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Commentary

Carter’s Wage-Price Guidelines: A Review of the First Year


     
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Late in 1978, as inflation approached a double-digit rate and the public urgently demanded that the government “do something” to slow the decline in the purchasing power of money, the Carter administration brought forth its wage-price guidelines. The President first announced the guidelines in preliminary form on October 24, and the government published final standards in the Federal Register on December 28. These final standards were not final at all, and the program continued to be amended in various ways from time to time; but most of the changes were minor, and the general character of the program remained intact during its first year.

The basic price standard required that an individual firm hold the rate of increase of its average price at least half a percentage point below the rate of increase during the two years 1976-77. In no case, however, could the increase exceed 9.5 percent; and any increase below 1.5 percent was considered in compliance. Firms that could not compute a meaningful average price change or could not meet the price standard because of uncontrollable increases in costs were required to hold their pre-tax profit margin below the average of the best two of the previous three years. In addition, in no case could a firm increase its dollar profit by more than 6.5 percent unless the excess was attributable to increased unit sales volume. Various exemptions and special rules applied to certain classes of firms or goods. For example, the prices of agricultural, forest, fishery, and mineral products, industrial raw commodities, and internationally traded goods, as well as interest rates, were excluded from coverage.

The basic pay standard required that an employer hold the annual rate of increase in average employee compensation, including fringes, to no more than 7 percent for each employee group. The groups were defined as (1) employees covered by collective bargaining agreements, (2) other nonmanagerial personnel, and (3) managerial personnel. Again, various special rules applied. For example, labor compensation increases mandated by federal statutes were exempted; employers were permitted to raise wages above the standard if they could obtain certification that such an increase was necessary to overcome an “acute labor shortage”; and workers earning less than $4.00 per hour on October 1, 1978, were not subject to the pay standard.

To Comply or Not to Comply?

While the general public greeted the President’s announcement of the guidelines with customary applause, business people reacted more cautiously. It soon became apparent, however, that few would openly defy the guidelines.

Some did complain publicly. Donald Rumsfeld, chairman and chief executive of G. D. Searle, wrote the President a personal letter expressing his conviction that the guidelines would not work. Charles Fogarty, chairman and chief executive of Texas-gulf, wrote that his company had “serious reservations about, and objections to” the guidelines. Mark Shepherd, Jr., chairman of Texas Instruments, criticized the proposed use of the government’s procurement policy to enforce the guidelines and warned the President that the program “will be tested in court.” Such negative reactions, however, were not typical.

In fact, the officers of many major corporations rushed to pledge that their firms would comply. As the editors of the Wall Street Journal noted on December 11, 1978, “The great corporations have fallen pusillanimously in line.” In mid-April the Council on Wage and Price Stability (COWPS, pronounced “cops”) announced that 447 of the 500 largest industrial firms had “made an explicit commitment to comply.”

Several business leaders went out of their way publicly to express support for the guidelines. Thomas A. Murphy, chairman of General Motors, said he had “no sympathy for those in the press, in business, in labor and in government who assert that a voluntary program cannot work before it is given a change to work.” John F. McGillicuddy, president of Manufacturers Hanover Bank, said the program “should be applauded, not condemned.” Donald C. Platten, chairman of Chemical Bank, saw the guidelines as “an effective way of using presidential leadership to educate businessmen, workers and consumers on just what needs to be done to bring inflation under control.” In early April, 1979, Murphy sent out 22,000 letters to GM suppliers and other large corporations urging a mass declaration of willingness to cooperate with the program.

Clearly, among the country’s major corporate leaders, those who intended to comply greatly outnumbered those who intended to defy the guidelines. One can identify several distinct motives for this widespread willingness to comply.

First, some business people believed they could use the guidelines as a club to beat the labor unions into submission at the bargaining table. As one corporate executive put it, “We can wrap ourselves in the flag and get a little more leverage at the bargaining table.” Perhaps Murphy, whose company was scheduled to negotiate a new labor contract with the United Auto Workers in September, 1979, had this consideration, among others, in mind. (Most labor union leaders, in contrast, followed George Meany’s lead and denounced the guidelines.)

