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3^rfls (fAj&re O&rj+vy? l$y £or*y<. j p * > c ^ \ r K'kC*r~ ^rfs rr> 4 u c*r- ^ p r& c^ rj **Ji- p r^ -^ S^C-J-vtj <$co>to^c:\ rt~i Ju n e 2 4 , 1972 D ear M r. P r e s id e n t: In re s p o n s e to y ou r re q u e s t, I am enclosin g a m em o ran d u m on p r ic e p o licy . P le a s e u n d erstan d th a t, in view of a ll th at 1 had to do in p re p a ra tio n fo r m y t r i p , th is m e m o ra n d u m w as p re p a re d in h a s te . H o w ever, it d oes convey the e s s e n c e of m y p re s e n t thinking. S in c e re ly y o u rs . A rth u r F . B u rn s The H onorable R ic h a rd Nixon The P r e s id e n t of th e United S ta te s The W hite H ouse W ashington, D. C. E n c lo s u re -A-FSB: ccm A rth u r F . B u rn * Ju n e 2 4 , 1972 A N O TE ON P R IC E P O L IC Y A s you know, eco n o m ic r e c o v e r y h as p ro ce e d e d fa v o ra b ly m r e c e n t m o n th s. P ro d u ctio n , em p loym en t, p e rso n a l in co m e # , b u sin e ss p r o f its , r e t a i l s a l e s , and new o r d e r s - - a ll h ave been in c r e a s in g a t a r a th e r vig oro u s p a c e . It a p p e a rs th at the eco n o m y w ill continue in th is fa v o ra b le tre n d a t le a s t during the re m a in d e r of th is y e a r . T he p r o g r e s s being m ad e in the fight a g a in st in flatio n , h o w ev er, is a n o th e r m a t t e r . W age r a t e s a r e continuing to r i s e a t a su b sta n tia l p a c e , and th e r e a r e nu m erou s in d icatio n s th a t the r i s e m a y a c c e l e r a t e - - r a th e r than m o d e ra te - - i n the m onths ah ead . T he gain in p ro d u ctiv ity h as been som ew h at disappointing fo r a p e rio d of v ig o ro u s e co n o m ic re c o v e ry * And p r ic e s continue to r i s e a t a r a t e th a t c a lls into qu estion the a ch ie v e m e n t of our s ta te d g o a ls . In the s i x m onths s in c e the p r ic e f r e e z e ended l a s t N o v em b er, the co n su m e r p r ic e index has r is e n at a 3 - 1 / 2 p e r cen t annual r a t e . T h is is b e tte r than the p e rfo rm a n c e b e fo re th e f r e e z e , but above the 2 - 3 p er cen t t a r g e t s e t fo r the p ro g ra m . In view of th is , the a c tiv itie s of the P r i c e C o m m issio n m ay need to be in ten sified in o r d e r to a s s u r e a b e tte r p e r f o rm a n c e . -2- W hat is p a r tic u la r ly d istu rb ing now is the r e c o r d of m e a t p r ic e s sin c e th e ending of the f r e e z e . In the five m onths to A p ril, the co n su m e r^ p rice in d ex r e c o r d e d an i n c r e a s e in the r e t a i l p r i c e 1 of m e a ts am ounting to 17 p er cen t a t an annual r a t e . In the la te s t m onth th e r e w as a sm a ll d e clin e , but th is is only a te m p o ra r y r e s p ite s in c e w h o le sa le m e a t p r ic e s have r i s e n su b sta n tia lly fu rth e r in r e c e n t w e e k s. W e should t r y to cu rb th is r i s e , fo r th e r e is no m o r e s e n s itiv e index of w hat is happening to p r ic e s fro m th e point of view of the hou sew ife. And if the a v e r a g e h o u se w ife cannot p e r c e iv e th a t p r e s s u r e s on the fa m ily budget a r e le sse n in g , th e r e is little hope thfet w e w ill be able to g e t the m o d e ra tio n in w