May 9, 1974
Page 14097
AUTHORIZATION OF APPROPRIATIONS UNDER THE INTERNATIONAL ECONOMIC POLICY ACT OF 1972
The PRESIDING OFFICER. Under the previous order, the Senate will proceed to the consideration of S. 2986, which the clerk will state by title.
The legislative clerk read the bill by title as follows:
A bill (S. 2986) to authorize appropriations for carrying out the provisions of the International Economy Policy Act of 1972, as amended.
The Senate resumed the consideration of the bill.
Mr. GRIFFIN. Mr. President, what is the time agreement?
The PRESIDING OFFICER. There is no time limitation.
Mr. GRIFFIN. Mr. President, I suggest the absence of a quorum.
The PRESIDING OFFICER. The clerk will call the roll.
The legislative clerk proceeded to call the roll.
Mr. STEVENSON. Mr. President, I ask unanimous consent that the order for the quorum call be rescinded.
Mr. President, this bill, S. 2986, is the authorization legislation for the Council on International Economic Policy. It has been carefully considered in the Committee on Banking, Housing, and Urban Affairs. It was reported unanimously by that committee. It has received consideration on the floor of the Senate. I am quite prepared to vote at this point on the legislation. I do not know if there are any amendments. I believe there may be one amendment to be offered to the bill. With that possible exception, I am ready to vote.
Mr. TOWER. Mr. President, we are trying to work out a possible amendment, and will need a few minutes' time. Therefore, I suggest the absence of a quorum.
The PRESIDING OFFICER. The clerk will call the roll.
The legislative clerk proceeded to call the roll.
Mr. STEVENSON. Mr. President, I ask unanimous consent that the order for the quorum call be rescinded.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. STEVENSON. Mr. President, for months the debate has raged on how to end wage and price controls. Throughout, I have emphasized the need for orderly decontrol, and that if decontrol were not orderly the result would be runaway inflation, another freeze, and new controls. The result would then be more disruption, more hardship, more uncertainty, and a long delay before returning to a free market.
This is happening already. The wholesale price figures announced today show that industrial commodities in April rose at an annual rate of 37.6 percent and that wholesale prices are 18.8 percent above their level 1 year ago.
In the 1 week since controls ended, major price increases have been announced. U.S. Steel announced increases of 9 percent on rolled steel – its major product – and average price increases of 5.7 percent. Major copper producers announced increases of 18 percent. Westinghouse announced increases of 10 percent on light bulbs. Major vitamin producers announced increases of 24 percent. And just yesterday, Ford Motor Co. announced increases averaging $163 per vehicle, an action which the Director of the Cost of Living Council branded as "unwarranted" and in violation of Ford's decontrol commitment.
Mr. President, the body of the Cost of Living Council is not yet cold, and already the rush is on to hike prices. Decontrol promises are being disregarded – and there is no effective way to enforce them. With the administration discredited and in disarray, it is everyone for himself, and the devil take the hindmost.
In these circumstances, a failure to act would be inexcusable. It is an abdication of responsibility.
The Nation cannot tolerate another surge of inflation and another round of controls. If they are to be forestalled, the time is now. Responsible economists and government officials agree.
In a column in the Washington Post today, Hobart Rowan warned that thoughtful analysts say that:
We haven't seen the last of controls. They are not a cure-all, but the only real alternative as an inflation-killer is a high level of unemployment.
In an appearance before the Senate Commerce Committee today, the Chairman of the Council of Economic Advisors, Herbert Stein, agreed that we need monitoring and continued control authority in the health care and construction industries.
In a speech on Monday of this week, the Director of the Cost of Living Council said:
The simple fact is that monetary and fiscal tools are not enough, and we must get to the task of developing other measures even though their contribution may be less immediate or powerful.
Mr. President, the pending bill is no cure-all. But it is a tool. It is less than I had hoped and fought for – namely, a limited continuation of standby wage and price control authority. It is, nonetheless, a tool for continuing the fight against runaway, double-digit inflation.
Last Thursday, the President chided the Congress for failure to enact the administration's proposal, but the administration's proposal never included standby authority, except in the health sector. It was the administration's abuse of its past control authority and its determined opposition to any effective legislation that brought us to where we are today. The President is playing an irresponsible game of politics with the inflation and suffering that his own mismanagement has helped to inflict upon the country.
There is no place for politics in this deadly serious matter. Inflation robs everyone – especially the poor, the elderly, and all those whose incomes cannot keep up. It generates labor unrest. It can lead to social strife. It jeopardizes the very foundations of our society. This limited, this minimal, this eminently reasonable legislation should be enacted – and it must be enacted now.
Mr. JOHNSTON. Mr. President, I ask unanimous consent that Jack Weiss, of my staff, be granted the privilege of the floor during the consideration of this bill and the votes thereon.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. JOHNSTON. Also, I ask unanimous consent that Reid Feldman, Stanley Marcus, Howard Beasley, and Anthony Cluff, of the Committee, be granted the privilege of the floor during the consideration of this bill and the votes thereon.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. JOHNSTON. Mr. President, there were three parts to the original bill on wage and price controls. The first part had to do with standby controls, which Senator MUSKIE, Senator STEVENSON, and I felt very strongly should be included in the legislation which Congress would pass; but Congress, in its wisdom, has deleted the portion on standby controls.
