1970
Page 40578
PRESIDENTS FISCAL MONETARY POLICIES
Mr. MUSKIE. Mr. President, President Nixon’s remarks on December 4 to the National Association of Manufacture were encouraging in several respects.
First; they signified that the President may have abandoned the deliberately restrictive fiscal and monetary policies of the past 22 months, policies which tried to control inflation by increasing unemployment, by tightening credit, and by ignoring the need to invest prudently in areas of housing ,and education and health care as typified by the President’s vetoes in August of appropriations in these vital areas.
Second, they signified that the President at last seems to recognize inflation can be curbed only by dealing specifically with particularly troubling areas of rising prices and rising labor costs. His emphasis on oil and on construction bargaining is important. It should be followed by steps to hold down the costs of health care and to increase the mobility of labor.
The President has finally noticed the immense discretionary power of big business and big labor. As he said:
This is the critical moment . . . for business and labor to make a special effort to exercise restraint in price and wage decisions.
These words are a welcome contrast to the President’s remarks in January 1969 when he said:
The leaders of labor and the leaders of management, much as they might personally want to do what is in the best interest of the Nation, have to be guided by the interests of the organizations they represent.
It is time the President recognized the public interest. Unfortunately, that recognition has not yet been combined with action.
The President has not yet told business and labor what is expected of them. He has offered no clues as to the extent to which restraint must be exercised. He has insisted that business and labor drive carefully without suggesting a reasonable speed limit.
The absence of that limit constitutes the vital missing link in our national economic policy today.
Many experts have suggested ways of forging that link. These experts include leaders of the Senate and House, businessmen such as those who serve on the Committee for Economic Development, and professional economists.
One member of this group who has recently made a particularly important contribution is Gardiner Means, an especially wise and experienced economist who first warned this Nation of the dangers of administrative inflation more than a generation ago.
His specific recommendations were printed in Sunday’s Washington Post. They revolve around the formation of a temporary emergency Guidance Board to provide price and wage guidelines for big business and big labor.
That proposal deserves the most careful consideration by the Senate and by the President, as a thoughtful and constructive approach toward forging the missing link of our economic policy.
I ask unanimous consent that the article, entitled “A Full Employment Program,” be printed in the RECORD.
There being no objection, the article was ordered to be printed in the RECORD, as follows:
A FULL EMPLOYMENT PROGRAM
(By Gardiner C. Means)
The first phase of President Nixon’s game plan to control inflation has already proved a failure. In spite of the fact that the planned reduction in production and employment has been exceeded, inflation has not been brought under control. Prices in the more concentrated markets such as autos and steel continue to rise although this rise has been masked by the fall in competitive market prices such as those for farm products, foods and lumber. Nor is the plan likely to bring such administrative inflation under control.
This presents the country with the need for an emergency program to get us back to full employment under conditions which recognize the reasons for the failure of the President’s game plan and take into consideration what would be required to restrain the kind of inflation we have been experiencing.
I. WHY THE NIXON GAME PLAN WILL CONTINUE TO FAIL
The President’s game plan is designed in terms of classical textbook theory under which simultaneous recession and inflation are theoretically impossible. It treats the inflation of recent years as solely a product of excess demand and a resulting pervasive inflation mindedness. Yet, by the end of 1969, excessive demand had been largely eliminated through the budget surplus bequeathed to the present Administration and by the Federal Reserve’s restrictive monetary policies. The main problem as conceived in the game plan was to kill the pervasive inflation mindedness.
The plan was to contract aggregate demand to a point well below that needed to support full employment, hold it well below the full employment level for two years, and then expand it to bring production up to its potential by early 1973, a goal now apparently revised to mid-1972.
This plan takes no account of the actual behavior of administered prices and wage rates in the industries in which big business and big labor play a major role. Past experience has shown that even where there is excessive unemployment, the prices in the more concentrated industries are likely to rise. This is being confirmed currently by the continued rise of administered prices while market prices go down.
In the last three months, four important market dominated categories (farm products, food, lumber products and nonferrous metals) have gone down an average of 25 per cent, or at the rate of 10 per cent a year, while four important administration dominated categories (steel, machinery, automobiles and non-metallic minerals) have gone up an average of 2.4 per cent or at the rate of 9.6 per cent a year. Furthermore, the administered price increases cannot generally be attributed to wage increases. The Department of Commerce Index of labor cost per unit of output for the corporate sector shows no significant increase in the last two quarters while according to the Survey of Current Business the improvement in profits in the third quarter was to a considerable extent due to expansion of profit margins. It is this administrative inflation which is at the root of the modern inflation problem and is not taken into account in the President’s game plan.
