The Threat of Wage and Price Controls

Dr. Schmidt, economic consultant, writer, and lecturer, served from 1943 to 1963 as Director of Economic Research of the Chamber of Commerce of the United States.

There is growing talk in Wash­ington and elsewhere that wage and price controls are now nec­essary, or at least inevitable. The consumer price index of the Bu­reau of Labor Statistics has been rising by more than 4 per cent per annum in recent months. Even if the surcharge on corporate and individual incomes and the slight cut in government expenditures provided by law in June, 1968 — as well as some monetary restraint —should slow down our economic growth and result in a rise in un­employment, the probability of a continuous rise in prices is strong.

Wage-fringe settlements have been running at 50 to 100 per cent or more in excess of the general rise in overall productivity. Nu­merous union contracts have one to two years to run with their contractual built-in labor cost increases.

Thus, the prospects of rising living costs even under a some­what softer economy are strong. Profit margins will be under pres­sure. Losses by numerous com­panies will be inevitable. Sales for many companies and in many lines may decline just enough to cut deeply into what a few months be­fore were profitable operations. But the general public, not under­standing the nature of cost pres­sures but noting that unemploy­ment has moved up fractionally, will fail to see why prices should still be rising. There must be something wrong! Why not get the government to protect the con­sumer?

Those who urge government controls either have short memo­ries or have had no experience trying to live under controls. The case for the free market economy, as well as the only real cause of inflation (deficit spending and loose monetary policies), are well known by FREEMAN readers. So, let us simply review here some of the controllist experiences within our own generation.

Meat Price Control

World War II price controls con­tinued until the late fall of 1946, about fifteen months after the end of the war. The attempt to control the prices of meats ended in utter futility; the end came in a total collapse.

In May, 1946, the Bureau of Labor Statistics stated:

Meat counters were empty more often during the first four days of the week of May 15, 1946, than any corresponding period in any month since March 1944. Approximately 85 per cent of the stores had no veal, more than four-fifths were without pork loins, ham or bacon, and almost seven out of ten often had no beef or lamb.

Official statistics for a year or two earlier showed no decline of the animal population on the farms which could account for this mas­sive disappearance of red meat. Something else must have hap­pened.

A little earlier Mayor LaGuardia of New York reported to Congress:

The inspector visited 105 stores in 43 towns scattered throughout the Black Market area. He found that 48 of the stores had no meat.

This refrain was voiced by the meat cutters union (AF of L) in the spring of 1946:

We know that the present govern­ment regulations in the meat indus­try are unenforceable; the legitimate dealer cannot pay the prices paid by the bootleggers and keep within the OPA restrictions…. As a result

(1)            the public’s meat bill is in­creased by billions of dollars a year;

(2)            thousands of men and women in packing plants are unemployed;

(3)            hundreds of legitimate slaugh­terers and dealers in meat are un­able to stay in business.

Here we note reference to "the black market" and to "bootleg­gers." Surely an industry the size of the packing industry could not be taken over by the black market and bootleggers! There must be some other explanation — some other part of the story.

The data of the Bureau of Labor Statistics showed that employment in packing plants dropped to 93,000 in October, 1946, reflecting a large diversion of livestock from the packing plants. Within one month after OPA controls were removed, em­ployment increased to 163,000, and by the end of December, 1946, reached 180,000 — nearly double the October figures.

Even so, many people apparently unaware of economic cause and effect, lamented the abolition of the controls and spoke of the price gougers. Price controls broke down in 1946, and President Harry S Truman merely officiated at the final rites.

But it is well to recall how re­luctant the President was to de­control prices. As late as October 14, 1946, he issued a statement containing some remarkably re­vealing language:

Some have even suggested that the government go out on to the farms and ranges and seize the cat­tle for slaughter. This would indeed be a drastic remedy. But we gave it long and serious consideration. We decided against the use of this ex­treme wartime emergency power of government. It would be wholly im­practical because the cattle are spread throughout all parts of the country.

Another remedy suggested by many people was to have the gov­ernment seize the packing houses. This offered no real solution, how­ever, because the seizing of empty packing plants would avail us noth­ing without the livestock.

