I. INTRODUCTION The United States has now gained slightly more than 1 year's experience with the first compulsory wage and price controls in our peacetime history. These controls, which were imposed following a comprehensive 3-month freeze on virtually all wages and prices, were intended to gradually remove inflationary pressure from the economy while at the same time allowing both for growth of real wages in keeping with the historical trend and for the relative price adjustments essential to an efficient economy. A major purpose of the controls was to create an atmosphere in which it would be possible to adopt the stimulative monetary and fiscal policies so necessary to bring about a rapid reduction in unemployment from the 6 percent level which had prevailed throughout 1971. The Joint Economic Committee has followed the wage-price control program, as well as other elements of the Administration's New Economic Policy, with close attention and concern. Last May this committee issued a report entitled "Price and Wage Control-An Interim Report." At that time the committee had held a total of 23 days of hearings on the New Economic Policy, not including the committee's regular annual hearings. More recently the committee has conducted an additional 3 days of hearings and has prepared a volume of written study papers evaluating some important aspects of the price and wage controls.1 The law authorizing the present control program expires on April 30, 1973. When the new Congress convenes this coming January, one of its first concerns must be whether to extend authority for the controls and, if so, in what form. This report is intended to provide the Congress with our assessment of the accomplishments of the control program over the past year, of its weaknesses and problems, and of future policy needs. Our main conclusions and recommendations are as follows: 1. The control program has been accompanied by wholly inadequate policy steps to reduce unemployment. Unemployment remains above 5 percent. This is far too high. Whatever the impact of the controls on the various price indices and other measures of inflation, anti-inflationary policies cannot be deemed a success if they fail to create an atmosphere in which the unemployment rate can be brought at least to the traditional interim target of 4 percent without creating unmanageable new inflationary pressures. 2. In order to reach our employment goals, some form of active price-wage or incomes policy will be an essential ingredient of overall economic policy for the foreseeable future. The present 1 "Price and Wage Control: An Evaluation of Current Policies. Part I. Hearings and Part II Studies of Selected Aspects" forthcoming. comprehensive controls are a temporary expedient and should be removed as soon as this is feasible, but some form of incomes policy must be continued. 3. The present control program has failed to adequately hold down price increases. This failure is dramatic since it has taken place in a context of virtually stable unit labor costs, continued high unemployment, and low capacity utilization. The failure is partly due to the dispersion of the control effort to include broad areas in which competition is adequate to hold prices in check. The control effort should be concentrated on the sectors of the economy in which monopoly power, scarcities, or imbalances between management and labor power produce strong inflationary pressures. 4. In those sectors of the economy which remain under control. price control needs to be made far more effective. Section 5 of this report contains a number of specific recommendations for improv ing the administration of the price controls. 5. To date wage control has been measurably more effective than price control. Pending greater progress on price control, any downward revision of the wage guideline would be highly inequitable and would destroy the labor cooperation so essential to enforcement of the standard. 6. The control program should have been accompanied from the beginning by vigorous efforts to reform the structure of the economy in ways which would increase the degree of competition. Unfortunately no procompetitive reforms have been undertaken and. indeed, some policy measures which further restrict competition have been adopted. A meaningful program of structural reform including labor market reforms, expanded public service employment, removal of import restrictions, vigorous antitrust prosecution, and improved government procurement practices should begin at once. With the needed structural reforms it should be possible over time to create an economy in which sensible monetary and fiscal policy together with an active but largely voluntary incomes policy can sustain high levels of employment without inflation. Without the necessary structural reforms, this objective is simply not attainable. The remaining sections of this report discuss each of these six conclusions in greater detail. 2 Senator Humphrey states: "Import restrictions may be required where the re moval of such restrictions would have a direct adverse effect on the economy of an area." II. REDUCING UNEMPLOYMENT The wage and price controls were not intended to be a substitute for responsible fiscal and monetary policy. Administration spokesmen have repeatedly stressed that the controls are not designed to deal with inflation caused by excess demand. We emphatically concur. As we discuss in section VII of this report, the controls are also not designed to bring about the structural economic reforms so necessary to our long-run success in controlling inflation at high levels of employment, and they have not been accompanied by any such reform effort. Nonetheless, as Administration spokesmen have frequently reiterated, the controls were intended to be part of a total policy package designed to promote vigorous economic growth and to restore noninflationary full employment. For example, the Council of Economic Advisers in its August 1972 mid-year report described the objectives of the new economic policy as follows: 1. The short-run objectives were to stimulate a much more rapid expansion of demand and at the same time to make sure that expansion led to increases in real output and employment rather than to increases in prices. 2. The longer run objective was to restore a state of affairs in which reasonable price stability and high levels of employment can be maintained without controls. These objectives are not being adequately met. Sixteen months. after the inauguration of the New Economic Policy the unemployment rate remains well above 5 percent. Worse yet, Administration spokesmen have made it clear that they no longer have any hope or any intention of reducing unemployment to the traditional interim target of 4 percent. They fear that a reduction of unemployment below the 412- to 5-percent range would be accompanied by unmanageable new inflationary pressures. We reject this view. Policy should be directed toward reducing unemployment quickly to 4 percent and, over a longer period, to 3 percent or less. While the control program was not designed to deal with the inflationary pressures of excess demand, it was intended to deal both with the inflation which stems from monopoly power of big business and strong labor unions and with the inflationary expectations which cause inflation to feed upon itself and become more intense and more prolonged. As we discuss in sections IV and V of this report, the control program has not fully come to grips with monopoly power as a source of inflation because the program has not focused with sufficient intensity on those sectors of the economy where such power is greatest. Neither has the control program succeeded in eliminating expectations of future inflation. This is demonstrated by the fact that many private 86-932 0-72-2 |