Even if the plan could be successful, it would be a highly expensive way to control inflation. It calls for something like five million man years of idle manpower and some $65 billion of potential production thrown away The hardships on individuals and the costs of social disruption could easily make the planned cost $100 billion.
However, there is no reason to expect that the prolonged period of stagnation contemplated in the plan would eliminate administrative inflation. In spite of exceeding the planned contraction., there is no sign of a decline in the rate of price increase in the more concentrated markets. And when demand is expanded to achieve full employment in the future, this would not only cause a legitimate rise in market dominated prices, but would reinforce the process of administrative inflation long before full employment was reached. Such inflation grows out of the use of market power and cannot be controlled through monetary and fiscal measures. This lesson is being learned in all of the major industrial countries.
The President’s game plan is thus not only criminally wasteful of human and material resources but bound to fail.
II. WHAT NEEDS TO BE DONE
Because monetary and fiscal measures alone cannot bring about both full employment and price stability, the country is faced with two problems: the immediate necessity of getting back to full employment as quickly as possible with minimum inflation, and the longer run task of maintaining full employment without inflation.
The first is essentially an emergency problem which can be tackled by measures which might not be feasible or effective in the long run.
It has taken the present Administration’s planned contraction less than 12 months to bring the economy from 3.4 per cent unemployment to its present level of stagnation. An emergency expansion program should aim to get back to 3.4 per cent unemployment within a year.
The means for expanding aggregate demand are well understood The big problem requiring a new approach is how to sit on the lid of administered. prices while the expansion goes on.
Controlling administrative inflation should not be confused with holding down prices in a demand inflation. The head of steam generated by excess demand is hard to control, and, if contained, is likely to produce inflation when the controls are removed.
Administrative inflation, on the other hand, results from the very considerable area of discretion involved in the setting of prices and the arriving at wage rates by big business and big labor. The problem of control is to limit the arbitrary use of market power within this area of discretion.
There is good reason why big business and big labor should be willing to accept guidance in this field in order to avoid inflation. Each business and each union has a strong interest in seeing that everybody else uses market power responsibly But, acting alone their specific interest in higher prices and wages for themselves leads to inflationary increases and only government can give the coordination necessary to achieve their common interest.
Two peacetime experiences with economic guidance by government indicate the possibility of
its success.
In the early days of the great depression, President Hoover called in the leaders of big business and persuaded them, in the interests of prosperity for all to agree not to cut wage rates. This was before the days of big unions, yet big business kept its promise. It was not until the business contraction had been going on for over two years that big business began to slash wages. If President Hoover had supported this wage guidance with the appropriate monetary and fiscal measures to expand demand, it might have been one of the most spectacular countercyclical programs on record
The second case involves the Kennedy guideposts. President Kennedy called on both labor and management to abide by wage and price guideposts in a period in which he was attempting to expand aggregate demand in order to achieve full production and employment. Big labor adhered to the guideposts for approximately three years; so that labor cost per unit of real industrial output actually went down. Management also adhered to the guideposts to a considerable extent though not as closely as labor.
In the end, labor ceased to follow the guideposts because of a basic flaw in their design. The wage guidepost took account only of increases in productivity and failed to make allowance for increases in cost of living which resulted from a legitimate rise in market dominated prices.
Because of this flaw, labor lost nearly half of the productivity gains to which it was entitled before it departed from the guidepost. If the Kennedy plan had included a suitable cost of living provision and if management had cooperated more closely, the reflation plan could have been an outstanding success instead of only a partial one.
The emergency program suggested below would build on the common interest in achieving full employment and minimizing inflation. It would provide price and wage guidance as to what increases were legitimate. It would focus on the actions of big business and big labor. It would use the power of published analysis and public opinion to encourage adherence to the program.
Furthermore the program would be based on a clear recognition that the present situation is indeed an emergency. It is certainly an emergency for the more than four million persons currently looking for work and not able to find it. It is also an emergency for the many business firms approaching or teetering on the edge of bankruptcy. It is hardly a normal situation for that half of industry that is operating at less than75 per cent of capacity. Treatment as an emergency will facilitate the adoption of temporary measures.
