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S e p te m b e r 23, 1971

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* O U T L IN E FO R a PHASE II S T R A T E G Y
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90-day f r e e z e ha s had e x t r a o r d in a r y a c c e p ta n c e and s u c c e s s .
a.

It i s s i m p l e and e a s i l y un de rstood by the public.

c.

Why?

It m e t a w e ll-d e fi ne d need. '

b.

I

It i s u n i v e r s a l in c o v e ra g e and a f f e c t s everyone
m o r e or l e s s equally.

P h a s e II should captu re the public e n th u s ia s m enge nd ere d by the f r e e z e .
a.

It ne ed s a l s o to be s im p le in concept.

b.

It m u s t be tough enough to avoid a p o s t - f r e e z e letdown
in psyc hology which could undo m uc h of the good that

*
c.

h a s now been a c c o m p li s h e d .
It should avoid, so f a r a s p o s s i b l e , a f r e s h b u r s t of wage
and p r i c e i n c r e a s e s pent up during the f r e e z e perio d.

S o m e s li p p a g e in wage and p r i c e p e r f o r m a n c e f r o m the s t a n d a r d s of
the f r e e z e is inevitable.
a.

T h e re a r e obvious inequities, involving (i) e m ploye es whose
wa ge i n c r e a s e s have been delayed or su s pen d ed by the f r e e z e ,
and (ii) e m p l o y e r s whose p r i c e s have been fr o z e n d e s p ite higher
wage or m a t e r i a l s c o s t s al r e a d y i n c u r r e d .

/

-2-

b.

S om e g e n e r a l pay r a i s e s need to be pe rm itted to r e f l e c t
productivity growth^and to re tai n a c oo pe ra tive attitude
by the public g e n e ra l ly ,

■ c,

It would be f a r bette r for P h a s e II acc ep ta n c e , ho we ver,
if the s li p p a g e w e r e to occur gr ad u a lly, rath e r than in a
s u r g e during the initial p o s t - f r e e z e period.

If p r i c e i n ­

c r e a s e s should suddenly sp urt to a 5-6 per cent r a t e a f t e r
the f r e e z e , in flationary expectations would be rekindle d,
and demands for l a r g e wage and p r i c e i n c r e a s e s would be
widely stim ulated .

The newly won confidence on which we

a r e counting fo r a vig o ro us r e c o v e r y would then tend to
erod e, and it might a l s o prove i m p o s s i b l e to r e s t o r e a
%

4.




r e a s o n a b l e d e g r e e of p r i c e stabi lity in the ne ar future.

Above c o n s id e rat io n s l e a d to the conclus ion that P h a s e II should
pro vide for a g r a d u a l th aw - -retain in g a tough sta nc e on our wage
and p r i c e p e r f o r m a n c e s ta n d a rd s - - r a t h e r than any s u b s ta n t i a l and
p r e c i p ita t e m ove toward decontrol.

S om e f e a tu r e s of a p r o g r a m

that might p e r m i t this a r e a s follows:
a.

Announce appointment of a Wage and S a l a r y B o a r d (tri pa rt ite)
and a National P r i c e C o m m i s s i o n (public) to work out r u l e s
and p r o c e d u r e s pe rmittin g n e c e s s a r y a d j u s tm e n ts in w ag es




-3-

and p r i c e s a s well a s to deal ’

ch s p e c if i c c a s e s .

Re co gnizing the complexity of the a s s i g n m e n t , the se
g r o u p s should be given 90 days to fo rm u l a te their p r o p o s a l s
fo r s u b m i s s i o n to the C ost of Living Council'for' r e v i e w and;
ap p ro v al.

