Wage and Price Controls Research Paper

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Examples of rulers and governments attempting to control prices and wages can be found in distant history, but comprehensive wage-price controls or similar voluntary programs for anti-inflation purposes are really a twentieth-century development. Simple microeconomic analysis suggests that controls that set prices and wages too low will create product or labor shortages. However, under wartime circumstances, governments have sometimes been willing to allow shortages and rationing. And in peacetime, the rationale for wage-price controls was for many years centered on the idea that prices and wages, especially the latter, could be administered.

In the United States and other countries, wage-price controls were enforced to varying degrees during the two world wars. The United States also imposed controls during the Korean and Vietnam wars. Voluntary wage-price programs were initiated during the Kennedy-Johnson and Carter administrations. After World War II, various European countries adopted “incomes policies” similar to the voluntary programs later installed in the United States. Controls during the two world wars and the Korean War were part of larger schemes aimed at diverting resources for military purposes. Beginning in the 1960s, attempts to influence or control wages and prices had a more general macroeconomic justification.

American participation in World War I was relatively brief but involved a diversion to military purposes of perhaps a fifth of the nation’s gross domestic product (GDP). Large corporations had developed by that time, so control administrators could interact with the heads of these firms. The idea developed that controls could be achieved by involving a few key captains of industry. Just as successful corporations engaged in internal planning, so too could the national economy be planned and—in wartime or other emergencies—controlled. As might be expected, in competitive industries—such as foodstuffs and coal— World War I controls did produce temporary shortages. However, formal ticket-based consumer-rationing schemes were not adopted and reliance instead was placed on patriotic appeals to reduce demand. Unions expanded during the war, and government pushed for industrial peace and production uninterrupted by strikes. In some instances, notably involving the railroads, the authorities seized enterprises when labor strife was threatened.

The World War I experience with controls on wages, prices, and resource allocation tended to reinforce notions of the practicality and virtue of national economic planning. These ideas carried over into the New Deal during the Great Depression and—when World War II arrived— into a cadre of individuals to staff wartime economic planning agencies and, in particular, wage-price control programs. Because of its duration and scale, World War II controls were more extensive than in World War I. Military expenditures exceeded 40 percent of GDP at the peak of the war.

Agencies were established to control prices, wages, and more general resource allocation. Formal ticket-based rationing of consumer goods applied to food, gasoline, and other products. The result was a retarding of officially measured inflation. In some cases, however, black markets developed for goods in short supply. The economic meaning of price indexes based on official prices at which goods were not freely available can be debated. However, the overall system of controls was justified on the basis of fairness, wartime resource needs, and appeals to patriotism.

Unions had already become powerful during the New Deal, and a pattern arose that carried on into the postwar wage-price programs. Specifically, the wage authorities— the War Labor Board in World War II—established a standard for pay, albeit one laden with exceptions. Price controls—under the Office of Price Administration— were then largely based on markups over costs. In a relatively closed economy, interindustry goods purchases and their costs largely net out, making labor a major cost element. During World War II, the pay standard was based on the “Little Steel Formula,” a wage settlement reached with smaller steel firms. When strikes occurred during World War II for pay above the standard, enterprises were sometimes seized and workers were sometimes threatened with conscription. Inflation and labor disputes were repressed sufficiently so that when the war ended and decontrol commenced, there was a wave of strikes and a burst of measured inflation.

Although federal controls ended, local rent controls lingered in some local jurisdictions, notably New York City. The wage authorities during World War II had tended to allow exceptions to the standard for fringe benefits such as pensions. As a result, pensions and health insurance gained a foothold at the employer level, which expanded after the war into a company-based system of social insurance.

The World War II experience led to public expectations that wars meant consumer goods shortages. Hence, when the Korean War began in 1950, a surge in consumer buying and hoarding led to a jump in inflation and, eventually, a reinstatement of wage-price and resource allocation controls by the Truman administration. In broad terms, the controls followed the World War II model, with a price authority and a wage authority. The program was again generally based on control of pay, with price controls largely to be achieved by allowable markups over costs. However, the overall program was less extensive than before, partly because peak military expenditures during the Korean War were about 15 percent of GDP, a substantially lower ratio than in the earlier conflict.

Presidential authority during the Korean War was also more limited than in World War II. An attempt by President Truman to seize the steel industry during a labor dispute was rebuffed by the U.S. Supreme Court. When President Eisenhower took office in early 1953, the Truman-era wage-price controls were quickly dismantled. Decontrol did not lead to a sharp surge in inflation, in part because the anticipatory price surge had occurred before controls were imposed. Under Eisenhower, activity in the wage-price area was largely limited to exhortations aimed at moderate wage settlements and price behavior.

In the period after the Korean War, a theoretical base developed in academia for wage-price interventions, encouraged in part by the observation of European incomes policies. Such European policies typically involved centralized wage settlements though a tripartite negotiation between employer federations, union federations, and government. With unions at their peak in the United States, notions developed of wage-push inflation and resulting wage-price spirals. These concepts were combined with empirical studies of the “Phillips curve,” which depicted an unpleasant trade-off between wage inflation (and therefore price inflation) and the unemployment rate.