Business people also chose to comply because they feared governmental sanctions. Although the guidelines were called voluntary, the government announced emphatically its intention to punish those who failed to comply. Threatened punishments included the withholding of large federal contracts, the more damaging exertion of federal regulatory powers, and the publication of an “enemies list” of noncompliers. Obviously, the major corporations, many of which do considerable business with the federal government, had no desire to jeopardize continued sales to Uncle Sam. The regulators, of course, can deal crippling blows to any corporation. And naturally, no one wants the adverse publicity of inclusion on the enemies list, where a firm is adjudged guilty of antisocial behavior by the court of public opinion until proven innocent by its own efforts and at its own expense.

Finally, some business people probably chose to comply simply because they wanted to contribute toward an important public purpose and to act as good citizens. Apparently, some business leaders honestly believe that guidelines make a positive contribution toward reducing inflation. Others, more skeptical of this, seem to believe that they should, as law-abiding citizens, comply even if the guidelines are purely cosmetic. To defy the President’s program places them in a pseudo-lawbreaking posture that they prefer not to assume.

Threats and Paper Work

From the start, a peculiar equivocality marked the guidelines program. On the one hand, the President and his subordinates insisted that the guidelines were voluntary. At every opportunity, they reasserted that the guidelines were not a step toward mandatory wage-price controls and that mandatory controls in any event short of a national emergency would be ineffective and pernicious. At the same time, however, they declared that the government would not hesitate to bring harmful force to bear on firms violating the voluntary standards. The guidelines were mandatory de facto but nonexistent de jure. The government would enforce compliance, to be sure, but it would do so capriciously, unrestrained by the legislative and judicial constraints that normally surround executive actions.

During the early months, while the basic standards were being fleshed out with detailed rules to cover diverse special cases, President Carter and Alfred Kahn, chairman of COWPS, worked to build public support for the program. Trumpeting the guidelines, they frequently resorted to demagoguery. Carter railed against “irresponsible firms” making what he called “unjustified price increases.” “Too many business leaders seem to feel that the fight against inflation is not their responsibility,” he declared, adding ominously that he would “not hesitate to identify those irresponsible firms and individuals to the people” and that he would “take firm steps to deal with this problem.” Kahn echoed this message when he complained to the Economics Club, a Chicago business group, that “business doesn’t believe it’s part of the problem.” Like a police officer administering the third degree to a common criminal, Kahn told his audience, “All of you are on the spot, and in trouble . . . . [The] business community hasn’t been doing its share in the anti-inflation fight.” These harangues did no real harm, but they made the President and Kahn appear either foolish or knavish in the eyes of knowledgeable people.

As long as COWPS lacked an informational basis for enforcement of the guidelines, it could take no effective action against anyone. The council therefore busied itself—and others—in an ambitious quest for data pertaining to the prices, costs, and profits of hundreds of large corporations. By the end of March, some 1,500 large corporations were being required to submit detailed reports. In as much as the 41 employees COWPS then had available to examine these reports could scarcely begin to scratch their surfaces, one is justified in viewing the privately financed costs of submitting the reports as a fine levied on certain firms for the crime of being big and publicly visible. Once again, a small but powerful governmental bureaucracy was imposing large costs—according to a Fortune writer, “untold millions of dollars”—on private firms in the form of compulsory paper work. What the government would do with the data acquired at such considerable private cost remained to be seen.

This early stage of the program—the period of threats and paper work—reached its climax at the end of April, when the Administration bludgeoned Sears, Roebuck and Co., the nation’s largest retailer, into reducing its catalog prices uniformly by 5 percent. The reduction followed hard on a threatening telephone call from Carter to a Sears executive, the first such action the President had taken since announcing the guidelines. The headlines heralded the episode as a “victory” for the President and an example of “Presidential power.” Some observers questioned the propriety of the President’s exercising an unlegislated power to achieve a victory over a private party innocent of any legal wrongdoing.

Labor, Management, and COWPS

While holding back from early enforcement of the price standards, COWPS felt sufficiently confident of the wage guideline to project itself without invitation into a succession of labor negotiations.

Success attended the council’s first such intervention, directed at negotiators for certain oil companies and the Oil, Chemical and Atomic Workers (OCAW) in December, 1978. The settlement reached in January, 1979, called for a 13 percent increase of wages over two years, well within the limit allowed by the guidelines. Government interveners, cheered and somewhat surprised by this early success, happily forecasted that the wage standards indeed would have an impact on the outcome of future labor settlements: “you’ve got people on both sides talking about them, sweating whether or not they fit within them, and taking them into their whole strategy.” Perhaps it was so; but the future held many surprises.