T h e s e r u l e s would e n c o m p a s s policy positions in

the handling of such i s s u e s as d e f e r r e d wage i n c r e a s e s ,
c o m p a ra b il i t y and catchup a d j u s tm e n t s , productivity b a r ­
gaining (on the w a g e side), and ground r u l e s for the p a s s ­
through of co s t i n c r e a s e s , the s u r v e i l l a n c e of profit m a r g i n s ,
and a ppr oval of h a rd sh i p ad ju s tm e n t s (in the c a s e of p r i c e s ) .
It should be un de rsto od that the P r i c e C o m m i s s i o n would
develop p r o c e d u r e s not only to rule on appl ications for p r i c e
i n c r e a s e s but a l s o to identify a r e a s where p r i c e r o l l - b a c k s
a r e needed, w h e r e v e r windfall p ro fits a r e re su lt in g f r o m the
program.
b.

Set forth a continuing national objectiv e that s e e k s o v e r a l l
stabili ty in p r i c e s .

A z e ro r a te of i n c r e a s e in p r i c e s i s

unlikely to be ach ieved, due to n e c e s s a r y ad ju s tm e n ts such
a s a r e noted above, but it is the i d e a l to which we should
aspire.

Point out that this objective m e a n s that i n c r e a s e s

in w a g e s and s a l a r i e s cannot, on the a v e r a g e , e xce ed the




-4-

national gain in productivity.

The e sta b li s h m en t of wage

*

s t a n d a r d s that will m e e t this t e s t is to be the r e s p o n s ib i li t y
of the Wage B o a rd .

In the m e a n t i m e , how ever, wage and

s a l a r y i n c r e a s e s of 3 per cent per annum might be authorized,
on the ground that productivity growth in the p a s t h as a v e r a g e d
c l o s e to that fi gu re.
c.

R e co g niz e that the re a r e i n sta n c e s where g r o s s inequities
m a y e x is t as a r e s u l t of the f r e e z e , affecting both w a g e s and
prices.

M ach in ery to deal with such c a s e s will be developed

by the Wage B o a r d and P r i c e C o m m i s s i o n .

But where s e v e r e

ha rd sh i p does not p e r m i t delay until that tim e, the C o st of
Living Council would be authorized to c onside r s p e c i a l
%
d.

e m e r g e n c y handling of petitions for r e li e f .
Authority to exem pt c l a s s e s of e m p lo y e es and goods and
s e r v i c e s f r o m f o r m a l w a g e - p r i c e r e s t r a i n t s should be
d e legated to the C o st of Living Council.

Im m ed iate exemption

might be given for w o r k e r s cu rr ently earning under $1. 60 per
hour, for a g r i c u l t u r a l produ cts and food p r o c e s s o r s , and for
c o m m e r c i a l r e n ts .

In each c a s e , there appe ar to be s o c i a l

and technical r e a s o n s ju stifying an exemption.

In addition,

the F P C , F C C , ICC and C A $ might be a s k e d to help the Co st

-5-

of Living Council to develop guidelines for u s e in r e g u la te d
i n d u s t r i e s , which in many c a s e s pose difficult and c o m p le x
problem s.
e.

Announce that a one y e a r extension of the Econom ic S t a b i l i ­
zation Act of 1970, which e x p ire s next Apri l 30, will be
sought.

It should be e m p h a si z e d that this does not m e a n

that a full panoply of w a g e - p r i c e r e s t r a i n t m ach in e ry will
be n e c e s s a r y throughout the extended period.

Indeed, it

i s co nte m plat e d that p ro v is io n a l decontrol of s p e c i f i c a r e a s
will occ u r a s 1972 p r o g r e s s e s , with the objective of returning
to f r e e m a r k e t s by e a r l y 1973.

But it will s till be n e c e s s a r y

to have the authority for the w a g e - p r i c e r e s t r a i n t p r o g r a m
%

beyond A p r i l 30, 1972.

The intent i s to have a p r o g r a m with

teeth in it, under which conspicuous v io l a t o r s will be pro se c u t ed ,

5.

T h r e e types of p r o b l e m s in the labo r a r e a d e s e r v e s p e c i a l mention,
a.