III. AN EMERGENCY EXPANSION PROGRAM.
The main instruments proposed for launching the program would consist of: 1) a Joint Resolution of the Congress directed to all parties at interest, declaring the economic emergency and pointing in general terms to the actions appropriate to each; and 2) a single piece of new emergency legislation setting up a temporary Emergency Guidance Board to provide price and wage guidance to big business and big labor.
A joint resolution on the economic emergency
The Joint Resolution by the Congress could appropriately state the character of the emergency, set forth the shape of the program which was being adopted, outline the time schedule for reflation, set a time limit for the program, call on all interested parties for cooperation and indicate in general what would constitute cooperation for each.
In particular, it might request the President to call together the leaders of big business as did President Hoover in an earlier emergency, and likewise the leaders of big labor, and ask each group to agree to cooperate with the temporary price and wage guidance board for the
duration of the emergency.
On fiscal policy, the recommendation of the Committee for Economic Development might be adopted. It calls for a budget that should be a little more than balanced at full employment, but would run an intentional deficit at less than full employment. Or during the emergency, an even greater but temporary deficit might be aimed at in order to reduce the extent of the monetary expansion that would be required. On monetary policy the Joint Resolution could appropriately direct the Federal Reserve Board 1) to cooperate with the Administration and the temporary guidance board in designing and carryingout an immediate reflation program, and 2) to expand and control the country’s stock of money to just support aggregate demand at the level necessary for reaching the goal of the emergency program in the light of the budget policies adopted.
The new legislation would set up a new and temporary agency which might be called the Emergency Guidance Board. The Board could be set up within the administrative arm of the Government or independent of the President and directly responsible to the Congress as is the Federal Reserve Board. In either case, it would be a temporary board created for the emergency period. In this way it could be more easily dismantled at the end of the emergency.
The Board should be composed of a small group of distinguished individuals respected by business, labor and consumers but not representing these several interests, with a chairman well versed in the operations of government.
The Board would presumably have no powers to force particular price or wage actions. Rather, its effectiveness would depend on the agreement of big business and big labor to cooperate, on the fairness of its guidelines, on the publication of the reports to it by big business and big labor justifying proposed or actual price or wage increases, and, in special cases, a Board recommendation against such increases or for a rollback. It should, however, have power to subpoena records for use in extreme cases. The responsibility of the Board might properly be limited to pricing in the more concentrated industries. The legislation setting forth its powers and responsibilities might specify, for example, that the Board must be concerned with substantial price increases by any business having assets of, say, one-half billion dollars or more and with any business supplying, say, thirty per cent of any substantial market. It may be concerned with price increases by business enterprises having, say, $100 million assets or, supplying, say, 10 per cent of any substantial market, provided that either the business voluntarily accepts such guidance or an examiner of the Board makes a finding that such guidance is essential to the success of the program.
The Board should be empowered to require that any business or union subject to its emergency guidance should file an economic justification for any substantial price or wage increase involving a substantial volume of output.
In order not to be overwhelmed with an excessive number of cases, the Board would need to develop procedures for selecting the more significant cases which require Board judgment and rcommendation, those to be handled through public hearings and attendant publicity and those for which staff consultation and negotiation would appear sufficient.
Large institutions, corporate or union, are not immune to public opinion. Their leaders know that their very size makes them vulnerable.The findings of a distinguished board are likely to have considerable persuasive effect. It is reasonable to expect that, for the limited duration of the emergency, they would respond with the degree of cooperation, necessary to make this an effective device for restraining administrative inflation during the period of reflation.
IV. LONG RUN POLICY
The emergency measures should not be expected to resolve the long term problem of administrative inflation which will still persist after the emergency has been overcome.
In the absence of some new program, the country will constantly be faced with the dilemma of inflation and unemployment. Actually an economy which is running well should have neither inflation nor serious unemployment. Those who suggest that a 2 or 3 per cent annual rise in prices is acceptable are simply not looking for a well running economy. Likewise those who accept 3.4 per cent unemployment as anything except an interim goal are accepting a badly running economy. They are saying that, rather than interfere with the abuse of market power they are satisfied that there should continuously be more than two and a half million workers looking for work and unable to find it; that the country should aim to throw away some 20 billion dollars of potential production a year and that the burden of avoiding inflation should be placed on those least able to bear it. The emergency guidance program and its success or failure should give us clues as to the permanent institutional changes which might be needed to provide a well running free enterprise system in the presence of substantial market power in the more concentrated industries.