There remain, however, two extremely important parts of this legislation which are still included in it. The distinguished Senator from Maine (Mr. MUSKIE) will discuss the importance of monitoring of the economy. I would like to say a few words about the enforcement of commitments – that part of the bill which allows the Cost of Living Council to enforce those commitments voluntarily given prior to May 1, 1974. Without the authority provided by this bill, there are serious questions as to whether there is the legal authority to enforce those commitments at all.
Mr. President, we saw, day before yesterday, that the Ford Motor Co., raised its average 1974 model car and truck retail prices by $163 or 3.5 percent. GM threatens similar action. GM, Ford, and American Motors had previously committed themselves not to increase 1974 model prices "barring major unforeseen factors." Dr. Dunlop has already made a statement on this matter, and has said that no unforeseen factors exist, and that the price rises are indefensible and are in fact in violation of a commitment given. The Cost of Living Council, in the face of difficult legal problems, is contemplating but has not yet decided whether or not to take court action.
The Ford situation is indicative of the need for immediate congressional action to clarify the enforceability of decontrol commitments. The decontrol commitment structure is threatening to come unglued, if not to collapse, depending upon what the courts should finally decide. This is of extreme importance to the fight against inflation in this country.
Three hundred major firms in the United States have made voluntary commitments, which cover 17 key sectors of the economy. Let me give you a partial listing of the sections of the economy which are subject to such commitments:
The fertilizer industry, which is so critical to food prices and to agriculture.
Cement, which is a basic raw material for construction.
Zinc, used in galvanizing.
Automobiles.
Prepared feeds.
Mobile homes.
Petrochemicals, which find their way into so many products that consumers use.
Insecticides.
Rubber tires and tubes.
Retail trade.
The paper industry.
Fabricated rubber.
Canned fruits and vegetables.
Coal.
Aluminum.
Semiconductors.
Mr. President, the industries in the United States which have made commitments are key and critical to the economy, and unless those commitments are enforced, obeyed, and lived up to according to the letter, inflation threatens to become even more unglued, even more exacerbated than it is today.
Mr. President, these commitments cover not only price restraints, as in the case of General Motors and Ford, but other parts of market behavior so critical to the fight against inflation.
For example, the fertilizer commitment, given on October 25, required that fertilizer exports be diverted to the U.S. market; that fertilizer firms would continue to operate marginally productive facilities and explore the possibility of reopening old plants; that they would undertake new plant construction and expedite new plant construction in progress. Many of these commitments are on an indefinite basis and continue to affect the key fertilizer industry.
Mr. President, if Ford is allowed to flagrantly violate its commitment, as it is doing now, fertilizer will do the same, and without increased capacity, without expedition in the building of new capacity, and without any constraint on exports, fertilizer threatens to become very critical.
Another typical example, Mr. President, is the rubber tire and tube industry, where the five largest firms agreed to increase wholesale prices only 5 percent through August 1, 1974; to increase prices on retail small car tires no more than 4 percent through August 1, 1974; to expand capacity for producing radial tires by January 1, 1975; and to improve their price reporting on an indefinite basis.
Again, Mr. President, in such a critical industry as the rubber tire and tube industry, where the prices affect such a large segment of the American consumers, without price restraints we face increasing inflation of a critical nature.
Mr. President, these commitments should be enforced; they were given in exchange for a valuable quid pro quo – exemption from price controls – while the law was still on the books; they are custom tailored to the individual industry and consequently we know they are workable.
These are not the kind of bureaucratic rules that have been fashioned by some group in Washington that is unfamiliar with the exigencies of a particular industry. Rather, these are commitments voluntarily given, bilaterally worked out between the Government and the industries, and calculated not only to cool inflation, but to work and allow the industries to make an adequate profit, as the free market system is designed to do.
Finally, Mr. President, it is part of our tradition that a bargain is a bargain. A deal is a deal, and these deals and these bargains ought to be enforced and lived up to.
Mr. President, what the provisions in the present law and in the bill now before the Senate do is declare that commitments given prior to expiration of the Economic Stabilization Act shall remain in full force and effect despite the expiration of the act on April 30. The bill provides that controls may be reimposed for violation of a commitment, injunctions may be obtained, and the penalties provided for under ESA for violating an order or regulation may be applied for violation of a commitment.
Mr. President, the bill also provides that judicial review provisions of ESA shall be available to a person charged with violation of a decontrol commitment.
I think it is important, Mr. President, that we point out also what the bill does not do. It does not cover under the rubric of commitments pre-April 30 wage orders. Term "commitments" is restricted and means only those specific arrangements secured from 17 key industries. No authority to enforce prior wage cutbacks or to issue regulations relating to "paper wage" problems in some industries is provided for this bill.
The term "commitments," Mr. President, also does not include any vague indication from management or labor to act responsibly in the future – no more and no less than the agreements reached with 17 key industries in the course of granting them exemption from the ESA. That is all that is provided for as far as commitments that have been given are concerned. In other words, the term "commitment" is a term of art, and relates only to those voluntary commitments reduced to writing and, in effect, made a contract between these industries and the United States.
Mr. President, in my judgment it would be utterly irresponsible, almost outrageous, for Congress to walk away from these commitments, which are not only morally right in their enforcement, but calculated to be effective in the fight against inflation.
Mr. MUSKIE. Mr. President, I do not see any necessity for extended debate on this issue. We debated it last week. We have had discussions off the floor. So that I think the Senate, by and large, is well acquainted with the issues and what it is that those of us responsible for the amendment seek to accomplish.