age dem ands -• w ith o r w ithout c o n tro ls - - th at is e s s e n tia l to a re d u ctio n o f in fla tio n a ry p r e s s u r e s in the A m e ric a n eco n o m y . My ju d gm en t, th e r e f o r e , is th a t th e p ro b lem of m e a t p r ic e s w a r ra n ts s p e c ia l a ctio n . Such m e a s u r e s could be of the p ie c e m e a l ty p e , d ir e c te d at in c re a s in g m a rg in a lly the supply of m e a t a v a ila b le to the p riv a te eco n o m y . I have in m ind h e r e a re d u ctio n in g o v ern m en t p u rch a se s of m e a ts by the D efen se D ep artm en t and under v a rio u s D ep artm en t of A g ric u ltu re p r o g r a m s , com bined w ith -3- a re la x a tio n - - o r p o ssib ly te m p o ra r y su sp en sio n - - of im p o rt q u o tas. Such a ctio n would have jprnftj. though only s m a ll, im p a c t on the supply of m e a t. , H o w ever, it would con vey to the public a se n s e of co n c e rn ab o u t^ he p ro b lem . The p r e c i s e tim in g of su ch a ctio n s w ill r e q u ir e v e r y c a re fu l thought. A b o ld er a c tio n th at would im m e d ia te ly h a lt the e s c a la tio n in p r ic e s would be to re im p o s e a p r ic e ceilin g on p r o c e s s e d m e a ts , tied to c u r r e n tly p re v a ilin g p r ic e s - - th o se a c tu a lly ch a rg e d by p r o c e s s o r s , m id d le -m e n and r e t a i l e r s in the seco n d h alf of Ju n e. T his would d ra m a tiz e the A d m in is tra tio n 's in ten t to m ak e th e c o n tro ls p r o g ra m w o rk , and m igh t w ell have s a lu ta r y e ffe c ts on b u sin e ss p ricin g d e c is io a s in o th e r a r e a s . It would be an e x tr e m e ly popular m o v e w ith hou sew ives e v e ry w h e re , and y e t it would not s e r io u s ly im p a ir f a rm in c o m e s , w hich a r e now ben efitting fro m the r e c o r d -h ig h p r ic e s being r e c e iv e d fo r m e a t a n im a ls . And, it would be r e la tiv e ly e a sy to a d m in iste r fo r a b r ie f p e rio d . R e ta il s to r e s would be re q u ire d to post ceilin g p r ic e s fo r th e ir m e a ts , ju s t as th ey did l a s t fa ll, and h ousew ives would tend to s e e to it th a t th e p r ic e s a c tu a lly ch a rg e d do not e x ce e d th e s e lim its . T h e r e a r e h a z a r d s , of c o u r s e , in adopting su ch a bold and d r a m a tic c o u r s e of a c tio n . The p ro g ra m would be e ffe c tiv e fo r -4- only a few m o n th s. And it could fa il if p ro d u c e rs w ithheld supplies of m e a ts and m e a t a n im a ls fro m the m a r k e t. T h e re is so m e p r a c ti c a l latitude fo r th is , but I doubt th at it would p ro v e to be q u a n titativ ely sig n ifica n t. T h is w as not a p ro b lem during the 9 0 -d a y f r e e z e la s t fa ll, and the p r ic e s being r e c e iv e d a r e now su b sta n tia lly h ig h er than th ey w e re th en . R e im p o sitio n of a te m p o ra r y p r ic e ce ilin g could a ls o h av e un fortu n ate co n seq u en ces if it w e re to be follow ed by y et a n o th e r u p su rg e in p r i c e s . B ut I u n d erstan d th a t the m e a t supply situ atio n is lik ely to show g ra d u a l im p ro v e m e n t in the m onths ah ead , so th a t the underlying m a rk e t situ atio n should be m oving to w ard b a la n c e , a t o r below c