The next major confrontation, one far more significant than the OCAW affair, arose in the trucking industry, where some 300,000 Teamsters faced a contract expiration date on April 1, 1979. Early in March the union, having failed to secure a relaxation of the guidelines from the Administration, asked the industry for an increase in total compensation approximately twice that allowed under the guidelines. Industry bargainers stood firmly behind the 7 percent limit, contending that the Interstate Commerce Commission had informed them that it would not allow firms to recover the costs of wage boosts in excess of 7 percent. Negotiators reached an early impasse at this point, compromise by management being blocked by a coalition of COWPS and the ICC.

Kahn reacted to the deadlock by warning the union that the speed and form of the Administration’s proposed trucking deregulation, which the Teamsters adamantly opposed in any form, would depend on whether the contract settlement were “reasonable.” As the deadline for a strike approached, differences between the two sides were said to be narrowing. Kahn had secured administrative reinterpretations that permitted certain wage increases to be exempted from the guidelines. Yet substantial differences remained unresolved. Bargainers complained that public statements and other meddling by Kahn and his subordinates made the negotiations more difficult. Said one exasperated management representative: “They’ve got to shut up.” But they didn’t. And so a strike, followed by an industry lockout, began on April 1. The work stoppage lasted 12 days and caused serious economic dislocations, particularly in the auto industry.

When a settlement was finally reached, President Carter hailed it as “welcome news” and an Administration official declared it “definitely within the standard.” Impartial observers could plainly see, however, that the terms of the agreement leaped far beyond the permissible bounds. Reconciliation of the discrepancy required the use of “guideline math,” which the editors of the Wall Street Journal illustrated as follows: “27 divided by three equals 7; 30 divided by three equals 7; 31.5 divided by three equals 7.” Specifically, COWPS computed the settlement at an acceptable 22.5 percent increase over three years by (1) excluding part of the increased wages as “old money” promised in a previous contract, (2) excluding part of the additional employer costs of pensions, health care, and welfare programs, and (3) assuming future inflation of 6 percent per year in calculating the value of cost-of-living adjustments. Many observers concluded that the fudging perpetrated by COWPS doomed the guidelines as a force in future labor negotiations. Even Kahn admitted: “you can say with honesty that there has been bending of the standards.”

Undaunted, COWPS immediately plunged headlong into the labor negotiations between some 55,000 rubber workers and their employers, where the United Rubber Workers’ contract was due to expire on April 21. The president of the URW, Peter Bommarito, declared that he would bargain “as if the guidelines don’t exist.” The first industry offer, on the other hand, stayed just within the guidelines. The union promptly rejected it. Bommarito subsequently reported that he had reached an agreement with the employers but they had backed out of it under pressure from COWPS. Industry spokesmen refused to confirm this claim.

Once again, the guidelines were said to be exacerbating the bargainers’ problems. The major difficulty this time stemmed from the government’s insistence that bargainers use weighted industry average figures in computing base labor costs. Given certain differences among the firms involved, this implied that Uniroyal would have to offer a smaller wage increase than the other firms to be in compliance. Like the trucking negotiators, the rubber bargainers failed to overcome their compounded difficulties in time to avert a strike, and a walkout of 8,200 workers at 12 plants occurred on May 9. Bommarito called it “Carter’s strike.”

When a settlement was finally reached, it greatly exceeded the government’s standard: even computed according to guidelines math, it reached about 27 percent over three years; more objective calculations indicated an increase of perhaps 40 percent, depending on what the cost-of-living adjustments actually turned out to be. Dismayed, COWPS gave notice at the end of June that three of the rubber companies (Goodrich, Firestone, and Uniroyal—Goodyear had yet to settle) were in “probable noncompliance” with the guidelines.

Similar failure attended COWPS’s interventions into a disruptive 58-day strike against United Airlines, the nation’s largest airline, by 18,600 mechanics and ground crew personnel belonging to the International Association of Machinists. Spokesmen for United contended that their hefty settlement did not violate the guidelines because it closely resembled a prior settlement by Trans World Airlines. (A program loophole permitted a firm to follow “in tandem” where an industry pattern had been established before the guidelines took effect.) Disagreeing with the airline’s contentions, COWPS on June 5 placed United on its lists of probable noncompliers.