However, it might be helpful if I reviewed some of the points in the pending bill and why I think it should be approved,
Mr. President, S. 2986 as presented to the Senate today contains provisions for a minimal but effective congressional response to the inflationary dangers our Nation faces. As a result of Senate action last week, S. 2986 has been amended to include a modified version of the Cost of Living Act, which I presented to the Senate with Senators STEVENSON and JOHNSTON – also cosponsored by Senators CANNON, CASE, CHILES, HASKELL, HATHAWAY, JAVITS, MANSFIELD, MCGEE, RANDOLPH, and RIBICOFF.
As presently contained in S. 2986, the Cost of Living Act basically includes two simple provisions: authority and a congressional mandate for the executive branch to monitor inflation, through an economic monitoring agency; and authority to enforce decontrol commitments.
The statistics on inflation in the first quarter of this year are familiar to most of the Senate by now: the 14.5 percent annual rate of consumer price increases; inflation in wholesale prices at a 25 percent annual rate; and a decrease in average real weekly earnings at an annual rate of 20 percent.
And more recent price increases since the Economic Stabilization Act expired last week tell us that we can expect continued high inflation in the months ahead. National Steel Corp., the Nation's third largest steel company, raised tinmetal products prices by 9.5 percent on the average last Wednesday. Copper producers increased some prices by 18 percent. Industrial gas prices were increased by between 10 percent and 15 percent by one large producer. And just yesterday, the Ford Motor Co. increased their base prices on 1974 model vehicles to levels Dr. John Dunlop, Director of the Cost of Living Council, called "unwarranted."
Mr. President, I ask unanimous consent to have printed in the RECORD an article on that subject which was published in the Washington Post this morning.
There being no objection, the article was ordered to be printed in the RECORD, as follows:
[From the Washington Post, May 9, 1974]
FORD RAISES PRICE DESPITE 1973 PLEDGE
(By James L. Rowe, Jr.)
Ford Motor Co. announced yesterday it is raising prices on its cars and trucks by an average of $113 per vehicle, effective immediately.
The move brought a quick telegram from Cost of Living Council Director John T. Dunlop, who told Ford that its action was "unwarranted" and a violation of the company's commitment last December to forego further price increases in exchange for being freed from wage and price controls.
Ford Chairman Henry Ford II responded with a telegram saying the company has had cost increases of $214 a car since Nov. 1, more than double the $98 forecast last December.
The company said its action was fully justified by costs and noted that the December agreement permitted price rises in the event of unforeseen economic developments, including cost increases substantially higher than projected.
The Cost of Living Council's authority to enforce mandatory wage and price controls expired on April 30. Since then there have been large increases in steel prices, health care prices and copper prices – three of the major industries that remained under price controls until the very end.
In addition, the chairman of Dow Chemical Co. told shareholders at the company's annual meeting in Miami yesterday that Dow "must massively increase the prices of our products" to recover the company's rising costs.
But Ford was apparently the first major company to raise prices after pledging to hold them down in return for being freed of wage and price restraints.
Some Senate observers think the Ford move will help a bipartisan group of legislators who are attempting to push through Congress some form of Cost of Living Council which will monitor the economy's wage and price developments. A vote is scheduled today.
One observer said Ford's move might kindle further support for giving the council authority to enforce decontrol commitments and perhaps some limited form of standby authority. Seventeen industries made deals with the council in return for decontrol.
In addition to the $113 of 2.4 per cent increase on base prices, Ford also announced that it is making standard equipment of a number of items that had previously been optional. That move will raise prices another 1.1 per cent, about $50 a car.
General Motors Corp., the industry's largest producer, said it had submitted data to the Cost of Living Council in support of a price increase but has not decided whether it will raise prices for the balance of the model year, which ends in September.
Last week, Chrysler Corp., third biggest auto maker, announced a price increase averaging $99 a car. Chrysler was the only one of the four biggest auto manufacturers that refused to enter the decontrol commitment with the Cost of Living Council.
The council decontrolled Chrysler anyway.
All four major automobile makers have had sharp declines in profits during the first quarter partially because of rising costs and partially because car sales were off substantially because of the energy crisis.
GM's profits were off 85 per cent and Chrysler's were down 98 per cent. Ford, the second largest producer, reported a profits dip of 66 per cent, and American Motors Corp. had a falloff of 58 per cent.
Small cars, whose sales have been booming, make up a larger percentage of Ford and AMC products lines than of the other two auto makers.
Dunlop, in his telegram to Ford, agreed that the data submitted by the company have risen "above those projected when the industry was exempted in December, 1973." But, he said, the Ford increases are not "consistent with the council's understanding of the voluntary commitment your company made with the council in December as a condition for decontrol."
A spokesman for the council said Dunlop is not basing his objection on how much Ford's cost increases have exceeded projections, but rather that Ford is violating the agreement made with the council during a climate of rising prices.
Ford said the $113 increase comprises a $91 increase for base vehicles, $15 for options and $7 for destination charges.
The $113 increase is on retail prices, and Ford will get $91 of it.
A spokesman for the company said that the increase applies neither to cars already on dealer lots nor to firm orders already placed.
Mr. MUSKIE. Mr. President, I make the point that the Ford Motor Co. was subject to one of the decontrol commitments which we have been discussing.
