, which in turn damages foreign markets and violates trade agreements. Second, controls create shortages. The disappearance of beef from the stores turned customers toward fish and poultry in such numbers that those were soon in shortage as well. At that point a lot of people began to fear a looming nationwide shortage of food in general. To head off a public panic, the administration was forced to drop the controls.
Controls are tolerable only for very short periods, in emergencies. The Carter administration knows that working down the current inflation is going to take a long, long time. It is relying mainly on exhortation, persuasion and, increasingly, cuts in federal spending. That isn't very dramatic, and it doesn't produce quick results. But it's better than the alternative.