Business as Usual in Texas

An experience of the last OPA administrator in 1946 finally con­vinced President Truman of the futility of price control. Paul Por­ter, in charge of OPA, and Clinton Anderson, Secretary of Agricul­ture, had not been seeing eye-to eye on control measures. The Pres­ident, as Mr. Porter told me the story, ordered Porter to reach an agreement with Secretary Ander­son and stop the feuding. Porter went to see Anderson in his home state, New Mexico, to carry out this mission.

On the way back to Washington, Porter said, he stopped in Texas and happened upon an auction sale of cattle. The live-weight prices exceeded the OPA prices of dressed meat! Sidling up to a man who appeared to have an interest in the sales and the prices being of­fered, and without being too ob­vious about it all, Porter inquired: "How come these prices?" The man didn’t seem to understand. After some further conversation, the Texan said, "Oh, you mean this here OP and A?"

"Yes," said Porter, "What about this OP and A?"

The Texan answered noncha­lantly and innocently, "I don’t think they have put it into effect yet down here."

When Porter got back to Washington he told the President of his Texas experience. The President, without further ado, called for the end of World War II price control.

The history of price controls and wage and salary controls is replete with countless episodes similar to the drastic experience in the packing and meat industry. Description and analysis of these innumerable cases fill many vol­umes. So let us take a look at what the President said when he terminated controls:

The law of supply and demand, operating in the market place, will, from now on, serve the people better than would continued regulation of prices by the government…. I am convinced that the time has come when such controls can serve no useful purpose. Their further con­tinuance would do the nation’s econ­omy more harm than good. Accord­ingly, I have directed immediate abandonment of all controls over wages, salaries, and prices." (Nov. 9, 1946)

This was a marked turn-around by the President. It took some dramatic events and experiences to cause him to change his mind. Yet, how short memories are! In early 1948, he again asked for comprehensive controls, though Congress then refused him such powers. A massive price control and wage control program was re­instituted during the Korean “police action." Defending all this, President Truman, said:

These people who say we should throw out price controls and rent controls are wrong. They are just as wrong now as they were back in 1946. (June 14, 1951)

Who was wrong and when, we need not further detail. Public opinion polls, for what they are worth, have indicated in recent months that a majority of the public now again favors controls.

Words of Warning

But fortunately, not everyone has such a short memory or such faith in government controls. The Economic Report of the Council of Economic Advisers in 1968 stated the situation in a short sentence worthy of recall:

Although such controls may be unfortunately popular when they are not in effect, the appeal quickly dis­appears once people live under them. (Page 119)

This view is widely held by most responsible government agency people in Washington.1 But the political winds may blow into a controllist gale at any time. A 4 per cent rise in prices per year cuts the value of the dollar in half in just 18 years. In terms of the early 1930′s, we now have a 38 dollar. Rarely does a year pass without some Congressional com­mittee or subcommittee, or sev­eral of them, recommending some form of price control, sometimes labeled "price surveillance."

The dangers are close at hand. Inflation, even though created by government policies, becomes po­litically "unacceptable." A bit of slack from an overheated economy atmosphere also becomes unac­ceptable. Henry Wallich, a former member of the President’s Coun­cil of Economic Advisers, put it this way:

To call inflation and recession "un­acceptable" is to call, in effect, for price and wage controls. Controls have long loomed as the last refuge of the unsuccessful planner. Yet of all the "unacceptable" solutions, they are the least acceptable.²

Have we not had enough ex­perience and warnings in regard to inflation to know how to pre­vent it — and to avoid the authori­tarian people-control, which goes by the name of wage and price control?

No country has succeeded in checking inflation without adopt­ing policies which first checked government spending and the growth in the stock of money. Every country which has held down the expansion in the stock of money has also checked the rise in the general level of prices.

 

—FOOTNOTES—

1 For recent expressions see, A Per­spective on Wage and Price Controls. Chamber of Commerce of the United States, Washington, April, 1968.

2 Newsweek, July 8, 1968.

 

***

The Price of Price Controls

The whole recorded history of man is strewn with the wreckage of the great civilizations which have crumbled under price con­trols; and in forty centuries of human experience, there has never been — so far as I can discover — a single case where such controls have stopped, or even curbed for long, the forces of inflation. On the contrary, in every instance I can find, they have discouraged production, created shortages, and aggravated the very evils they were intended to cure.

IRVING S. OLDS

Further Reading

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