u r r e n t p r i c e s , with the p a s s a g e of tim e . F in a lly , th e r e is th e likelihood of a d v e r s e r e a c tio n f ro m f a r m g ro u p s, and th is f a c to r r e q u ir e s th e m o s t ca re fu l p o litic a l ev alu atio n . If s p e c ia l a ctio n is taken to sta b iliz e m e a t p r ic e s - w h eth er it be a f r e e z e o r announcem ent of o th e r new G o v ern m en t in itia tiv e s - - th e o c c a s io n could a lso be used to stre n g th e n the r e s o lv e w ith w hich th e g e n e ra l p ro g ra m of p r ic e r e s t r a i n t is being p u rsu ed . T he re g u la tio n s of the P r i c e C o m m issio n re q u ir e not only th at the p r ic e i n c r e a s e s of a ll of the l a r g e r co m p an ies be -5- ju stifie d by c o s t i n c r e a s e s , but a ls o th at any p r ic e i n c r e a s e s g ra n te d not be p e rm itte d to r a i s e p ro fit m a rg in s above a h is to r ic a l b a s e . T h a t ^ a s e w as d e lib e ra te ly ch o se n so a s to allow so m e r e c o v e r y in p ro fit m a rg in s f ro m the v e ry low le v e ls to w hich th ey had fallen in th e la tte r I 9 6 0 's . B ut a s the p a ce of b u sin e ss a c tiv ity q u ick en s, m o re and m o r e individual f ir m s w ill b e e x p e rie n cin g a r e c o v e r y in m a rg in s to th e point w h e re the h is to r ic a l b a se w ill b e co m e a c o n s tr a in t on th e ir p ricin g p o lic ie s . T h e e ffe c tiv e co n tro l of p r ic e s through p ro fit m a rg in s is a difficu lt ta s k . The m o v em en t of m a rg in s fro m q u a rte r to q u a rte r h as to be m o n ito re d c a r e fu lly , and the co m p a n ie s a ffe cte d h av e to know th a t th e ir p e rfo rm a n c e is being w atch ed and th a t r e m e d ia l a ctio n w ill be re q u ire d p ro m p tly should th ey e x ce e d the p ro fits g u id elin es. I b e lie v e th at som ew h at s t r i c t e r m o n ito rin g and e n fo rce m e n t in th is a r e a would now be a d v isa b le . B u s in e ss e x e cu tiv e s w ill o b je ct stro n g ly a s th e r u le s begin to b ite . N ev er th e le s s , I am in clin ed to b elie v e th a t w e should e n co u ra g e the P r i c e C o m m issio n to in ten sify its p ro fits m a rg in s u r v e illa n c e p r o g ra m . -6- ’ It w ill be a rg u ’ed th at su ch a p o licy w ill w eaken th e e co n o m ic r e c o v e r y , and m a y r e s u lt in re d u ce d em p loym en t g a in s, lo w e r « to ck p r i c e s , and a le s s ebullient e co n o m ic a tm o s p h e re . is p o s s ib le . T hat In m y judgm ent, h o w ev er, the b u sin e ss exp an sion now in p r o g r e s s h a s su fficie n t stre n g th and m om en tu m to w ith stan d so m e r e s t r a i n t on p ro fit m a rg in s , p rovid ed it does not l a s t m o re than a few m o n th s. A s you know, I have long a rg u e d th a t p ro fits n eed to be h ig h e r in o r d e r to e n co u ra g e th e in v e stm e n t th a t i s e s s e n tia l to a stro n g and grow ing econom y* At p r e s e n t, h o w e v er, I fe e l th a t th e m o s t u rg en t need is to a ch ie v e the d e g r e e of p r i c e s ta b ility th a t is e s s e n tia l in seeking a g ra d u a l m o d e ra tio n in the w age i n c r e a s e s th a t w o rk e rs w ill dem and and be w illing to a c c e p t.
@FedFRASER