In another article in the Washington Post this morning, Hobart Rowan, reporting on the aftermath of wage and price controls, made the following observation--
The early signs are not very encouraging to those suffering from inflation. Health "industry" prices, according to the administration's own analysis, will skyrocket. Metal, auto, paper, and many other prices are already moving up. Wage increases, without doubt, will be pushed higher this year than last (and the 1975 pattern could top 1974's).
Mr. President, I ask unanimous consent that the Hobart Rowen article be printed in full in the RECORD.
There being no objection, the article was ordered to be printed in the RECORD, as follows:
WAGE AND PRICE CONTROLS: A RESURRECTION?
(By Hobart Rowan)
Wage and price controls having been buried, we will now have an opportunity to see what the much-advertised "free market system" will accomplish.
The early signs are not very encouraging to those suffering from inflation. Health "industry" prices, according to the administration's own analysis, will skyrocket. Metal, auto, paper, and many other prices are already moving up. Wage increases, without doubt, will be pushed higher this year than last (and the 1975 pattern could top 1974's).
Logically, it is difficult to understand why this country, in the midst of the most pressing inflation since World War I, would abandon all form of controls, even on a stand-by basis that might inhibit extreme wage and price increases.
Those who expect that the rate of inflation will drop back from the horrendous results of the first quarter, when consumer prices shot ahead at an annual rate of 14.5 per cent, agree that price jumps will still be above what used to be considered "acceptable" levels.
Thus, Michael K. Evans of Chase Econometrics predicts that the CPI this quarter will be up by another 8 per cent, with industrial wholesale prices spurting at a 15 per cent annual rate.
Evans sees further improvement in the second half, "due primarily to the end of sharply rising oil prices, a continuing decline in prices received by farmers, and the end of the post-Phase IV inflation bubble."
But as union leaders, not abandoning logic, press for wage increases to make up for last year's 10 per cent inflation, they won't have to buck a wage guidepost, or that wise old Cost of Living Council director, John Dunlop.
What can be expected are wage hikes averaging over 7 per cent this year and 9 per cent next year, according to Evans. Many unions will be pushing for and getting much more, with increasing attention to cost-of-living escalators.
In an otherwise optimistic appraisal of the economy, economist Wilfred Lewis Jr. of the National Planning Association says "the cloud on the horizon is the continuing threat of inflation.
"Although there should be some slowing by year end in the recent rate of food and fuel prices, wage demands will be very large this year, understandable in the light of last year's hikes in consumer prices.
"If no constraints are imposed on manufacturers' prices, there is a very grave danger that, by as early as 1975, we will once again face the unpleasant dilemma of accelerating inflationary pressures while there is still too high a rate of unemployment."
What Lewis and other keen analysts are saying, rather bluntly, is that we haven't seen the last of controls. They are not a cure-all but the only real alternative as an inflation-killer is a high level of unemployment.
The moderation in fuel and food prices, Lewis says, is but a reflection of an easing of last year's shortages. The underlying inflationary pressures are much worse now than they were in 1973.
The fact that the second quarter CPI rate may be less horrible to contemplate than that 14.5 per cent number of the first quarter, Lewis adds, "should not be taken as a sign that demand management policies have succeeded in curbing inflation, or that the time has come when price controls can safely be discarded."
Controls now have a bad name, created in large part by an administration entrapped by its bitter ideological hatred of them. It waited too long before applying the first freeze in 1971, then weakened the ability of controls to perform a reasonable function by inflationary fiscal policies and an agriculture policy (nonpolicy?) that was downright irresponsible.
Then in the flush of victory after the November, 1972, election, the ideologies won out over good sense and catapulted the whole program into disaster by abandoning the mandatory Phase II in January, 1973. The program has been dying a slow death ever since.
Big business, which originally argued for controls as a device to hold down wages and which then led the charge for total abandonment, will probably be back hollering for help before long.
As for labor, which helped in the final kill, its unhappiness with Nixon's controls needs to be put aside in the future. Wage increases of 10 per cent look great when announced, but amount to zero when there's a 10 per cent inflation.
There is room for an "incomes policy" which is fair to all sides. But it will take time to purge the country of the Nixon administration's catastrophic influence.
Mr. MUSKIE. Mr. President, in the face of this continuation of inflationary trends, there is a clear need for the economic monitoring and decontrol commitment enforcement provisions which are now included in the Cost of Living Act as part of S. 2986. My distinguished colleague from Louisiana, Senator JOHNSTON, has described in detail the need for the decontrol commitment enforcement authority. I would like to take a few minutes of the Senate's time this afternoon to discuss the need for the economic monitoring agency authority contained in the Cost of Living Act.
The basic purpose of an economic monitoring agency is to provide a distinct institutional focus for Federal action on inflation.
One important reason to grant special economic monitoring authority is to evaluate the effect of a variety of Federal decisions on prices and availability of domestic products. For instance, the Agriculture Department, the Treasury Department, the Commerce Department, the Council on International Economic Policy, the President's Special Trade Representative, the Federal Energy Office – all make decisions that have an impact on our import and export policy. The Interior Department, the Federal Energy Office, the Agriculture Department, the Department of Housing and Urban Development – all make decisions affecting the production of important resources. The Labor Department has responsibility for labor decisions. Dozens of kinds of regulatory decisions – made by the Department of Transportation, the ICC, the FTC, the Environmental Protection Agency, and other agencies – have important effects on domestic prices and supply.
And the many Federal budgetary decisions, made by the Office of Management and Budget and specific agencies, can also have important effects on prices and supplies of specific commodities and products.