All in all, the council’s actions in the field of labor relations had been disruptive and counterproductive. After its fiascos in the labor negotiations of the trucking, rubber, and airline industries, COWPS was perhaps relieved when Douglas A. Fraser, head of the United Auto Workers, told the government’s interveners to “stay the hell away” from forthcoming negotiations in the auto industry. Fraser asserted that the President’s men “would enhance the chances of our settling without a strike if they stayed away.” The council did stay away from the auto industry’s negotiations, which the UAW targeted on GM; and a peaceful settlement was reached just before the strike deadline, September 15. When asked whether the settlement complied with the government’s standards, Fraser said he hadn’t “the foggiest idea” and maintained that “we never discussed the guidelines.” In fact, the auto contract far exceeded the government’s standard.

On and Off the Enemies List

During the first six months of the program, COWPS tried to enforce the price standards by exerting pressures behind closed doors. Government officials approached a number of firms, accusing them of probable noncompliance and inducing them to moderate or rescind price increases in order to avoid further trouble. Apparently the interveners had some success with this quiet approach, but COWPS’s small staff and inadequate data base severely limited its capacity to enter into private bargaining with firms. Near the end of April, 1979, the council decided to get tougher and add the power of public accusation to its arsenal of enforcement weapons.

On April 27, COWPS notified Crown Zellerbach Corporation and Hammermill Paper Company that they were probably not in compliance with the price standard. The council then informed the press of its actions, marking the first time that firms had been publicly accused as probable violators. Both companies asked for exceptions to the price deceleration standard, seeking permission to comply with the more lenient profit-margin standard. Within a few weeks both requests had been granted and the companies restored to good standing in the eyes of COWPS.

This sequence established a pattern that would be followed by many other firms during subsequent months: (1) COWPS publicly accused firms of probable noncompliance; (2) firms denied noncompliance and sought reconsideration and permission to switch to the profit-margin standard; (3) after inquiries and negotiations, COWPS granted an exception. So tiresome did this procedure become, as a multitude of firms swamped the council with requests for exceptions, that in late July COWPS announced that 59 firms could switch standards without doing the usual paper work. A council spokesman stated that, after processing about 200 requests for exceptions, “we’ve established what amounts to a body of law that is public and well-understood to the point where we feel these 59 companies can self-administer the profit-margin exception.” In its gross misapprehension of how a “body of law” becomes legitimately established, this statement made a mockery of the American legal process.

Indeed, far from establishing a body of law, COWPS went about its business in an essentially arbitrary and lawless manner. Joseph H. Williams, chairman of a company publicly accused of probable noncompliance in May, sent a telegram to Kahn objecting to COWPS’s “high handed tactics [that] can only discourage voluntary participation in the fight against inflation.” In June the council’s irresponsibility reached a new high when COWPS publicly castigated four lead companies even though their prices complied with the guidelines. “Their actions,” said a council spokesman, “violate the intent of the program and are clearly inflationary.” A representative of one of the accused companies observed that the council was “missing the basic point—lead is an international commodity.” He added that unless the companies took advantage of high points in the world market’s price fluctuations, they could not survive the low points.

Administrative inconsistencies proliferated. While COWPS granted permission for hundreds of firms to switch to the less burdensome profit-margin standard, it refused to grant the same permission to the Port Authority of New York and New Jersey, even though compliance with the price deceleration standard would require the port authority to examine in detail 2,500 individual agreements. Although the council exempted copper prices from the guidelines, it required compliance for lead and zinc prices. When General Motors in April introduced its new model compacts, they were exempted from the guidelines on the grounds that they were not just new models—and therefore subject to the standards—but completely new products. (Perhaps there had been method in the madness of Chairman Murphy’s early and ardent public support of the guidelines program.)

The government’s arbitrariness reached its highest elevation in the notorious Amerada Hess affair. This oil company’s name first appeared on a list of probable noncompliers issued at the end of May, 1979. Perhaps its most unforgivable transgression was its unrepentant attitude. Hess had never pledged to comply with the guidelines and had failed to respond to the threats of COWPS. The company’s public response to governmental notices had been the terse statement: “We regret that the price guidelines as established by the council don’t allow Amerada Hess to comply.” Company spokesmen called the guidelines “grossly inequitable” and “inappropriate.” To punish this unabashed sinner, COWPS on June 15 forwarded Hess’s name (along with that of Ideal Basic’s cement division) to the Office of Federal Procurement, which, in obedience to the President, was to withhold government contracts of $5 million or more from all noncompliers. Hess thus became one of the first two definite noncompliers publicly identified by the council.

