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ECONOMIC STABILIZATION PROGRAM
COST OF LIVING COUNCILWASHINGTON, D.C.

20507

January 8, 1973

MEMORANDUM FOR:

THE PRESIDENT

FROM:

GEORGE P. SHULTZ

RE:

Revisions in the Wage-Price
Control System

1.

We have now completed the round of consultations
which.you directed, having talked with over 400
people representing the complete spectrum of in­
terests involved* On the basis of these consulta­
tions, the results of which are summarized in
Tab A, I believe there will be widespread support
for the revisions of the system which you approved
on a tentative basis.

2.

The top people in organized labor will cooperate
with us on such a new system and will join the
proposed Labor-Management Advisory Committee, which
will include Meany, Fitzsimmons, Paul Hall, I. W.
Abel and Woodcock. From this standpoint, we have
hit on a sort of minimax solution: it minimizes the
chances of a confrontation with labor and maximizes
the chances of reasonableness in the big bargaining
ahead.

3.

The new system will:
a.

Be comprehensive in concept, with price and
wage rules put forward, to be used on a self- \
administering basis with compliance initially,!
and we expect generally voluntary, but with
\
the Cost of Living Council able to intervene
'
on a mandatory basis where necessary (Tab B).

b.

Include a stepped-up effort on food prices,!
operating through an outside advisory panelj
drawn from the industry and a Government
group working on internal policy (Tab C ) .




c.

Include a stepped-up effort on-medical costs,
operating through a dual structure as in food
(Tab D).

d.

Continue the Construction Industry Stabilization
Committee, which is working well and is well
accepted by unions and management.

e.

Continue the Committee on Interest and Dividends,
chaired by Arthur Burns.

f.

Get out of the rent control business.

g.

Eliminate the Price Commission and Pay Board,
leading to a cut by roughly one-half in the
administrative bureaucracy needed to operate the
system.

We would propose a one-year extension of the Economic
Stabilization Act, leaving the substance of the Act as
is. We will, however, be prepared with our own suggested
amendments, should a drive to make substantive changes
get underway.
We would adopt a Presidential goal of getting the rate
of inflation down to 2.5 percent or below by the end of
1973. This is ambitious but not impossible. Tab E
i
contains the proposed language.
f
We will continue to emphasize the importance of work
on fundamentals — monetary and budget policy — as the
basic way to achieve full prosperity with reasonably
stable prices. The budget and economic messages will
emphasize this theme.
:

The proposed system has the support of Arthur Burns and
John Connally, as well as the immediate working group
(Shultz, Stein, Rumsfeld).
We believe it desirable to launch the new system by
the end of this week and have prepared the documents
necessary to bring that off. I would appreciate an
opportunity to talk with you about the method of pre­
sentation.
Approved




Disapproved

See Me

Tab

SUMMARY OF CONSULTATIONS
As directed by the President on December 11, Herb Stein
Don Rumsfeld and George Shultz held 25 consultation sessions
with leaders of labor, business, professional economists, con­
sumer groups and the Congress. Over 400 individuals representing
130 different organizations were directly involved. In addition,
various members of the Cost of Living Council and the Chairmen
of the Price Commission and advisory committees to the Economic
^Stabilization Program held consultation sessions with their
various constituent groups.
Several points emerged from these consultation sessions:
°

The tolerance for the present control mechanism and,
to some extent, for any form of controls is not what
'
it once was. While there was general agreement to
an extension of the Economic Stabilization Act, there
was also a widespread feeling that the program should
be characterized as temporary and should rely more on
voluntary compliance. This is true among labor leaders
who feel that their functioning has been significantly
impaired by the present procedures. Their views were
not so much an attack against the wage standard as
they were an attack on the red tape and difficulty of
obtaining prompt, reasonable decisions. It is a
particular problem for the smaller unions. Business
leaders who might once have favored controls during
1973 because of the bargaining calendar appear to be
shifting in favor of standby controls. Uncertainty, v/
bureaucratic delays and fear of profit margin restraint
seem to account for this rather significant shift in
opinion over recent months.

°

There is a good deal of appreciation on the part of
business, the professional economists and select
members of Congress for the importance of the funda­
mentals — budget and monetary policy — in the fight
against inflation.

°

Food prices are the leading concern of organized labor.
It appears that labor will support a self-administering
r.ystem on prices and wages and exercise some genuine




Tab
Page _ <
.r
self-restraint at the bargaining table if food prices
can be kept within bounds. Labor is also concerned
about the appearance of excessive'growth in corporate
profits and about interest rates. These three factors
will be the cause of their greatest pressure from the
rank and file.
There is widespread support for the Construction
Industry Stabilization Committee and its successful
record. Several people recommended the creation of
similar mechanisms for other problem sectors, including
health and the retail food industry.
Congressional leaders now appear to be favorably
disposed toward an extension of the Act. With some
obvious exceptions, they do not appear interested in
writing the details of any controls program into the
Act or adding crippling amendments.
It is difficult to characterize consumer opinion.
However, it might be said that the program in its
present form is so complicated that consumers have no
opinion with regard to it except for the obvious fact
that they notice prices, particularly food prices,
going up and conclude that the controls are not working
and should be tougher. Consumers, particularly tenant
groups, appear to support rent controls.