A second important reason for establishing a separate economic monitoring agency is the collection and analysis of economic data adequate to forecast special inflationary and shortage problems in special industries. Conventional economic data, such as that collected by the Bureau of Labor Statistics, and the Commerce Department, are most often historical by nature, telling us what kinds of inflation and shortages we have experienced in the recent past, but not what we can expect in the future. Only under the Cost of Living Council has there been adequate "forecasting- type" data, such as: wage rates by locality in the construction industry; fertilizer prices, production capacity, import and export data; projected demand data on health; and data on the ability to substitute one raw material for another. Only with the continuation of an economic monitoring agency will the Federal Government continue to have the capacity to perform this important data collection and analysis function.
Third, Mr. President, a separate anti-inflation agency is needed to take positive action, short of wage and price controls, to avoid inflation and shortages in specific economic sectors. No conventional agency now performs these kinds of functions, such as: establishing communications among Government, management, and labor in particular sectors; calling attention, publicly and privately, to the need for voluntary restraints in selected instances; and the promotion of planning to avoid shortages which might have a ripple effect on the rest of the community.
None of these functions – these three that I have described – are now the mission of any other agency. The only executive branch body with the potential economic overview to perform these functions is the Council of Economic Advisors – and its permanent staff of 46 – including both professional and clerical positions – is far too small to allow it to assume this mission. And, of course, it is not now charged with this mission.
Only by passing the Cost of Living Act, and mandating that these functions be performed by the executive branch, can we have some hope of having necessary warning of special short-term inflation and shortage problems we might face in the months ahead, and assurance that there will be a continuing study of the long-term inflation problems our Nation faces.
Finally, Mr. President, I would like to point out that the psychology of having a monitoring agency, even though it has no standby control authority, will be at least marginally helpful to the economy. A watchdog on inflation is better than providing no attention at all. And no one will ask for higher wages, or higher prices merely because this agency exists. But its activities along the lines I have described could help promote a responsible attitude toward inflation on the part of business, labor, the administration, and the public at large.
By reaffirming its decision of last week, and giving final approval to S. 2986 and the Cost of Living Act, the Senate would be taking a positive step to meet the inflationary dangers of the months ahead.
Last week, Mr. President, some confusion was reflected in the debate as to the position of the administration on this proposal. Yesterday, I put in the RECORD a speech by Dr. Dunlop in which he strongly endorsed the concept of an economic monitoring agency; and I ask unanimous consent that his speech be printed at this point in the RECORD, so that there will be continuity in the presentation of this issue.
There being no objection, the speech was ordered to be printed in the RECORD, as follows:
TOWARD A LESS INFLATIONARY ECONOMY
(By John T. Dunlop)
Although the economy is performing surprisingly well in real terms, everyone knows inflation is a baffling persistent problem. It appears to be intractable here and abroad. Our CPI was up 10.2 percent in the period March 1973 to March 1974. The GNP deflator was up at a 10.8 percent rate in the first quarter of 1974. Inflation in the CPI in Japan was 26.3 percent in the past year and 13.2 percent in Great Britain.
The tendency of all forecasters has been seriously to underestimate inflation while showing a better record of estimates for output and employment. For instance, early in the year the forecasts for the GNP deflator in the first quarter were in the 7 and 8 percent range; the first quarter was in fact at the annual rate of 10.8 percent. While forecasts for the rest of 1974 typically show a marked reduction in this rate of inflation, it is my view that these estimates, derived from a combination of econometric models and hunch in varying proportions, still have a tendency to underestimate the extent of inflation in the second half of the year. A number of forecasters have again revised these estimates upwards recently.
I wish to propose for our discussion the nagging question of why these inflation rates, and at the same time pose the inescapable enigma of the private and public policies that are appropriate to constrain such inflation over the long term.
As an example of one view of inflation, the April 1974 Monthly Economic Letter of the First National City Bank argued against any Federal concern with monitoring private actions or government influence in particular markets as a means to constrain inflation. It held that–
"Inflation has little to do with the structure of private markets, which change only slowly. Rather, [inflation] depends on the relation between two growing aggregates, the level of monetary demand and the level of physical supply. When money demand grows faster than real output, the price level ultimately rises."
These views are a mirrored image of the perspective of Milton Friedman: "... inflation is made in Washington, in that stately and impressive Grecian temple on Constitution Avenue that houses the Board of Governors of the Federal Reserve System. Prices have been rising at faster and faster rates because William McChesney Martin and the other distinguished men who govern the
system have decreed that they shall." (Newsweek, January 20, 1969, p. 78.) The names and the inflation rates are different today, but the theory is unchanged.
Let it be clear that I have no doubts that monetary policy is a major tool which can restrain or stimulate the economy; indeed monetary policy and fiscal policy are generally considered to be the major tools. But I reject the absolutism and exclusivity of this and similar analyses of inflation and its antidote, particularly for the long term.
The experience of recent years, in my view, supports the realistic judgment that monetary and fiscal policies are not sufficient tools by themselves to restrain effectively the types of inflation we have had, or that the authorities in charge of these policies – in the executive or legislative branch of government – are constrained in the extent they can use them. For the present purpose it matters little whether monetary and fiscal tools are inherently inadequate to deal with contemporary inflation or that the users are inhibited by practical considerations in their application of these classical measures. The simple fact is that monetary and fiscal tools are not enough, and we must get to the task of developing other measures even though their contribution might be less immediate or powerful.