Less than three weeks after Hess’s inaugural appearance on the enemies list, however, the Department of Defense on July 3 announced that it was had awarded a $77 million contract to Hess for jet fuel. Pentagon spokesman explained to an astonished public that an exception had been made to the rules of the guidelines program on grounds of national security. Actually, it had been established that dealing with alternative suppliers would cost an additional $49 million. Remarkably, it appeared that the Pentagon had put governmental economy above adherence to the President’s anti-inflation program.

Later reports revealed that Vice President Walter Mondale had on July 2 spoken by telephone to Leon Hess, the company’s chairman, and that subsequently Kahn and representatives of the company had met several times. The final outcome of these high-level machinations was that the Amerada Hess Corporation kept its newly awarded contract with the Pentagon, agreed to comply with the price guidelines (using the profit-margin standard and switching its accounting system from FIFO to LIFO), and was removed from the enemies list.

As the summer of 1979 merged into autumn, COWPS had only two firms on its public list of definite noncompliers with the price standards: Ideal Basic’s cement division and Charter Company, an oil firm. It seemed a pitifully poor showing after such frenetic efforts. Like the words of a Shakespearian idiot, COWPS’s efforts to compile an enemies list had been full of sound and fury, signifying nothing.

Relative Price Distortions, Inefficiencies, and Uncertainties

The guidelines were not totally without effect: some wages and prices differed at certain times from what they would have been in the absence of the program. This does not imply that the program succeeded in slowing significantly the rate of decline of the average purchasing power of money. It does imply that the guidelines distorted the economy’s structure of relative prices. As a consequence of these distortions, shortages of certain goods and services appeared. Resource owners were adjusting the uses of their resources in response to an artificial price structure. Economic theory establishes a presumption that under such conditions consumers suffer reduced welfare because the overall economy does a poorer job of allocating resources in accordance with the relative urgencies of consumers’ demands.

Numerous distortions appeared in the labor markets. Early in 1979, Sibson and Co., a consulting firm, surveyed 634 large companies and found that 73 percent of them had reduced their budgets for salary increases during the coming year in response to the guidelines. Apparently the crunch squeezed management employees the hardest. Another survey, by Russell Reynolds Associates, disclosed that 44 percent of the chief executives responding thought the guidelines would make it more difficult to retain their best executives. A similar situation developed in the market for engineers. As one executive put it, “To handsomely reward your very, very good engineers to keep them from jumping ship, it sometimes becomes necessary not to give a raise to the less-than-superior guy to keep the whole payroll within the guidelines.” Of course, firms acting in this way soon found themselves short of mediocre engineers.

Product markets, too, displayed guidelines-induced distortions. The aluminum industry provided a clear and important example. Several large producers announced in mid-March, 1979, that they would raise prices by certain amounts, allowable under the guidelines, on April 1. In late March, however, the council abruptly imposed a new requirement that prohibited firms from taking at once all the price increase allowed them during the second half of the program year, which commenced April 1. As the major companies reassessed their pricing options, buyers and smaller producers complained of confusion, disruption, and uncertainties in the market. Said a spokesman for Revere Brass and Copper, “everything is up in the air.” One large buyer observed that “different producers will raise prices on different products to fit the guidelines. No one’s even speculating on who’s going to raise what price.” Of course, in a more fundamental sense, the buyers were speculating; they could not avoid doing so. But unlike the risks of the free market, which experienced buyers and sellers learn to characterize and insure against, the uncertainties created by COWPS defied parameterization and hedging. One never knew what the council might require from one day to the next; all one knew was that it might be a requirement critically damaging to one’s business calculation and planning, not to mention profits.

The aluminum industry also illustrated how the guidelines could create shortages. Under the government’s standards, aluminum ingots were held to about 60 cents per pound during the first part of 1979. At the same time, however, the world price reached about 73 cents. Not surprisingly, with export prices excluded from the grip of COWPS’s controls, producers began to divert ingots from the domestic to the export market. While exports of ingots during the first quarter of 1979 soared more than 300 percent above the level of a year earlier, domestic buyers complained of growing shortages. Traders and middlemen engaged in a “flurry of business,” scrambling to acquire ingots for domestic resale or export. This episode showed clearly how the world market can impinge on domestic control programs, subverting their workings and generating even greater shortages than those that occur in purely domestic markets subject to price controls.