Essentially, the idea was that if wages could be made less “pushy” through some form of governmental intervention, the nasty trade-off of the Phillips curve could be repositioned to allow lower unemployment at a given inflation rate. Later, when the idea of a permanent Phillips curve was replaced by that of a non-accelerating inflation rate of unemployment (NAIRU), the same argument could still be advanced. Intervention aimed at making wages less pushy could lower the NAIRU. There were notions of “key” union pay settlements, which were then imitated elsewhere in the union sector and which spilled over into nonunion pay adjustments. If the key union settlements could be moderated, pay setting would be less inflationary.

The incoming Kennedy administration—whose economists were Keynesians with a focus on lowering unemployment—was particularly receptive to this concept. Under the Bretton Woods fixed exchange-rate system, the United States was committed to maintaining the value of the dollar relative to other currencies and the value of gold relative to the dollar. By the early 1960s, there was a dollar surplus and concern about the dwindling gold stock. Holding down inflation was seen as needed to defend the dollar by maintaining American cost competitiveness in world markets. But absent some other policy instrument, inflation moderation was also seen as requiring a higher level of unemployment than President Kennedy wanted. As a result, the Council of Economic Advisors under Kennedy (and later Johnson) put forward voluntary wage-price “guideposts,” with its wage standard to be based on the trend rate of productivity (seen as a little over 3 percent per annum) and prices to be based on markups.

Steel was again the center of a major dispute. The Kennedy administration intervened in a steel labor negotiation and achieved what it believed was a moderate pay settlement. When the industry subsequently raised its prices, President Kennedy demanded and ultimately received a price rollback. The guidepost program became more elaborate as time went on. But it eventually was overcome by demand pressures in the labor market and union demands for wage increases above the standard, and it basically faded away.

Inflation became a political issue in the early years of the Nixon administration. In August 1971, President Nixon announced an end to the Bretton Woods system, disengaged the dollar from gold, and imposed a ninety-day wage-price freeze. Thereafter, mandatory controls on wages and prices were imposed, which then passed though a series of phases of varying intensity. The most elaborate was Phase II, which featured a tripartite Pay Board and a Price Commission. This model was subsequently imitated in Britain and Canada.

Although the Vietnam War was in progress, the Nixon controls were not part of a larger scheme to redirect resources to the military. Indeed, the peak ratio of military expenditures to GDP during the Vietnam War was about 10 percent—and that peak had already occurred under Johnson. Moreover, because of earlier ongoing cold war military spending, the ramp-up of such spending to accommodate the Vietnam War was less dramatic than in prior wartime situations.

The initial pay standard after the freeze was based on productivity plus an allowable rate of inflation, with price controls built—as before—on permissible cost markups. Some shortages occurred during the Nixon controls, notably involving meat and gasoline. The Nixon program was largely ended under President Ford in the spring of 1974, except for elaborate controls on oil prices. Ford replaced formal wage-price controls with a program of anti-inflation exhortation coordinated by a Council on Wage and Price Stability (COWPS). This program featured promotion of much-ridiculed WIN buttons (“Whip Inflation Now”) and various announced “inflation alerts.”

President Carter continued COWPS and returned in 1978 to a Kennedy-Johnson-type program of voluntary wage-price restraints, termed “guidelines” rather than guideposts. A wage standard of 7 percent was announced with various exceptions. Academics in the 1970s had toyed with using the tax code to reward employers and/or workers for complying with such pay standards or penalizing those who did not. Reflecting this academic work, the Carter administration proposed an elaborate (and probably unworkable) program of “real wage insurance,” which would have used tax rebates to protect complying workers from inflation above 7 percent.

Subsequently, a tripartite Pay Advisory Committee was established with a vague charter to support the 7 percent target. Congress never enacted the Carter tax program, and the Reagan administration quickly abandoned wage-price interventions altogether, relying on tight monetary policy at the Federal Reserve to reduce inflation. The mandatory controls on oil prices that Carter had inherited from Nixon and Ford led to very unpopular gasoline shortages, contributing to Carter’s defeat by Reagan in the 1980 presidential election.

Post-Korean wage-price interventions were based heavily on notions of wage-push and wage-price spirals. But starting in the mid-1950s, the union share of the workforce had begun to decline, a process that accelerated during the Reagan years and continued thereafter. In much of the developed world, similar union declines occurred. Thus, the intellectual rationale for wage-price interventions—mandatory or voluntary—largely has disappeared. In addition, wars after the Korean War have not entailed large shares of GDP. Absent the earlier military or macroeconomic justifications, it is unlikely that such programs will be used in the future.

The era of wage-price controls, guideposts, and guidelines, with its accompanying notions of dangerous wage-push pressures and wage-price spirals that needed to be restrained, has left a mark on macroeconomics. Contemporary economists often explain the concept of the NAIRU in language from the era of extensive unionization and collective bargaining. Low unemployment is often said to lead workers to “demand” higher wages or refuse to “accept” wage offers by employers. In fact, the conversion of labor markets to nonbargained pay determination has created what past proponents of mandatory or voluntary wage-price programs had once hoped to achieve. The U.S. economy in the 1990s and thereafter operated with a relatively low NAIRU and without the inflationary tilt feared to exist in the period beginning in the 1950s. Given this institutional change, it is likely that the rhetorical legacy of mandatory and voluntary wage-price programs will eventually also disappear.


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