Another school of thought stresses that inflation is derived, or at least made more virulent, by monopoly power of certain business enterprises and labor organizations. The appropriate relief to this alleged cause of inflation is seen to be more vigorous prosecution of the antitrust laws.
Organized consumer groups in the past year have often stressed this view to me, urging a greater role for the Federal Trade Commission and the Justice Department. I readily agree that a more competitive economy in some sectors is desirable. But such policies involve endless litigation and uncertainty and, accordingly, are not likely to make much of an impact on inflation. Further, the contributions of collective bargaining are not likely to be set aside by the American community in favor of extension of the antitrust laws to industrial relations. In the present setting, it has been the competitive sectors of the economy that have shown the greatest inflation.
While not neglecting the contribution of other policy tools, I would like to stress the need for a whole series of structural changes in the economy and in their relations to government in order to constrain inflation over the long pull. These structural changes take time to develop; some are major institutional changes, while others are more modest adjustments.
There is need for a central focus – a continuing Cost of Living Council, or similar type of organization – to work within the Federal Government and in cooperation with private sector institutions to explore, to stimulate and to induce necessary changes. These activities are not to be confused with jawboning or preachments. They involve, rather, seeking to get government and private groups to change their internal decisionmaking processes, their habits of mind and thought patterns, and their responses to their outside worlds. Such changes cannot be achieved by fiat or regulation, but must emerge from persuasion and hard experience as a series of new consensuses, both within the society and within separate economic groups and institutions.
I should like to set forth a number of examples of the type of structural changes that need to be made in government, in the government's relationships with various groups, in labor- management relations, and in business, all with the objective of creating a less inflationary economy.
GOVERNMENT
1. The single most important structural change needed in government to restrain inflation is a reorganization in the Congress to formulate coherent tax and expenditure policies and thereby to work more cooperatively with any administration toward a viable fiscal policy to constrain inflation. Many public spirited members of the Congress of both parties have been working on this matter for many years and some progress has been made, but we have a long way to go. We simply cannot constrain inflation in this country until the Congress gets its fiscal house in order.
There is a need for change in outdated, outmoded Federal policies which contribute to inflation in specific industries. We have a golden opportunity now to rid ourselves for the long term of the restrictive agricultural policies of the past 30 years that were engendered particularly by the depression of the 1930's. The Cost of Living Council in 1972 and 1973, somewhat belatedly perhaps, took the leadership in pushing for the elimination of many of these restrictive practices – planting restrictions, import restrictions, some provisions of marketing orders, and the like. The extent to which agriculture has been largely transformed to expansionist policies, in my view, is not fully appreciated. Yet, it is extremely important to maintain these changes in order to constrain inflation for the future, to rebuild stockpiles to provide a degree of cushion from worldwide price and crop fluctuations in the future, and to provide further counters for our foreign policy. Regrettably, there are already signs that the restrictive practices of the past are returning. Agriculture is but one illustration of areas where government policies to encourage supply, or to stop inhibiting supply, are essential to restrain price increases.
3. The involvement of government in various sectors of our economy also dictates a reevaluation of existing private policies. In the health care area the government has come to be the largest purveyor of funds and now is seriously considering new injections of dollars and demand in the form of national health insurance. Its interventions, including Medicaid and Medicare, essentially have provided for cost passthrough and reimbursement, with the inevitable consequences of unnecessary services, inefficiencies and, consequently, more inflation. It is essential that the government's involvement in the health care field be modified to restrain inflation by requiring that prospective budgeting procedures replace automatic cost reimbursement. That was the purpose and design of our Phase IV health regulations.
GOVERNMENT RELATIONS TO SPECIAL PROBLEM AREAS
4. The relationship of government to particular problem areas in our society warrants increased attention. For example, despite some commendable innovations in the last half dozen years, the fate of the housing industry and its fluctuations from year to year depend very largely upon general monetary policy and interest rates. There are enormous costs of instability and inefficiencies in home building which grow out of the frequent and unpredictable changes in monetary policies. A significant area for institutional and structural change is to develop ways of providing for less violent fluctuations in housing through variable mortgage and deposit interest rates, as in some other countries, or other devices to provide a flow of funds more stable for housing with consequent greater efficiency and lower costs of housing production.
5. Another of the major problems of the society where the government has a role is the interface between work and school, particularly in the age group 16-21. Reported unemployment rates of 17.0 percent for 16 and 17 year olds and 11.4 percent for 18 and 19 year olds, compared to 4.9 percent for all age groups in 1973, may alternatively be viewed as a failure of the labor market, as it usually is, or as a failure in the educational system. No amount of general economic policy is likely to make much of a contribution to this problem and attempts to do so will likely contribute to inflation. Rather, there is a definite need for considerable restructuring of the local arrangements made to bring young people of this age group into contact with the labor market, and for labor market feedback, in turn, into the educational system.
Incidentally, to include these youth in our national unemployment figures, as we conventionally now compute them, whether or not the person has previously held a job, is also to provide a most unsatisfactory and inflationary indicator for general economic problems.
6. One of the areas of policy most likely to affect long-term inflation prospects has to do with the impact of the rest of the world upon the United States through variations in imports, exports and exchange rates. I am convinced that the major lesson of the inflation of 1973 is the reality that we live in a vastly more interdependent world in primary commodities and manufactured goods than ever before. One needs to be very careful not to promote autarky, by restricting unduly either imports or exports. But, at the same time, the United States can no longer afford to be the market of last resort, as in the case of ferrous scrap – the only country to export ferrous scrap, with the consequence that our steel prices must bear the full impact of the residual decisions of all other countries.