Many other distortions in product markets, too numerous to recount in detail, appeared in the wake of the guidelines. In industries scattered throughout the economy, many firms had to alter the timing as well as the magnitude of changes in prices. Uncertainties of all sorts abounded as business people and consumers alike tried to anticipate future changes in the government’s standards.

As a wag had forecasted, the guidelines did prove to be the “mother of circumvention.” But the story did not end there. Numerous firms actually complied with the government’s standards. Many of these complying firms imposed real costs of economic inefficiency on the economy by adjusting their behavior to an artificial price structure and by transmitting artificial price signals to their customers. Further, firms that circumvented the program also imposed additional real costs on the economy, the various costs associated with circumvention—juggling accounts, altering product mixes, contriving evasive corporate mergers, and so on and on. Hence, the main lesson taught by this experience was an oft-ignored but inescapable one: when government attempts seriously to enforce a distortion of the economy’s relative price structure, it reduces economic efficiency whether firms comply or not.

Promoting Social Conflict

Conflicts are endemic in American society. A primary duty of government is to prevent these social hot spots from bursting into flames. Unfortunately, in the first year of the guidelines program the government’s officers, far from cooling inherent passions, willfully excited them. Bluntly put, both the President and COWPS actively, and quite unnecessarily, created and exacerbated social conflicts. Hence arose still another of those nonbudgetary social costs so commonly ignored when socio-economic analysts add up the bill for government’s efforts at promoting the “public interest.”

Much of the problem sprang from COWPS’s own recognition that with its limited budget and staff it could not monitor many wages and prices, much less enforce its standards on recalcitrant private parties. This problem, similar in principle to that confronted by any police state, obtained a Soviet-style solution: people were encouraged to watch one another and to report observed crimes to the authorities. Never mind that these crimes were not really crimes; they were, the President and Kahn kept insisting, socially reprehensible and ought to be stopped. In this spirit, the spirit of stirring up mutual distrust among the citizens, the government proceeded.

Leaders of the AFL-CIO wished earnestly to assist in identifying “price cheaters” and bringing them into the glare of public scrutiny and condemnation. When George Meany proposed that union members establish a “price watch,” monitoring stores and reporting prices to COWPS, President Carter pronounced the plan “very good.” Besides receiving reports from the labor unions’ “shock troops in the fight against inflation” (this disconcerting metaphor was coined by a union official), COWPS announced that it would happily receive and investigate reports from small business people and from a group calling itself Citizens Opposed to Inflation in the Necessities (COIN), a coalition of some 60 labor, consumer, minority, and senior citizens groups.

The government’s price control officials must have known that the data obtained from such unsystematic and unconfirmed reports would be worthless. Because the guidelines applied only to a firm’s average price and because so many exemptions and special rules applied, it was simply impossible for either the neighborhood price monitors or the council itself to know whether a particular price change indicated noncompliance or not. The amateur price watchers therefore threatened to inundate the council’s already overwhelmed staff in a tidal wave of totally useless price reports. But no one needed to worry. Enthusiasm for statistical nit-picking among the masses quickly evaporated, if indeed it had ever existed. Four months after the initiation of these efforts, it was reported in early August that “only 156 [AFL-CIO] monitors finally sent in the right forms filled out in the right way, after making between 3 and 11 trips each to their target stores—or 658 visits in all.” The whole episode was aptly compared to the Children’s Crusade.

Almost everyone sensed that the guidelines program was unfair, though no consensus existed as to the precise kinds of unfairness involved. After polling a cross section of the public, Louis Harris reported in early June, 1979, that people believed “that big business and big labor have broken the guidelines, and that the situation has been unfair and harmful to the elderly and the poor, as well as to employees who are not members of labor unions.” A majority of Harris’s respondents therefore favored substituting mandatory wage-price controls for the guidelines.

