If budget policy follows a responsible course such as we have outlined in the two previous sections, it should be possible for monetary policy to remain accommodative so long as the economy is below full employment.

During the remainder of this year monetary policy should be
conducted in such a way as to keep interest rates at or
below their present levels and to provide adequate funds to
all sectors of the economy, including housing, Ŝtate and local
government and small business.

POLICIES TO CONTROL INFLATION

This Committee has long stressed the need for a price and incomes policy as an integral and continuing part of total economic policy. We have also stressed that to the maximum extent possible, such policy should rely on the voluntary cooperation of business, labor and con

sumers.

In view of the continued large price increases in some areas, as evidenced by the wholesale price index, and in view of the forthcoming heavy round of labor negotiations, an active price and incomes policy will be needed in 1973. The present law authorizing price and wage controls expires April 30. The Administration has provided no information on what, if any, plans they are making to meet the need for policies which extend beyond the next few months.

The Continuing Problem of Inflation

The recent performance of the Consumer Price Index and the GNP deflator indicate some welcome reduction in the rate of inflation. The recent performance of the Wholesale Price Index, however, gives cause for concern that some of the improvement in the other indices may be only temporary. As shown in Table 4, wholesale prices have risen more rapidly during Phase II of the control program than they did in the period prior to the price-wage freeze which began last August. Indeed, not since 1951 has the Wholesale Price Index risen as rapidly over an 8 month period as it has during Phase II.

TABLE 4.-WHOLESALE PRICE CHANGES, SELECTED ITEMS, BEFORE AND DURING THE PRICE-WAGE CONTROL

The continued rise in wholesale industrial prices at a rate of about 4 percent per year is especially disturbing. The industrial sector is the sector in which high productivity gains should permit complete price stability or even declining prices. From 1959 to 1964, for example, wholesale industrial prices did not rise at all. The extremely high rates of price increases for certain specific commodities, such as hides, lumber and beef indicate that the control program has not so far succeeded in dealing with supply-demand imbalances in particular markets.

As discussed in more detail below, there has been more apparent progress in controlling wages than prices, a situation which raises serious equity questions. Almost twice as many workers will be involved in collective bargaining negotiations in 1973 as in 1972. To provide equity in these wage settlements while at the same time avoiding an inflationary pattern of wage increases will be a most difficult problem for public policy.

The Shape of Future Policy

A price and incomes policy will continue to be needed, though this does not necessarily mean that mandatory controls should be continued. The present system of controls suffers from many defects both of equity and of effectiveness. A number of these defects were discussed in a report issued by this Committee in May." Any longerterm policy will require sweeping changes from the present program. It is unfortunate that there is presently so little serious discussion of a price and incomes policy for the future.

With reasonable fiscal and monetary policies there should be no need for a continuation of widespread control over the entire economy or even a major portion of it. There are, however, two general areas where some type of active government policy will continue to be required.

The first area is the concentrated sector of the economy, in which monopoly or semi-monopoly power permits prices and wages to be kept higher than those which would prevail under competitive conditions. With respect to this "big business-strong labor" sector of the economy government has two responsibilities. The first is to promote increased competition through such structural reforms as improved government procurement practices and removal of import restrictions. The second is to encourage-through guidelines or controls-prices similar to those which would be set if competition were more fully effective. Compulsory control of this sector of the economy may need to be extended for a time, but for the longer run a policy of voluntary price-wage guideposts still appears preferable.

The second general type of situation in which government has a direct role is the situation of shortage of a particular commodity or service. As has been abundantly demonstrated in recent months, shortages and rapid price rises for specific commodities can occur even in a severely underemployed economy. The solution to such shortages

Price and Wage Controls: An Interim Report, May 22, 1972.

Senator Humphrey states: "Restrictions may be required where the removal of such restrictions would have a direct adverse effect on the economy of an area."

lies in increasing supplies of the commodity or, in some cases, reducing demand. There are many ways the government can assist this process-such as removal of import restrictions or postponement of government procurement of the scarce commodity-but price control may also at times be temporarily necessary until more basic solutions can take effect.