Neither is it realistic for a domestic energy program to be entirely dependent on price policies of other oil producing countries where those policies have been used for political purposes. A world in which primary producing countries decide to raise, in cartel fashion, the prices of many other primary products is a very different one than we have previously experienced. Thus, the time has come to equip ourselves with trade policies to deal with these new conditions.
LABOR-MANAGEMENT RELATIONS
7. Today, an opportunity exists as never before for the development of imaginative machinery for the settlement of disputes over the provisions of new collective bargaining agreements in a number of industries. Basic steel and railroads have reflected this atmosphere. Yet, a good deal of further constructive work can be done in other sectors, such as paper, maritime, retail food, construction, newspapers, and the like. The fragmentation of collective bargaining in many industries which conduct local or regional negotiations, with the associated whipsawing and escalation of settlements, is one of the principal ways in which collective bargaining creates inflationary pressures. Dispute settling machineries which deal with these questions, and at the same time direct the attention of the parties to their fundamental long-run problems of technological change, productivity and manpower, can be enormously constructive.
8. Within the labor area, one of the most important structural problems for the future relates to the continued growth in fringe benefits relative to the pay package. There is no doubt that following 1940 it was appropriate to develop a variety of private pension, health and welfare, and other fringe benefit plans. But the question needs to be raised whether these tendencies have not now been excessive as one considers the costs of private pension plans and as one recognizes that the tax system tends to encourage parties to put money into fringes rather than into wages where it might very well better serve the interests of workers and members. Simply stated, when funds put into the pay envelope are taxed at 30 percent or more, while moneys placed into certain fringes are tax free, the tax system is biasing the bargaining processes in an inflationary manner.
9. Various structural changes are required in collective bargaining that vary from industry to industry. One illustration may be sufficient. In the construction industry it is imperative that the owners set up a more viable working relationship with the contractors in order to strengthen the management side in collective bargaining. This has never been easy to do, since the contractors feel that the owners will interfere unduly in the bargaining process and seek to eliminate "contracting out." Yet, in the absence of such working relationships, owners often tip the scales in favor of the union side by encouraging particular contractors to work through a strike or to work overtime or by setting completion schedules and volumes of construction in an area which can have only inflationary consequences. In the same way, the jurisdictions of local unions or the group involved at the bargaining table may be inappropriate to represent the best long-run interests of the members in the area. International unions have a more general and long-term perspective than local negotiators and, thereby, should have larger role.
BUSINESS PRACTICES
10. One of the most significant areas of business decision-making have to do with the timing of investment decisions. The present inflationary period has been made very much worse by company decisions not to expand capacity substantially in such industries as steel, fertilizer, paper, cement, oil refining, and the like. The fraction of Gross National Product expended on net new plant and equipment investment has been lower for many years in the United States than among our industrialized competitors. The present purpose is to second guess those decisions. It is essential, rather, to explore ways in various industries to achieve a smoother flow of investment outlays over the future. This is a most difficult matter in the framework of the American legal system. Nonetheless, a more public discussion of these issues, a government- business discussion of the capacity needs of various industries, and an exploration of the means of financing such expansion seem to me necessary in the American economy of the future. It may very well be that in several industries, such as basic steel, the prices that would be required to attract new capital to the industry may be so high, and the inflationary consequences of such prices may be so great for the economy as a whole, that other means of financing modernization of capacity, such as various forms of tax and accelerated amortization and depreciation arrangements, may be preferred to constrain inflation. These issues require urgent and quantitative review.
11. There are occasions, also, when government and the business community can work cooperatively to solve problems which contribute to inflation. In the economy at most times, and particularly when operations are near capacity, there are various bottlenecks, areas of shortages and problems of efficiency and distribution within and among various sectors. At the present time special problems relating to railroad flat car availability, the production of steel for drag lines, the distribution of fertilizer, the production and distribution of roof bolts for underground coal mines, and the supply of ferrous scrap are illustrative. There is a role for the government in assisting to isolate and eliminate such inflationary bottlenecks by providing data, by bringing together representatives of sectors to make a contribution to the resolution of the problem, and by other nonmandatory means.
Both the Cost of Living Council and the National Commission on Productivity have been active in solving these problems, but both may be eliminated by Congressional inaction. The continued identification of a changing agenda of such problems and work with the sectors on these problems can make a contribution to expansion of output and supply without the imposition of mandatory controls and can reduce pressures which lead to Congressional demands for the reimposition of mandatory controls.
12. In the achievement of public objectives, the energy area is bound to be one that will remain for many years at the center of public concerns. In a whole host of ways it should be possible to encourage the generation of capacity and distribution in the energy field so as to minimize the impact upon price and inflation. In this field as in all stabilization matters, there is involved the delicate balancing of prices high enough to generate adequate supply but not so high that they represent an undue burden to consumers and an unnecessary impetus to inflation.
The Administration has proposed for the post-controls period the establishment of a small Cabinet-level agency to work on some of these changes without the authority to impose mandatory wage and price controls in order to develop a less inflationary economy. These illustrations can be multiplied many times. Tomorrow and next year there will be new and different opportunities.