Under e xistin g union c o n tra c t s, many w o r k e r s have a l r e a d y
b a r g a i n e d for d e f e r r e d v/age i n c r e a s e s su b st antia ll y exceeding
the p r o p o s e d 3 per cent i n te r i m guideline.

T h e s e c a s e s will

be re v i e w e d by the new Wage B o a rd , but in the m e a n t i m e it
will be n e c e s s a r y that i n t e r i m i n c r e a s e s be held to 3 pe r cent,
with the a s s u r a n c e that t h e se c a s e s will be dealt with l a t e r .

b.

S om e labo r grou ps m a y have

^ c t i a t i c , or be planning

to negotiate, wage i n c r e a s e s that would cover the f r e e z e
pe rio d r e t r o a c t i v e l y .

T h e s e m u s t be prohibited if the

b en efi ci al eff ec ts of the. f r e e z e a r e to be p r e s e r v e d .
c.

S e v e r a l unions (d oc kw o rk ers , c oa l m i n e r s ) s e e m likely
to negotiate w age i n c r e a s e s g r e a t l y exceeding any a c c e p ta b l e
sta nd ard.

The i n t e r i m ru le of 3 per cent wage i n c r e a s e

aft er N ovem ber 12 should not be b reac h e d ; however, such
c a s e s should be p r o m i s e d pro m p t r e vie w by the new Wage
Board.

Of c o u r s e , there i s a su b sta n t i a l probability that

s t r i k e situations will develop, either i m m e d i a te l y or l a t e r ,
i f l a r g e wage i n c r e a s e s a r e not p e rm itted .

A s t r a t e g y for

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dealing with th e se e x t r e m e l y difficult situations needs to be
developed.

F o r e x a m p l e , Stab iliz ation Act sanctions m a y

need to be p r e s s e d , or the u s e of the T a ft - H a r t l e y p r o c e d u r e s
m a y be n e c e s s a r y wh ere work s to p p a g e s threaten the national
interest.

The above r e p r e s e n t s a tough p r o g r a m , but public a c c e p t a n c e of s t e r n
and s i m p l e m e a s u r e s i s likely to be high, extending for a ti m e the
s u c c e s s of P h a s e I.




-7-

a.

A r e l a t i v e l y s e v e r e p r o g r a m j ^ e m s e s s e n t i a l if we a r e
to hold wa ge gains and p r i c e i n c r e a s e s to m o d e r a t e l e v e l s ,
thus retaining the initiative in coping with the inflation
s p i r a l that we have gained f r o m the f r e e z e .

If our goal

by the end of 1972 i s something like a 2 or 3 per cent r a t e
of inflation, we a r e f a r m o r e likely to get it by pe rm ittin g
a g r a d u a l thaw than by moving abruptly at the end of P h a s e
I.

b.

Continued s u c c e s s on the inflation front holds high p r o m i s e
of extending the i m p r o v e d state of confidence that i s e s s e n t i a l
i f we a r e to have the ro b ust econom ic r e c o v e r y that now
s e e m s within our g r a s p .

%
c.

An in cidental but i m portant advantage of a g r a d u a l evolution
f r o m P h a s e I to P h a s e II is that we a r e not yet in a position
to s p e l l out d e t a il s of tr e atm e n t and c o v e r a g e , nor will we
be so in a m a t t e r of we eks.

Many com plex i s s u e s r e m a i n to

be r e v ie w ed and de ter m in ed, to which the p r o p o s e d Wage
B o a r d and P r i c e C o m m i s s i o n can m a k e im p o rt an t contributions.
d.




In announcing the launching of P h a s e II, it will be highly
i m po rt a nt to stres^s that if a b u s e s in wage or p r i c e b eh av io r
develop, a p ro m pt re tur n to a u n i v e r s a l f r e e z e m a y b e c o m e

-8-

necessary.

This should help '

restrain excessive adjust­

m e n t s , not only in the a r e a s to be decontrolled but a l s o in
the s p e c i f i c c a s e s coming before the Wage B o a r d and P r i c e
Comm ission.