As the history of the last three years so clearly indicates, reduction of overall demand below the full employment level is a most ineffective way to reduce inflation stemming from either of the above causes. Since mid-1969 the economic situation has been one of insufficient demand and idle resources. Yet, inflation remained so severe that it became necessary last summer to adopt the first peacetime wage and price controls in our history. If these controls had been limited to the problem areas which are causing inflation rather than being thinly and ineffectively spread over almost the entire economy, progress against inflation over the past year might have been far more noticeable.

In developing price and incomes policy for the future, the
emphasis should be on containing inflation in the concen-
trated sectors of the economy (big business and strong
labor unions) and on mitigating supply shortages of specific
commodities and services (such as health care, hides and
lumber). This will require policies to make the economy
more efficient, such as removal of import restrictions, effec-
tive enforcement of anti-trust laws, and reforms of govern-
ment procurement. It will also require price and income
guidelines. Temporary controls may be required at times for
some commodities. Restriction of aggregate demand below
the full employment level is both an ineffective and an
unacceptably costly way to fight inflation.

The Need for Equity

Inflation affects the distribution of income and so do policies to control inflation. Neither guidelines, controls, nor any other antiinflation policy will succeed without the co-operation of all the major groups in the economy. This co-operation will not be forthcoming if the program contains any serious inequities or threatens to lead to unintended changes in the distribution of income.

In our report last May we discussed the possible serious inequity that could arise if wages were controlled more firmly than prices. At that time we stated "At least one more quarter's statistics will be required before even a tentative conclusion about the effectiveness of wage control can be reached." Since that time an additional quarter's statistics have become available. These statistics suggest that wages are indeed being more firmly controlled than prices, with a consequent sharp reduction in the growth of workers' real income. If this situation persists, it will produce a degree of inequity which workers cannot and should not be expected to tolerate. Furthermore, such restraint of real income growth will have a dampening effect on consumer spending and thus threaten the prospects for any rapid return to full employment.

Table 5 brings together various statistics relating to wages, prices and profits. In the second quarter real compensation per man hour in the private non-farm sector increased at a rate of only 1.6 percent, a sharp slowdown from the previous quarter and well below the longterm trend of almost 3 percent per year. A single quarter's statistics do not permit firm conclusions, but the slowdown in real wage gains would appear to be a direct result of the control program.

TABLE 5.-SELECTED MEASURES OF WAGES, PRICES, AND PROFITS, 1971 AND 1972

That wage control is having some effect is also illustrated in the statistics on major collective bargaining settlements. As shown in Table 5 average wage gains in manufacturing settlements approved by the Pay Board in the first six months of 1972 are only 5.5 percent per year, compared to 7.2 percent in 1971. These settlements conform to the Pay Board guidelines. They are equitable settlements only if price increases can be held to 2.5 percent per year, thus allowing for real wage gains of about 3 percent. Yet there is much discussion of a more stringent Pay Board standard for 1973 settlements, but little discussion of a correspondingly firm attitude on prices. The Pay Board has recently decided to leave the basic 5.5 percent guideline unchanged for now, but has indicated that this decision will be reviewed again later.

Future policy must be fair and even-handed. Otherwise, there will not be the cooperation necessary to make policy work. The present policy appears to be controlling wages more firmly than prices. This is not fair, nor with its dampening effect on consumer spending, is it good economics. Certainly the Pay Board wage standard should not be revised downward in the absence of evidence that an equally stringent price standard can also be met.

SUPPLEMENTAL VIEWS OF SENATOR FULBRIGHT

While other responsibilities have prevented me from fully participating in the recent hearings and deliberations of the Joint Economic Committee, I do support the general tenor of the Committee's recommendations in this mid-year report on the economy.

I want to emphasize particularly my agreement with the recommendations on defense spending. We continue to spend billions of dollars on unwise and unnecessary weapons systems while frequently neglecting domestic needs and our true national security. I strongly concur with the statement that, "If the Administration seriously wishes to restrict expenditures, defense spending is the place to start."

I am pleased that the Committee has given emphasis to this point, and I hope that the report and its recommendations will stimulate both the Administration and the Congress to focus on this important issue.

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