These activities are not to replace fiscal and monetary policy, nor are they to provide an excuse for less diligent macroeconomic policies to restrain inflation. These monitoring activities, designed to promote inflation-restraining structural changes, are to be supplementary and supportive. In some circumstances, however, they may be decisive. Dr. Arthur Okun has well made this point, although one need not accept his precise numbers: "Let me replay fiscal and monetary policy with perfect hindsight over the last two years and I don't think I could save you more than a couple of points on the rate of inflation. Let me replay agricultural policy and energy policy, however, and I'll give you five points." (New York Times, April 28, 1974, F. p. 24.)
One of the difficulties with the structural change policies here proposed lies in the failure of the discipline of economics itself. Since the 1930's the preoccupation of the core of economics has been with macroeconomic issues and models of the total economy. This area has attracted the best of the younger generation and is the center of attention in the journals and in scholarly writings. Even this body of contemporary theory is not very adequate in analyzing inflation. Abba Lerner stresses this point in the current Economic Literature in discussing Keynesian economics: "A new ball game has been established in which only direct influence on the wage unit by an incomes policy, as a kind of splint on the fractured price mechanism, can restore a free economy working at a satisfactory level of employment."
But this attention to macroeconomics has not helped the making of economic policy very much, in my view, or assisted in the concerns over individual sectors which now require attention. The academic and career field of industrial organization which treats market structures and pricing decisions, or the related fields of labor market analysis, have languished. The result is that, despite a greatly enlarged economics profession, there do not exist many first-rate specialists in microeconomic analysis equal to the challenge before us. There are only a few specialists in the academic world, in business or in government with working knowledge of the institutional structures and the operation of various industries and markets. This intellectual limitation has been a serious impediment in the generation of ideas to deal with sectoral and structural problems that are central to any operating concern with contemporary inflation.
The deficiency is even more serious since economists are not well trained, or adjusted, to pay attention to processes by which institutions change or are changed in this society, They know far too little about the ways in which managements, labor organization, other producer groups and government agencies in fact operate and respond to various economic and political pressures or opportunities. They specialize in predicting results on the basis of varying inputs with the institutions and market structures unchanged. But a major area for anti-inflation policy concerns the understanding and inducing such changes.
A new breed of analysts and public policy makers is required, with more emphasis on understanding private decision-making, more emphasis upon detailed data, more concentration on problem sectors, and more resort to persuasion and cooperation. The government is deeply involved in private decision making, like it or not, and the government has many counters to play, apart from any mandatory wage and price controls, and our interest groups are ordinarily sufficiently willing to participate to warrant a major effort to develop less inflationary policies for all.
Mr. MUSKIE. I also ask unanimous consent to have printed in the RECORD an Associated Press wire report of a statement by Secretary Shultz, in a press conference the day before yesterday, in which he gave a clear endorsement to the concept of the Cost of Living Council Act as it was approved by the Senate.
There being no objection, the article was ordered to be printed in the RECORD, as follows:
STATEMENT BY SECRETARY SHULTZ
WASHINGTON.– Americans cannot expect any relief from record high interest rates until progress is made in the fight against inflation, says outgoing Treasury Secretary George P, Shultz.
But Shultz, whose last day in office will be Wednesday, says interest rates may just about have reached their peak.
Shultz commented after the interest rate for government short-term borrowing – in the form of treasury bills – hit a record 9.036 per cent Monday.
Shultz said interest rates, especially long term rates, are being kept high by inflation and will not decline until progress is made in controlling inflation.
He indicated he agrees with policies of the Federal Reserve Board to moderate the growth of the Nation's money supply and keep a tight rein on the supply of credit, actions that are designed to restrain inflation but also help push interest rates upward.
Meanwhile, Labor Secretary Peter J. Brennan said Monday he does not see "on the horizon any immediate solution" to the inflation problem.
After meeting with President Nixon at the White House, Brennan told newsmen: "I don't think there is any clear program" within the administration to quickly curb inflation.
Shultz, 53, will leave the Nixon administration Wednesday when William E. Simon is sworn in as his successor at a White House ceremony.
The last member of the original Nixon Cabinet still with the administration, he has been Secretary of Labor, Director of the Office of Management and Budget and, since 1972, Secretary of the Treasury.
He told newsmen at a reception that, after careers in education and government, he expects to make his third – and probably last – career in business.
He said he has not yet made a final decision on what business to enter, but said he has received a number of good offers, job offers have included proposals from oil companies, but Shultz did not say whether these were the ones he was considering.
He said he wants a job that will allow him flexibility to continue some university work. He was Dean of the University of Chicago Graduate School of Business when he joined the administration as Nixon's first Secretary of Labor in 1969.
He also made these other points:
The administration supports legislation now before the Senate to turn the Cost of Living Council into an inflation-monitoring agency with power to enforce price restraining commitments given by big business and to watch over wages and prices in the economy.
Simon is the logical choice to emerge as the administration's top economic adviser, although he acknowledged there was no reason the position had to go to the Deputy Treasury Secretary.
In addition to his other offices, Shultz has held the rank of the Assistant to the President for Economic Affairs, a title that will not go to Simon, at least at the beginning.
Mr. MUSKIE. May I close these informal remarks by saying that no one who sponsors this proposal sees it as a cure-all for inflation. Nor do we see it as much of a restraining effect on price and wage decision makers as standby controls would have had – but the Senate has made its decision to refuse to grant that authority.
So what we are discussing today is whether or not we ought to take this minimal step, whether or not it would be useful, whether or not it could position us to respond to the unanticipated events which the volatile forces at loose in our economy could well bring to pass.