A strong de fe ns e of the p r o g r e s s ach ie ved

will help g r e a t l y to convince the public that we a r e s e r i o u s
about continued r e s t r a i n t under P h a s e II.

Summary.

The above outline of a P h a s e II p r o g r a m e m b o d ies c e rta i n

b asic principles.
a.

It i s s i m p l e in concept, for that i s e s s e n t i a l to w i d e s p r e a d
• public un derstandin g and a cc ep ta n c e .

b.
%
c.

It r e q u i r e s the continued av aila bility of s an cti on s, including
the th re at that m i s b e h a v i o r will bring a re turn of the f r e e z e .
P h a s e II will evolve gr ad ually out of P h a s e I, so that the
p s y c h o l o g i c a l a d v a n t a g e of the f r e e z e can be p r e s e r v e d .
Thi s i s e s s e n t i a l to the vigor of the economic r e c o v e r y .

d.




It would be a m i s t a k e to confine P h a s e II c o v e r a g e to m a j o r
i n d u s t r i e s and t r a d e unions.

F o r the public r a r e l y d e a ls

d i re c tl y with big c o m p a n ie s ; it r a th e r deals with l o c a l
m e r c h a n t s and s e r v i c e o r g a n i z a t i o n s .

Also, the p r o b le m

of w a g e - p u s h inflation extends throughout the economy.




A d m i n i s t r a t i v e complexity should not be confused with
*

coverage.

Although the concept of c o v e r a g e r e m a i n s

.very b ro ad , the m a c h in e ry of a d m i n is t r a tio n should be
con centra ted in the big p attern -se ttin g situ ations, with
on ly spot checks for com pliance and enforcement in
other a r e a s .
The entire pu r p os e of both P h a s e I and P h a s e II of the
p r o g r a m i s to s pee d the t ran s it io n f r o m the ra pid
inflation we have been e xp er ienci ng to a condition of
r e a s o n a b l e p r i c e stability ach ie v ed through f r e e m a r k e t s .
Thus p a r t i a l decontrol, se g m e nt by se g m e nt, should be
a ttem pted a s quickly as a p p e a r s f e a s i b l e and c o n s i ste n t
with the main te na nc e of an effective o v e r a l l p r o g r a m .

Fi nally , let m e say that it would be wise to use the o p p o r ­
tunity gran ted us by P h a s e II to ponder d i s p a s s i o n a t e l y why our
economy has b e c o m e so prone to inflation and why the f i r e s of
inflation, once s ta r t e d , a r e so difficult to extinguish; _ Has the
s t r u c t u r e of our econom y changed so a s to i m p a r t an i n c r e a s i n g
b i a s toward inflation?

A r e b u s i n e s s or labor groups abusing their

e co no m ic power to a l a r g e r d e g r e e than they did ten, twenty, or
thirty y e a r s a g o ?

If so, to what d e g r e e a r e our laws or re gu la tio n s

r e s p o n s i b l e for such a b u s e s ?

Why did the n o r m a l growth of p r o ­

ductivity* come to a v i r t u a l halt toward the end of the 1960! s ?

How

can our g o v e rn m en ta l training p r o g r a m s , on which v a s t s u m s a r e
being expended, be m a d e m o r e effec tiv e ?

What contribution can

l o c a l productivity councils m ake to i m p r o v e m e n t s in i n d u s t r i a l
e ff ic ie nc y?

How can the a d v a n ta ge s of c om pu terize d job banks be

eff ec tiv ely h a r n e s s e d ?

T h e s e a r e a few of the questions that we

need to a s k and try to r e s o l v e in o r d e r to help a s s u r e that the
c ontro ls of P h a s e II, once dismant le d, will not be needed again
in our lifetim e .




BOARD




OF

GOVERNORS

OF

THE

L

FEC

i
y

RESERVE

SYSTEM

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