Tab

COMPREHENSIVE WAGE-PRICE RESTRAINT PROGRAM
Except in special problem areas, the present program
would be replaced by one which is self-administering and based
on voluntary compliance. Guides or standards would be provided
aind restraint called for. If restraint is not exercised, the
government would have the capacity to intervene as appropriate
in the particular situation and ensure that restraint is exer­
cised from that point on. Some firms would be required to keep
records, and other larger firms would be asked to file quarterly
reports. This would help the Cost of Living Council monitor
price and wage developments. Prenotification and government
approval for individual actions would be dropped. Firms would
be expected to make their own decisions, in the spirit of res­
traint and voluntarism, within the guides.
Price Standards
Firms would be allowed to increase prices to reflect
increased costs subject to either one of two limits:
(a) that
their average price increases do not exceed 1.5 percent; or
(b) that their base period profit margin is not exceeded. In
judging whether price increases are merited by cost increases,
firms can use the present rules as a guide. The base period
for profit margin computation would be revised to allow more
flexibility. There would be exceptions tp permit necessary
adjustments to avoid distortions.
Wage Standards
A Labor-Management Advisory Committee would be convened
to consider whether the wage standard is consistent with our
new anti-inflation goal. Until that group convenes and returns
with its recommendations, the present standards of 5.5 percent
with additions for fringe benefits would be continued.
Operation of the Program
2
.
'
The standards described above would be issued to guide
individual performance. In examining the performance of firms
and industries in their self-administration of these standards,
the Council would be looking for behavior that was reasonably
consistent with them. Precise technical conformity with the
standards will not be required. The standards would be manda­
tory in the sense that unreasonably inconsistent actions could
result in the imposition of specific, legally binding price or




Tab r
Page
wage levels, as well as other prospective restrictions. It
would be absolutely clear that the government reserved the
right and capability to do this, the idea -would be to achieve
wag^.settlements and price actions that minimize the need for
this'"’
type of specific compulsory involvement. But there would
be the "shotgun in the closet" and sufficient procedures to
make the threat credible.




SPECIAL EFFORT ON FOOD

iFirms involved in food processing will be required to
comply with present regulations applying to them,
including prenotification of and approval of costjustified price increases. Firms involved in food
retailing will be held to present item margin markups.
A committee drawn from the Cost of Living Council will
be established, chaired by the Chairman of the Cost of
Living Council and composed of the Chairman of CEA,
-Secretary of Agriculture, Director of OMB, and Director
of CLC. Mrs. Armstrong might also be added to this
food group. The committee's purpose will be to review
and recommend appropriate changes in government policies
having an adverse effect on food prices.
An advisory group composed of non-government individuals
knowledgeable about all aspects of the food industry will
..be established to advise the Cost of Living Council Com­
mittee on Food. This group will consider the operation
of the controls program as it affects the industry and
the people working in it, federal policies and actions
affecting food prices, and ways of improving productivity
at all points in the food processing and distribution
chain.
A Labor-Management Committee may be established as a
subgroup of the Food Advisory Group to move the retail
food industry toward a more rational labor bargaining
structure that would moderate wage increases. This group
would operate in a manner similar to the Construction
Industry Stabilization Committee.




SPECIAL EFFORT OF HEALTH

The present controls applicable to this sector would
be continued until appropriate modifications are
recommended by the committees described below.
A committee drawn from the Cost of Living Council will
be established, chaired by the Director of the CLC and
composed of the Chairman of CEA, the Director of OMB
and the Secretaries of the Treasury and HEW.
(The
Secretary of HEW is being added to the CLC.) The com­
mittee's purpose will be to review and make appropriate
recommendations concerning changes in government programs
that could lessen the rise of health costs.
An Advisory Committee composed of knowledgeable
individuals outside the Federal Government will be es­
tablished to advise the Cost of Living Council on the
operation of controls in the health industry and changes
in government programs that could alleviate the rise of
health costs. This committee would also work to mobilize
insurance companies and other third-party payers to use
their influence in reducing the rise in health costs.




Tab

PRESIDENTIAL GOAL FOR THE FIGHT.
AGAINST INFLATION
The rate of inflation, which had been around six percent
a year in 1969, has now been reduced to around three percent —
a little more by Some measures and a little less by others.
This has been an outstanding achievement. It has given the
United States the lowest inflation rate of any free industrial
country.
Our goal in 1973 should be further progress in reducing
the'rate of inflation. To get the rate down further while
output and employment are rising vigorously and slack in the
economy is shrinking will not be easy. However, a cooperative
effort can do it, and doing it will contribute greatly to con­
fidence in reasonable price stability for the future.
Specifically, our goal is to reduce the rate of inflation
to 2-1/2 percent or below by the end of 1973. How far we can
get below 2-1/2 percent will depend on private behavior, as
well as on public policy.
The Federal Government will play its part in the national
effort in several ways.
First, it will follow a course of moderation in fiscal
and monetary policy, contributing to steady expansion of em­
ployment and rising productivity but not permitting an explosion
of demand that would start the inflation rising again.
Second, it will continue price and wage controls
temporarily in the most effective way possible, in an effort
to achieve price and pay behavior that is consistent with an
average rate of inflation not exceeding 2-1/2 percent.
Third, it will manage its own actions that affect prices
in particular sectors, such as food, to help reduce the infla­
tion rate in 1973.
f
We need to add to these efforts of government the
cooperation of business and labor in raising productivity and
restraint in price and wage behavior, even within the limits
permitted by the controls program. Together, we can keep the
inflation rate going down, below 2-1/2 percent, and set the
stage for continuing economic prosperity.





Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102