How the guidelines actually affected the elderly and the poor remained obscure, but the program’s effect on the earnings differential between union members and nonunion workers stood out more clearly. In fact, what mattered most was not union membership itself but membership in a union whose contract included a cost-of-living adjustment (COLA). Under COWPS’s rules, the monetary equivalent of an expected COLA payment was computed for purposes of determining compliance on the assumption that the annual rate of inflation during the life of the contract would be 6 percent. Thus, in the eyes of the council, a contract with a 2.5 percent wage increase plus a COLA adjusting for 75 percent of inflation was equivalent to a contract with a 7 percent wage increase and no COLA. But if—as actually happened—the rate of inflation turned out to be 12 percent, the former contract actually increased wages by 11.5 percent, while the latter remained stuck at a 7 percent increase. Despite widespread violations of the guidelines in the nonunion sector of the labor markets, the union-nonunion gap did widen significantly during the first year of the guidelines, an abnormal development for a near-peak stage of the business cycle. According to Jason Benderly, an economist for Washington Analysis Corp., “The guidelines were almost totally ineffective in the unionized sector, but they have been faithfully followed by many nonunion managements. As a result, the nonunionized sector’s catch-up in wage gains was prematurely aborted.”

Obviously, the government’s treatment of COLAs heavily favored the 9 million workers subject to such contractual provisions. It also, though not so obviously, established incentives for other union members to press for COLAs and for nonunion workers to join unions. Perhaps this was not an anticipated effect of the program; it may say more about how obtuse than about how conspiratorial the bureaucrats were. In any event, no one could fail to notice that the government’s treatment of COLAs rested on a wildly improbable forecast. Making public policy depend on this preposterous projection clearly favored one group of workers and penalized another; it therefore exacerbated one of the more menacing conflicts in the already conflict-ridden domain of labor relations.

The guidelines were bound to be challenged in court. In suits brought by several labor unions, the AFL-CIO, and a small group of congressmen acting as “friends of the court,” the government’s use of its procurement policy to enforce the wage-price standards was first struck down by a district federal court, then upheld by the court of appeals. The Supreme Court declined to review the case. This left open the possibility that the high court would strike down the program at a later date. The legality of the guidelines therefore remained under a cloud, but the President’s men were elated by the Supreme Court’s momentary quiescence. Ed Dooley, a spokesman for COWPS, nobly promised reporters: “We will use this authority fairly and firmly against those who seek unfair advantage while the rest of us make sacrifices.” It was not reported whether Dooley uttered these words with a straight face.

Conclusions and Interpretations

Patently, the guidelines did not slow the rate of inflation: during 1979 the decline in the purchasing power of money actually accelerated. That the program failed to achieve its ostensible objective therefore is beyond argument.

The guidelines did have other effects. They (1) imposed substantial reporting costs on hundreds of large firms; (2) disrupted several important collective bargaining negotiations, twice helping to bring about costly and disruptive strikes; (3) induced distortions in the economy’s structure of relative prices, with consequent shortages of various goods and services and reductions in overall economic efficiency and consumer welfare; (4) exacerbated a variety of social conflicts; and (5) further jeopardized American liberties through the demagogic, congressionally unauthorized, and constitutionally questionable actions of the President and COWPS.

Naturally in view of all this, one wonders why the administration clung to the guidelines. Of course, no one except the President and his close advisers can know for sure. In the absence of an official confession, however, one may tentatively subscribe to the following explanation. First, the President was unwilling to bear the political risks associated with a genuine anti-inflation policy, particularly the risks associated with rising unemployment, which is an inevitable consequence of pushing inflation below the rate anticipated in the labor markets. Second, most voters are densely ignorant of economics; many actually believe that wage-price controls can serve as an effective anti-inflation policy. Under these conditions, the President could get what he wanted as a practicing politician from the guidelines: they gave the appearance that the government was “doing something” about inflation, shifted the blame for inflation onto big business and big labor, and allowed the President to continue pursuing a low-unemployment strategy by means of highly expansionary fiscal and monetary policies. The guidelines, in brief, were simply a political circus to bemuse the masses and divert their attention from the realities of economic life.



Robert Higgs is Senior Fellow in Political Economy at The Independent Institute and Editor at Large of the Institute’s quarterly journal The Independent Review. He received his Ph.D. in economics from Johns Hopkins University, and he has taught at the University of Washington, Lafayette College, Seattle University, and the University of Economics, Prague. He has been a visiting scholar at Oxford University and Stanford University, and a fellow for the Hoover Institution and the National Science Foundation. He is the author of many books, including Depression, War, and Cold War.

Full Biography and Recent Publications

This article is reprinted with permission from Policy Review (Winter 1980). © Copyright 1980, Heritage Foundation.

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